CNH Capital Australia Pty Ltd v Pitt - [2006] FMCA 1698

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CNH CAPITAL AUSTRALIA PTY LTD v PITT & ANOR

[2006] FMCA 1698

BANKRUPTCY – Creditor’s petition – notice of opposition – debt owed to finance subsidiary of farm machinery supplier – claims against supplier not pursued but foreshadowed – whether sufficient cause to dismiss petition – whether debtors able to pay debts – adjournment allowed to enable realisation of farm equity.

Bankruptcy Act 1966 (Cth), ss.52(1), 52(2), 52(2)(a), 52(2)(b), 52(5)

Australia & New Zealand Banking Group Pty Ltd v Foyster [2000] FCA 400
Commonwealth Bank of Australia v Jeans [2005] FCA 1852
Prestia, in the matter of Australia and New Zealand Banking Group Ltd v Prestia [2001] FCA 792
St George Bank Ltd v Helfenbaum [1999] FCA 1337
Totev v Sfar [2006] FCA 470

Applicant:

CNH CAPITAL AUSTRALIA PTY LTD

First Respondent:

KENNETH JAMES PITT

Second Respondent:

EDNA MURIEL PITT

File Number:

SYG413 of 2006

Judgment of:

Smith FM

Hearing date:

2 November 2006

Delivered at:

Sydney

Delivered on:

2 November 2006

REPRESENTATION

Counsel for the Applicant:

Mr A Spencer

Solicitors for the Applicant:

Bayside Solicitors

Counsel for the Respondents:

Mr D Villa

Solicitors for the Respondents:

pappas, j. – attorney

ORDERS

The hearing of the petition is adjourned to 15 March 2007 at 10.15 a.m.
Without the leave of the Court, no further affidavit may be relied upon in chief by either party on that day, other than formal affidavits, unless that affidavit is filed and served before 4 pm on 8 March 2007.
Under s.52(5) of the Bankruptcy Act 1966 (Cth), the period at the expiration of which the petition will lapse is extended to 8 February 2008.
These orders are conditional upon the respondents, and each of them:
(i)Taking all reasonable steps to sell their property, being the land comprised in folio B/33571, or otherwise to make arrangements to answer the demands of all their creditors, and
(ii)Undertaking to the Court that, except for the purposes of giving effect to condition (i) or for the payment of ordinary living expenses, they will not enter into any agreement or transaction nor take any other action which would dispose of or diminish their assets.
(iii)Undertaking to the Court that during the adjournment they will not take any steps, including in the capacity as directors or proprietors of Pitt Enterprises (Aust) Pty Ltd, to pursue the claims foreshadowed in Exhibit 2, nor incur any costs in relation to those claims.
(iv)Undertaking to the Court that they will notify the solicitors for the applicant of the time, date and place of any proposed settlement of the sale of the said property, and that they will direct any purchaser to pay to the applicant at settlement the amount of the debt which is the subject of the petition.
The parties have liberty to apply on a date allowing 2 day’s notice to the other party.
Costs reserved.
Note that the respondents, by their counsel, have given the above undertakings.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG413 of 2006

CNH CAPITAL AUSTRALIA PTY LTD

Applicant

And

KENNETH JAMES PITT

First Respondent

EDNA MURIEL PITT

Second Respondent

REASONS FOR JUDGMENT

(revised from transcript)

