Charter Finance Pty Ltd v Finn
[2012] FMCA 681
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| CHARTER FINANCE PTY LTD v FINN | [2012] FMCA 681 |
| BANKRUPTCY – Interim application filed by second mortgagee against Trustee contesting the terms of a Deed of Settlement & Release entered into to settle ligation – construction of key terms of the agreement. BANKRUPTCY – Trustee’s obligations in respect to the acceptance and rejection of Proof of Debt – effect of Deed of Settlement & Release. |
| Bankruptcy Act 1966 (Cth), ss.43, 52, 82, 90, 104, 105, 120, 176 Conveyancing Act 1919 (NSW), s.66 Real Property Act 1900 (NSW), ss.57, 58 Trade Practices Act 1974 (Cth) |
| Barwick v Goodridge (No.2) [2011] NSWSC 1523 Adsett v Berlouis & Ors (1992) 37 FCR 201 Brady v Official Trustee in Bankruptcy (No.1) [2001] FMCA 63 Brady v Official Trustee in Bankruptcy [2002] FCA 363 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Esber v Kimberly Securities Ltd [2009] NSWSC 1422 Hunt Brothers (a firm) v Colwell (1939) CA Vol 4, 406 Jackson v Salisbury (No.3) [2000] FCA 1840 McKenzie v Rees (1941) 65 CLR 1 Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458 Re Stanton [1902] 2 IR 57 Sanwick v Wily as Trustee of the Bankrupt Estate of Peter Robert Finn & Anor [2009] NSWSC 86 Schuler A.G. v Wickman Machine Tool Sales Ltd [1974] AC 235 Scott Fell v Lloyd (1911) 13 CLR 230 |
| Applicant: | CHARTER FINANCE PTY LTD |
| Respondent: | PETER ROBERT FINN |
| Applicant for Interim Orders: | MANGO MEDIA PTY LTD |
| Respondent for Interim Orders: | ANDREW HUGH JENNER WILY AS TRUSTEE FOR THE BAKRUPT ESTATE OF PETER ROBERT FINN |
| File Number: | SYG 3906 of 2007 |
| Judgment of: | Lloyd-Jones FM |
| Hearing date: | 11 October 2011 |
| Date of Last Submission: | 11 October 2011 |
| Delivered at: | Sydney |
| Delivered on: | 13 August 2012 |
REPRESENTATION
| Counsel for the Applicant for Interim Orders: | Mr M. W. Young |
| Solicitors for the Applicant for Interim Orders: | Heidtman & Co |
| Counsel for the Respondent for the Interim Orders: | Mr Baird |
| Solicitors for the Respondent for the Interim Orders: | Sally Nash & Co |
ORDERS
The interim application filed on 27 June 2011 is dismissed.
The Applicant to pay the Respondent’s costs to be agreed on or, in the absence of agreement, to be assessed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 3906 of 2007
| CHARTER FINANCE PTY LTD |
Applicant
And
| PETER ROBERT FINN |
Respondent
REASONS FOR JUDGMENT
Introduction
On 20 December 2007 a creditor’s petition was filed by Charter Finance Pty Ltd, applying to the Court for the making of a sequestration order under s.43 of the Bankruptcy Act 1966 (Cth) (the “Bankruptcy Act”) against the estate of Peter Robert Finn. The respondent debtor failed to comply on or before 15 November 2007 with the requirements of a bankruptcy notice issued on 17 October 2007 and served on the respondent debtor on 25 October 2007, or to satisfy the Court that he had a counter-claim, set-off or cross-demand equal to or more than the sum claimed in the bankruptcy notice. On 31 March 2008 Registrar Tesoriero made a sequestration order against the estate of Peter Robert Finn and pursuant to s.52(3) of the Bankruptcy Act the sequestration order was stayed for 15 days.
Present Proceedings
On 27 June 2011 an interim application was filed in court by Mango Media Pty Ltd (ACN 097 642 443) as applicant for the interim orders against Andrew Hugh Jenner Wily as Trustee of the Bankrupt Estate of Peter Robert Finn (“the Trustee”), the respondent for the interim orders. The application indicates that it was brought under ss.104, 105 and 176 of the Bankruptcy Act and is also an application for damages for the breach, by the defendant, of the Deed of Settlement & Release entered into between Andrew Hugh Jenner Wily as Trustee for the Bankrupt Estate of Peter Robert Finn and Mango Media Pty Limited dated 30 March 2010.
Details of Interim Order
The interim orders sought by Mango Media in the application were:
On the grounds stated in the supporting affidavit, the applicant, Mango Media Pty Limited, seeks the following orders:
1. An order pursuant to s 176 of the Bankruptcy Act that the defendant make good the loss the defendant has caused to the plaintiff by reason of his breach of duty in failing to act in accordance with the Deed of Settlement & Release.
2. In the alternative, judgment for the plaintiff against the defendant for damages for breach of contract with respect to clause 6 of the Deed of Settlement & Release.
3. In the alternative, judgment for the plaintiff against the defendant for damages for breach of contract with respect to clause 9 of the Deed of Settlement & Release.
4. In the alternative, a review pursuant to s 104 of the Bankruptcy Act of the decision of defendant made on 6 June 2011 to reject in its entirety the plaintiff’s proof of debt against the bankrupt estate of Peter Robert Finn, and that the decision be reversed such that the plaintiff’s proof of debt be admitted in its entirety.
5. In the alternative, a review made pursuant to s 104 of the Bankruptcy Act of the decision of defendant made on 6 June 2011 to reject in its entirety the plaintiff’s proof of debt against the bankrupt estate of Peter Robert Finn, and that the decision be varied such that the plaintiff’s proof of debt be admitted in the sum of $ 203,500.
(This ground was not pressed at the hearing)
6. An order that the defendant pay the plaintiff’s costs of these proceedings on an indemnity basis.
7. An order pursuant to s 105 of the Bankruptcy Act, s 176(2)(c) of the Bankruptcy Act and/or the court’s general discretion that the defendant personally pay both the plaintiff’s costs and his own costs with respect to these proceedings.
8. Interest pursuant to s 51A of the Federal Court of Australia Act.
9. Such further or other orders as the Court sees fit.
The first return date was listed as Tuesday 5 July 2011.
Grounds of opposition to the interim application
On the first return date solicitors for the Trustee filed a notice stating grounds of opposition to the interim application. This notice was amended on 14 September 2011 and was in the following terms:
Andrew Hugh Jenner Wily as Trustee of the bankrupt estate of Peter Robert Finn, Respondent, intends to oppose the interim application on the following grounds:-
1. The Respondent opposes paragraphs 1, 2, 3, 6, 7, 8 of the interim orders sought in the Interim Application filed on 27 June 2011 on the following grounds:-
a) The parties entered in a Deed of Settlement and Release dated 30 March 2010 the terms of that Deed did not require the Respondent to pay any money to the Applicant other than as recited therein.
b) The Respondent received no funds upon the sale of 125 Wardell Road, Dulwich Hill or Unit 11, 11 Davidson Road, Greenacre from Sanwick Pty Ltd as mortgagee in possession requiring payment by the Respondent care of the applicant under the terms of a Deed of Settlement and Release dated 30 March 2010.
Particulars
a) Letter 2 March 2010 from Corporate & Civil Legal
b) Settlement and adjustment sheet sale 125 Wardell Road, Dulwich Hill
c) Settlement and adjustment sheet sale Unit 11, 11 Davidson Road, Greenacre
d) Letter Corporate and Civil Legal to Heidtman & Co dated 8 November 2010
b) New South Wales Supreme Court judgment Sanwick v Wily as Trustee of the Bankrupt Estate of Peter Robert Finn and another (2009) NSWSC 86
c) New South Wales Court of Appeal settlement terms
c) All rights, remedies, actions and claims between the Applicant and the Respondent were released by a Deed dated 30 March 2010 signed in counter part by both parties.
d) The Respondent received other money from Sanwick Pty Ltd in settlement of New South Wales Supreme Court of Appeal proceedings which sum was not the subject of the Deed between the Applicant and the Respondent.
e) The bankrupt asserts he was not paid $185,000.00 from the Applicant and asserts his signature was a forgery.
Particulars on the Applicant’s loan and mortgage documents
(a) Applicant’s Statement of Claim 11653/2008
(b) Bankrupt’s Defence 11653/2008 (Exhibit to Affidavit of Yanis Artis Derums sworn 27 June 2011 in these proceedings)
2. The Respondent submits to a determination of paragraphs 4 and 5 by this Honourable Court of the Proof of Debt of the Applicant, save as costs.
Particulars
a) The Applicant’s Proof of Debt was lodged for $702,760.87 and has not been reduced or amended.
b) On 11 February 2011 the Respondent sought particulars of the sum of $702,760.81.
c) The calculation of the amount claimed in the Interim Application is now $203,500.00 but not verified as to the sum due.
d) Interest ceases to be calculated from the date of the Sequestration Order on 31 March 2008 (s153a(1A) Bankruptcy Act
e) On 17 September 2010 the Applicant was paid $232,395.32.
f) The amount of interest of 15% per month is excessive.
g) The bankrupt asserts that his signature is a forgery on the Applicant’s mortgage and loan documents and he was not paid $185,000.00
PARTICULARS
(c) Applicant’s Statement of Claim 11653/2008
(d) Bankrupt’s Defence 11653/2008 (Exhibit to Affidavit of Yanis Artis Derums sworn 27 June 2011 in these proceedings
3. Interest is unable to be claimed after bankruptcy unless there is to be an annulment under s153A(1A) Bankruptcy Act.
4. The determination of the Applicant’s Proof of Debt is a de novo hearing.
Calculation of debt interest under the asserted agreement between the Applicant and the bankrupt
Principal debt November 2007 $185,000.00
Interest @ 15% per month from 1.12.2007 $111,000.00
to 31.03.2008 (date of bankruptcy)(4 months x $27,750.00/month)
Sub-total $296,000.00
Less paid $232,395,32
BALANCE DUE $63,604.68
5. The Respondent seeks costs.
Background
By way of introduction I refer to the Supreme Court of New South Wales Equity Division judgment of his honour Bryson AJ (as he then was) in the matter of Sanwick v Wily as Trustee of the Bankrupt Estate of Peter Robert Finn & Anor [2009] NSWSC 86 (Tab 42, p. 157 of the Tender Bundle). His Honour stated:
1. HIS HONOUR: These proceedings relate to the enforcement of mortgage AD 432195T which Mr Peter Finn gave to the plaintiffs Sanwick Pty Limited (“Sanwick”). The mortgage bears date 15 September 2007 and it was registered on 26 September 2009. Mr Finn mortgaged his interest in two properties, a house at Dulwich Hill of which he owns a three-quarter share and is tenant in common with his wife, Mrs Helen Finn (who is the second defendant) who owed a quarter share and a strata unit at Greenacre, which each of them owned as tenants in common in equal shares. The mortgage only extended to Mr Finn’s interests.
