December 2016

Losing priority of security by not searching hard enough – NWC Finance Pty Limited v Borsellino (No.2)

What's in a name? that which we call a rose
By any other name would smell as sweet;
Shakespeare – Romeo and Juliet

Stephen Borsellino was also known as Steven Borsellino. Under the pseudonym Steven he owned 3 properties in Sydney, jointly with his wife.

When Mr Borsellino became bankrupt in February 2013 his trustee in bankruptcy conducted a search of the LPI NSW register under the name “Stephen Borsellino”. No properties owned under that name turned up. The trustee’s ignorance of Mr Borsellino’s interest in the 3 properties continued for some time, as Mr Borsellino delayed in providing the trustee with the required statement of his affairs, which included his property holdings.

Despite being bankrupt, Mr Borsellino and his wife borrowed $330,500 from NWC Finance Pty Limited on 25 March 2013. As security for the loan Mr Borsellino and his wife gave NWC a charge over their properties. In the loan documents Mr Borsellino’s name was spelled “Steven”. He didn’t inform NWC of his bankruptcy, and NWC’s searches of the national insolvency register under “Steven Borsellino” didn’t return any result.

NWC didn’t lodge any caveats over the titles to the Borsellino’s properties, at least not for some months. In the meantime, in May 2013, the trustee became aware of Mr Borsellino’s property interests through the efforts of a collections agency and immediately lodged caveats over the properties. The caveats recorded the trustee’s equitable interest in Mr Borsellino’s share of the properties that vested in the trustee automatically pursuant to s58 of the Bankruptcy Act 1966 when Mr Borsellino became bankrupt.

In due course two of the properties were sold by St George Bank as first mortgagee. There was a surplus of $380,000 on the sale after payment of the amount owed to St George Bank. NWC claimed to be entitled to the whole of the surplus, and the trustee claimed to be entitled to half (representing Mr Borsellino’s former share).

Since neither the trustee nor NWC had registered mortgages, their interests in the properties were equitable, not legal. The normal rule is that the equitable interest that arose first prevails.

The trustee’s interest was created first (February 2013 on the date the bankruptcy order was made), but the trustee said that he didn’t have to rely on the equitable rules anyway. The trustee argued that once Mr Borsellino’s interest in the properties vested in him, there was nothing for Mr Borsellino to charge in favour of NWC, so NWC’s security was of no effect at all.

NWC had disputed the trustee’s submissions. NWC claimed that by not lodging his caveats until after NWC had loaned money to Mr and Mrs Borsellino, the trustee allowed Mr Borsellino to represent to NWC that he was capable of giving security over the properties, and that he was not bankrupt. This, said NWC, was sufficient to displace the usual rule of priority in relation to equitable interests, and prevented the trustee from relying on the effect of s58.

The Court found for the trustee, pointing out that the trustee didn’t know Mr Borsellino owned any properties until May 2013, despite searching the LPI NSW register under Mr Borsellino’s correct name, and lodged caveats as soon as he found out.  The trustee owed no duty to search under the alternate spelling of “Steven”.

Accordingly the trustee was entitled to one half of the surplus.

All’s well that ends well for the trustee, but the lesson to be learned from this case is that while a single search conducted using the correct name may be legally adequate, a great deal of aggravation, time and cost can be saved by allowing for inadvertent (and deliberate) error - search under combinations of common alternative spellings, as well as surname alone, and register quickly.

Author: David Creais