Commonwealth Bank of Australia v Papas

[2013] FCCA 1261

FEDERAL CIRCUIT COURT OF AUSTRALIA

COMMONWEALTH BANK OF AUSTRALIA & ANOR v PAPAS [2013] FCCA 1261

Catchwords:

BANKRUPTCY – Sequestration order – creditor’s petition opposed – prospect of proceedings in Supreme Court of Queensland – debtor attempting to have sequestration delayed until conclusion of Supreme Court proceedings – no real prospect of success in prosecuting Supreme Court proceedings – no reason for delay – sequestration order made.

Legislation: 

Bankruptcy Act 1966 (Cth), s.52

Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785

Menzies v Paccar Financial Pty Ltd [2011] FCA 460

Applicant: COMMONWEALTH BANK OF AUSTRALIA

Supporting Creditor: WESTPAC BANKING CORPORATION

Respondent: JOHN PAPAS

File Number: BRG 273 of 2013

Judgment of: Judge Burnett

Hearing date: 31 July 2013

Date of Last Submission: 31 July 2013

Delivered at: Brisbane

Delivered on: 2 August 2013

REPRESENTATION

Counsel for the Supporting Creditor: Mr C. Wilson

Solicitors for the Supporting Creditor: Thomsons Lawyers

The Respondent appeared on his own behalf

ORDERS

1. A sequestration order be made against the estate of JOHN PAPAS.

2. The applicant creditor’s costs be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.

The Court notes that the date of the act of bankruptcy is 5 March 2013.

FEDERAL CIRCUIT COURT OF AUSTRALIA

AT BRISBANE

BRG 273 of 2013

COMMONWEALTH BANK OF AUSTRALIA

Applicant

WESTPAC BANKING CORPORATION

Supporting Creditor

And

JOHN PAPAS

Respondent

REASONS FOR JUDGMENT

(Revised from Ex Tempore Reasons)

1. On 31 October 2012 the originating applicant creditor obtained a judgment, which caused the commencement of these proceedings.  Subsequently, for reasons I will explain, the substituted creditor in turn obtained a judgment in the Supreme Court of Queensland for a sum of $1,161,253.99.  A bankruptcy notice issued in respect of that sum on 25 January 2013 and it was served personally upon the debtor on 12 February 2013.  The debtor failed to comply with the requirements of the notice and thereby committed an act of bankruptcy on 6 March 2013. 

2. On 8 April 2013 the original petitioning creditor filed its creditor’s petition. The applicant substituted creditor in the meantime was pursuing its own rights. Ultimately it sought to be substituted as the petitioning creditor in this application. An order was made earlier this week permitting substitution. Substitution was permitted as the original petitioning creditor had come to satisfactory terms with the debtor.  The substituted creditor indicated that it wished to proceed and I entertained argument on that point on Wednesday. 

3. It first needs to be noted that the respondents to the original creditor’s petition and the substituted petition were noted as John Papas and Denise Papas, but now the applicant substituted creditor, only seeks to proceed against Mr John Papas

4. On Wednesday orders were also made to amend the creditor’s petition to incorporate the particulars relevant to the substituted creditor’s claim. Additionally orders were made in respect of service of the amended petition which was directed to be effected forthwith. Service of the amended petition was in terms of the draft identified in an affidavit relied upon by the applicant substituting creditor.  All the matters which are alleged in the amended creditor’s petition have been verified. 

5. By way of background it needs to be observed that the original claim by the substituted creditor arose from indebtedness alleged following an advance pursuant to commercial bill facility which was entered into between it and the debtors on 16 August 2007. The debtors fell into default notwithstanding a number of agreements that had been struck between them concerning the extension of the facility. Ultimately, the security in support of the facility was sold at public auction and a significant deficit was realised on the sale of that property. It is that deficit is relied upon by the debtor as an offsetting claim in respect of outstanding moneys. 

6. As matters presently stand, the debtor is indebted to the substituted creditor for a sum in excess of $1.3 million. The substituted creditor has otherwise addressed all the matters required to be addressed pursuant to s.52(1) of the Bankruptcy Act 1966 (Cth) (“the Act”). It follows that the substituted creditor is prima facie entitled to the remedy that it now seeks, namely, an order for sequestration.

7. The debtor, however, contests the relief sought. He says it ought not be granted because he can demonstrate other sufficient reason as to why a sequestration order ought not be made; see s.52(2).

8. Broadly, the creditor’s material shows that the debtor advanced the sum of $2.6 million pursuant to the facility on or about 20 August 2007. The facility originally provided for a 12 month term, that term was subsequently extended by reason of agreement entered between the substituted creditor and the debtor. 