I have before me a petition by the finance subsidiary, CNH Capital Australia Pty Limited (“the finance company”), of a manufacturer/supplier of farm equipment, CNH Australia Pty Limited (“the parent company”), seeking a sequestration order against a husband and wife based on an amount owing of $124,718.79 under two judgment debts. The judgment debts were obtained by default on 23 June 2004 and 25 January 2005. There were previously amounts paid in reduction of the judgment amounts, which I need not itemise.
The judgment debts arose upon the failure of the respondents to answer demands on them as guarantors under financing agreements entered into when their family company, Pitt Enterprises (Australia) Pty Limited (“the family company”), acquired farm equipment which included a tractor, identified as “Case IH Model CVX170 MFD cab tractor with extras”. The extras included modifications and components allowing the tractor to be used with a heavy duty forestry mulcher.
The equipment was not supplied directly by the parent company of the applicant petitioner, but by a local equipment supplier, Carruthers Machinery Company (“Carruthers”). There is evidence before me that Carruthers was aware of a profitable use to which the equipment was intended to be put, and it is arguable that this knowledge also reached the parent of the finance company.
The financing agreements upon which the judgment debts were obtained were entered into during 2003. There is evidence before me from the husband respondent that, within a short period after its delivery, the equipment proved defective in numerous ways, giving rise to repeated return of the equipment for warranty maintenance and other problems. There is also evidence that the parent company was involved in answering the respondents’ requests to rectify the machinery.
The respondents made complaints about the machinery and its suppliers during 2004 to the New South Wales Office of Fair Trading, but did not commence any litigation against the parent company nor Carruthers. In particular, they did not make any claims by way of response or cross‑claim to the finance company’s proceedings that gave rise to the judgment debts nor in collateral separate proceedings.
There is some reference in the evidence to an attempt by the applicant petitioner, or another creditor, to obtain payment of debts owing by the respondents by processes of execution, but this evidence was left obscure. Eventually a bankruptcy notice was issued on 22 August 2005 which was served on each of the respondents on 7 September 2005. The notices were not complied with, and the present petition was filed on 9 February 2006, relying on the failure to comply with the bankruptcy notices. The applicant petitioner had some difficulties effecting personal service of the petitions and supporting documents, and this was not effected until an order for substituted service was obtained. Eventually they were served, and the respondents filed an appearance by a solicitor on 12 July 2006.
The respondents then filed a notice of opposition which claimed that there was an arguable defence against the default judgments, and that a motion to set aside the default judgments would be lodged. It appears that at that time the respondents were considering whether they had causes of action directly against the finance company in relation to its actions when repossessing the equipment. However, subsequently the respondents did not proceed with their challenge to the default judgments obtained by the petitioner.
On 6 September 2006, the respondents filed an amended notice of opposition to the petition. This, in effect, concedes the debt relied upon, and the act of bankruptcy, and the other formalities required to be established pursuant to s.52(1) of the Bankruptcy Act 1966 (Cth). It contends:
1.The petition is based upon two Judgments issued by the Parramatta District Court:
(a)one in proceedings number 46/04 which was entered on 23 June 2004, and
(b)one in proceedings number 333/04 which was entered on 25 January 2005.
2.The Judgments were obtained by default.
3.The Judgments arise from a loan made by the applicant creditor to Pitt Enterprises (Australia) Pty Limited (the Company), for the purpose of the Company purchasing farm equipment manufactured by CNH Australia Pty Ltd (CNH Australia).
4.The applicant creditor is a wholly owned subsidiary of CNH Australia.
5.The respondent debtors guaranteed the Company’s repayment of the loan to the applicant creditor.
6.The Company and the respondent debtors have causes of action against CNH Australia arising from defects in the farm equipment. The value of those causes of action will exceed the amount of the applicant creditor’s debt.
7.In the premises:
(a)the respondent debtors are able to pay their debts;
(b)further or in the alternative, there is other sufficient cause for a sequestration order not to be made within the meaning of section 52(2)(b) of the Bankrupty Act;
(c)further or in the alternative, these proceedings should be adjourned until after the final hearing of proceedings by the Company and the respondent debtors against CNH Australia.
In effect, two contentions were presented for the dismissal of the petition. These invoke the two grounds of the Court’s discretion under s.52(2), by arguing that the Court should be satisfied:
(a) that [the respondents] are able to pay his or her debts; or
(b)that for other sufficient cause a sequestration order ought not to be made; …
The “other sufficient cause” which is relied upon is the cause of action of the respondents’ company against Carruthers and the parent company for their supply of defective machinery. The respondents concede that no proceedings have yet been commenced. However, they say that they have caused their company to be reinstated in the register of corporations, and that this occurred on 23 October 2006. They have engaged a solicitor to assist them in the bringing of the claim, and a draft pleading was tendered today.
