Black v Andrews

[2001] FCA 1416

FEDERAL COURT OF AUSTRALIA

Black v Andrews [2001] FCA 1416

BANKRUPTCY – creditors petition – motion of debtor seeking order in relation to petition on basis of an estoppel or counter claim or other sufficient cause – no basis for estoppel – no evidence of solvency – false allegations attacking debt in an attempt to go behind judgment debt – any basis for counter claim was within knowledge of debtor prior to process leading to judgment debt – no other sufficient cause – sequestration order made.

Bankruptcy Act 1966 (Cth) s 40(1)(g), s 52

Wren v Mahoney (1972) 126 CLR 212 referred to
Ling v Enrobook (1997) 143 ALR 396 referred to
Cain v Whyte (1933) 48 CLR 639 applied
Re Schmidt (1968) 13 FLR 111 referred to

Stuart Alexander Black and Others v Peter John Andrews
N 7152 of 2001

ALLSOP J

SYDNEY

28 SEPTEMBER 2001

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 7152 of 2001

BETWEEN:	STUART ALEXANDER BLACK, VAUGHAN LEE CHAPMAN AND ANDREW PHILLIP CARTER, TRADING AS CHAPMAN AND EASTWAY APPLICANT CREDITOR
AND:	PETER JOHN ANDREWS RESPONDENT DEBTOR
JUDGE:	ALLSOP J
DATE OF ORDER:	28 SEPTEMBER 2001
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.a sequestration order be made against the estate of Peter John Andrews;

2.the motion brought by amended notice of motion dated 11 September 2001 be dismissed with costs; 

3.the applicant creditor’s costs including the creditor’s costs of the motion and including reserved costs, if any, be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.

The Court notes that the date of the act of bankruptcy is 16 October 2000.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 7152 of 2001

BETWEEN:	STUART ALEXANDER BLACK, VAUGHAN LEE CHAPMAN AND ANDREW PHILLIP CARTER, TRADING AS CHAPMAN AND EASTWAY APPLICANT CREDITOR
AND:	PETER JOHN ANDREWS RESPONDENT DEBTOR

JUDGE:	ALLSOP J
DATE:	28 SEPTEMBER 2001
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. I have before me a creditor’s petition brought by Stuart Alexander Black, Vaughan Lee Chapman and Andrew Phillip Carter trading as Chapman and Eastway, brought against the respondent debtor, Peter John Andrews.  The creditors are an accounting partnership.  I will refer to them as the ‘creditor’ or the ‘judgment creditor’.  I will refer to Mr Andrews as the debtor.

2. The creditor’s petition relies upon failure of the debtor to pay a sum identified in a bankruptcy notice served on 25 September 2000 claiming the sum of $36,338.94 arising from a judgment entered in the Local Court on 11 May 1998.  The sum claimed in the Local Court related to accounting fees, details of which are set out in the evidence of Mr Chapman.

3. Judgment in the Local Court was a default judgment.  When delivering these reasons extempore on 28 September I said that by reason of the lateness of the hour, I did not propose to then go through the detail of the chronology of the matter in the Local Court.  I noted then that I proposed to examine these reasons at a time after the orders were made and to amend or supplement them to the extent I considered necessary.  I have revised these reasons so as to make appropriate corrections to the transcript recording of them, and as proposed.  On 24 December 1998 Mr Andrews filed a notice of motion in the Local Court in which he sought to have the default judgment set aside.  In the ensuing months further correspondence took place between the parties in relation to the notice of motion.  The notice of motion was not granted.  On 5 March 1999 Mr Andrews made an application to pay the judgment debt by instalments.  That application was granted on 12 March 1999.  On 29 April 1999 an affidavit was filed on behalf of the creditor to the effect that Mr Andrews had not made payment in accordance with the instalment order.  He had not made any payments.  On 31 May 1999 the creditor filed an application to issue execution.  It appears that a levy was attempted on the property pursuant to a writ of execution issued in July 1999, however the levy could not be made as the property was claimed by Mr Andrew’s son as the new owner.  It should be noted that there is no evidence that at any time during these events in the Local Court was there a suggestion of the claim against the judgment creditor with which I am partly concerned in this matter.

