Commonwealth Bank of Australia v Kapil

[2013] FCCA 1183

FEDERAL CIRCUIT COURT OF AUSTRALIA

COMMONWEALTH BANK OF AUSTRALIA v KAPIL & ANOR [2013] FCCA 1183

Catchwords:
BANKRUPTCY – Creditor’s petition – notice of objection – where debtors financed purchase of franchises by their company through arrangement of borrowings from petitioning creditor – where debtors primary obligors of those agreements – where debtor’s company went into voluntary liquidation – where liquidation complete and company deregistered – where residence of debtors subject to mortgage with petitioning creditor – where mortgage an all moneys mortgage subject to caveat that debtors acknowledged in writing that mortgage extended to other agreements – where no written acknowledgment that mortgage extended to debtors’ other agreements – whether petitioning creditor a secured creditor in respect of borrowings.

BANKRUPTCY – Creditor’s petition – notices of objection – whether proceedings open to debtors to reclaim moneys through their former company from its former franchisor – whether any moneys recovered would first be owed to petitioning creditor as secured creditor of the former company – where proceedings not yet commenced – whether to exercise discretion to hold that there is other sufficient cause why the petition should be dismissed – whether to adjourn proceedings to allow for commencement of proceedings against former franchisor.

Legislation:
Federal Circuit Court Rules 2001, r.6.14(2)

Ling v Enrobook Pty Ltd (1997) 143 ALR 396

Applicant: COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)

Respondent: SHEFALI KAPIL

File Number: SYG 3019 of 2012

Applicant: COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)

First Respondent: LALITA KAPIL

Second Respondent: RISHI KAPIL

File Number: SYG 3020 of 2012

Judgment of: Judge Raphael

Hearing date: 15 August 2013

Date of Last Submission: 15 August 2013

Delivered at: Sydney

Delivered on: 15 August 2013

REPRESENTATION

Solicitors for the Applicant: Gadens Lawyers

Solicitors for the Respondent: Beazley Singleton Lawyers

ORDERS

1. Leave to file Amended Petition in SYG3020/2012.

2. Pursuant to Rule 6.14(2) of the Federal Circuit Court Rules 2001 the Petition be deemed to have been served on Lalita Kapil on 3 April 2013.

3. Matter adjourned to 2.15p.m. on 22 October 2013.

4. Liberty to apply on 3 days notice.

5. Costs reserved.

FEDERAL CIRCUIT COURT OF AUSTRALIA

AT SYDNEY

SYG 3019 of 2012

COMMONWEALTH BANK OF AUSTRALIA

Applicant

And

SHEFALI KAPIL

Respondent

SYG 3020 of 2012

COMMONWEALTH BANK OF AUSTRALIA

Applicant

And

LALITA KAPIL

First Respondent

RISHI KAPIL

Second Respondent

REASONS FOR JUDGMENT

1. There comes before me today two associated matters in which the Commonwealth Bank of Australia[1] is seeking sequestration orders against the estates of four individual members of the same family, the Kapils. I have been advised today that the proceedings are not to continue against Mr Vishive Mohan Kapil because at the relevant time he was a bankrupt. Upon the commencement of the proceedings I permitted the filing of an amended petition in matter number SYG3020/2012. I made orders pursuant to Rule 6.14(2) of the Federal Circuit Court Rules 2001 that the petition be deemed to have been served on 3 April 2013 on Lalita Kapil.

   [1] “CBA”

2. The Kapil family purchased a series of franchises in the Gloria Jean’s coffee shop business and I have before me, as Exhibit 3, a copy of one of these franchise agreements dated 24 July 2008.  According to the evidence of Ms Shefali Kapil, who swore an affidavit in both proceedings, the first franchise was purchased on 2 June 2005, the second on 13 December 2006 and third on 26 October 2007.  The franchises cost, respectively, $385,000, $700,000 and $250,000.  Although these franchise businesses were initially successful they began to fail after Mr Vishive Kapil got sick in India.  Money was owed to the Gloria Jean’s company and one of the businesses was sold.  On 29 September 2011 Gloria Jean’s issued a termination notice on the company which owned these franchises for which the family members were guarantors.  Gloria Jean’s went into possession of two properties and have been operating those properties ever since.

3. In order to finance their purchases through their company, Kapil Pty Limited, the family arranged for borrowings from the petitioning creditor, the CBA.  They guaranteed the obligations of the company and in the normal way of these things became primary obligors under those agreements.  Lalita and Rishi Kapil own their house in which all members of the family live at 17 Figtree Crescent Glen Alpine.  There is a mortgage to the CBA of that property and reference is made to this in the amended petition SYG3020/2012.  Kapil Proprietary Limited went into creditor’s voluntary liquidation and there was some suggestion that the CBA may have appointed a receiver but there does not appear to be any evidence of this.  The liquidation has now been completed and the company has been deregistered.

4. The Kapil family members have filed notices of objection to the petitions issued by the CBA.  There were two grounds in respect of matter number SYG3020/2012 and one in respect of matter SYG3019/2012.  One ground in respect of SYG3020/2012 claimed that the CBA was a secured creditor because of the mortgage over the family property and thus, was not a person who could properly present a petition against Lalita and Rishi Kapil.  In court today I have had the benefit of seeing the mortgage memorandum and the guarantees of the business.  In the mortgage memorandum which is Exhibit 1 the amount owing is described to mean:

   “All moneys which one or more of you owe us or will or may owe us, in the future, under a Secured Agreement and this mortgage or either of them.”

