New South Wales Supreme Court CITATION : Sutherland v Vale [2008] NSWSC 759 HEARING DATE(S) : 30 May 2008 JURISDICTION : Equity Division Duty Judge List JUDGMENT OF : Brereton J EX TEMPORE JUDGMENT DATE : 30 May 2008 DECISION : Summons dismissed with costs. CATCHWORDS : REAL PROPERTY – TORRENS TITLES – CAVEATS – BANKRUPTCY – caveatable interests – where bankrupt transferred joint tenancy interest in land to spouse for $1 consideration – where trustee of bankrupt estate issued a notice pursuant to Bankruptcy Act 1966, s 139ZQ, to bankrupt's spouse – where notice set aside but appeal pending to Federal Court – where caveat claims "equitable interest" – where application to Court made for the purpose of extending operation of caveat in aid of appeal in Federal Court – whether caveator's claim in the caveat "has or may have substance" – test for determining whether claim "has or may have substance" – whether nature of interest was sufficiently described in the caveat – whether caveator sufficiently complied with (NSW) Real Property Regulation 2003, cl 7 – whether Bankruptcy Act, ss 120 and 121 create a caveatable interest – whether charge created by Bankruptcy Act, s 139ZR(1) is a caveatable interest – where s 139ZR(1) charge did not exist at time caveat lodged – where caveat discloses no connection with s 139ZR(1) – DISCRETIONARY CONSIDERATIONS – where trustee has not administered bankrupt estate or brought proceedings expeditiously – whether more appropriate remedy to aid appeal in Federal Court is to seek an interlocutory injunction from that Court – where sufficient security retained for trustee's claim. (CTH) Bankruptcy Act 1966, ss 120, 121, 139ZQ, 139ZR LEGISLATION CITED : (NSW) Real Property Act 1900, ss 74F, 74K (NSW) Real Property Regulation 2003, cl 7, Sch 3 CATEGORY : Principal judgment Circuit Finance Pty Ltd v Crown & Gleeson Securities Pty Ltd [2005] NSWSC 997; (2006) NSW ConvR 56-143 CASES CITED : Hanson Construction Materials Pty Ltd v Vimwise Civil Engineering Pty Ltd [2005] NSWSC 880; (2006) NSW ConvR 56-137 Martin v Official Trustee in Bankruptcy [1990] Tas R 65 Sutherland v Vale [2007] FCA 1876 PARTIES : Roderick Mackay Sutherland as Trustee fo the Bankrupt Estate of Linda Anne Vale (plaintiff) Malcolm Geoffrey Vale (defendant) FILE NUMBER(S) : SC 2906/08 COUNSEL : Mr B J Skinner (plaintiff) Mr J T Johnson (defendant) SOLICITORS : Sparke Helmore (plaintiff) Watson Mangioni Lawyers Pty Ltd (defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION DUTY LIST BRERETON J 30 May 2008 2906/08 Roderick Mackay Sutherland as Trustee of the Bankrupt Estate of Linda Anne Vale v Malcolm Geoffrey Vale JUDGMENT (ex tempore) 1 HIS HONOUR: Prior to 23 April 1999, the defendant Malcolm Geoffrey Vale and his wife Linda Anne Vale were the registered proprietors as joint tenants of three properties in the Mudgee district, which, for the sake of convenience, I shall call Springwood Park, Wattle Vale, and Cook's Gap. On 23 April 1999, Ms Vale, whom I shall call the bankrupt, transferred her interest in those properties to Mr Vale, who as a result became the sole registered proprietor of each of them. Those transfers were each for a consideration of $1. Although there is some evidence that the bankrupt's interest as joint tenant was then worth $270,000, the correctness of that valuation evidence is in issue in other proceedings. 2 A sequestration order was made against the estate of the bankrupt on 24 April 2001, and the plaintiff Roderick Mackay Sutherland became Trustee of her bankrupt estate. On or about 8 May 2001, the Trustee caused caveats to be lodged in respect of each of the properties to which I have referred. Each caveat, in Schedule 1, describes the interest claimed merely as "equitable interest" and proceeds to state: by virtue of the facts ... the caveator is the trustee of the bankrupt estate of Linda Anne Vale pursuant to a sequestration order made on 21 April 2001. The transfer of the interest of Linda Anne Vale in the land to the registered proprietor is void against the caveat pursuant to ss 120 and 121 of the Bankruptcy Act 1966. The interest claimed by the caveat is not limited to the interest acquired by Mr Vale from the bankrupt, but extends to the whole of Mr Vale's interest in the properties. 3 On 28 May 2002, the Trustee served on Mr Vale a notice under (CTH) Bankruptcy Act 1966, s 139ZQ, claiming payment of the asserted value of the bankrupt's half interest in the properties, being $270,000. For the purposes of s 139ZQ, such notice must be regarded as having been given in respect of the interest in the properties which was formerly held by the bankrupt and transferred to Mr Vale, and not Mr Vale's pre-existing interest as joint tenant in the properties. Bankruptcy Act, s 139ZR(1), has the effect that upon service of such a notice "in respect of any property", the property is charged with the liability of the person to make payments to the Trustee required by the notice, unless and until that person either makes the payment or transfers the property to the Trustee. Again, it seems plain that, for the purposes of s 139ZR, the relevant property is the bankrupt's former interest as a joint tenant, and not that interest in the property which Mr Vale already held in his own right before the transfer to him of the bankrupt's interest. 4 Mr Vale neither complied with the notice, nor at that stage applied to have it set aside. On 31 July 2002, the Official Receiver issued a certificate under s 139ZR(4), which in due course was registered on the title in the Land Titles Office, recording a charge in favour of the Trustee pursuant to the Bankruptcy Act. 5 Years passed until, on 19 April 2006, the Trustee commenced proceedings in the Federal Magistrates Court, claiming possession of the properties. Mr Vale brought a cross-claim, seeking to have the notice set aside. On 2 October 2007, Lloyd-Jones FM made orders setting aside the notice and dismissing the Trustee's claim for possession. 