4. The bankruptcy notice was served on 25 September 2000, shortly after being taken out.  Shortly thereafter the debtor or his wife spoke to Mr Robert Somervaille, a retired solicitor, who was known both to the debtor and to the creditors.  The debtor was involved in a project in country regions of New South Wales in connection with a joint venture.  The project related to research and development of flood plain hydrology and technology in relation to fertility and the control of salinity.  The debtor had been involved in developing solutions in this regard for a number of years.  Mr Somervaille, who gave evidence before me, spoke in measured terms about the potential importance of this work.  The joint venture was established in order to carry on research and development of a model developed and tested on a property owned by the debtor.  Exhibit 2 is a bundle of transaction documents in relation to the Natural Farming Sequence Joint Venture.  In the mid 1990’s the joint venture was established with BT Corporate Finance Ltd providing or arranging capital for the venture. 

5. The creditor’s claim allowed by the Local Court for accounting fees was for fees for which the debtor was said to be liable personally.  The judgment creditor had also performed services in relation to the joint venture.  The debtor was concerned that the existence of the bankruptcy notice and any acting on it might interfere with commercial matters he had in and about and in connection with the joint venture, in particular with a Mr Harvey.  He conveyed this fear to Mr Somervaille who was happy to, and who agreed to, speak with Mr Chapman (a senior partner of the judgment creditor partnership) about the matter.

6. Mr Somervaille had known Mr Chapman for some time and Mr Chapman had always done his (Mr Somervaille’s) accounting work, or some of his accounting work, and Mr Somervaille held Mr Chapman in high regard.  He spoke to Mr Chapman.  His evidence was to the effect that he and a Mr Price spoke with Mr Chapman and indicated the importance of, if possible, the bankruptcy notice not being acted on for a period of time while attempts were made to develop the commercial aspects of the joint venture with Mr Harvey.  Both Mr Somervaille and Mr Price, who as landowners have themselves adopted and implemented Mr Andrew’s ideas and regarded Mr Andrew’s efforts highly, felt the work that the joint venture sought to achieve was important and worthwhile and that if Mr Chapman did not arrange a deferral of action on the bankruptcy notice, the effect of it might jeopardise the project.

7. Mr Somervaille says, and I accept his evidence completely, that he recalls Mr Chapman indicating or saying that he would wait for three months but that he wanted the debt paid (although Mr Chapman doesn't recall three months being spoken of).  Mr Somervaille readily agreed, when it was put to him by Mr Aldridge in cross-examination, that Mr Chapman also said something to the effect that “Peter [that is the debtor] has got to give us [that is the judgment creditor] something from the CSIRO in writing.  We would want some kind of undertaking from Peter that he would pay his debt.  We'd need some form of direct debit authority; if he could put all of that in place before the court date then we'd refer the matter to our solicitors and would not have the matter proceed.”  Words to that effect were conceded by Mr Somervaille as having been said.  I find that they were.

8. The gist of the representation, it is clear, was that Mr Chapman said either that three months or a reasonable time would be left for the debtor to deal with the debt and provide some form of information in writing as set out in Mr Chapman's affidavit.  It is clear that none of that was done and it is clear that the debt was not paid.  It was no one’s evidence that an undertaking was given to withdraw the bankruptcy notice or to consent to the extension of time in relation to it.  Rather nothing was to be done to act on it – that is lodge and proceed with a petition.

9. Therefore, an act of bankruptcy was committed on 16 October 2000.  The representation itself was not of a nature to require the creditor in any way to act other than as was done which involved the occurrence of an act of bankruptcy.  In fact no step was taken by the judgment creditor for some six months or thereabouts until a creditor’s petition was taken out and served on 23 March of this year.

10. A notice of motion has been filed in the proceedings and it has been amended by filing of an amended notice of motion. It seeks orders for the dismissal of the petition based on an estoppel and a declaration asserting rights on a number of bases. The bases upon which the amended notice of motion appears to seek relief are first the estoppel, to which I will return; secondly, a declaration that the respondent has not committed an act of bankruptcy because of the existence of the material facts set out in various affidavits and in particular in relation to a counterclaim or cross demand equalling or exceeding the amount of judgment debt; alternatively, a stay of the creditor’s petition is sought and in effect alternatively, though not stated in the motion as it would not have to be, is the proposition that there is other sufficient cause why the orders should not be made under the petition (for the purposes of s52 of the Act).

11. There were thusfar, really only two issues: the estoppel and the effect of the cross claim. Subject to what I am about to say, there was no issue taken with the formalities of the petition and in any event the matters stated in s 52 have been proved on the evidence before me and no issue was taken about them in the evidence or in submissions: that is the matters contained in paragraphs 52(1)(a), 52(1)(b) and, subject to what I am about to say, 52(1)(c).