This foreshadows a statement of claim in the Supreme Court of the Australian Capital Territory against the relevant Carruthers entity, Davibray Pty Limited, and the parent company. The finance company is not named as a defendant, and no cause of action proposed against it. In relation to the parent company, as well as alleging breach of sale of goods warranties, it is pleaded that the parent company was “indirectly a party to [Carruthers’] contravention of s 52 of the [Trade Practices Act]”, on the basis that false or misleading representations about the suitability and performance of the equipment were made by its agent. Particulars of the agency are not given and, although there is an allegation that damages include loss of profits, the pleading makes no attempt to quantify them in particulars.
On the evidence presented by the respondents which is before me today, I am not able to reach a conclusion that the foreshadowed claim in relation to the farm equipment is “likely to succeed” nor that “its quantum is likely to equal or exceed the creditor’s claim”, within the principles relevant to s.52(2)(b), which are referred to by Sundberg J in St George Bank Ltd v Helfenbaum [1999] FCA 1337 at [13] (see also the extensive discussion of the authorities by Allsop J in Totev v Sfar [2006] FCA 470). This is so, even if I assume that the respondents’ claimed losses were personally incurred or are recoverable by them. For this reason, I do not consider that the argued ground for dismissing the petition under s.52(2)(b) is made out.
My inability to be satisfied as to the prospect of recovering an amount exceeding the amount of the debt relied on by the petitioner, means that I do not need to address whether the relationship of the petitioner, as a subsidiary of one of the proposed defendants in the ACT Supreme Court claim, would satisfy a further requirement which emerges from the cases discussed by Allsop J in Totev v Sfar (supra). This is that the proposed claim should be against the petitioner, and not an unrelated body. I note in this respect that the respondents relied on the judgment of Wilcox J in Commonwealth Bank of Australia v Jeans [2005] FCA 1852 at [13], which suggests that the distinction might not be absolute.
Since I am unable to be satisfied as to a prospect of quantifiable damages arising from the respondents’ misfortunes in relation to their forestry mulcher endeavours, I am unable to bring the value of the proposed cause of action into any accounting when I come to consider whether the respondents are “able to pay [their] debts”.
On my assessment of the evidence presented to me, I have at least been persuaded that the proposed cause of action has enough substance to be characterised as a “real claim”. This might allow consideration of the Court’s discretions as to adjournment of the petition. However, counsel for the respondents conceded that the expiry date of the petition, even with a 12 month extension, would be unlikely to allow sufficient time for an outcome to be achieved in the proposed action in the ACT Supreme Court, noting that it had not yet even been commenced. He therefore conceded that the Court would not be able to adjourn the petition to await the outcome of that claim.
The evidence before me as to the current assets and liabilities of the respondents was not entirely clear. However, a broad picture of their financial situation can be drawn. It is that, apart from the mortgagee of their farming property and the current petitioner, there are no other significant creditors pressing for payment of debts.
The respondents identify Esanda Finance as a creditor in relation to the financing of two Toyota Land Cruisers. The respondent husband, whose evidence I accept, quantifies this debt at approximately $40,000, but swears that he has arrived at an arrangement with that creditor whereby payment of its debt is not being pressed, and it is not incurring interest, because that creditor is prepared to allow time to the respondents to pursue their claims in relation to the defective farm machinery.
The only other substantial unsecured creditor is CBFC who is owed $35,000 in relation to other machinery. However, I accept the evidence of the respondent husband that, although this debt is in default, it is being paid at a rate which the creditor is happy with.
The only other debts which were identified in evidence and cross‑examination were a very small overdraft, and a small credit card debt.
The applicant husband is currently earning income as a subcontractor for an office renovating operation. To the extent that the nature of this occupation was explored, it does not appear to me to involve the incurring of any significant ongoing trading debts.
This leaves two creditors who, on the evidence before me, are currently pressing for payment, being the current petitioner with a debt of approximately $125,000, and a mortgage liability which is identified as $390,199.50. There is evidence suggesting that the respondents are in default under their mortgage, and that the mortgagee may be contemplating exercising rights of possession and sale. However, there is no evidence that there is imminent prospect that this will occur, nor that the mortgagee would not permit the respondents a reasonable opportunity themselves to realise their equity in their farm.
