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By Darrin Mitchell, Senior Associate at Matthews Folbigg in the Insolvency, Restructuring and Debt Recovery Group

A person goes bankrupt.  It’s a common occurrence.  In fact there were 17,202 bankruptcies across Australia in the 2015/16 Financial Year, on average, more than 47 people going bankrupt each and every day.  That’s 17,202 new files opened by Bankruptcy Trustees, be it by the Official Trustee or private Trustees who are all governed by statutory and professional requirements.

The Trustee initially has only the information provided to him or her by the Bankrupt, or the creditor who obtained the Court order, to commence an investigation as to the financial affairs of the Bankrupt.  It is from this information that the Trustee assesses what assets are available to be realised for a dividend payment to creditors.

Section 54 of the Bankruptcy Act 1966 (“Act”) requires the Bankrupt to file with the Trustee a Statement of Affairs.  The Statement of Affairs is designed to assist the Trustee with investigations and provide a snapshot of the financial position of the Bankrupt.  But what if it’s filed late or not filed at all?  The Trustee has to start from scratch basing the investigations sometimes on little more than the Bankrupt’s name.

In NWC Finance Pty Ltd v Borsellino (No. 2) [2016] NSWSC 1338 the Supreme Court of New South Wales was recently faced with competing interests over monies it held.  A person who was declared bankrupt on 28 February 2013 was, with his wife, the registered proprietor of three parcels of land.  Two of these properties were encumbered with a first mortgage to St George Bank.  The Official Trustee was appointed as the trustee (“the Trustee“) and on 8 March 2013 conducted various searches which resulted in no real property being located.  The Trustee conducted the searches using the Christian name “Stephen” as that is the way the Bankrupt had been described by the creditor in the court proceedings which resulted in the sequestration order being made.  The land however was held by the Bankrupt in the name “Steven”.

The Bankrupt was aware of his bankruptcy at least by 15 March 2013, yet on 25 March 2013 the Bankrupt and his wife entered into a loan agreement and a mortgage with NWC Finance Pty ltd (“NWC”) by which they borrowed $330,500 and allowed one of the properties to be burdened with a first mortgage and a charge over the other properties. NWC conducted its searches in the name of “Steven” and so was unaware of the bankruptcy of the husband.

It was not until 1 May 2013 when the Trustee was contacted by a collection agent that the Trustee became aware of the properties.  The following day the Bankrupt filed his Statement of Affairs which included reference to the properties and on 3 May 2013 the Trustee registered caveats on the title of the properties.  Despite its loan in March 2013, it was not until June and October 2013 that NWC registered its own caveats.

St George Bank called in its loan and subsequently sold the properties registered to the Bankrupt and his wife in late 2013 and early 2014.  Due to the dispute over funds, St George Bank paid the surplus of monies, some $379,117, into the Supreme Court.  Both the Trustee and NWC filed applications seeking payment of the monies.  The Trustee conceded that the dispute was over 50% of the monies held by the Court being the half share due to the Bankrupt.

NWC claimed that both it and the Trustee had an equitable interest in the monies and contended that the Trustee’s interest arose earlier in time (due to the date of the bankruptcy).  However, NWC argued that it had “acted entirely reasonably” in the searches and enquiries it had undertaken.  On the other hand, it was said, the delay in the Trustee registering a Caveat over the properties resulted in postponing conduct that (pursuant to the relevant legal principles) meant that the Trustee should rank behind NWC in any claim to the monies.

The Trustee argued that as at the date of bankruptcy, the equity in the properties had passed to the Trustee and that the Bankrupt held a “bare legal interest” in the properties only.  This meant the Bankrupt had no legal authority to charge any of the equity in the properties in favour of NWC on execution of the loan documents.

Justice Davies when considering the matter noted section 58 of the Act in particular subsection 1 which states in part “… the property of the bankrupt, not being after‑acquired property, vests forthwith in the Official Trustee  …” when a debtor becomes bankrupt and so His Honour stated at [22]:

He [the Bankrupt] retained no equitable interest in the land that could be disposed of by way of the charge given to NWC. The result is that no equity was ever created in NWC for any priority issue to arise”.

With regard to the Trustee only conducting searches in the name of “Stephen”, His Honour said at [29]:

The high point of NWC’s case must be that the Official Trustee did not search the LPI in the name Steven as well as Stephen. In my opinion, the Trustee was under no duty to do so. It was entitled to rely on the spelling of his name contained in the sequestration order. It had no basis for thinking that Mr Borsellino might have been trying to mislead his creditors or anybody else by spelling his name in different ways”.

and further at [32]:

“… nothing that the Official Trustee does or fails to do can divest the Trustee of the interest that s 58 vests in the Trustee”.

So His Honour concluded that at the time the Bankrupt purported to give a charge or a mortgage to NWC he had no equitable estate to do so. The charge to NWC was ineffective because the whole of the equitable estate had vested in the Trustee. Even if NWC acquired an equitable interest in the properties, the Trustee’s interest was not postponed to that of NWC.  The Trustee was therefore entitled to 50% of the monies held by the Court or the Bankrupt’s share in the surplus form the sale of the properties by the first mortgagee.  NWC was paid the share due to the Bankrupt’s wife which was not disputed by the Trustee.

So what’s in a name?  It can be everything or nothing but it’s worth checking out.

Read the judgment here(link is external)

If you would like more information or advice in relation to insolvency, restructuring or debt recovery law, contact Darrin Mitchell on 02 9806 7428 or or a Principal of the Matthews Folbigg Insolvency, Restructuring & Debt Recovery Group:

Jeffrey Brown on (02) 9806 7446 or

Stephen Mullette on (02) 9806 7459 or