12. However, it is necessary to refer to a third matter or a group of matters which can be identified as a third matter.  A notice of intention to oppose was filed on 10 August of this year.  It was in the following terms:

    The grounds of the opposition to the petition are:

    1.The Respondent Debtor has a substantial cause of action against the petitioning creditor, which far exceeds any debt, which is allegedly due to the petitioning creditor.

    2.The Respondent Debtor seeks leave to bring this statement of claim into the Court as being the appropriate jurisdiction.

    3.The Respondent Debtor disputes in the circumstances that he owes the debt alleged by the petitioning creditor.

    4.The Respondent seeks a stay of proceedings in relation to the creditors petition until such time as the cause of action in the Statement of Claim in offset is determined.

13. The challenge to the debt of the judgement creditor to be gleaned from this document was what was contained in the claim referred to in paras 1 and 2 of the document.  That claim is found in a statement of claim filed in the Supreme Court of NSW.  In fairness to the respondent debtor and his legal representatives, the notice of intention to oppose did state in paragraph 3 that the respondent did dispute in the circumstances that he owes the debt alleged by the petitioning creditor.  However, no inkling of any matter other than the matters referred to in the statement of claim in the Supreme Court, being exhibit 1, were placed before the Court at this time. 

14. Exhibit 1 is the statement of claim in the Supreme Court proceedings.  It contains the following in paragraph 33:

    Between the period 2 December 1995 and 30 June 1997 the defendant, who had control over the bank accounts of the plaintiff, drew down and paid to itself the total of $35,712.91 which amount has not been offset or accounted for against the invoices so issued  in so far as such amounts may be found to be owing as stated in those invoices.

15. The Statement of claim thus obliquely indicates that moneys were paid to the accountants who are the creditor and which is not accounted for. 

16. This claim took various forms during the course of the day.  After some early confusion, Mr Santisi identified, on his instructions, a claim that the judgment debt itself was contested and an application in effect was being made to go behind the judgment debt (not so enunciated) but on principles reflected in cases such as Wren v Mahoney (1972) 126 CLR 212. This was to be put quite irrespective of the claim in the Supreme Court and its merits.

17. The first articulated basis for this attack on the debt appeared to be that a form, or a body, of conduct had been engaged in by the judgment creditor difficult to distinguish from rank dishonesty, to the effect that the invoices upon which the judgment was obtained had all been invoiced to and paid by the joint venture to which I have earlier referred and then further duplicate invoices were given to Mr and Mrs Andrews or Mr Andrews.  No delineation was made in the identification of this case as to whether this was deliberate or accidental, but it was said that all these matters had been so billed and paid by a third party and now billed once again to the hapless Mr Andrews.

18. During the debtor’s examination in chief it became plain that at least one of the invoices for a small sum of money plainly could not have fallen into the category so enunciated by counsel earlier in the day.  Finally at the end of the evidence of the debtor, Mr Aldridge openly required (being the best way to put it) Mr Santisi to withdraw the allegations made about those invoices.  Those allegations were then immediately withdrawn. 

19. Mr Chapman was then cross-examined.  As the cross examination of Mr Chapman, and the day, progressed I sought to inquire what was now the nature of any further issue beyond the two issues which I have earlier identified.  It appeared to be and was so expressed that it was now said, contrary to what had been previously said, that the invoices were themselves in fact in issue as not reflecting work which had been done.  I required this to be particularised in Court so that I, Mr Aldridge and the witness and party, Mr Chapman, could understand what was being said.  It seemed to me that this allegation was close to one of dishonesty, or could be so understood.  Various invoices were then identified.  They were identified as invoices being challenged as not reflecting real work.  It became apparent after a further time of cross-examination that these invoices were not being challenged at all.

20. Then, a third variant of the attack on the debt arose.  It was now said that sums of money had in fact been paid by the debtor over a period of time from January 1996 through to June 1997, being sums set out in the particulars to paragraph 33 of the statement of claim in the Supreme Court proceedings and that those sums were for accounting fees and in effect should have been taken into account as payments on the invoices (now conceded to be for work done) and had wrongly not so been taken into account and that they totalled an amount exceeding the sum claimed and recovered in the judgment by a small sum. So, though the invoices affected work done (and not work billed to or paid by the joint venture) there were sums paid to the creditor not accounted for which met or exceeded the judgment sum.  In other words the debt had been paid all along.