6 On 10 December 2007, the Trustee, having obtained an extension of time in which to do so, filed in the Federal Court a notice of appeal from the judgment of Lloyd-Jones FM, which included by way of interlocutory relief a claim for a stay of the Federal Magistrate's orders. When the application for an extension of time in which to appeal had come before Buchanan J of the Federal Court on 6 December 2007, his Honour declined to deal with the application for a stay, saying: "I declined to entertain the application for a stay on the basis presented. The applicant may renew any such application if it wishes, in a more formal way, with appropriate evidentiary support if that is necessary" [Sutherland v Vale [2007] FCA 1876, [18]]. 7 On 4 February 2008, the Trustee filed in the Federal Court a motion claiming an order that the charges and caveats registered over the title of the three properties remain in force pending the determination of the appeal. After some correspondence between the parties, Mr Vale's solicitors, on 9 May 2008 or thereabouts, served on the Trustee a Notice to Caveator of Proposed Lapsing of the caveats in respect of the Springwood Park and Wattle Vale properties, but not the Cook's Gap property. The Trustee's motion was dismissed by consent on 23 May 2008. 8 The Full Court of the Federal Court has subsequently heard the appeal from Lloyd-Jones FM on 28 May 2008; judgment was reserved. However, at the conclusion of the hearing of the appeal, the Full Court made an order staying the operation of the Federal Magistrate's order – namely, the order setting aside the s 139ZQ notice. Meanwhile, however, consequent upon Lloyd-Jones FM's decision, the charges which had been registered in favour of the Trustee on the title of the three properties had been removed. 9 By summons filed in this Court on 22 May 2008, the Trustee claims an order extending the operation of the caveats until the further order of the Court. The summons does not contain any claim for final relief. When the matter came on for hearing this afternoon, Mr B J Skinner of Counsel, who appears for the Trustee, frankly announced that the Trustee did not assert that it had a current equitable interest in the two properties in question, but sought an extension of the caveat on what he described as "the just and equitable ground", essentially as a statutory injunction in aid of the appeal in the Federal Court of Australia. 10 The power of the Court to extend the operation of a caveat is governed by (NSW) Real Property Act 1900, s 74F, which provides that the Supreme Court may, if satisfied that the caveator's claim has or may have substance, make an order extending the operation of the caveat concerned for such period as is specified in the order or until further order of the Court. In other words, it is an essential ground of even an interlocutory order extending the operation of a caveat that the Court be satisfied that the caveator's claim in the caveat "has or may have substance". If the Court is not so satisfied, s 74K(2) commands the Court to dismiss the application. 11 It is well established that on an application for an order extending the operation of a caveat, a test substantially the same as that for an interlocutory injunction applies. First, the applicant must demonstrate that the caveat has or may have substance, the phrase "may have substance" encompassing the concept of a seriously arguable case; secondly, the Court will have regard to considerations of the balance of convenience and prejudice; and finally, to other discretionary considerations. 12 The starting point, however, is to consider whether or not this caveat has or may have substance. In order to judge that, it is necessary to turn first to the caveat itself and the claim stated in it. As I have recorded, that claim is for merely "an equitable interest". In Hanson Construction Materials Pty Ltd v Vimwise Civil Engineering Pty Ltd [2005] NSWSC 880; (2006) NSW ConvR ¶56-137, Campbell J explained why a caveat which claimed merely "an equitable interest" was insufficient to specify the interest claimed by the caveator as required by the relevant provisions of the Real Property Act and (NSW) Real Property Regulation 2003 [see also Circuit Finance Pty Ltd v Crown & Gleeson Securities Pty Ltd [2005] NSWSC 997; (2006) NSW ConvR ¶56-143]. Real Property Regulation provides, by clause 7, that a caveat must specify the particulars as set out in Schedule 3 in relation to the estate or interest to which a caveator claims to be entitled. A central concept in the Act and the Regulation is that of "the nature of the estate or interest claimed" by the caveator: it is that claim that the Court must be satisfied has or may have substance before making an order. The characterisation and description of the nature of the estate, interest or right claimed by a caveator is more than a mere formal requirement of the provisions of the Act, but goes to the heart and substance of their operation, because without a description of the estate, interest or right claimed, neither the Registrar-General nor a person reading the caveat can know whether a dealing would adversely affect the estate claimed, nor can the Court tell whether the caveator's claim has or may have substance. As I endeavoured to explain in Circuit Finance, the insufficiency of a description as "an equitable interest" is further illustrated by Schedule 3, sub-cl 10 of the Real Property Regulation, which provides that it is not necessary to specify whether the estate or interest claimed is legal or equitable (at [28]); it would follow that if a caveat claiming an equitable interest were sufficient, then so would be one which merely claimed an "interest". Yet that of course would not at all describe the nature of the estate or interest claimed. 