2. Sanwick, by its summons dated 15 February 2008 claimed orders under s.66G of the Conveyancing Act 1919 (NSW), appointing trustees for the sale of the whole of the properties including Mrs Finn’s interests.
3. Mr Finn brought a first Cross Claim on 28 April 2008. However Mr Finn became bankrupt by a sequestration order of the Federal Magistrates Court on 31 March 2008; this had the effect of staying those proceedings under s.58 of the Bankruptcy Act 1966 (Cth). The Registrar made an order on the 24 July 2008 which had the effect of substituting Mr Wily, the trustee of Mr Finn’s bankrupt estate, as the first defendant in substitution for Mr Finn and the litigation proceeded. No step has been taken under the first cross-claim. On 11 September 2008 Mr Wily brought a second cross claim against Sanwick seeking declaration which would establish that the mortgage did not have effect and that there was no obligation of Mr Finn to repay money to Sanwick…
...
6. The relevant facts appear to be simple at their core, but they are immersed in complexities, much of which I must state.
7. In 2007 Mr Finn was a sole director and secretary of Finns Bins Investments Pty Ltd. Mr Finn and his wife purchased the house in Dulwich Hill in 1995 and a home unit at Greenacre in 2005. By April 2007 Mr Finn owed a lot of money to Charter Finance Pty Ltd and could not pay. Charter sued him by a statement of claim filed on 13 April 2007, which he could not defend. Charter obtained judgment for $1,430,656.98 on 20 September 2007: more money than Mr Finn's assets were worth. It is plain that by and well before September 2007 Mr Finn was insolvent. This is supported by his own evidence and by the evidence of Ms Fleur Evans an Insolvency Manager employed by the Bankruptcy Trustee, and was not disputed. Charter issued a bankruptcy notice on 17 October 2007 and served it soon afterwards, and Mr Finn did not comply. Charter filed a creditors' petition from 20 December 2007 and a sequestration order was made on 8 April 2008…
(emphasis added)
Mr Young, appearing for the applicant, informed the Court that the background of the application is another mortgage that was entered into between the bankrupt, Peter Robert Finn and Mango Media. That mortgage was entered into in relation to a property at Croydon, NSW. However, there was a charging clause in which on default under that mortgage, the moneys that were due under that mortgage would also be secured over all other properties owned by the mortgagor. The mortgagor had interests in properties in Greenacre and Dulwich Hill as well, and in consequence Mango Media’s mortgagee then lodged caveats over both of those two properties. Mango Media brought proceedings #11653 of 2008 in the Supreme Court of NSW, in relation to the Croydon property, and although the bankrupt, Mr Finn only had a one per cent interest in the Croydon property, those proceedings then came to be the battlefield between the parties.
Mango Media Pty Ltd on 14 April 2008 filed a Statement of Claim in the Common Law Division of the Supreme Court of NSW against Peter Robert Finn and Pauline St George Barnes (case number 11653 of 2008) seeking;
a)Judgment for possession of the Croydon property;
b)Leave to issue a writ of possession.
On the basis that Mr Finn and Ms Barnes default in payment of the principle and instalments due under the mortgage on 29 February 2008 and the default continued. On 31 March 2008 Mr Finn became bankrupt pursuant to a sequestration order made in the Federal Magistrates Court of Australia on the petition of Charter Finance Pty Ltd and Mr Andrew Hugh Jenner Wily of Armstrong Wily, Charter Accounts was appointed Trustee. Ms Barnes died on 13 July 2008. On 22 September 2008 Mr Wily advised Inner West Legal that he confirmed his previous instructions to Inner West Legal to continue to act for him in the Mango Media proceedings in his capacity as Trustee. On 25 September 2008 the Trustee filed a Statement of Cross-Claim in the proceedings.
There was never any litigation between Mango Media and Mr Finn or his Trustees in relation to the Greenacre and Dulwich Hill properties, even though most of the practical interest was in those properties. Instead, in the Supreme Court proceedings over the Croydon property, there were allegations of forgery made in relation to the Mango Media mortgage and the proceedings were hotly contested. In relation to Croydon, however, the first mortgagee, Westpac Banking Corporation, then took possession of the property and sold that property with a surplus remaining, which was then paid into the Supreme Court.
Meanwhile, Sanwick Pty Ltd, which was the first mortgagee of the Dulwich Hill and Greenacre properties, was in the process of seeking possession of those two properties, which, Mr Wily as Trustee for Mr Finn staunchly defended those proceedings against Sanwick Pty Ltd. On 4 March 2009, his Honour Bryson AJ determined that the Sanwick proceedings in the Trustee’s favour, finding that Sanwick’s mortgage secured no debt, Mr Finn’s estate was not liable to Sanwick in any respect, and that the Sanwick mortgage was void. There was then an appeal lodged by Sanwick in the NSW Court of Appeal and those proceedings were settled prior to hearing, as between Sanwick, the Trustee, Mr Wily and Mrs Helen Janet Finn. Mrs Finn owned a 50 per cent share of the Greenacre property and a 25 per cent share in the Dulwich Hill property.
The settlement involved upholding the appeal and allowing Sanwick to take possession of the property, but there was a clause in the agreement whereby such moneys would go to Sanwick after the payment of the costs of sale and the share that had to go to Mrs Finn as part-owner. The Sanwick shares were split 50-50 between the Trustee, Mr Wily, and Sanwick. That split took place in relation to each property and, in total, in respect of both properties, the sum of $329,907.77 was received by the Trustee. Mango Media claims, by virtue of an agreement between Mango Media and the Trustee, that the surplus funds from the properties be split 50-50 between Mango Media and the Trustee, Mr Wily, on the grounds that Mango Media is entitled to half of that sum, being $164,953.88.
Mr Baird, appearing for the Trustee, Mr Wily, confirmed that Mr Young’s summary was correct and not in dispute between parties.
The mortgage taken out by Peter Robert Finn and Pauline St. George Barnes from Mango Media for the Croydon Property identified as AD874245N in (Tab 6, p. 12 of the Tender Bundle) at [22] of that document contains a charging clause in the following terms:
22. The Mortgagor/s do hereby mortgage to the Lender/s all their estate title interest in any real property/ies they currently own or partly own as surety for all of the Mortgagor’s obligations to the Mortgagee/s arising herein (“Other Security”). The terms of the Mortgage over the Other Security will be the same as those contained herein. The Mortgagee/s undertakes not to protect its priority in relation to the Other Security by registering a Caveat or Mortgage over the title of the Other Security unless any of the Mortgagor’s default under this Mortgage. Regardless of whether a default is rectified the Lender will not be obliged to remove any caveats placed on the title of the Other Security until this Mortgage is discharged. The Mortgagor/s is/are free to deal with the Other Security without regard to the Mortgagee/s so long as they are not in default under this Mortgage. In the event of a default under this Mortgage the Lender/s will have the right to take possession of the Other Security and exercised power of sale and/or foreclosure to recover the debt and the Mortgagor/s will yield and surrender possession of the other security to the Lender/s.
The decision Esber v Kimberly Securities Ltd [2009] NSWSC 1422 per his Honour Hammerschlag J which raises significant issues about the allocation of funds following the exercise of a mortgagees power of sale and the mortgagee duties and obligations in allocating the proceeds. The decision concerns the effect of s.58(3) of the Real Property Act 1900 (NSW), which sets out the order of priority for the allocation of funds arising from the exercise of a power of sale and states:
The purchase monies to arise from the sale… shall be applied, first, in payment of the expenses occasion by such sale; secondly, in payment of the monies which may then be due owing to the mortgagee, chargee or covenant chargee; third, in payment of subsequent mortgages, charges or covenant charges (if any) in order of their priority; and the surplus (if any) shall be paid to the mortgagor, charger or covenant charger, as the case may be.
In Esber v Kimberly (supra) the following issues were considered:
a) whether the words “subsequent mortgagors, charges or covenant charges” in s.58(3) include unregistered or equitable mortgages; and
b)whether the words “payment of subsequent mortgages” under s.58(3) places an obligation on a mortgagee who has surplus funds in their position (having received sum greater than amount owed to them) to ensure that the surplus is paid to a person with a beneficial entitlement to the fund, as distinct from a person merely “named” as mortgagee or chargee.
The Esber’s had mortgaged certain land in the following stages:
a) First registered mortgage to M1;
b) Second registered mortgage to M2;
c) Third unregistered mortgage to M3.
M1 exercised its power of sale under the Real Property Act and paid the surplus proceeds to M2. Then M2 then paid the balance remaining to M3, despite Esber’s assertion that Esber owed no money to M3. At a separate trial, it was held that Esber’s assertions were correct – Esber owed no money to M3. Then Esber then pursued M3 for the disputed amount, but M3 was insolvent. So Esber sought to recover from M2 on the basis that M2 was in breach of s.58(3) because the payment to M3 was not “in payment of subsequent mortgagees”. This raised the issue whether “subsequent mortgagors” in s.58(3) included unregistered mortgagors.