   A secured agreement means:

   “An agreement between one or more of you and us (including a guarantee given by one or more of you) whenever made, under which you undertake to pay or repay us money and which you acknowledge in writing to be an agreement to which this mortgage extends;  and any such agreement as varied.”[emphasis added]

5. This all moneys mortgage would clearly capture the debt owed under the guarantee and thus becomes security for it if it were not for the caveat referred to in the latter part of the definition of “secured agreement”.  Mr Beazley, who appears on behalf of the debtors on a pro bono basis and for whose assistance the court is grateful, accepts that he cannot establish that the parties had acknowledged in writing that the mortgage extends to the guarantees given for the Kapil Pty Limited loans.  And nothing in those documents that I have also seen and which are found as part of the annexures to the affidavit of Stephen Goddard dated 9 August 2013 and filed herein, shed any more light on that aspect of the matter.  I am therefore not satisfied that the CBA is a secured creditor in respect of the debts for which the petition was issued.

6. The second ground of opposition which Mr Beazley argues is common to both proceedings SYG3019/2012 and SYG3020/2012.  The Kapils say that Gloria Jean’s has certain obligations under the franchise agreement upon termination of a franchise and these are contained in clause 16 of that agreement.  Essentially, there is an election given to the franchisor in clause 16.2 to require the franchisee to remove the fit out and equipment and make good the premises or to leave the fit out in the premises and allow the franchisor to use it for no fee or charge for a period of 120 days and allow the franchisor to purchase the fit out.  Another option is sale by the franchisor (who in this agreement is described as the master franchisee).  That clause is in the following form 16.5.

   “16.5If required by the Master Franchisee:

   (a)  the Fitout must remain in the Premises; and

   (b)the Master Franchisee or it’s nominee will be entitled to enter upon and operate the Store using the Fitout for no fee or charge; and

   (c)the Master Franchise or its nominee may sell the Store and the Franchise, including all stock and the Fitout, for a price and on terms and conditions considered by the Master Franchisee in its absolute discretion to another person or company and:

   (i)           firstly, apply the proceeds of such sale towards any monies then owing to the Master Franchisee by the Franchisee under this Agreement and to the discharge of any encumbrance over the Fitout; and

   (ii)     secondly, after accounting for the payments specified in clause 16.2(c)(i) and pay any remaining proceeds to the Franchisee.”

7. The Kapils argue that the franchisor has not adopted any of these options but has continued to remain in the premises and operate them.  They believe that the franchisor is obligated to sell the businesses, which one can infer are trading profitably from the fact that they are continuing to be traded by the franchisor, and to account to them for any balance remaining of the sale price after any monies owed to the franchisor are paid.  In this case, of course, accounting would not be to the individuals but to the company.

8. The Kapils argue that they would be entitled, as guarantors, to commence proceedings against the franchisor to enforce the agreement and that this would result in the sale of the businesses and the repayment of the loans to the bank.  There is some question as to whether they, as guarantors, can do this or whether it would be necessary to reinstate the company and for the liquidator to be funded to commence the proceedings.   

9. The bank’s debt against the company is a secured one and therefore it would stand ahead of any ordinary creditors and so it is not necessary for me to delve into whether any dividend was paid or whether all other creditors were paid out in full.  Any money received from these proceedings would go straight to the CBA.  But although the termination of the franchise agreement is now, some two years ago, no proceedings have yet been commenced. 

10. The bank argues that I should not exercise my discretion under s.52(2) to hold that there is other sufficient cause why the petition should be dismissed.  There is much authority on the exercise of the discretion in cases where litigation is on foot most of which are considered in the Full Court decision of Ling v Enrobook Pty Ltd (1997) 143 ALR 396 where the court Davies, Wilcox and Branson JJ say:

    “A review of the authorities discloses that in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor’s debt, will amount to ‘other sufficient cause’ not to make a sequestration order Re Yeatman Ex parte Yeatman (1880) 16 Ch D 283; Maddestra v Penfold Wines Pty Ltd (1993) 44 FCR 303, Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No. 2) (1994) FCR 14, and Ling v The Commonwealth (1996) 139 ALR 159.

    The circumstance that the legitimate claim of the debtor is one against the judgment creditor is likely to be a significant circumstance for the purposes of 52(2)(b).  …

    The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts, may well provide a basis for a finding that there is ‘sufficient cause’ for a sequestration order not to be made (see, for example, Maddestra v Penfold Wines Pty Ltd (1993) 44 FCR 303. But the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally. They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be only of a short duration.”

11. The evidence before me certainly points to the fact that an argument can be made against the franchisor that it has not complied with its own agreement.  Although it is possible that clause 16.5 it can be said not to have any temporal limitation.  I am sufficiently impressed by the evidence that a breach may have occurred to provide some relief to the debtors.  I note that they claim that this is their only substantial obligation and that there are no supporting creditors.  The case made on their behalf is not strong enough, by any means, for me even to consider dismissing the petitions but assistance can be given to them by a short adjournment during which time they will be expected to commence the proceedings they have foreshadowed with a statement of claim that clearly shows the court how they articulate their legal entitlement and, equally importantly, how they calculate the damage or claim that they intend to make. 

12. In order that the court can make any further decision on the matter at the adjourned hearing it would be ideal if the defendants to the intended proceedings had put on their defence.  But the court would be reluctant to grant some lengthy adjournment without the ability to have the matter brought back to it if the debtors did not commence the proceedings expeditiously. 

13. In the court’s view these debtors should be able to have a statement of claim filed within 28 days.  Under the Rules of Court in the District Court of New South Wales, where I assume the case will be commenced, one can expect that a defence will be filed within a further 28 days.  I therefore propose to adjourn the matter until 9.30a.m. on 22 October but I will give liberty to apply on three day’s notice and expect that such an application would be made by the applicants if no copy of a Statement of Claim is provided to them by 16 September. 

I certify that the preceding thirteen (13) paragraphs are a true copy of the reasons for judgment of Judge Raphael

Associate: 

Date:  21 August 2013