Commonwealth Bank of Australia v Starrs

[2014] FCCA 2800

FEDERAL CIRCUIT COURT OF AUSTRALIA

COMMONWEALTH BANK OF AUSTRALIA v STARRS & ANOR [2014] FCCA 2800

Catchwords:
BANKRUPTCY – Application for sequestration order – respondents submit that there is “other sufficient cause” not to make a sequestration order – other sufficient cause not established – sequestration order made.

Legislation:

Bankruptcy Act 1966 (Cth), ss.52 and 306

Federal Circuit Court (Bankruptcy) Rules 2006 (Cth), rr.4.04, 4.05 and 4.06
Real Property Act 1886 (SA) Part XVII

Re Choi On On (1985) 11 FCR 149
Re Moore; Ex Parte MGICA Ltd (1986) 11 FCR 400

Applicant: COMMONWEALTH BANK OF AUSTRALIA

First Respondent: CHRISTOPHER DAMIEN STARRS

Second Respondent: JANINE RUTH STARRS

File Number: ADG 371 of 2013

Judgment of: Judge Simpson

Hearing date: 25 February 2014

Date of Last Submission: 25 February 2014

Delivered at: Adelaide

Delivered on: 2 December 2014

REPRESENTATION

Counsel for the Applicant: Mr S Thomas

Solicitors for the Applicant: Commonwealth Bank Group, Legal Services

The Respondents: In person

ORDERS

1. A sequestration order be made against the estate of Christopher Damien Starrs.

2. A sequestration order be made against the estate of Janine Ruth Starrs.

3. The petitioning creditor’s costs of and incidental to the petition, including reserved costs, if any, be taxed in accordance with the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth).

THE COURT NOTES THAT:

1. The date of the act of bankruptcy in relation to each of the respondents is 5 December 2013.

2. A consent to act as trustee has been signed by Robert Anthony Ferguson.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT ADELAIDE

ADG 371 of 2013

COMMONWEALTH BANK OF AUSTRALIA

Applicant

And

CHRISTOPHER DAMIEN STARRS

First Respondent

JANINE RUTH STARRS

Second Respondent

REASONS FOR JUDGMENT

Introduction

1. In these reasons, statements of fact are findings of fact arrived at on the balance of probabilities.

2. I have before me a Creditor’s Petition brought by the applicant, the Commonwealth Bank of Australia (“the bank”) in relation to two respondent debtors, Dr Christopher Damien Starrs (“the first respondent”), and his wife Janine Ruth Starrs (“Mrs Starrs”). 

3. The petition relies on acts of bankruptcy resulting from the respondents each failing to comply with a Bankruptcy Notice within the time allowed.  The Bankruptcy Notice relied on a judgment debt in the sum of $2,387,976.48 being the unpaid balance due on a final judgment obtained by the bank in the Supreme Court of South Australia on 20 December 2012.

4. Save for one matter that the respondents raised in the first of the grounds referred to later in these reasons, the respondents accept that s.52(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) has been complied with and that the bank has prima facie established a proper basis for the making of a sequestration order.  The principal issue in this case is identified in the respondents’ second ground, namely, whether the applicant’s conduct provides sufficient cause for the Court to exercise a discretion not to make the sequestration order and to instead dismiss the petition. 

Respondents’ grounds of opposition

1. The respondents filed a Form 5, being a Notice Stating Grounds of Opposition to Application.  Initially it contained three grounds.  At the commencement of the hearing before me, the respondents indicated that one of the grounds was no longer relied upon.  The remaining grounds are as follows:

   “1.That the “Affidavit Verifying Paragraph 4 of the Petition” is incorrect as the respondent debtor had made an application in relation to the Bankruptcy Notice No. 124 of 2013. Consequently the Creditor’s Petition does not comply with Federal Circuit Court (Bankruptcy) Rules 2006 section 4.04. In particular, a copy of the order finally deciding the application must be attached to the affidavit required by paragraph (1)(a).

   2.That there is other sufficient cause not to grant the petition for the purposes of s.52(2)(b) and a sequestration order ought not to be made. In particular, an agent of the bank promised not to proceed with bankruptcy action.”

Ground one

1. The first of the grounds is simply addressed. 

2. I find that the applicant erred in not properly complying with the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth) (“FCC Bankruptcy Rules”), namely r.4.04(1), in that the applicant’s affidavit filed in purported compliance with that rule, firstly, did not state that the respondents had made application to have the Bankruptcy Notice set aside, nor, secondly, was a copy of the order finally deciding the application to set aside the Bankruptcy Notice attached to the affidavit.

3. Section 306(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) accommodates errors such as these. Section 306(1) states:

   “306 Formal defect not to invalidate proceedings

   (1)Proceedings under this Act are not invalidated by a formal defect or an irregularity, unless the court before which the objection on that ground is made is of opinion that substantial injustice has been caused by the defect or irregularity and that the injustice cannot be remedied by an order of that court.”