In Hammerschlag J’s view “mortgagee, chargee or covenant chargee” in s.58(3) must mean a mortgagee, chargee or covenant chargee referred to in s.58(1) which in turn, refers to s.57(2), which comprehends only registered mortgagees, chargees or covenant chargees. However equitable interests are not “left out of a count”. In his Honours opinion a court of equity would recognise and enforce equitable interests (and disturb the legal priorities accordingly) and would allow an equitable owner access to the funds. His Honour’s opinion was that “payment of subsequent mortgagors” required payment of the surplus funds by the mortgagee to someone “beneficially entitled to” the funds as it does not simply mean “payment to whoever holds the next registered or equitable mortgage, irrespective of whether the holder is owed money”.
This gave Mango Media the right to have a caveat placed on both the Dulwich Hill and Greenacre properties (Tab 15, p. 41 of the Tender Bundle). The nature of the interest is identified as the equitable interest, mortgage and charged pursuant to the mortgage.
Evidence
Mr Young indicated that he wished to read the affidavit of Yanis Artis Derums sworn 27 June 2011
Mr Young indicated there were two exhibits that go with the affidavit and for the benefit of the Court there had been a Tender Bundle prepared with all the applicant’s evidence in chronological order and properly tabulated. He indicated that he proposed to simply tender that bundle in place of the separate exhibits.
Mr Baird indicated that he objected to seven documents in the bundle identified as those appearing at Tabs 51, 54, 56, 57, 60, 61 and 64. The one objection in the form of a Codelfa objection in that they were antecedent documents brought into existence after the settlement and ought not to be admitted into evidence. Mr Young conceded that these are antecedent documents to the agreement but he pressed to have them admitted. Mr Young indicated that they are correspondence between the solicitors from either side with the proposals that ultimately lead to the making of the crucial deed that this Court needs to construe. Mr Young conceded that there was going to be a major debate over what surplus proceeds of the Dulwich Hill and the Greenacre properties are when one is looking to identify the subject matter of a contract one can admit extraneous material for that purpose and also if there is ambiguity in the contract itself.
Mr Young contends that to some extent to rule on that objection involves coming to some tentative conclusion on the final question on whether the words are ambiguous or not. The correspondence itself does not shed a lot of light on the meaning of the words but in case the Court did find that there was an ambiguity in that it needed to be looked at in the context of all of the proceeding facts the correspondence has been included for that purpose. Mr Baird indicated that he believed Mr Young was correct in that before the objection can be determined it is necessary to read the documents as the objection is that the Deed of Settlement on Mr Baird’s construction is not ambiguous. Therefore one ought not to take into account correspondence or antecedent negotiation however Mr Young takes a contrary position. It is common ground between the parties that the Court can have regard, absent ambiguity, to surrounding facts and circumstances. I indicated to the parties that I would reserve the question of the admissibility of those identified documents until I had made decision on other points in the case.
Mr Young indicated that he sought to read the affidavit of Vanessa Marquez Vollejo sworn 24 August 2011. Mr Baird raised objection to the entire affidavit on the same basis to the documents contained in the Tender Bundle in that they all addressed antecedent negotiations. Mr Young indicated that the affidavit was going to antecedent events that may or may not be able to be used in construction of the contract. I indicated to the parties that this affidavit would be admitted on the same basis as those within the tender document.
Mr Young indicated that he sought to file a short corrective affidavit of Yanis Artis Derums sworn 11 October 2011 that simply corrects a figure contained in the previous affidavit. Mr Baird indicated that there was no objection.
Mr Baird indicated that there were no affidavits filed for the respondent and there was no evidence beyond the documents that are in the Tender Bundle aside from the seven documents to which objections have already been taken. Mr Baird indicated that the Tender Bundle as he understood it was a consensual document as the evidence in both the applicant’s and respondents case so that the Tender Bundle already having been admitted into evidence the Trustee has no further evidence.
Submissions and Arguments
The interim application filed by Mango Media centres on a document identified as Deed of Settlement & Release (“Deed of Settlement”) made 30 March 2010 between Andrew Hugh Jenner Wily as Trustee of the bankrupt estate of Peter Robert Finn and Mango Media Pty Limited (ACN 097 462 443)(Tab 69, p. 391-402 of the Tender Bundle). Both Counsel acknowledge that there are three clauses in that Deed of Settlement the Court will need to construe and that everything else will depend on the construction of those three clauses. The first clause, Clause 6 (p. 393 of the Tender Bundle) deals with the splitting of what is referred to as “surplus funds” between the respondent and the applicant being surplus funds of the properties at Dulwich Hill and Greenacre. The other clauses, being Clause 8 and Clause 9 (p. 394 of the Tender Bundle) deal with the admission by the respondent of any proof of debt by the applicant for any shortfall under its mortgage.
Mr Baird, for the Trustee, places little weight on the significance of Clauses 8 and 9, however, Mr Young indicates that this is not a case in which the Court will need to determine the admission of the proof of debt under the usual rules for admission of proof, insofar as it is now common ground that if the conventional rules were applied, then the proof would be rejected. A question is what impact, if any, has Clauses 8 and 9 got on the respondents ability to admit or not admit the proof of debt, and secondly, if the respondent is obliged to reject the proof of debt by reason of the general law whether he is liable, contractually, in damages for breach of contract, having promised in the Deed of Settlement, Clause 9, to admit the proof.
Mr Young advanced his argument starting with a breach of duty that then goes to a breach of contract with respect to two clauses and then comes to consider the issue of indebtedness. Whereas Mr Baird advanced his argument in reverse logical order starting with what amount, if any, was Mango Media owed under its mortgage at the date of bankruptcy as being the first and threshold question which he submits can be answered relatively easily. The subsidiary questions being what amount was Mango Media entitled to recover under it mortgage at a later point in time and secondly what amount was it entitled to prove in respect of its debt at the date of bankruptcy. Both Counsel acknowledge that they are different questions and there is no disagreement between them in that respect. The structure and content of the Deed of Settlement is considered in detail below.
The issue between the parties is further narrowed by an acknowledgment by both Counsel that this is not a claim by Mango Media under the Trade Practices Act 1974 (Cth) for misleading and deceptive conduct. There was no attempt to pursue those sections of the Bankruptcy Act, Part VI, Division 1 – Proof of Debt, starting from s.90 that deal with what a secured creditor must do to prove for any shortfall under their security. I was not invited to apply any tracing remedy. Consequently the issue being pursued is Mango Media’s claims to be an unsecured creditor with an admissible proof of debt or alternatively there is a contractual obligation for the Trustee to pay Mango Media some amount.
The parties acknowledge in accordance with s.82(3B) of the Bankruptcy Act, with which this case is centrally concerned, a secured creditor is entitled to have recourse to his security for the total amount of the debt that is owed under their mortgage. Mango Media received money from the mortgage that it took, being a second mortgage over the Croydon property. Westpac sold the Croydon property as first mortgagee and from that sale Mango Media received $234,000 which is not in dispute between the parties. Further, had the property been sold for more or had there been a greater amount realised than the proceeds of sale after discharge of Westpac’s mortgage then Mango Media would have been entitled to all of that and the Trustee would have has nothing to do with those proceeds.
Initially adopting Mr Baird’s approach his starting point is the determination of what amount, as of the date of bankruptcy, was secured to Mango Media. The mortgage for the Croydon property (Tab 6, p. 12 of the Tender Bundle) identifies the mortgagors as the bankrupt, Peter Robert Finn and a Pauline St George Barnes the other registered proprietor. The mortgage is dated 30 November 2008 and signed by Mr Finn on his own behalf and on behalf of Ms Barnes under a power of attorney. In “Annexure A” (Tab 6, p. 13 of the Tender Bundle) states:
2. The principle amount agreed to be advanced by the Mortgagee/s to the Mortgagor/s and secured by this Mortgage is $185,000 (the principle sum)
3. The Mortgagor/s covenants to pay the mortgagee/s on 28 February 2007 (the “Expiry Date”) such of the principle sum of $185,000 that has not been paid as at the Expiry Date.
4. The Mortgagor/s will pay interest on the Principle Sum or upon any judgment or order in which this or the proceeding clause shall become merged at the rate of 10 per centum per calendar month (“the Higher Rate”)
It is common ground that the Croydon mortgage was advanced and that when the due date for repayment fell due on the expiry of three months the principle amount was not paid. Nor had it been repaid one month later when Mr Finn became bankrupt. The date of the Act of Bankruptcy by Mr Finn failing to comply with the Bankruptcy Notice was 15 November 2007; Charter Finance issue Creditors Petition against Mr Finn on 20 December 2007; Sequestration Order against Mr Finn on 31 May 2008. Consequently, what was the mortgagee secured for and entitled to as at the date of bankruptcy, 31 March 2008. The amount of $185,000 was the principle, plus one month’s interest at 10 per cent per month, $18,500 with the total being $203,500. The money that was to be paid under Clause 6 is the money that constitutes the major dispute in these proceedings.
A letter from Inner West Legal Solicitors representing the Trustee to Heidtman & Co, lawyers, representing Mango Media propose a settlement of the Mango Media proceeding (Supreme Court Number 11653) (Tab 51 of the Tender Bundle). That correspondence states:
On 11 December, 2009, the Supreme Court Appeal proceedings between our client and Sanwick Pty Limited were concluded by the Court allowing Sanwick’s appeal and declaring that the mortgage given by Peter Robert Finn to Sanwick over his interests in the land described as folio identifiers 1/711399 and 11/SP3906 constitute a valid and enforceable mortgage over those interests in those lands.
Consequently, Sanwick have taken possession of those properties and are proposing to sell each of the properties at public auction.
In the circumstances, as you can appreciate there is little utility in our client continuing with litigation against your client when the reality of the situation dictates that whatever surplus funds result from the sale of the two properties by Sanwick will be quickly eaten away by legal fees if the parties continue with protracted and lengthy litigation herein. On that basis, our client has instructed us to seek a commercial resolution of the matter where both our clients and our client can realise a positive outcome to the matter.
