Inadvertently surrendering security?

StockCo Agricapital Pty Limited, in the matter of Webb (Bankrupt) v Webb [2024] FCA 302
In what circumstances will leave be given to amend a creditor’s petition?

Overview

In this case, the Court considered a request by a secured creditor to amend its creditor’s petition to refer to a charge it held over two pieces of land owned by the debtors. The creditor’s solicitor had inadvertently indicated in the petition that the creditor did not hold security over the properties. The Court allowed the amendment, finding that the secured creditor had acted quickly to remedy the issue once discovered, and that no creditor would be prejudiced if the amendment were allowed.

Background

In August 2020, StockCo Agricapital (the “Secured Creditor”) and the debtors, Scott Daniel Webb and Aliza Maria Webb (the “Debtors”), entered into a Master Livestock Agreement (“MLA”). Under the MLA, the Debtors as agents for the Secured Creditor bought and sold livestock and incurred debts owed to the Secured Creditor. The MLA secured the Debtors’ obligations to the Secured Creditor by way of a charge (the “Charge”) over two pieces of land owned by the Debtors as joint tenants.

In March 2022, the Secured Creditor wrote to the Debtors advising them that they had breached the MLA by failing to make payments when due and demanded payment of the amounts owing under the MLA. The Secured Creditor obtained default judgment against the Debtors in the amount of approximately $370,000 in January 2023, and issued a Bankruptcy Notice relying on the default judgment in June 2023.

In August 2023, the Secured Creditor filed a Creditor’s Petition seeking a sequestration order under s 43 of the Bankruptcy Act 1966 (Cth). However, the Secured Creditor did not set out the particulars of its security as required under s 44(4) of the Act. Instead, the Creditor’s Petition stated that the Secured Creditor did not hold security over the property.

The Secured Creditor was not willing to surrender its security and, in the circumstances, was a creditor only to the extent to which the total debt owing to it exceeded its security under s 44(2) of the Act. The sequestration order was made, and the Secured Creditor subsequently sought to amend the petition to refer to the Charge, explaining that its failure to do so was the result of inadvertence.

The Court’s Decision

This Court has the power to allow an amendment in the terms sought by the Secured Creditor under s 33(1)(b) of the Act, which permits the Court to “at any time allow the amendment of any written process, proceeding or notice” under the Act. Factors relevant to the exercise of the Court’s discretion are:

• the circumstances in which the error in the petition came to be made;

• whether the amendment, if allowed, provides a basis for the sequestration order previously made;

• whether the secured creditor has acted in a timely fashion after discovering the error; and

• whether there will be prejudice to any third parties if the amendment is allowed.

Considering these factors, the Court concluded that the amendment to the Creditor’s Petition should be allowed.

The solicitor for the Secured Creditor who prepared the Creditor’s Petition stated that the error was an “inadvertent drafting error” on his part. The Court accepted that the error was inadvertent, either because the solicitor had used a precedent and failed to check it properly, or because he had failed to link the charging clause with the appropriate section of the Creditor’s Petition at the time he was drafting it, or for some other reason.

The Secured Creditor became aware of the error sometime in late January 2024 and quickly proceeded to issue this application in February 2024. There was no unnecessary delay by the Secured Creditor in bringing the application.

There was similarly no evidence of prejudice to other creditors in this case. Prejudice in this type of case means “a change in position between the issuing of the Creditor’s Petition and the time at which they were advised of this application”. No creditor had sought to assert prejudice or that its position had been changed in response to this application. The Debtors likewise had not sought to intervene on the basis that they would be prejudiced if the amendment were allowed.

There was also a basis for the sequestration order if the amendment were allowed. The two pieces of land were valued to be worth approximately $1,214,000 and the amount owing to the prior registered mortgages was estimated at $855,000 inclusive of interest and costs, leaving an amount of $359,000. The judgment debt is in the amount of $373,008.40, and interest of at least $7,000 has accrued since the judgment. The statutory minimum for the presentation of a Creditor’s Petition is $10,000. On the basis of these figures, the Secured Creditor was a “creditor” within s 44(2) in the amount of $14,000 or $21,000 if interest was added.

Conclusion

For these reasons, the Court allowed the amendment to the Creditor’s Petition. Interestingly, the Court concluded its judgment with an observation on cases in which a petitioning creditor seeks to amend its petition to make reference to its security in accordance with s 44(4) of the Act, but then to goes on to say that it surrenders its security and thereby falls within s 44(3) of the Act.

The Court emphasised that the requirements of s 44(2) and (3) are not cumulative. In other words, a secured creditor who wishes to bring a Creditor’s Petition is not required to surrender its security. A secured creditor is able to bring a Creditor’s Petition for the difference between the value of his or her security and the debt owed to a secured creditor providing the debt meets the statutory minimum. What the secured creditor cannot do is claim the full value of his or her security, and claim a share in the pool of money available to the unsecured creditors based on the full amount of his or her debt.

Judge: Besanko J

Counsel for the Applicant: Sally Heidenreich of Murray Chambers

Solicitor for the Applicant: HWL Ebsworth Lawyers