13 The present case is an acute example of the difficulty that arises where a claim is not sufficiently described. Theoretically, the caveator might have either of two types of interest in the subject land, or at least part of it: the caveator might claim to be the beneficial owner of the land (or at least a half interest in it), the transfer to Mr Vale being void against the Trustee pursuant to Bankruptcy Act, s 120 or s 121; or the caveator might claim an interest, not as beneficial owner but as chargee pursuant to Bankruptcy Act, s 139ZR. The fact that only an "equitable interest" is claimed, without characterising that interest either as beneficial owner or as chargee is, as I have said, an acute illustration of the problem which arises from failing to define the nature of the interest claimed. 14 Accordingly, given the ambiguity surrounding the nature of the "equitable interest" claimed in this case, this is yet another case in which a caveat claiming merely an "equitable interest" can be said to be invalid without having to take the matter any further. But in deference to the arguments that have been presented, I will consider the substantive issues that have been raised. 15 If, as seems likely – because when the caveat was lodged, no s 139ZQ notice had been issued – the claim were intended to be one to the effect that the Trustee was beneficially entitled to a half interest (being the bankrupt's former interest as joint tenant), then it suffers from the defect that the provisions of ss 120 and 121 of the Bankruptcy Act, to the effect that a relevant disposition is "void against the trustee", have been held to mean that the disposition is only voidable, and that the Trustee has no equitable interest (and therefore no caveatable interest) in the subject property unless and until the relevant court makes an order pursuant to the Bankruptcy Act setting aside the disposition and revesting the property in the Trustee [Martin v Official Trustee in Bankruptcy [1990] Tas R 65]. Accordingly, the mere assertion of a claim under s 120 and/or s 121 is not sufficient to give the Trustee a caveatable interest. It follows, and Mr Skinner did not suggest the contrary, that that is not a basis on which the caveat "may have substance". 16 As to the alternative basis on which the caveat might be supported – a charge created by s 139ZR(1) – such a charge is created by the service of the s 139ZQ notice, although it is not registered until the subsequent issue of a certificate under s 139ZR(4). In this case, a charge was registered, but subsequently deregistered after the Federal Magistrate's judgment set aside the notice. Now that the order of the Federal Magistrate has been stayed, it is at least arguable that the result is that the charge under s 139ZR(1) – though not the registered charge – is resurrected pending the determination of the appeal. Such a charge would create a caveatable interest in the chargee. 17 The difficulty with that argument, however, as Mr J T Johnson for Mr Vale points out, is that on no view was any such charge in existence when the caveat was lodged, and on the face of the caveat it does not claim an interest pursuant to s 139ZR, nor an interest "as chargee". No such interest could have existed when the caveat was lodged; accordingly, it cannot be the interest claimed in the caveat. 18 Accordingly, it does not appear, and I am not satisfied, that the caveat has or may have substance. If, as appears to be the case, what is really sought is interlocutory relief in aid of the appellate process in the Federal Court, then the appropriate remedy would be an injunction in the Federal Court restraining Mr Vale from dealing with the properties to which the Trustee lays claim. But the pendency of the appellate proceedings does not constitute a caveatable interest capable of giving substance to the caveat. 19 For those reasons, I am not satisfied that the caveat may have substance. I am, accordingly, required by Real Property Act, s 74K(2), to dismiss the application. 20 Even if I thought it arguable, on the s 139ZR ground, that there was a caveatable interest, significant factors pertaining to the balance of convenience and other discretionary considerations would incline me not to extend the operation of the caveat. In this regard, while it cannot be said that until very recently expedition has characterised the approach of any of the parties to the administration of this bankrupt estate, it is to be noted that the notice of appeal from the Federal Magistrate's decision was filed out of time and required an extension of time; that the initial application for a stay was not entertained by Buchanan J who, nonetheless, invited a further application on additional evidence; and when such further application was made in the appropriate jurisdiction, namely, the Federal Court, it was ultimately dismissed by consent on 23 May 2008. 21 Moreover, as to the balance of convenience, there remains a caveat in respect of the Cook's Gap property, which has apparently been valued at $315,000 and, though it is subject to a prior encumbrance, that prior encumbrance appears to secure a liability of only about $20,000, which leaves sufficient equity to cover the whole of the Trustee's claim of $270,000. 22 For all those reasons, then, I order that the summons be dismissed with costs. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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