Our client is prepared to settle the proceedings on the following basis:-
1. Our client will consent to his 1% share in the Croydon property being paid to your client forthwith;
2. After Sanwick sell the two properties and recover the reasonable amount to which it is rightfully entitled to satisfy its justifiable liability, the surplus fund there from are to be distributed equally between your client and our client;
3. Your client’s statement of claim as against our client is dismissed with no order as to costs;
4. Our client’s cross claim is dismissed with no order as to costs; and
5. Above is to be incorporated into a Deed of Settlement & Release between the parties.
Heidtman and Co Lawyers on behalf of Mango Media responded on the 17 February 2010 accepting the offer made by the Trustee in full and final settlement of the Supreme Court proceedings. Short Minutes of Order between the parties was made by a Registrar of the Supreme Court on 30 March 2010 and the Deed of Settlement & Release was executed the same day.
Importantly the proof of debt which the Court is asked to deal with in Clause 4 of the interim application claims an amount of $702,760.81 (Tab 92, p. 463 of the Tender Bundle). Mr Baird submits that there is no basis to that claim unless it is claimed under a security and Mr Young has conceded that if Mango Media is unsecured then that proof of debt must fall away. The argument advanced by Mr Young is that the proper construction of Clause 6, Mango Media has retained its secured creditor status and is entitled to a distribution of the sales surplus from the sale of secured properties which a Trustee has contracted to pay. Significantly in the proof of debt at [4] raises a question:
Do you hold any security?
No T
The rejection of the proof of debt (Tab 98, p. 471 of the Tender Bundle) in the letter from Armstrong Wily to Mango Media contains the following:
…rejects your claim against the estate to the extent of $702,761.81 on the following ground/s:-
· As you are aware the above named was made bankrupt on 31 March 2008.
· The bankrupt loaned funds from Mango Media on 3 November 2007 of $185,000
· From a review of the records Mango Media at the date of bankruptcy was owed an amount of $203,500 which was secured over the property at 17 Fitzroy Street Croydon to your client. In May 2009 the first mortgagee, Westpac Banking Corporation sold the property and the surplus funds was paid into court.
· On 6 September 2009 your client pursuant to an order of the Court was paid an amount of $234,895.32.
· Interest up to the date of bankruptcy is provable.
· Interest accrued on a provable debt for the time after the date of bankruptcy is not a provable debt.
· Accordingly, there is no provable debt owing to your client.
Mr Baird submits that is the Trustee’s position and the debate before this Court turns on the construction of Clause 6 together with Clauses 8 and 9 of the Deed of Settlement.
Mr Baird advances the argument that the crucial documents from the Trustee’s point of view are the three that deal with the resolution of the Court of Appeal proceedings came into existence approximately four months prior to the entry into the Deed of Settlement. Mr Baird contends that the Court of Appeal documents have to be seen in their context and are contained in the red appeal book in the proceedings between Sanwick Pty Limited (applicant) and Andrew Hugh Jenner Wily as Trustee of the bankrupt estate of Peter Robert Finn (first respondent) and Helen Janet Finn (second respondent) the co-owners of the Dulwich Hill and Greenacre properties (Tab 42, p. 143-169 of the Tender Bundle). In the initial proceedings Sanwick Pty Ltd v Andrew Hugh Jenner Wily as trustee of the Bankrupt Estate of Peter Robert Finn and Helen Janet Finn the judgment of Bryson AJ of 27 February 2009 (Tab 42, p. 157 of the Tender Bundle) contains a convenient summary of the history, the arguments and submissions that were before his Honour which are completely summarised together with the conclusion reached by his Honour (at p. 164 of the Tender Bundle). At [35] his Honour makes certain orders in favour of the Trustee Mr Wily who was successful at first instance and declarations were made that there was no money and no obligation to pay any money secured to Sanwick. The bankrupt was not liable to Sanwick under the mortgage and the mortgage was void against the Trustee in bankruptcy under s.120 of the Bankruptcy Act.
The judgment of Bryson AJ was appealed (Notice of Appeal, Tab 42 p. 165 of the Tender Bundle). The entirety of the judgment of Bryson AJ was sought to be reviewed. During the course of those proceedings it became apparent that the Trustee was going to lose the benefit of the judgment that he had at first instance. Mr Baird submitted that there were three documents that contained the genesis of the factual situation and matrix surrounding and leading up to the entry into the deed:
(a) Short Minutes of Orders (Tab 46, p. 360 of the Tender Bundle);
i)By the first order, “appeal allowed”, Bryson AJ’s judgment was overturned. The declaration made by Bryson AJ that the mortgage was invalid as against the Trustee, all of that event has gone and the declaration that the mortgage given by the bankrupt, Mr Finn, to Sanwick over the two properties, Dulwich Hill and Greenacre, constitute a valid and enforceable mortgage over those interests in those lands; and
ii)Set aside all orders for costs in the Supreme Court and in all other respects dismiss the appeal.
(b) Agreement (Tab 48, p. 362 of the Tender Bundle);
The tripartite involving Sanwick, the Trustee and Mrs Finn entered into an agreement citing the agreement between them that:
The proceedings are settled;
i)Sanwick, as mortgagee, shall be entitled to sell the interest of the bankrupt and Mrs Finn by consent in Dulwich Hill and the Greenacre properties;
ii)A split of the proceedings between Sanwick and Mrs Finn, 75/25 in relation to the Dulwich Hill property, 50/50 in relation to the Greenacre property;
iii)Sanwick’s legal representative to handle the conveyancing;
iv)Terms of consent to be handed up into Court;
v)On that document there is nothing coming back to the Trustee whatsoever out of the mortgage and there is an acknowledgment that Sanwick as mortgagee has a power of sale;
vi)The validity of the mortgage previously upset by Bryson AJ has now been acknowledged
(c) Agreement (Tab 49, p. 363 of the Tender Bundle);
i) This has only two parties, the Trustee and Sanwick;
ii) All disputes are settled
iii)Sanwick as mortgagee shall be entitled to sell the interest of the bankrupt in the two properties and take carriage of the conveyancing;
iv)Sanwick Pty Ltd shall be entitled to the whole of the proceeds of sale of the interest of Peter Robert Finn in the above properties;
v) The Trustee had no interest in the properties having surrendered any entitlement in the bankrupt’s interest in the properties mortgaged;
vi) The proceedings are settled on the terms of consent order filed in the Court of Appeal on 11 December 2009;
vii) In consideration of Andrew Hugh Jenner Wily agreeing to settle the proceedings on the terms of the consent orders, Sanwick Pty Ltd shall pay to him an amount that is equal to 50 per cent of the amount received by it from the sale of the above properties after deduction of agent’s commission and conveyancing fees.
The consequences of the appeal proceedings, although not heard in settlement terms were clear that the mortgage is valid, Sanwick is entitled to sell the property and take those moneys to itself as mortgagee since in conjunction with the agreement (at Tab 49). Mr Wily has no residual interest in the property after Sanwick’s mortgage and Sanwick shall be entitled to the whole of the proceedings of sale.
Mr Young took the Court to the Trustee’s Report to Creditor’s (Tab 89, p. 431 of the Tender Bundle). At p. 435 the Trustee reporting to creditors refers to the Greenacre and Dulwich Hill properties being mortgaged to Sanwick and the mortgage to Mango Media. References then made to the proceedings on foot in the report state:
I advise that the above properties [Greenacre and Dulwich Hill] were fully mortgaged to Sanwick Pty Limited (“Sanwick”). A mortgage was also registered over the properties by Mango Media Pty Limited. Sanwick originally commenced proceedings in the Supreme Court of New South Wales to appoint a Trustee over the properties pursuant to its right as mortgagee of the properties under the Conveyancing Act 1919. These proceedings were defended by the Bankrupt’s wife, Helen Finn and me as Trustee of the Bankrupt Estate.
We have been successful in defending the proceedings in first instance in the Supreme Court however Sanwick appealed to the Full Court for review of the judgment. The legal advice that I received was that as defendants we were unlikely to be able to resist the secured position of Sanwick. Sanwick agreed to pay a settlement sum to the Trustee of the Bankrupt Estate the total amount of $330,000. In lieu of substantial legal costs and Trustee costs. Sanwick have since entered into possession of the properties and they have subsequently been sold under their security.
(emphasis added)
The report then states;
As Trustee, the above actions have incurred substantial legal fees and Trustee costs in defending the two proceedings brought by Sanwick. The total amount of legal fees incurred by the Trustee in defending the proceedings was $93,000.
Mr Baird contends that the Trustee’s report makes good the proposition that is in that document that whatever amount it was that the Trustee was to receive from the settlement of the Sanwick litigation, it was not what one might call a free and clear amount. It was an amount in lieu of or to reimburse amounts that the Trustee had already incurred both by legal costs and his own remuneration.
I return to a closer examination of the Deed of Settlement (Tab 69 of the Tender Bundle). The document is initially referred to and identified at [24] above. There is no contest between Counsel in respect to the title, date and recitals (at p.392) Recital N states;
In or about May, 2009, the property was sold by the first registered Mortgagee of the Property [Croydon], Westpac Banking Corporation, pursuant to its Power of Sale. The Surplus Funds are retained and held by the solicitors acting for Westpac Banking Corporation, Henry Davis York (“the Surplus Funds”).
It is important to note that there are two sets of surplus funds. There is the defined “Surplus Funds”, and that is the Croydon surplus and there are other surpluses. Recital O states:
In or about December, 2009, the registered first Mortgagee of the Dulwich Hill Property and the Greenacre property, Sanwick Pty Limited (“SANWICK”) took possession of the said properties as Mortgagee in possession and exercised its power of sale over the said properties.
The first of the operative clauses is Clause 3, that is relevant, states:
(SURPLUS FUNDS) Within seven (7) days of the date hereof, WILY shall forward a written direction to Henry Davis York (“HDY”) authorising and directing HDY or their client to pay FINN’s 1% share of the Surplus Funds to MANGO MEDIA.
The Croydon property was held as 1 per cent by the bankrupt and 99 per cent by Ms Barnes. That is how the Surplus Funds were dealt with. The remainder of the Surplus Funds after satisfaction of Westpac’s mortgage was paid into Court and were ultimately released into Mango Media. This mechanism was not identified as controversial by either Counsel. Clauses 4 and 5 are procedural.
