Commonwealth Development Bank of Australia - [2001] FMCA 37

FEDERAL MAGISTRATES COURT OF AUSTRALIA

COMMONWEALTH DEVELOPMENT BANK OF AUSTRALIA v TANCOCK [2001] FMCA 37

BANKRUPTCY – Creditors Petition – Method of valuation of debtor’s assets where petitioning creditor secured mortgagee – ‘forced sale’ or ‘open market’ valuation – each case to be decided on facts – interpretation of s 44 of Bankruptcy Act 1966 (Cth) – Unconscionable conduct

Bankruptcy Act 1966 (Cth), ss 43, 44, 52
Trade Practices Act 1974 ss 51AA, 51AB

Re Wiggins; Ex parte Credit Assistance Pty Ltd (1979) 36 FLR 182 applied
Re Vassis; Ex parte; Leung (1986) 9 FCR 518 followed
Bryant v Commonwealth Bank of Australia (Unreported, 24 November 1995 NG223 of 1995 applied
Re O’Leary; Ex parte Bayne (1985) 61 ALR 674 followed
Hurley v McDonalds Australia Ltd (1999) FCA 1728; (2000) ATPR 41-741 applied
Dowling v Colonial Mutual Life Assurance Society Limited (1915) 20 CLR 509 at 521 followed

Applicant:	COMMONWEALTH DEVELOPMENT BANK OF AUSTRALIA
Respondents:	MICHAEL ROBERT TANCOCK AND CLAIRE TANCOCK

File No:

WZ43 of 2001

Delivered on:

20 June 2001

Delivered at:

Perth

Hearing Date:

18^th June 2001

Judgment of:

McInnis FM

REPRESENTATION

Solicitor for the Applicant:

Mr A McLean

Solicitors for the Applicant:

Corrs Chambers Westgarth

Solicitor for the Respondent:

Mr M Levitan

Solicitors for the Respondent:

Melvyn Levitan

ORDERS

The further hearing of the Application be adjourned by consent to 3 pm on 20 July 2001 pending receipt of submissions from the parties as to the final form of orders arising out of this judgment.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH

WZ43 of 2001

COMMONWEALTH DEVELOPMENT BANK OF AUSTRALIA

Applicant

And

MICHAEL ROBERT TANCOCK AND CLAIRE TANCOCK

Respondents

REASONS FOR JUDGMENT

(as amended)

