Commonwealth Bank of Australia Trading as BankWest v Mastronardo (No.2)

In the matter of *Commonwealth Bank of Australia Trading as BankWest v Mastronardo (No.2)*, the Federal Court of Australia considered an application by BankWest for a sequestration order against Mr. Mastronardo. Mr. Mastronardo contended that he possessed a cross-claim against BankWest that was equal to or exceeded the debt upon which the creditor’s petition was based. The central dispute revolved around whether Mr. Mastronardo was required to establish a likelihood of success in his cross-claim before the Court could exercise its discretion under s.52(2)(b) of the *Bankruptcy Act 1966* (Cth) to refuse the sequestration order.

The Court was required to determine several legal issues. Firstly, it needed to ascertain the threshold for establishing a cross-claim in the context of a sequestration application, specifically whether a likelihood of success must be demonstrated. Secondly, the Court had to consider whether BankWest's right to appoint receivers over properties mortgaged by Mr. Mastronardo as security for his liabilities under guarantees was contingent on BankWest first making a demand for payment of the secured moneys under those guarantees. Thirdly, the Court examined whether BankWest's actions in appointing receivers without a prior demand discharged Mr. Mastronardo from his liabilities under the guarantees, or if an election was required. Finally, the Court assessed whether Mr. Mastronardo had a claim against BankWest for the proceeds of sale of the mortgaged properties, and whether BankWest's conduct in offering additional lending or appointing receivers constituted unconscionable conduct.

Judge Manousaridis reasoned that it is necessary for a debtor to establish a likelihood of success in their cross-claim before the Court can exercise its discretion to refuse a sequestration order under s.52(2)(b) of the *Bankruptcy Act*. The Court found that Mr. Mastronardo had established a likelihood of success in his cross-claim, which arose from BankWest's appointment of receivers over mortgaged properties without first making a demand under the guarantees. The Court held that BankWest's rights to appoint receivers were likely dependent on such a demand, and that the appointment without it likely discharged Mr. Mastronardo from his liabilities, provided he elected not to be bound by the guarantees. The Court found that Mr. Mastronardo had not affirmed his obligations and likely had a claim against BankWest for the proceeds of sale of the mortgaged properties, with a likelihood of success at trial. However, the Court found no reasonably arguable case of unconscionable conduct.

Consequently, the Court ordered that BankWest was not entitled to a sequestration order. The matter was to be listed for a hearing concerning BankWest's application to be substituted as the petitioning creditor.