The critical clause is Clause 6 which states:
(GREENACRE AND DULWICH HILL PROPERTIES) subject to clause 8 below, it is agreed that any surplus funds generated from the sale of either the Greenacre property or the Dulwich Hill property by SANWICK as mortgagee in possession, after SANWICK has deducted it rightful justifiable costs, expenses and secured monies, shall be shared equally between WILY and MANGO MEDIA
It is put to the Court that the critical question for determination and it is in very narrow compass – what is the meaning of the words;
…after Sanwick has deducted its rightful justifiable costs, expenses and secured monies.
(emphasis added)
Both Counsel indicated the importance of the “and secured monies”.
Under the Court of Appeal Short Minutes of Order Sanwick was entitled to all of the proceeds of the Dulwich Hill and Greenacre properties. The secured monies referred to in Clause 6 owed to Sanwick were everything from the proceeds of the sale of those two properties and there is no interest of the Bankrupt or the Trustee in either of the properties remaining from those sales.
Clause 8 is a reference to a dispute that was on foot at the time in respect of the quantum of legal costs Sanwick, in its capacity as a mortgagee, was charging in respect of its actions. Clause 8.5 is a terminal point of process, of objection and assessment. At 8.5 there was an agreement that the benefits of any reduction or refund obtained as a result of the costs assessment is to be divided equally between the parties. In a letter from Inner West Legal to Heightman & Co Lawyers (Tab 51, p. 365-66) which refers to a complaint about the costs that were being eaten up, particularly by the conduct of the mortgagee. Clause 8 does have work to do and there is the possibility of there being surplus moneys from the sale of those properties, in the sense that if there is a refund of costs after assessment, pursuant to Clause 8.5, then that was to be shared equally.
Mr Baird submits that there is nothing ambiguous about the construction of Clause 6 that necessitates the introduction of extraneous material to assist in its interpretation and the Clause was to be construed having regard to the contents of the Deed of Settlement as a whole and the contents in surrounding circumstances. The Court was referred to the High Court decision in Codelfa Construction Pty Ltd v State Rail Authority of NSW [1982] HCA 24; (1982) 149 CLR 337. The relevant passages that are constantly quoted start at p. 345 in the judgment of his Honour Mason J (as he was then) and it sets out the way in which a court is to direct itself into construing a document. His Honour was dealing with both rectification suits and for a suit for the implications of a term. His Honour, at 347, refers to the parole evidence rule, which is the issue before this Court, and these words have been cited on innumerable occasions since then. The broad purpose of the parole evidence rule is:
11. …To exclude extrinsic evidence except as to surrounding circumstances including direct statements of intention, except in cases of blatant ambiguity and antecedent negotiations to subtract from, add to, vary or contradict the language of a written instruction… Although the traditional exposition of the rule did not in terms deny resent to extrinsic evidence for the purpose of interpreting the written instrument, it has often been regarded as prohibiting the use of extrinsic evidence for this purpose. No doubt this was due to the theory which came to prevail in English legal thinking in the first half of this century that the words of a contract are ordinarily to be given their plain and ordinary meaning. Recourse to extrinsic evidence is then superfluous. At best it confirms what has been definitely established by other means; at worst it tends ineffectively to modify what has been so established.
The second passage that is frequently cited at p. 348 states:
12.On the other hand, it has frequently been acknowledged that there is more to the construction of the words of written instructions than merely assigning to them their plain and ordinary meaning. This has led to a recognition that evidence of surrounding circumstances is admissible in aid of construction of a contract.
His Honour then referred to Lord Wilberforce in Schuler A.G. v Wickman Machine Tool Sales Ltd [1974] AC 235 who was able to state the broad thrust of the rule in this way:
The general rule is that extrinsic evidence is not admissible for the construction of a written contract; the party’s intentions must be ascertained, on legal principles of construction, for the words they have used. It is one and the same principle which excludes evidence of statements, or actions, during negotiations, at the time of the contract, or subsequent to the contract, any of which to the lay mind might at first sight seem to be proper to the received.
Mr Baird referred the Court to his original objections to the documents at Tabs 51, 54, 56, 57, 61 and 64 (see [9] above) and indicated that if I felt there was some ambiguity in the construction of Clause 6 then I may be assisted by referring to that material. In respect of that material Mr Baird made the following submission:
a)The Clause is plain on its face, it is not ambiguous and those documents do not need to be looked at; and
b)That those documents add nothing further to the construction of the Clause.
Mr Young referred to the letter from Inner West Legal dated 5 February 2010 (Tab 51 p. 365 of the Tender Bundle) noting that there was no mention in that letter or any of the following letters of the nature of the agreement between Sanwick and the Trustee about the 50 per cent sharing agreement. In the letter from Corporate and Civil legal, being the solicitors for Sanwick, dated 2 March 2010 to Mr Wily (Tab 59, p. 376 of the Tender Bundle) refers to the sale of the Dulwich Hill property. It states:
Sanwick is mortgagee as mortgagee in possession exercised its power of sale over the share of Peter Robert Finn. The property was sold for $740,500 entitling our clients to 50% of the proceeds of $370,250 less agents and legal costs. The remaining 50% of the proceeds are passed to Helen Janet Finn as co-owner.
Sanwick will apply the whole of the proceeds to satisfy its mortgage. There will be no surplus.
Mr Young contends that this letter is incorrect as it did not reflect what actually occurred between the parties. The settlement sheet for the Greenacre property (Tab 66, p. 387 of the Tender Bundle) indicates that the [sale] price of $245,500. After deducting the deposit, council rates, strata levies there was an amount due at settlement of $216,123.18. At Tab 67, p. 388 (of the Tender Bundle) there were some further deductions giving a balance to be dispersed of $212,327.79, then a 50 per cent share to Helen Janet Finn being the 50 per cent owner of the property. The other 50 per cent share went to Corporate and Civil Legal Services being the solicitors for Sanwick. The deposit money was similarly split 50/50 between Helen Janet Finn and Corporate and Civil Legal Services resulting in each party receiving $117,933.90. In the Settlement Statement of Account (Tab 65, p. 386 of the Tender Bundle) notes a balance of $117,933.90 was then dispersed at 50 per cent to Andrew Hugh Jenner Wily and 50 per cent to Sanwick Pty Limited each in the amount of $58,966.95.
In relation to Dulwich Hill there is a similar set of settlement sheets at Tabs 71, 72 and 73. At Tab 72 the amount due on settlement is computed to be $667,284.46. At Tab 73 after further costs and disbursements are deducted the residual is split 25 per cent to Helen Janet Finn as being $181,345.47 and 75 per cent to Corporate and Civil Legal Services for Sanwick being $541,818.65. At Tab 71 the Settlement Statement of Accounts notes that the $541,818.65 was split 50 per cent to Andrew Hugh Jenner Wily in the amount of $270,940.82 and 50 per cent to Sanwick being $270,940.83.
Mr Young submits that Westpac Bank, as first mortgagee, had sold the Croydon property and after deducting the amount due to it there was money paid into Court. The Court gave judgment (Tab 82, p. 423 of the Tender Bundle) in Mango Media v Westpac Banking Corporation (case number 2010/00248394 made on 6 September 2010) that the funds paid into Court by Westpac be paid to Mango Media. An EFT Remittance Advice from the NSW Justice & Attorney General Department (Tab 85, p. 426 of the Tender Bundle) notes a remittance from the Supreme Court to Mango Media in the amount of $232,395.32. Mr Derums affidavit sworn 27 June 2011 at [23] states:
Mango Media also received a sum of $1500 by electronic funds transfer and that the total amount that Mango Media received was $234,895.32.
In the report to creditors (Tab 89, p. 435 of the Tender Bundle) it states:
…Sanwick agreed to pay a settlement sum to the Trustee of the bankrupt estate for a total amount of $330,000 in view of substantial legal costs and trust costs.
Mr Young indicates this is an acknowledgment by the Trustee that he did indeed receive money from Sanwick. In the letter from Heidtman & Co Lawyers to Inner West Legal Solicitors dated 20 January 2011 (Tab 91, p. 460 of the Tender Bundle) states:
We refer to the Trustee’s report to creditors dated 15 September 2010 (Report) and note that the Trustee received settlement monies totalling $330,000 from Sanwick Pty Ltd (Sanwick), the first mortgagee of the properties at Greenacre and Dulwich Hill.
Which you may recall that the Trustee and our client entered into a Deed of Settlement & Release (Deed) in March 2010 to settle all claims as between the Trustee and our client. We note Clause 6 of the Deed states as follows:
“6. Subject to Clause 8 below it was agreed that any surplus funds generated from the sale of either the Greenacre property or the Dulwich Hill property by SANWICK as mortgagee in possession, after SANWICK has deducted is [sic] rightfully justifiable cost, expenses and secured money, shall be shared equally between WILY and MANGO MEDIA.”
It is common ground that the moneys have never been paid.
Mr Young acknowledges that the Trustee was certainly correct in stating that under the usual principles for the determination of proof of debt, the receipt of the Westpac moneys would have cancel the debt and there would not have been any proof of debt available to the applicant. However the Trustee had entered into a Deed of Settlement. Within that document the most important clause is 6. It is noted that Sanwick received money from the sale and the settlement sheets record the deduction of costs and expenses. Sanwick took out the remaining 50 per cent which were moneys secured under its mortgage then gave the other 50 per cent to Mr Wily. Mr Young submits that Clause 6 means that whatever money is left over after the mortgagee has deducted costs and expenses and what ever money that is secured under the mortgage, that mortgagee sees fit to deduct any moneys left over that would otherwise go to Mr Wily or Mango Media being split 50/50.
Mr Young contends that the fact that the mortgagee, Sanwick, might have deducted more from the property in other circumstances, or might have had more money secured over the property than what it chose to deduct from the proceeds is immaterial. The clause clearly targets those moneys that are surplus to the requirements of Sanwick. Surplus to the money that it has taken out. The fact that it did not take out 50 per cent of the balance by reason of a previous agreement with Mr Wily does not prevent the surplus money from having that character of surplus funds to be divided between the parties. Both Mr Wily and Mango Media are saying that they are the parties entitled to the Peter Robert Finn moneys after Sanwick has taken its interest.