The size of that equity is substantial. Their property is a well situated rural property, partly farmed, partly cleared, with good access to Bredbo, a township not far south of Canberra. A fully considered valuation of that property gives a market value of the fee simple in vacant possession as at 27 October 2006 at $570,000. Less formal opinions by local real estate agents are also in evidence. One of these by an agent, who has been employed in very recent times by the respondents to sell the property as exclusive agent, gave an opinion of an estimated selling price range at $685,000 to $730,000 and also a separate opinion that it was valued at $680,000. Two other agents who gave written opinions on value, valued it at $650,000 to $680,000 in one case, and $625,000 to $650,000 in another case.
Counsel for the petitioner in cross‑examination took the respondents through an accounting in relation to their solvency, based on the $570,000 valuation. This arrived at a deficit in the region of $75,000, but it took into account the debts owing to Esanda and CBFC. The calculation did not take into account a possibility of some additional legal and other expenses, but it also put out of consideration a claim by the debtors that they owned farm equipment which they identified in a list. The respondent husband estimated that this equipment was realisable, if given time, for $90,000. It was clear that some of the items of equipment are substantial, and must have a value, but his expertise to give opinions was not apparent and I do not find it possible to arrive at an amount which the sale of these items might procure.
Considering all the evidence as to the assets and liabilities of the respondents, I have arrived at a firm view that it does not satisfy me that they have assets available to them sufficient to meet their currently owing debts, within s.52(2)(a) (c.f. the discussion in Australia & New Zealand Banking Group Pty Ltd v Foyster [2000] FCA 400 and Prestia, in the matter of Australia and New Zealand Banking Group Ltd v Prestia [2001] FCA 792).
However, the evidence does not persuade me as to the converse: that they are insolvent and unable to pay those debts whose payment is being demanded by creditors. It leaves in my mind a real possibility that the sale of the property could leave the respondents with sufficient money to pay the present petitioner’s debt and the amount owing to the secured mortgagor, leaving sufficient funds in hand to meet the demands of other creditors which are “likely to be made in the reasonably immediate future”.
Moreover, it appears to me that the respondents have belatedly accepted the necessity of themselves attempting to realise their equity, and I am satisfied that their present proposal to do this is genuinely put to the Court. I am satisfied that the prospects of realising a greater amount, with substantially lower expenses, is much higher if the applicants can achieve a sale through their own efforts, rather than that it be performed in the course of a bankruptcy administration.
In those circumstances, I entertained an alternative application by the respondent debtors that, if I were not prepared to dismiss the petition, I should grant an adjournment of about four months to allow them the opportunity they now request to endeavour to pay the debt relied on by the petitioner by realising their farm equity.
I have carefully weighed up the public interests in relation to granting such an adjournment. As I have indicated above, there is a reasonable prospect that the sale will provide sufficient funds to answer the secured mortgagee and the current petitioner. The ability of the respondents to meet other debts in the immediate future is less clear, but on the evidence before me those creditors are not pressing for payment. There is no indication that the respondents are currently incurring other debts of any substance in the course of trading or business activities.
In my opinion, the general interests of creditors of the respondents is in favour of allowing them the opportunity to answer the debt of this current petitioner before being sent into bankruptcy, rather than the reverse. Weighing up the public interests in their entirety, I consider the circumstances which I have sketched above point to allowing the respondents the opportunity they seek.
I have taken into consideration the chronology of the present matter. I accept that the respondents have been dilatory in pursuing their claims against the agricultural machinery manufacturers and suppliers. It is only at the last minute that they have applied their mind to legal advice as to their situation, and have accepted the business reality that they will have to sell their farm without delay. However, I consider that these aspects of their conduct could eventually be answered by costs orders, and that if they are able to pay the debt, it will be generally in the interests of the present parties and other creditors.
A concern which I raised with counsel for the respondents was whether in the meanwhile the respondents might either directly, or as directors or proprietors of their family company, jeopardise or diminish their estate by commencing the litigation in the ACT Supreme Court which was foreshadowed to me. However, an undertaking has been offered which should diminish that risk during the period of an adjournment. In that circumstance, I consider that there is no substantial risk to the potential estate in bankruptcy arising from the adjournment.

For the above reasons I shall allow an adjournment of the petition, and shall invite submissions on the formulation of the conditions for the adjournment. I consider that it is appropriate to extend the period before which the petition will lapse, and note that the parties are agreed that this should be for the full period allowed by s.52(5).

I certify that the preceding thirty-two (32) paragraphs are a true copy of the reasons for judgment of Smith FM

Associate: Lilian Khaw

Date: 27 November 2006