4. Unfortunately, neither “formal defect” nor “irregularity” are defined in the Act. I am assisted, however, by the case of Re Choi On On[1], in which the Court found that it was “a formal defect or an irregularity” within s.306 of the Act for summonses not to be properly sealed. As there had been no injustice, the Court found that the irregularity did not taint the proceedings.

   [1]     Re Choi On On (1985) 11 FCR 149 at page 15; see also Re Moore; Ex Parte MGICA Ltd (1986) 11 FCR 400.

5. I find that the applicant’s errors in the affidavit to be formal defects in the sense that the respondents well knew that they had applied to have the Bankruptcy Notice set aside and that the Court had dismissed their application.  The respondents cannot say that they were misled by the irregularity.  I do not believe that substantial (or any) injustice has been caused to the respondents or any other person as a result of the defect.  The irregularity did not impeach the petition.  Ground one fails.

Ground two

The legislation

1. Section 52(1) of the Act provides as follows:

   “52 Proceedings and order on creditor’s petition

   (1)At the hearing of a creditor’s petition, the Court shall require proof of:

   (a)the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);

   (b)service of the petition; and

   (c)the fact that the debt or debts on which the petitioning creditor relies is or are still owing;

   and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.

   (1A)…..

   (1B)….

   (2)If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:

   (a)that he or she is able to pay his or her debts; or

   (b)that for other sufficient cause a sequestration order ought not to be made;

   it may dismiss the petition.

   (3)…”

Outline of parties’ positions

1. The respondents submit that pursuant to s.52(2)(b) of the Act, the Court should exercise its discretion and should find that there is “other sufficient cause” to decline to make sequestration orders and that instead, the petition should be dismissed. 

2. There is substantial agreement between the parties that Mr Alan Bennett, an employee of the bank having the title “Head of Adelaide Group Credit Structuring”, said at a meeting with the respondents in July 2009 words to the following effect: “If you co-operate with selling these properties I will not bankrupt you.”.

3. The respondents say that they did co-operate with the bank with the selling of the properties and that the bank should not therefore have taken bankruptcy proceedings. 

4. The bank says that while Mr Bennett made the statement mentioned, the context of the statement needs to be considered.  Unfortunately, Mr Bennett’s affidavit does not depose to the context of the conversation.  It is left to be drawn from the pages of transcript mentioned later in these reasons.  The applicant also say that even taking the respondents’ case at its highest, there is no “sufficient cause” to decline to make a sequestration order.

5. Finally the bank submits that the respondents did not co-operate in the sale of the properties but instead took action to frustrate the bank’s efforts to realise their interest in both the North Adelaide and Gilberton properties.

Findings of Fact

1. Mr Bennett was head of Adelaide Group Credit Structuring of the bank.  He was responsible for managing the exposure of the bank to risk associated with the respondent’s debts.

2. The debt claimed by the bank against the respondents arose from the respondents’ guarantees given by them to the bank in relation to the indebtedness of Starrs & Co. Pty Ltd (“Starrs & Co.”). 

3. As security for the bank debt, the bank held first registered mortgages from the respondents in respect of properties owned by them in North Adelaide and Gilberton.  The respondents rented out the North Adelaide property and occupied the residence at Gilberton.

4. In July 2009, the second respondent, a director of Starrs & Co., informed the bank that Starrs & Co. had defaulted on its obligation to Retrovision (WA) Ltd (“Retrovision”), a secured creditor of Starrs & Co.  Subsequently Retrovision appointed receivers and managers to Starrs & Co. and, later, administrators.

5. Also in July 2009 the meeting took place at which Mr Bennett said to the respondents words to the effect, “If you co-operate with selling these properties [meaning the properties at North Adelaide and Gilberton] I will not bankrupt you.”

6. On 28 October 2009, the bank commenced proceedings against the respondents in the Supreme Court of South Australia.  The judgment obtained in those proceedings on 17 December 2012 forms the basis of the debt claimed by the bank in these proceedings.

7. The respondents in these proceedings were also respondents in the Supreme Court proceedings.  Mr Bennett was a witness in the Supreme Court proceedings.  Mr Bennett was cross examined at length by Mrs Starrs, who was the second respondent in those proceedings, on the topic of Mr Bennett’s statement at the meeting of July 2009. 

8. In the present proceedings both the applicant and the respondents have put into evidence numerous pages of the transcript of the Supreme Court proceedings, which evidence concentrates on the topic of what was said at the meeting of July 2009.