Mr Young argues that although Mr Wily is the one who is engaged in litigation with Sanwick, Mango Media has had caveats on the Greenacre and Dulwich Hill properties protecting the interest it observes as mortgagee, under the equitable mortgage created by the charging clause in the mortgage over Croydon (Tab 6, p. 17 of the Tender Bundle, Clause 22). What Mango Media and Mr Wily have done in order to resolve the issue of whether it is Mr Wily as Trustee or Mango Media as second mortgagee to resolve the issue of which of the two of them is entitled to any money left over, they have arrived at a 50/50 split arrangement. It is quite clear that the money received by Mr Wily for moneys caught by Clause 6 that Mango Media is entitled to its 50 per cent share and it is not necessary to consider any extrinsic material to determine this.
The next issue is the construction of Clause 9 (Tab 69 p. 394 of the Tender Bundle) which states:
(CREDITOR) WILY agrees to acknowledge MANGO MEDIA as a creditor of FINN in respect of any proof of debt MANGO MEDIA lodges with WILY regarding any shortfall MANGO MEDIA suffers under the Mortgage.
This clause raises a question as the meaning of the term “shortfall”. Mr Young submits that the term should be given its normal meaning being the difference between what is due under the mortgage and the amount that has actually been recovered. The method to be adopted is to add the principle, all the interest to the dates at which the shortfall is being determined and then further deduct any legal costs incurred and are recoverable under the mortgage. That gives a figure of what is owing to determine the shortfall by taking the difference between the figure and all of the amounts that have been received by way of selling up securities or receiving surplus funds in relation to any other mortgage sale.
Mr Young indicated that $234,000 was received from the sale of the Croydon property. He suggests that the standard and conventional meaning of shortfall is calculated in the same way that Mango Media calculated the amount being $702,760.87. Mr Young argues that what Mr Wily has agreed to do is to acknowledge Mango Media as a creditor of the bankrupt, Peter Robert Finn, in relation to the shortfall that had been suffered. There is not any reference to acknowledging Mango Media as a creditor for the amount due at the date of bankruptcy or the amount due at the date of bankruptcy less any moneys received after that date. Nor is there any other formulation in respect of this issue.
There is simply an agreement to acknowledge as a creditor regarding any shortfall Mango Media suffers under the mortgage. Mango Media’s position is that there is a contractual liability to admit a proof of debt in that sum. Even if Mr Wily had some other duty not to admit the proof of debt in that sum, he has promised Mango Media that he would admit a proof of debt as to the shortfall so he would then be in breach of contract for admitting a proof of debt in a lesser sum. It is submitted that a trustee who enters into a contract in the course of administering a bankrupt estate is personally liable for fulfilling that contract and any damages for a breach; Hunt Brothers (a firm) v Colwell (1939) CA Vol 4, 406.
That was a case in which a trustee entered into a contract for materials while administering the bankrupt estate and added the word “trustee” and described himself in the contract as trustee and signed it as trustee. In the report the editorial note states:
Where a person signs a document for or on behalf of a principle, or in a representative capacity, he is not generally personally liable thereon, but on the mere edition to his signature of words describing himself as an agent or as filling a representative capacity does not exempt him from personal liability. In the presence case, it is suggested in the judgment that a trustee of a deed of arrangement designed to negative personal liability should use express words denoting that recourse is only to be had to the funds that he holds as trustee.
Slesser, LJ at [408] states:
It is therefore, I think, clear now beyond dispute that the mere addition of the word “trustee” by itself will not be sufficient to operate as a limitation of the liability which would otherwise arise on a person who under a contract such as this, makes himself liable for the supply of material.
It is said, however, that there are circumstances in this case from which it ought properly to be inferred that the agreement between the parties was that the liability of the trustee should be limited to the assets of the estate. First, reliance is placed upon the fact – and it is a fact – that the plaintiff in this case, suing under the contract, was himself a creditor of the debtor, and took part in the appointment of the trustee who is the trustee of the estate. For myself, I cannot see how that carries the matter any further. The plaintiff has two different capacities. First, he is a contractor in this particular matter and secondly he is a creditor of the debtor. Argument has been adduced to us in the point whether the trustee may not have certain rights of indemnity, if he incurs liability on the assets against the estate or against the creditor either collectively or individually. I am not inclined to enter into these difficult questions in the present case. They do not seem to me to be relevant. The material question here is whether or not the trustee, in making this contract, has limited his liability.
Mr Young argues that in the case before this Court there is no limitation of liability in the Deed of Settlement, nothing that says that the Trustee is liable only to the extant moneys, therefore, the question of what moneys remain in the bankrupts estate are irrelevant to the question of his liabilities under the contract. Mr Young argues it is not a question of the Trustee making good a loss to the bankrupt’s estate but rather a loss to a creditor, Mango Media.
Mr Baird submits that this is not an entitlement to lodge a proof of debt at large or for any amount that it sees fit. This is clear from the words of qualification that state:
… any proof of debt MANGO MEDIA lodges with WILY regarding any shortfall MANGO MEDIA suffers under the Mortgage.
A shortfall, being an amount that was due to it under the mortgage once its power of sale had been exercised. Mr Baird advanced the argument that the starting point was what amount was secured under the mortgage as at the date of bankruptcy and that, at a later point in time, pursuant to the Deed of Settlement and as a result of the application for release of the funds from the Supreme Court, Mango Media received under its security, the Croydon mortgage an amount of $234,896.32 being an amount greater than that due to it as of the date of bankruptcy.
Mango Media was entitled to keep the difference between $234,896.32 and $203,500 and there is no issue between the parties about this amount. The difference represents an amount due to Mango Media under its security but what it was not entitled to do was to prove as a shortfall for an amount that it is not entitled to as being unsecured creditor. What the Trustee received from Sanwick under the sale of the Dulwich Hill and Greenacre properties was not money, in respect of which Mango Media was secured. It was an amount the Trustee was entitled to receive contractually.
This raises a question of what is Mango Media’s shortfall as of the date of bankruptcy Mr Baird contends that to be none. In support of his position the Court was referred to s.82(3B) of the Bankruptcy Act which states:
A debt is not provable in a bankruptcy insofar as the debt consists of interest accruing in respect of a period commencing on or after the date of bankruptcy on a debt that is provable in the bankruptcy.
The date of bankruptcy was 31 March 2008 and if Mango Media had a security, it could have relied on it and did to the extent that it was secured. Beyond its security over the Croydon property it was unsecured so was bound by s.82(3B) in its submission of its proof of debt and the Trustee was obliged to apply s.82(3B) in the admission of its debt. Both counsel referred the Court to the High Court decision in McKenzie v Rees & Anor (1941) 65 CLR 1 which is a case dealing with a surplus in bankruptcy where his Honour Dixon J (as he was then) at [12] stated:
A bankruptcy under the federal act is governed by the principles of administration which allow no proof for interest accrued or to accrue after the sequestration unless and until a surplus is found to exist and then allows creditors to claim upon the surplus or interest accruing since sequestration upon interest bearing debts.
There is no dispute between Counsel that Mango Media’s debt is an interest bearing debt, but it has no security, and there is no surplus in this administration. If there were a surplus in this administration, and ordinary unsecured creditors were fully paid then there is no issue and Mango Media could prove for interest post the date of bankruptcy.
Mr Young also relied on [12] of MacKenzie v Rees & Anor (supra) to the effect that it is not necessarily the case that a creditor won’t get interest after the date of bankruptcy and that the Court should not imply that additional words should be read into the Clause 9 by the reason of any such rule. Those words are not in Clause 9 and Mr Young argues that they should not be added.
Mr Young submits that s.176 of the Bankruptcy Act is one of the basis of the claim brought by the applicant. The section states:
Section 176 - Court may order trustee to make good loss caused by breach of duty
(1) Where, on application by the Inspector-General or by a creditor who has or had a debt provable in the bankruptcy, the Court is satisfied that a person who is or has been a trustee of a bankrupt's estate has been guilty (whether before or after the commencement of this section) of breach of duty in relation to the bankrupt's estate or affairs, subsection (2) applies.
(2) The Court may make any one or more of the following orders:
(a) an order directing the person to make good any loss that the bankrupt's estate has sustained because of the person's breach of duty;
(b) if the person is a registered trustee--an order directing the Inspector-General to cancel the person's registration as a trustee;
(c) any other order that the Court considers just and equitable in the circumstances.
Mr Young’s argument is that in this case it is not a question of the Trustee making good a loss to the bankrupt’s estate, rather a loss to a creditor, Mango Media. In support of that view Mr Young relied upon the decision in Brady v Official Trustee in Bankruptcy (No. 1) [2001] FMCA 63 per McInnes FM in which the creditor claimed under s.126 of the Bankruptcy Act damages for a conversion of property that the creditor claimed was a secured creditor in relation to. The damages were determined to be $17,550 and orders were made that the respondent pursuant to s.176 of the Bankruptcy Act pay the applicant damages of $17,550 which demonstrates that the section does allow the Court to make an order that the Trustee not just refund money back to the estate but pay compensation to a creditor who has suffered as a result of the breach of duty by the Trustee. An appeal against that decision was dismissed in Brady v Official Trustee in Bankruptcy [2002] FCA 363.
Section 5 of the Bankruptcy Act defines breach of duty as malfeasance, misfeasance, neglect, wilful default or breach of trust. Mr Young argues that they are a wide set of words and would also include a breach of contract. A breach of contract is, in itself, a wrong this Court has got jurisdiction to deal with, along with other claims relating to these proceedings whether or not they arise under the Bankruptcy Act if they are associated with the bankruptcy. Mr Young contends if the Court thought that s.176 was not applicable in these circumstances the Court could simply award damages for breach of contract being one of the claims brought against the Trustee in the interim application.