This is a creditor’s petition by the Applicant seeking a sequestration order pursuant to s 43 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) against each of the Respondents.
The creditor’s petition is based upon a Bankruptcy Notice issued on 13 December 1999 which relied upon a consent judgment obtained by the Applicant against each of the Respondents in the Supreme Court of Western Australia. The amount claimed in the Bankruptcy Notice was $558,461.49.
The Bankruptcy Notice was served upon the Respondent’s on 9 May 2000. Accordingly the date of the act of bankruptcy is noted to be the 30^th of May 2000.
In this matter an order was made by the Court on 18 September 2000 whereby the Applicant was substituted as petitioner in the action.
In support of its application the Applicant relies upon the Affidavits of Peter John Martin sworn 6 February 2001, 30 April 2001 and 15 June 2001. In addition the Applicant relies upon the Affidavits of Alexander Jason McLean sworn 15 June 2001 and 18 June 2001 together with updated Affidavit evidence concerning proof of debt and searches.
It should be noted at the outset that although some issue had been made by the Respondents in the Outline of Submissions concerning alleged defects in the particulars of the security and service of the Bankruptcy notice that those matters were not ultimately pursued at the hearing. Hence there were no technical arguments advanced which would lead the Court to find that there has not been compliance with the requirements of s 52 of the Bankruptcy Act and accordingly the Court finds that indeed there has been compliance with the requirements of that section.
The Affidavit material relied upon by the Respondent included Affidavits of the Firstnamed Respondent sworn 26 April 2001 and 5 June 2001.
It is not in dispute that at all material times the Applicant creditor held security over property of the Respondents as follows:-
a)A registered mortgage over property of Blackforrest Holdings Pty Ltd (in liquidation) as trustee for the Micla Trust over property situated at Avon Location 21928, 17203 and 2240 (the first property); and
b)Registered mortgage over property of Blackforrest Holdings Pty Ltd (in liquidation) as trustee for the Micla Trust, Jessie Tancock, Adeline Mae Tancock, Patricia Doris Tancock and Thelma Millicent Tancock over Avon Location 27176 (the second property).
The properties are situated south and north of Bows Road Narembeen which is approximately 15 kilometres west of the Narembeen town site and 270 kilometres east of Perth. It is noted that Narembeen is regarded by a valuer as “typical of some rural centres in the central eastern wheat belt with sound community facilities and basic retail/commercial services”.
The Affidavit of Peter John Martin sworn 15 June 2001 verifies that the debt owing as at 15 June 2001 was $743,637.04 with interest continuing to accrue at the rate of $294.37 per day.
Annexed to the Affidavit of Alexander Jason McLean sworn 15 June 2001 is a valuation report dated 8 June 2001 prepared by Mr Michael Chartres, a certified practising valuer. In his report Mr Chartres provides valuations based upon ‘open market’ values and ‘mortgage in possession’ values or what has been described in this Court as “forced sale” valuations.
Mr Chartres provides an open market value of the first property of $220,000 and the second property of $525,000 making a total valuation for both properties of $745,000. He provides a mortgage in possession or forced sale value of $175,000 for the first property and $410,000 for the second property making a total of $585,000. Hence it is submitted by the Applicant that on a forced sale based valuation there would be an estimated deficiency of $158,637.04 as at 15 June 2001.
It is further submitted that even if the Court were to accept an open market value of $745,000 that after making a deduction for the costs associated with sale there would still be a net deficiency of an amount exceeding $2,000 at least and that the Court should also have regard to the fact that as each day passes prior to sale there is a interest component continuing to accrue of $294.37.
The Respondents in the most recent Affidavit of Michael Robert Tancock sworn 5 June 2001 relied upon a valuation obtained from Mr Allan Moore, a certified practising valuer. Mr Moore provides a valuation of the first property on an ‘open market’ basis of $540,000 and on the same basis values the second property at $230,000 making a total of $770,000.
Hence it will be seen that there is not a significant discrepancy between the open market valuations obtained by the Applicant and the Respondents. The Applicants, as indicated, on an ‘open market’ value suggest that the properties are worth $745,000 whilst the Respondents valuer places the combined value of the properties at a total of $770,000.
The real issue in the present case is whether in making an assessment of the valuation of the properties the Court should apply the ‘open market’ valuation or a ‘forced sale’ valuation.