9. Ultimately however, the debtor fell into default and the creditor, using its security, exercised its powers of sale in respect of the secured property, a unit development at Newmarket. Upon the sale, a sum of $762,500.00 was realised, excluding costs, which left a significant default on the sum which was then due by the debtor to the substituted creditor pursuant to the facility. It is noteworthy that that sale occurred almost 12 months ago in September 2012 and that the default following the sale was for a sum slightly in excess of $1 million. 

10. Presently, the applicant as substituted creditor is owed about $1.3 million, and it is in respect of that sum that the act of bankruptcy is alleged to have been committed. The debt, of course, grows in accordance with the security instrument that provides for the accruing of interest.  It is that debt of about $1.3 million that supports the amended petition. 

11. In his notice stating grounds of opposition to the application, the debtor says:

    a)That Westpac, the present substituted creditor, engaged in misleading and deceptive conduct in that it did not roll over a facility as promised after large amounts of money were paid off the facility;

    b)That Westpac sold the subject property at a significant undervalue;

    c)That there was a failure of due process in Westpac repossessing the property, because, as he says, “flawed notices were sent to the wrong addresses”;  and

    d)That the substituted creditor has just served documents of 9 June 2013(that being the date of a claim in the Supreme Court which I will address below) and that he intends to lodge a defence and counterclaim in respect of that claim. 

12. The substituted creditor commenced recovery proceedings in the Supreme Court on 18 April as a money owing claim, and on 5 July 2013 the debtor filed his defence and counterclaim.  The matters that are identified in issue concern allegations in respect of the early payment of part of the facility and the sale of property below market value.

13. The role of this Court in considering the debtor’s complaints about the substituted creditor’s conduct is not to determine or second guess the outcome of Supreme Court proceedings, but is really to determine whether or not, by reason of the material and the complaints made, there is a realistic prospect that the cause of action contended for is such that the debtor ought be permitted an opportunity to pursue his action before the substituted creditor has the relief it claims under the Act. That is there should be a plausible contention requiring investigation: Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785 and Menzies v Paccar Financial Pty Ltd [2011] FCA 460

14. For reasons that follow, I am of the view that the debtor’s complaints have little, if any, prospects and that even if they did have prospects, the quantum of any such claim would not extinguish the debt such that the net result would be that the debtor would continue to be indebted to the substituted creditor in the amount that the substituted creditor claims or for or a figure approaching that amount such that in the result there would be little utility in permitting the debtor to prosecute those proceedings.

15. As I have earlier noted, there were two principal matters alleged by the debtor.  The first relates to promises in respect of early payments for preserving the facility. In a defence filed to the substituted creditors claim for money owing issues in the Supreme Court the defence stated that Westpac said they would roll over the facility of a large amount of the facility was paid out. Accordingly the director made a deposit. The allegation was devoid of any particulars. It begs the question of what advantage the bank would enjoy from this or any arrangement in a debtor/creditor relationship. Irrespective of the truth of those matters, the fact remains that the debtor would have remained indebted to the bank in terms of the facilities, and would have continued to be in breach of his obligations to repay the funds by the due date provided for by the term that had been agreed between them. It follows, in my view, that that particular claim contended for in his defence has little, if any, real prospects.

16. The second matter concerns the alleged sale at an undervalue of the secured property. In material which was provided by the debtor to the Court, it seems quite evident that this is an action which, even if proven to be successful, would not render any useful outcome. 

17. The debtor has submitted two valuations. The first has absolutely no utility in these proceedings at all.  It values the property at $2 million, but that valuation was effected in July 2010. The second valuation, which is perhaps more material for present purposes, was a valuation prepared in August 2012, that is, a short time before the sale of the property. At that time, the assessed value of the property was $1.1 million.  I note that, at that time also, the Valuer-General’s value of the property was $900,000.00. It is apparent that the sum realised on the sale of the property falls well below the two valuations. 

18. However even if it can be established that the mortgagee exercising the power of sale breached its duty to the debtor, the net effect of any such breach would only sound in damages of a couple of hundred thousand dollars. It would not address the significant indebtedness currently outstanding at $1.3 million or even the debt at the time of the sale, which was approximately $1 million. 

19. It follows, in my view that the debtor has not been able to demonstrate that there is any sufficient reason as to why a sequestration order ought not be made, and in the circumstances I will make a sequestration order in the usual terms.

I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Judge Burnett

Date: 5 September 2013