Mr Baird submits in respect to the Trustee’s obligations, they are always founded upon the construction of Clause 9 of the Deed of Settlement, that there is some obligation on the Trustee to admit Mango Media as a creditor. Mr Baird argues that the only amount that can be admitted is an amount that is properly entitled to prove and different from whatever amount might have been secured. For a proof to be admitted it would only be for a shortfall and that is the wording that appears in Clause 9, consequently, there is utility in the construction of Clause 9. The Trustee is covenanting to Mango Media to admit any shortfall and that is where the surrounding circumstances are important.
As of the date of the Deed of Settlement, 30 March 2010, the defined term “surplus funds” that Westpac was holding, had not at that time been released to Mango Media. Mango Media could not have submitted a proof of debt for a sum certain at that time. Mango Media did not know at that time how much it was going to receive in respect of its security. Mango Media could not know as of the date of the Deed of Settlement if there was going to be a shortfall or not. Clause 9 indicates that if there is a shortfall the Trustee acknowledges, as a mortgagee Mango Media was entitled to prove its shortfall. Consequently the Trustee establishes this obligation to administer the Bankruptcy Act, s.176 governs the Trustee’s conduct but in the opposite way to that contends to Trustee. Mr Baird contends at Clause 9 of the Deed has to be read subject to s.82(3B) and s.176.
Mr Baird argues that contrary to Mr Young’s submissions in respect to “breach of duty” in s.5 of the Bankruptcy Act, rather the Trustee is seeking to administer the section of the Bankruptcy Act that is binding on him being s.82(3B) in accordance with Mackenzie v Rees & Anor (supra) which cannot be a breach of duty to apply the Bankruptcy Act.
Mr Baird indicated he wished to draw to the Court’s attention the factual material in the Trustee Report to Creditors (Tab 89 p.431 of the Tender Bundle). At p.438 there is a list of creditors in the administration at the day of the report there being only two and possibly a third
a)ANZ Banking Group for $6,694.
b)Charter Finance Pty Ltd for $1,430,650.98.
c)There is a reference to Mango Media and Sanwick but no amount recorded.
The position in relation to the Trustee’s administration is that there is not going to be a surplus and there are interests of other creditors to be considered which the Trustee is representing in relation to the distribution of the assets. In the last income and expenditure account by the Trustee in the administration of the estate as at 6 October 2011 (Tab 100, p. 473 of the Tender Bundle) income is listed as $329,907.77. I note there is common ground between the parties that the amount of $329,907.77 is half of the amount that Mr Young seeks on his construction of Clause 6 (Interim Application paragraphs [1][2][3] see [3] above.
Consideration
Now that I have had the opportunity to read and consider all of the material I have formed the view that the tender documents numbered 54, 56, 57, 60, 61 and 64 are not required to be considered in order to understand the construction of the Deed of Settlement and a ruling on their admissibility is not required.
Although both counsel have identified three specific clauses in the Deed of Settlement it is important to consider the content of the Deed of Settlement in its entirety and further the context in which it was entered into in respect to the relevant dates of surrounding the events. Those events were:
a) 19.03.2010 – settlement of sale by Sanwick of the Greenacre Property.
b) 30.03.2010 – Deed of Settlement & Release between Wily and Mango Media Pty Ltd.
c) 06.09.2010 – Supreme Court orders Mango Media Pty Ltd be paid the monies paid into Court by Westpac Banking Corporation (Croydon property).
d) 24.01.2011 – Proof of Debt lodged by Mango Media
e) 06.04.2011 – Settlement of Sale by Sanwick of the Dulwich Hill property.
These dates are significant when considered the status of various issues at the time that the Deed of Settlement was entered into.
The first issue to be resolved is what amount, if any, was Mango Media entitled to claim in its proof of debt in the bankruptcy of Peter Robert Finn as at 31 March 2008 the date of bankruptcy. On the material before the Court Mango Media was entitled to be paid its principle amount of $185,000 which had fallen due on 28 February 2008 plus one month’s interest at the default rate of 10 per cent per month for the period between 28 February 2008 to 31 March 2008 being $18,500 given a total due of $203,500. This takes into account the payment of three months interest in advance to Mango Media (Affidavit of Yanis Artis Derums sworn 27 June 2011 at [5] – [8])
The operation of s.82(3B) of the Bankruptcy Act which states:
A debt in not provable in a bankruptcy insofar as the debt consists of interest accruing, in respect of a period commencing on or after the date of bankruptcy, on a debt that is provable in the bankruptcy.
This section came into effect on 31 March 2008 being the date of Peter Robert Finn’s bankruptcy. Significantly s.82(3B) does not affect a mortgagee’s entitlement to have recourse to its security for all amounts due under its mortgage notwithstanding the bankruptcy of the mortgagor.
An unsecured creditor who has an interest bearing debt which arises under the contract constituted by the mortgage the mortgagee cannot prove bankruptcy for interest in respect of a period after the date of bankruptcy, at least not until all other debts of the bankrupt have been paid in full: Mackenzie v Rees & Anor (supra). Consequently, if a mortgagee seeks to prove in a bankruptcy a claim of a shortfall under its mortgage it is in the same position as every other unsecured creditor. Mango Media in respect to its mortgage over the Croydon property received $234,895.32 being an amount greater than the sum $203,500 due under the mortgage as at 31 March 2008 being the date of bankruptcy.
Mango Media is entitled under its mortgage to recourse to it security in the Croydon property from amounts including interest after the date of bankruptcy. A creditor is entitled to receive out of any property remaining in the estate, interest for the period from the date of the bankruptcy of the payment of the provable debt while a surplus exists: Mackenzie v Rees & Anor (supra). However when that security is exhausted it is not permissible for Mango Media to attempt to prove as an unsecured creditor in the bankruptcy for a shortfall to the extent that the shortfall is represented by interest accruing after the date of bankruptcy. Interest is only payable out of a surplus and if there is no surplus interest after bankruptcy cannot be claimed: Re Stanton [1902] 2 IR 57. This a statutory restriction under s.82(3B) referred to above.
I believe the argument advanced by Mr Baird and the evidence relied upon at [26] – [28] above is the correct approach which is summarised in his submissions.
Part VI - Administration of Property, Division 1 - Proof of Debts address the issues that on the day bankruptcy takes place all provable debts owing by the debtor are converted from rights of actions against the debtor to a right to share in the distribution of the debtors estate vested in the Trustee, this is an equitable right regard to which the creditors are entitled to have all assets realised and applied pro rata for them. A secured creditor must identify and set out the details of its security and any shortfall. Section 90 provides a code, being the only means by which a creditor may prove a debt, but does not exclusively govern the surrender of rights, nor excludes the application of equity to the conduct of a person involved in execution of proceedings purportedly accord with the act: Pridmore v Magenta Nominees Pty Ltd (1999) 161 ALR 458 pp. 13 – 14. The proof of debt filed on behalf of Mango Media Pty Ltd on 24 January 2011 (Tab 92, p. 463 of the Tender Bundle) makes no claim for security on any property or fund. Accordingly I believe that the Trustee was correct to reject the Proof of Debt on Mango Media for the reasons set out in his notice of rejection of Proof of Debt date 6 June 2011 (Tab 98, p. 471 of the Tender Bundle) particularly the following ground:
Interest accruing on a provable debt for the time after the date of bankruptcy is not a provable debt.
Accordingly, there is no provable debt owing to your client [maintenance of Mango Media’s claim].
I believe that it is important to note in the analysis of the structure and impact of the Deed of Settlement that at the time it was entered into it was not known what amounts would be achieved by the mortgagee’s sale by Westpac Banking Corporation of the Croydon property, nor what amount was required in order to discharge the Westpac mortgage. Consequently, at that time it was not known what amount would ultimately become available to Mango Media as second mortgagee from the sale of that property.
I accept the argument advanced by Mr Baird that Clause 9 simply acknowledges the entitlement of Mango Media to prove in its capacity as mortgagee in the bankruptcy of Peter Robert Finn in respect to any shortfall that Mango Media might suffer under the second mortgage over the Croydon property when the final accounting of sale proceeds taken place after Westpac’s mortgagee sale. This acknowledgment does not entitle Mango Media to lodge a Proof of Debt at large or for any amount that it may select in the Bankrupt estate of Peter Robert Finn as the entitlement to the lodge qualified by the words “regarding any shortfall Mango Media suffers under the mortgage.” The provisions of the Act are fixed and not variable by the Trustee. Interest after the bankruptcy is not provable and the Trustee cannot contract out of the Bankruptcy Act.
Schedule 4A of the Bankruptcy Act addresses Performance Standards For Trustees (including Controlling Trustee). In Part 1 – Preliminary states:
1.1 Purpose
(1) This schedule sets out the standards for the minimum level of acceptable conduct and performance of:
(a) A registered Trustee when exercising their powers, or carrying out their duties of a registered Trustee under the Act; and
(b)…
The learned authors of McQuade Gronow, Australian Bankruptcy Law and Practice, Thompson Reuters at [19.1.10] indicate that the duties and conduct of a Trustee in a general sense were examined by the Full Court in Adsett v Berlouis & Ors (1992) 37 FCR 201; 109 ALR 100 per Northrop, Wilcox and Cooper J at [208]-[209] from which the following general principles may be extracted.
1. A trustee appointed in relation to a bankrupt becomes trustee of the bankrupt’s estate and is bound to administer that estate in accordance with the Bankruptcy Act 1966 (Cth) and the Bankruptcy Rules.
2. The trustee has a dual function:
(a) to administer the estate in the interests of the creditors and the bankrupt;
(b) to exercise, as a public duty and for the public welfare, the powers given and duties imposed, under the Bankruptcy Act 1966 (Cth).
3. The trustee’s conduct is subject to supervision of the court: Div 4 of Pt VIII.
4. The trustee is regarded as an officer of the relevant court.
5. A trustee in bankruptcy who acts for remuneration is under a duty of care greater than a gratuitous trustee.
6. The trustee is required to bring reasonable skill to the performance of her or his duties. A trustee must exercise judgment so as to save the estate unnecessary expenditure of money.
