One of the frequent issues that arises in the context of personal insolvency matters is the right of a secured creditor to take or continue legal action against property of the bankrupt.
Section 58 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) sets out the longstanding general rule that:
Relevantly, a secured creditor is defined in section 5 of the Bankruptcy Act, and includes a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to them from the debtor.
The recent decision of Morris Finance Ltd v Brown4 confirmed that there is well established authority to support the proposition that legal proceedings brought by a mortgagee seeking an order for possession of mortgaged property falls within section 58(5) of the Bankruptcy Act such that proceedings can be brought or maintained against a bankrupt’s property.
As the Court outlined, a mortgage might (and in our experience generally does) contain express terms conferring an entitlement to possession and a power of sale, so that it may be said the ‘legal proceedings are merely ancillary to enforcing otherwise conferred rights.’
Practically speaking, this means that where a secured property remains occupied by a bankrupt, a secured party will normally need to seek relief of the Court (by way of orders for possession) to give effect to its right to enforce its security but not to authorise the enforcement of that agreement secured by the property.
Fundamentally, provided a lender’s security is valid and enforceable, bankruptcy is no bar to exercising rights to enter into possession and sale of the property to pay the secured debt.
There are a range of other complications that may arise, for example:
which will be the subject of a further bulletin.
If you are the trustee appointed over a secured property which has vested in bankruptcy, this is an important consideration affecting your dealings with the bankrupt’s estate.