After bankruptcy commences, does s58 of the Bankruptcy Act permit registering a caveat or taking enforcement action?

Because the terms of s58(3) of the Bankruptcy Act 1966 (Act) appears to prevent enforcement of remedies by creditors, a question that frequently arises for our clients is whether or not they can take action to protect their interests, including registering a caveat over the property of a debtor after that debtor becomes a bankrupt. For creditors with charging clauses in their agreements with customers and/or guarantors, the answer is yes.

As set out in previous TurkAlerts, caveats are often registered when an interest in land is created by operation of a charging clause. Caveats are lodged in those circumstances to give notice of a security interest in the caveated property on the basis the debtor agreed to grant the creditor an interest in their real property as security for a debt owed.

Section 58(1) of the Act sets out the general rule relating to the vesting of property and after acquired property of a bankrupt in the bankruptcy Trustee. Section 58(3) prohibits taking steps to enforce a remedy for a provable debt, without the leave of the court.

However, s58(5) preserves the rights of secured creditors as follows:

(5) Nothing in this section affects the right of a secured creditor to realise or otherwise deal with his or her security.

Section 58(5) has been held to apply to creditors with equitable charges which encompasses the nature of a charge held by trade credit providers.¹ By virtue of underlying agreements creating an equitable charge, these creditors are secured creditors under the Act.

Typically, trade creditors are granted equitable charges through ‘charging clauses’ in credit applications or by operation of personal guarantees. Properly drafted charging clauses entitle creditors to register a caveat against any real property owned by the debtor/guarantor to secure payment of the debt.

Equitable chargees have a right to realise their security by judicial processes, including obtaining an order for sale or to appoint a receiver.²

Courts have held that steps taken by an equitable chargee to have a receiver or trustee appointed to sell the property necessary to enforce a secured debt falls within the scope of s58(5). In Morris Finance Ltd v Brown, the Court observed that ‘it is apparent that an equitable charge can only be enforced by judicial order for sale or receivership of the charged property.’

Steps taken by a creditor to realise a security do not require leave of the court. A creditor may commence proceedings seeking orders for the appointment of a trustee or receiver in order to realise the extent of security necessary to discharge the debt owing and to distribute the proceeds of sale.

Registration of a caveat after bankruptcy has commenced is not a step by which a creditor realises its security and does not require obtaining leave from the court.

Proceedings requiring leave of the court

Steps taken beyond the realisation of the security, require leave of the court. The current jurisprudence suggests that this includes:

• starting proceedings to seek a declaration of right or the existence of an equitable charge³;
• commencing proceedings seeking orders fixing the amount of a debt owing⁴; and
• starting proceedings to extend the operation of a caveat.⁵

Key Takeaways

If you have a secured debt and are concerned the debtor may be in financial distress or bankruptcy has commenced, you are not only permitted to lodge a caveat to protect your interest, it is good practice to do so. Separately, you may continue to enforce your rights as a secured creditor.

If you are a secured creditor, our team can assist you to take steps to both protect and enforce your secured interest, which can include taking steps to seek an order for judicial sale.

¹ Morris Finance Ltd v Brown (FCAFC 2017).
² Porter & Anor v Bonarrgio & Anor (VSC 2009).
³ Mango Media Pty Ltd v Velingos [2008] NSWSC 202, [6] – [15].
⁴ Perpetual Trustee Co Ltd v Cuitanovic (2013) 17 BPR 32343; [2013] NSWSC 722 at [15] – [19] (Slattery J), citing Savieri v Brown [2008] NSWSC 1210 at [31] – [33] (White J); Hanshaw v National Australia Bank Ltd (2012) 264 FLR 294; 7 BFRA 403; 16 BPR 30991; [2012] NSWCA 100 at [35] – [44] (per Young JA); Perpetual Trustee Co Ltd v Cuitanovic (2013) 17 BPR 32343; [2013] NSWSC 722, at [15] – [19] (Slattery J).
⁵ Mango Media Pty Ltd v Velingos [2008] NSWSC 202 at [17] (Barrett J).