7. The discharge of a public duty imposed by the Bankruptcy Act 1966 (Cth) is to be performed conformably with the requirements of that duty, but also conformably with the trustee’s obligation to administer the estate in such a manner as to maximise satisfaction of the creditors’ claims and any possible surplus for the bankrupt. The trustee is in charge of the assets of the bankrupt and those assets are to be applied for the benefit of the creditors, and if there is any surplus, for the benefit of the bankrupt. It is clear that the minimum standard required if the trustee is that he or she shall handle he assets with a view to achieving the maximum return form the assts to satisfy the claims of the creditors and to provide the best surplus possible for the bankrupt.
8. A great deal of discretion and judgment is required to be exercised by the trustee.
9. The standard of conduct required of the trustee will ordinarily be the standard required of a professional person and perhaps higher.
10. Where an order is sought that a trustee be removed and make good losses suffered by the estate, it must be established that the trustee has been guilty of a breach of duty to act “diligently and prudently in regard to the business of the trust”.
11. The trustee is bound to execute the trust with fidelity and reasonable diligence and ought to conduct its affairs in the same manner as an ordinary prudent business person would conduct her or her affairs. A trustee in bankruptcy is governed by the general law relating to trustees save where the position of the trustee is governed by the general law relating to trustees save where the position of the trustee is modified by the Bankruptcy Act 1966 (Cth) or the Bankruptcy Rules.
The above authority referred to in the recent Supreme Court of NSW – Equity Division decision in Barwick v Goodridge (No. 2) [2011] NSWSC 1523 per Black J in following Adsett v Berlouis (supra) state that in Jackson v Salisbury (No. 3) [2000] FCA 1840, Mansfield J noted that the general principles expounded by Griffiths CJ in Scott Fell v Lloyd [1911] HCA 34; (1911) 13 CLR 230 had been adopted and applied in the Full Court of the Federal Court in Adsett v Berlouis (supra).
The Deed of Settlement and particularly Clause 9 are to be construed in relation to the provisions of the Bankruptcy Act as Mr Wily negotiated and executed the Deed of Settlement in his capacity as Trustee and his obligations as a Trustee bind the determination of the creditor’s rights. Mango Media’s Proof of Debt and Clause 9 must be construed within the context of the Bankruptcy Act. The Trustee is under an obligation to administer Part VI, Division 1 of the Bankruptcy Act in accordance with the Act and is not permitted to contract out of that obligation. On this construction it is consistent with the Trustee’s action of refusing to admit the Proof of Debt admitted on behalf of Mango Media and the Trustee’s duties under the Act.
The other issue concerns the proper construction of Clause 6 of the Deed of Settlement and as I indicated above the Clause should be construed as having regard to the entire contents of the Deed of Settlement including recitals. The anticipated but yet to occur mortgagees sale of the Croydon property by Westpac is demonstrated in Clauses 3 and 4 of the Deed of Settlement which state:
3. (SURPLUS FUNDS) Within seven (7) days of the date hereof, WILY shall forward a written direction to Henry Davis York (“HDY”) authorising and directing HDY or their client to pay FINN’s 1% share of the Surplus Funds to MANGO MEDIA.
4. In the event that HDY does not pay FINN’s 1% share of the SURPLUS FUNDS to MANGO MEDIA when fourteen (14) days or receipt of HDY of the authority referred to in this clause WILY hereby undertakes and agrees to execute such other documents as may reasonably be required to cause the said 1% share to be paid to MANGO MEDIA (for support of any application relating to the said payment), provided that such documents are prepared at MANGO MEDIA’s costs.
An inference can be drawn from Clauses 3 and 4 that Mango Media would receive a substantial payment, although at that time not yet quantified, in respect of its second ranking security over the Croydon property, which would be applied against its secured debt. At the time the Deed of Settlement was being prepared and executed the Greenacre and Dulwich Hill properties were in the process of being sold. Clause 8 sets out the procedure whereby should there be a dispute as to the amounts deducted by Sanwick for costs and expenses under its mortgage of those properties, then the benefit of any reduction or refund obtained thereby was to be divided equally between Mango Media and the Trustee. This procedure is also referred to in Clause 6 where it states:
…any surplus funds generated from the sale of either the Greenacre property or the Dulwich Hill property by Sanwick as mortgagee in possession, after Sanwick has deducted its rightful justifiable costs, expenses and security moneys
In support of that contention are the contents of the two Court of Appeal Agreements and the Short Minutes of Order dated 11 December 2009.
The counterpart agreements between Sanwick Pty Ltd and the Trustee executed on 11 December 2009 in [3] states:
(3) The parties shall be entitled to the proceeds of the above sales after Agent Fees and Conveyancing Fees for the sales in the following manner:
(i) As to 125 Wardell Street Dulwich Hill
75 per cent to Sanwick Pty Ltd
25 per cent to Helen Janet Finn
(ii) As to 11/11 Davidson Road Greenacre
50 per cent to Sanwick Pty Ltd
50 per cent to Helen Janet Finn
Sanwick’s legal representative shall take carriage of the Conveyancing
(Tab 47, p. 361; Tab 48, p.362 of the Tender Bundle)
The other counterpart agreements between Sanwick Pty Ltd and the Trustee state:
(2) Sanwick Pty Ltd as mortgagee shall be entitled to sell interests of Peter Robert Finn in 125Orwell Street Dulwich Hill, NSW and 11/11 Davison Road Greenacre, NSW. Sanwick’s legal representatives shall take carriage of the Conveyancing.
(3) Sanwick Pty Ltd shall be entitled to the whole of the proceeds of sale of the interests of Peter Robert Finn in the above properties.
(Tab 49, p.363; Tab 50, p.364 of the Tender Bundle)
In the Supreme Court of New South Wales – Court of Appeal the Short Minutes of Orders (by consent) state:
(2) Declare that the Mortgage given by Peter Robert Finn to Sanwick Pty Limited over his interests in the land described as Folio identifies 1/711399 and 11/SP3906 constitute a valid and enforceable mortgage over those interests in those lands.
(Tab 46, p. 360 of the Tender Bundle)
In the second of the counterpart agreements executed to resolve the Court of Appeal proceedings between Sanwick and the Trustee in [6] it states:
(6) In consideration of Andrew Hugh Jenner Wily agreeing to settle the proceedings on the terms of the consent orders, Sanwick Pty Ltd shall pay to him an amount that is equal to 50 per cent of the amount received by it from the sale of the above properties after deduction of agent commission and conveyancing Fees.
As a consequence of that agreement there was no entitlement on the part of the Trustee to receive any part of the proceeds from the mortgagee sale as the Trustee had foregone that entitlement. Instead the Trustee was to receive an agreed amount calculated by reference to 50 per cent of the amount received by Sanwick from the sales after deduction of agent’s commission and conveyancing fees.
In relation to the litigation between Sanwick Pty Ltd and Andrew Hugh Jenner Wily as Trustee for the bankrupt estate of Peter Robert Finn and Helen Janet Finn in the Court of Appeal Proceeding 40099 of 2009, appealing the earlier decision of the Supreme Court of NSW – Equity Division Proceeding 506 of 2008, had reached settlement on 11 December 2009 the costs incurred by the Trustee are referred to by the Trustee in his report to creditors in the following terms.
As Trustee, the above actions have incurred substantial legal fees and Trustee costs in defending the two proceedings brought by Sanwick. The total amount of legal fees incurred by the Trustee in defending the proceedings was $93,000.
(Tab 89, p. 435 of the Tender Bundle).
The amount to be received by the Trustee under the settlement of the Court of Appeal proceedings was clearly a commercial settlement of litigation, having regard to a number of factors. The sum, which the Trustee was prepared to accept at that time to resolve all the issues in the proceeding then on foot. It may be inferred that the settlement fee included an element of reimbursement to the Trustee for his legal costs and remuneration incurred to that date. He presumably took into account prospects of success on the appeal and the strong possibility that his Honour Bryson AJ’s Judgment would be overturned. The aspect of early resolution would have been attractive. However at that time it was not possible to conduct an analysis of the amount and to break it down into its constituent elements.
I am persuaded by the argument advanced by Mr Baird that taking into account these factors the amount that was paid by Sanwick to the Trustee under the Court of Appeal settlement agreements dated 9 December 2009 cannot under any construction be said to be surplus funds generated from the sale of the Greenacre and Dulwich Hill properties after the deduction of Sanwick’s costs, expenses and secured moneys. Although the full accounting records of the Trustee are not in evidence I believe that the inference can be drawn that this is the circumstances faced by the Trustee leading to the decision that he made.
In respect to Mango Media the procedures available to that organisation under s.90(4) of the Bankruptcy Act for a secured creditor who wishes to retain the benefit of his security and prove for the balance have not been followed. The section states:
90 (4) Asecured creditor who has not realized or surrendered his or her security may:
(a) estimate its value; and
(b) prove for the balance due to him or her after deducting the value so estimated.
As a consequence of s.90(1), secured creditors are not allowed to prove unless they comply with the provisions of s.90(2)-(5) concerning surrendering, realising or valuing the security. A secured creditor's rights are entirely statutory and if they are to share in the division of the bankrupt's estate they must comply with the requirements of the Bankruptcy Act. Although property of the debtor on his or her bankruptcy vests in the Trustee and unsecured creditors cannot enforce remedies against the personal property of the bankrupt in respect of any provable debt, any rights of a secured creditor to realise or otherwise deal with his or her security are not affected. The secured creditor may nonetheless prove in the debtor’s bankruptcy circumstances referred to in this section.
In respect to the claim brought by Mango Media against the Trustee pursuant to s.176 of the Bankruptcy Act it is alleged that the Trustee is in breach of the terms of the Deed of Settlement by failing to pay the amount of $164,953.88 to Mango Media. The claim was brought on a purely contractual basis as Mango Media has no claim to be a secured creditor in respect of that amount. Nor is Mango Media entitled to prove as an unsecured creditor in the bankrupt’s estate for its interest due to the operation of s.82(3B) of the Bankruptcy Act (see [80]-[82] above). No other basis of personal liability on the part of the Trustee has been advanced in the pleadings.
In the circumstances I am satisfied that the grounds in the interim application cannot be sustained and should be dismissed.
I certify that the preceding one hundred and one (101) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM
Date: 13 August 2012
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