21. Cross-examination commenced on this variant.  After a significant period of cross-examination on the first amount, being a sum of $7,891.83, said to have been paid on 19 January 1996 by cheque number 105, it became apparent, at Mr Aldridge's interruption, perfectly legitimately made, that that sum was a total of various invoices which had been paid and had been recorded as being paid and so accounted for in the papers before the Court which had been filed for some time.  I then asked Mr Santisi which of the sums in paragraph 33 were said to have been paid and not accounted for.  He identified four of the other five in paragraph 33 of the statement of claim.  I take it that the fifth is not the subject of that allegation, Mr Santisi not having raised it, that is the sum on 12 February, 1996 (cheque number 109) in the sum of $2454.59.

22. The other four sums were identified.  I then interrupted the cross-examination of Mr Chapman and adjourned so as to allow Mr Chapman, who had been under cross-examination for over an hour, and had been in court all day, to confer with his instructing solicitor, Ms Hilferty, and if he thought fit, Mr Aldridge, to examine the evidence in the case to see if it could be identified where these sums went.  After a quarter of an hour, I returned, to be told that it was now agreed by all parties at the bar table and in the room that these sums were, in fact, paid and accounted for in respect of other invoices.  Thus the third variant of this attack on the judgment debt melted away.

23. That position was reached at a time of approximately 5:30 or thereabouts this evening, it now being 6:30 pm. That meant that virtually half this day, if not longer, has been spent on examining accounting material which it is now agreed on an examination of the material before the Court, does not disclose any individual challenge to any invoice upon which this judgment was obtained. That left, in answer to the creditor’s petition, two matters as the foundation to the motion and the defence of the petition: first, the estoppel; and secondly, the existence of a counter-claim/cross-demand of a kind described in s 40(1)(g) of the Bankruptcy Act 1966, which could found an application under subsection 41(7) of the Act or affect the question of “other sufficient cause” in s 52.

24. The difficulty with the use of the statement of claim is that the application under s 41(7) was not put on before the expiry of the bankruptcy notice.  It is said that it could have been if the estoppel had not arisen, that is if the representation had not been made; but as I have already said, the estoppel representation did not go to dealing with the act of bankruptcy other than not acting on it, it did not go to withdrawal of it or postponing its legal effects.  Secondly, the claim (which is exhibit 1) deals with facts all of which occurred well prior to the filing of the initiating process in the Local Court and which is plainly a claim which could have been set up in answer to the claim in the Local Court for the invoices which are not now disputed.  If it otherwise was a claim which, on the principles of mutuality, could have been filed and pursued against Mr Chapman, there can be no basis for a challenge to the existence of the act of bankruptcy.  The estoppel does not create one, nor does the claim. 

25. It follows that what needs to be dealt with is a question of whether “other sufficient cause” in s 52 of the Act has been shown. The principles in relation to this are well known. They are contained in the decision in Ling v Enrobook (1997) 143 ALR 396, being a decision of a Full Court of this Court on appeal from the judgment of Lehane J.

26. The question of “other sufficient cause” is governed by the principles enunciated by the primary judge, approved of by the High Court, in Cain v Whyte (1933) 48 CLR 639 at 645-6 and the judgment of Gibbs J in Re Schmidt (1968) 13 FLR 111 at 115-116 as commented upon by their Honours in Ling at 400-1. The primary judge in Cain v Whyte stated that:

    It is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due.  Something has to be put to the courts to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order.

1. It is a wide discretion which is before me. 

2. There are now three, not four possible matters upon which I must focus.  The fourth matter was the “challenge” to the debt which has now evaporated in the circumstances briefly discussed by me earlier.  The first is the estoppel.  For the reasons that I have indicated, there is no basis at all for any estoppel.  For the reasons I have given there was no relevant representation in dealing with the act of bankruptcy.  The representation was complied with and there is no evidence that the debtor was at that time solvent and could have paid the debt or whether he is now solvent.  I will deal with solvency in a moment.

3. The second matter is the claim in exhibit 1. It would be open to me, if I had credible and reliable material before me to substantiate any wrong doing by the petitioning creditor (which I do not) of a kind which might conceivably found a liability to the plaintiff, that is the judgment debtor, to take that into account in my discretion as to whether other sufficient cause has been shown for the purposes of s 52.

4. I have examined the statement of claim.  It contains, amongst other things, at para 33 some very serious allegations, none of which are particularised in any satisfactory way, alleging breach of fiduciary duty, dishonesty, and/or conspiracy.  That is, serious allegations of, in effect, dishonesty in the context of this statement of claim, and even if not dishonesty, serious malpractice that between 2 December 1995 and 30 June 1997 the defendants (that is, the petitioning creditors) who had control over the bank accounts of the plaintiff (that is, the judgment debtor) drew down and paid to itself a total of $35,712.91, which amount has not been offset or accounted for against the invoices so issued insofar as such amounts may be found to be owing as stated in those invoices.  This was one of the matters sought to be agitated before me today.