There is no dispute that the reality of the situation is that the Applicant holds security over the properties and is in a position to seek possession for the purpose of a forced sale. Accordingly both in a practical and legal sense it seems on the balance of probabilities and I so find, that it would be unlikely in these circumstances that the properties when placed on the market would not be subjected to a discount in value having regard to the fact that the sale is a forced sale. The mortgagee through the selling agent would need to disclose its interest to purchasers and in any event given the properties are both rural properties it seems highly unlikely to me that prospective purchasers, some of whom would undoubtedly come from the district, would not know of the circumstances of the sale.
In submissions made on behalf of the Applicant I was urged to adopt a ‘forced sale’ valuation as being most appropriate. It was submitted that although valuation evidence had been placed before the Court pursuant to an order by the Registrar, that the secured creditor did not need to do any more than simply provide an estimate of the value of the security or state that it is willing to surrender its security for the benefit of creditors generally in the event of a sequestration order being made against the debtors. I was referred to s 44 of the Bankruptcy Act and a decision of the Federal Court in Re Wiggins; Ex parte Credit Assistance Pty Ltd (1979) 36 FLR 182. It was submitted and I accept that a secured creditor may elect to show that the realisation of its security will not yield sufficient to enable it to be paid in full. If it establishes that to be the case then according to the Applicant’s submission provided other requisite conditions are satisfied the petitioning creditor is entitled to a sequestration order (See Re Vassis; Ex parte; Leung (1986) 9 FCR 518).
Sub section 44(2) of the Bankruptcy Act provides that “subject to sub section (3) a secured creditor shall for the purposes of paragraph (1)(a) be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security”. The section does not refer to the method of valuation and indeed neither legal representative of the parties was able to refer me specifically to any authority which may assist in determining the appropriate method of valuation.
Not surprisingly the Respondents have submitted that an open market value should be applied and that in the circumstances the application of an open market value would mean that the Applicant would not satisfy sub-section 44(2) in the sense that the amount of the debt owing to the Applicant would not exceed the value of the security.
In general terms the Applicant submitted that the petitioning creditor’s estimate must bear a close relationship to the realities of the matter and not be arbitrary or capricious. I was referred to the Unreported Full Court Decision of the Federal Court of Australia in the matter of Bryant v Commonwealth Bank of Australia (Unreported, 24 November 1995 NG223 of 1995). In that case the Full Court referred to the Decision of Lockhart J in Re Wiggins and noted His Honour’s comments in that case that “a petitioning secured creditor may in its petition estimate the value of its security provided the creditor acts in good faith and that in the event of a sequestration order being made it is not bound by the estimate when it seeks to prove its debt”. The Full Court in its Judgment stated that “This construction is consistent with the prescribed form of petition required by s 47(1)(a) of the Act which envisages a global value being placed on a creditor’s security and not a separate value for each mortgage, charge or lien.” The Full Court further referred to the observations of Sheppard J in Re O’Leary; Ex parte Bayne (1985) 61 ALR 674 where at page 682 His Honour stated the petitioning creditor’s estimate “must bear a close relationship to the realities of the matter ….. [and] not be arbitrary or capricious.”
Apart from the general assistance to be gained from the decisions to which I have referred it is my view that in a matter of this kind each case must be determined on its facts before the Court before it can be satisfied that the secured creditor is owed an amount which exceeds the value of its security.
I was referred to the Affidavit of Alexander Jason McLean sworn 15 June 2001 and in particular the valuation of Mr Chartres to which I have already noted. That valuation had annexed to it Guidance Note 32 entitled “Forced Sale Value for Mortgage Purposes”. The stated purpose of the guidance note was to address the issues of providing a “forced sale value” of property and its relation to the assessment of market value for mortgage purposes. The guidance note contains the following further notes:-
“GN32:2.1 The expressions ‘forced sale value’ and ‘distress sale value’ are considered to be inconsistent with the concept of ‘market value’ and represent expressions of property prices achieved under different selling conditions.
GN32:2.2 Valuers may, when requested, provide an estimate of a realisable price when forced or distress sale circumstances exist. The reporting of a range of value can be appropriate in these circumstances.”
In my view having regard to the circumstances of the present case it is entirely reasonable for the petitioning creditor to rely upon the forced sale valuations. To do otherwise would be to ignore the market reality and provide an artificially higher value of a rural property which is known to be the subject of mortgagee proceedings and a forced sale.