9. Somewhat surprisingly, in Mr Bennett’s trial affidavit filed in these proceedings, he does not give direct evidence of what was said at the meeting of July 2009.  Instead the affidavit relies on what Mr Bennett said in his cross examination in the Supreme Court proceedings.  This is achieved by relying on the transcript pages that the respondents have put into evidence (pages 305 to 308 of the transcript) and the pages Mr Bennett put into evidence (pages 341 to 350 of the transcript).  I have not found Mr Bennett’s affidavit to be very helpful on the topic of the July 2009 meeting.  I do not propose to try to summarise what is contained in the transcript as it is lengthy and ultimately unhelpful.  It is suffice to mention two extracts from the transcript.  The transcript shows that in his evidence in the Supreme Court proceedings, Mr Bennett said, “I don’t recall the full details of the conversation.  It would have been along the lines of ‘your full co-operation to ensure the bank achieved the best outcome’” and, later, to the question, “What co-operation did you specify you were expecting …?”, the reply, “The suggestion of co-operation was wide ranging, full co-operation in every respect.”

10. It is difficult to draw conclusions from the transcript evidence other than to say that it is likely that there were discussions around the topic of the respondents co-operating with the bank to achieve a smooth realisation of the respondents real estate assets.

11. Mr Bennett’s affidavit is rather more helpful on the topic of the respondents’ co-operation, or perhaps more accurately, lack of co-operation, in the sale of the respondents’ properties.

12. It is the applicant’s case that the respondents did not co-operate with the selling of the North Adelaide and Gilberton properties.  It is the applicant’s case that the respondents were guilty of underhanded, if not fraudulent conduct, in relation to the respondents’ sale of the North Adelaide property.

Sale of the North Adelaide property

1. The applicant allowed the respondents to personally market and sell the North Adelaide house.  The applicant generously allowed this to occur so that the respondents had the opportunity to get their best price for the sale of the house.  It would not be sold as a mortgagee sale. 

2. The respondents sold the property at auction to a company, Heywood Pty Ltd, for $875,000.  It eventually became apparent to the bank that Heywood Pty Ltd was a company associated with the respondents.  With the benefit of hindsight the applicant came to realise that the respondents did what they could to ensure that there were few prospective purchasers at the auction.  This was achieved by a very short marketing period (2 to 3 weeks) and the respondents’ instructions to their agent to list the property with an indicative price of $1.2 million and later, $1.3 million.  These indicative prices were well above the property’s value.  A valuation had been obtained which suggested that the property had a forced sale value of only $950,000.

3. Initially unknown to the applicant, the respondents had instructed the agent that the reserve price on the day of the auction would be $650,000.  Also initially unknown to the applicant, the purchaser, Heywood Pty Ltd, was a company that was trustee of the first respondent’s superannuation fund.  The first respondent was a director of that company.

4. When these matters became apparent to the applicant, it refused to discharge the mortgage, took possession of the North Adelaide property and sold it at auction for $1.16 million.

5. In my view, the actions of the respondents in relation to the sale of the North Adelaide property were aimed at benefiting themselves to the detriment of the applicant and could certainly not be characterised as “… co-operating with selling the property …”.

Sale of Gilberton property

1. The respondents were just as unco-operative in relation to the sale of the Gilberton property as they were for the North Adelaide property.  In the case of the Gilberton property, it became necessary for the bank to issue proceedings pursuant to Part XVII of the Real Property Act 1886 (SA) against the Starrs for possession of the property

2. Mr Bennett on behalf of the bank, sent a letter to the first respondent dated 21 December 2009.  The letter was in the following terms:

   “Dear Dr Starrs

   32 Northcote Tce Gilberton

   121-123 Jeffcott St North Adelaide SA

   I refer to Notice Alleging Breach served on you on 19 November 2009 with the terms of such notice not being complied with.

   I now enclose a Notice of Sale in relation to both the above properties which you have mortgaged to the Bank in support of your guarantee to Starrs and Co P/L (In Liquidation).  This notice allows a period of 1 day after which the Bank will look to take possession and proceed to mortgagee sale.

   While arrangements are in place to market Jeffcott St, we request that you now vacate Northcote St and provide vacant possession with (sic) 14 days.  I note that you gave written notice to the Bank that you would vacate as at 14 December 2009 but have not complied with that undertaking.  If you are intending voluntarily vacating the premises shortly please let me know what arrangements are being made to avoid further action.

   Do not hesitate to contact me should you wish to discuss your liability under guarantee further.  I understand you have already sought independent advice.

   AP Bennett

   Manager Credit Risk Solutions”

3. The respondents did not comply with the requirements of the letter with the result that the applicant had to bring proceedings to evict the respondents.

4. Without wishing to infer that what Mr Bennett said at the meeting in July 2009 imposed any legal or moral obligation on the applicant to restrain from bringing bankruptcy proceedings against the respondents, the appalling behaviour of the respondents towards the applicant in relation to the sale of the North Adelaide and Gilberton properties would put an end to any such obligation.

5. The respondents have failed to convince me that there is “other sufficient cause” not to make sequestration orders.  There will be sequestration orders against the estates of each of the debtors.

6. I make the orders to be found at the beginning of these Reasons.

I certify that the preceding thirty-nine (39) paragraphs are a true copy of the reasons for judgment of Judge Simpson

Associate: 

Date: 2 December 2014