5. As I have indicated earlier, that is patently false and I can, I think, take that falsity of allegation into account in viewing the reliability of the balance of the statement of claim given that no real attempt has been made to substantiate it by evidence.  Directions were made for the conduct of this matter, affidavits were ordered to be filed.  The parties have been put to the expense today, and the Court has been put to the trouble (including court officers and other associated people) of listening to a case run without substantiating affidavits for much of it, and for some hours today dealing with serious allegations of impropriety and serious allegations challenging the debt which have been shown ultimately in the glare of (not so hard) analysis to be quite wrong.

6. That conduct and that background of a general willingness apparently to give instructions to counsel to say things which are simply wrong are matters that I can, I think, take into account in assessing the reliability of this statement of claim.  Mr Aldridge has otherwise identified serious difficulties with it in terms of the named parties.  I think those criticisms are legitimate.  There may or may not be some wrong in respect of which the debtor legitimately may have a claim against the conduct of the judgment creditor.  If so, it can be vindicated in the Supreme Court of New South Wales and if it is of merit (of which there is no reliable evidence before me) and if the debtor is made bankrupt then his trustee is perfectly able to maintain that claim on behalf of his estate.

7. Few if any of the damages in the claim are particularised.  It is a claim that is difficult to appreciate in any detail especially without the benefit of any form of particulars and as I said one small but precise and serious aspect of it is manifestly false. 

8. There is the third matter: the question of solvency.  Mr Andrews has filed an affidavit on 27 August 2001 in which paragraph 12 he sets out his asset position relevantly as follows:

   1.   cash $2,000.00

   2.   Motor vehicle $10,000.00

   3.   Horses (15) worth $1,000.00 each totalling $15,000.00

   4.   A work in progress contract for $200,000.00

   5.   Contingent assets in the form of current legal proceedings including:

   i)a cross claim in the Downing Centre Local Court seeking $50,000.00

   ii)a cross claim in the District Court claiming an unliquidated amount of damages from the University of Newcastle Research Associates for negligent conduct in the R & D program.

9. No attempt whatsoever was made by him to identify his liabilities. Mr Santisi asked me to infer that there are not any. This is a very odd inference to draw when the statement was entirely within the ken and power of the debtor to identify. The submission is without foundation. It was plainly for the debtor to prove he was solvent if that matter was to be pressed in connection with s 52.

10. The evidence reveals that the debtor has not disclosed his solvency position either on a cash flow or on a balance sheet basis and I take that matter into account in particular in relation to the overriding interest of the public as identified by the learned primary judge in Cain v Whyte, supra, requiring me in the assessment of “other sufficient cause” to be shown something overriding the interest of the public in stopping unremunerative trading and protecting the rights of creditors who are unable to get their debts paid as they become due.  Something has to be put to the Court to outweigh those considerations before it can be said that sufficient cause was shown against the making of a sequestration order.

11. In the light of (a) the evidence put before me and the paucity of evidence supporting the claim in exhibit 1, (b) the making of manifestly false allegations during the course of the day (which I don't ascribe wholly to Mr Santisi, they being all made on instructions given either carelessly, grossly carelessly or recklessly or intentionally), (c) the lack of any evidence of solvency, (d) the lack of any basis for the estoppel claim, (e) the fact that any possible basis for the claim filed in the Supreme Court which could possibly exist has been known to the judgment debtor for some years, since 1995 when the events arose, and (f) the form and structure of the claim in exhibit 1, I see no “other sufficient cause” whatsoever made out to prevent the making an order under s 52.

12. In those circumstances the Court orders that a sequestration order be made against the estate of Peter John Andrews.  I also dismiss the motion brought by the judgment debtor.  The applicant creditor’s costs including the creditor’s costs of the motion and including reserved costs, if any, are to be taxed and paid from the estate or of the respondent debtor in accordance with the Act.  I note that the date of the act of bankruptcy is 16 October 2000.

I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.

Associate:

Dated:             11 October 2001

Counsel for the Applicant Judgment Debtor:	Mr F Santisi
Solicitor for the Applicant Judgment Debtor:	Lawside Lawyers
Counsel for the Respondent in the Motion:	Mr M Aldridge SC
Solicitor for the Respondent in the Motion:	Stephen Blanks and Associates
Date of Hearing:	28 September 2001
Date of Judgment:	28 September 2001