Accordingly I consider there is sufficient evidence upon which the Court can rely to establish that pursuant to sub section 44(2) of the Bankruptcy Act the value of the petitioning creditors security is less than the amount of the debt owing and that subject to compliance with the other provisions of the Bankruptcy Act the petitioning creditor is entitled to an order for sequestration of the estates of the Respondents.
In the event that I have erred in my interpretation of the applicability of forced sale valuation I further find as a fact that in providing an estimate of the market value and having regard to the reality of the current market values before the Court that after deducting the costs of sale then the net amount to be realised in relation to the properties would still not exceed the amount of the judgment debt at least to the extent that there would be a deficiency of not less than $2,000.
A further matter which was raised by the Respondents in their Outline of Submissions was that the filing of the Bankruptcy Notice by the petitioning creditor amounted to unconscionable conduct pursuant to s 51AA of the Trade Practices Act 1974. In my view the filing of a Bankruptcy Notice and pursuit of a creditor’s petition is no more than the exercise of a legal entitlement available to an Applicant in a case of this kind. To suggest that that conduct amounts to unconscionable conduct cannot be sustained. This is particularly so where there is no affidavit evidence which would provide sufficient material upon which the Court could rely to establish unconscionable conduct. Whilst it might be perceived by the Respondents that the conduct of the Applicant has led to a reduction in the value of the properties it is clear in my opinion that that of itself cannot lead to a finding of unconscionable conduct. It is inevitable in circumstances where a significant Supreme Court Judgment has been obtained by consent with ongoing interest being charged on a daily basis that the equity of the properties will be diminished with the passage of time. It is clear on the material available to me that in any event there was precious little equity available to the Respondents in the properties at any particular time and regrettably the effluxion of time has seen a reduction of equity to the point where even on open market valuations, as I have found, there is insufficient to be realised upon sale to exceed the amount owed by the Respondents to the Applicant.
I find in the circumstances that there is no other sufficient cause which would persuade me not to make a sequestration order and in particular I reject the submission that the Applicant has conducted itself in a way which could be regarded as unconscionable conduct. I do not find any evidence to support the conclusion that the Applicant has acted in a way which would be regarded as unfair or unreasonable or otherwise was guilty of serious misconduct. (See Hurley v McDonalds Australia Ltd (1999) FCA 1728; (2000) ATPR 41-741)
I accept in the circumstances that once the Court is satisfied as I have already found that the petitioning creditor’s had complied with the matters referred to in s 52(1) of the Bankruptcy Act that it would only be in exceptional circumstances that it should refuse a sequestration order under s 52(2)(b) (See Dowling v Colonial Mutual Life Assurance Society Limited (1915) 20 CLR 509 at 521).
Accordingly I find that the Applicant has established an entitlement to a sequestration order. It is noted that there is no evidence placed before this Court by the Respondents concerning their ability to pay the debt and nor had there indeed been any evidence at all put forward regarding the assets and liabilities save for the valuations of the properties to which I have referred.
At the conclusion of the hearing a suggestion was made that a stay may be sought of the orders to be made by this Court and/or that some discussion may occur between the parities to enable the Respondents more time within which to arrange re-financing of the properties. I do not believe it is appropriate on the evidence before me to grant a stay. I propose making the following orders subject to the submissions to be made by the parties legal representatives:
(1)That the estates of Michael Robert Tancock and Claire Tancock be sequestrated.
(2)That the Applicant’s costs (including any reserved costs) be taxed and paid out of the estate of each of the Respondents in accordance with the Bankruptcy Act 1966 (Cth).
IT IS NOTED that the date of the act of bankruptcy is 30 May 2000.
Upon delivering Reasons for Judgment submissions were made as to the final form of orders. By consent I was urged to delay formalising the final orders until 20 July 2001. Although the request is somewhat unusual and was made after I had announced the intention of the Court to make the orders referred to in paragraph 31 hereof I was prepared to accede to the request. Accordingly the only order made at this time is that by consent the further hearing be adjourned to 3 pm on 20 July 2001 pending receipt of the submissions as to the final form of orders arising out of the Reasons for Judgment. I note that it is submitted that costs should include the costs of the motion to substitute the Applicant as creditor. It will be expected on the further hearing date that if the final orders are made in accordance with those set out in paragraph 31 then either an application will be made for leave to waive the requirements of proof of debt and searches pursuant to s 52 of the Bankruptcy Act or additional updated material be filed and served. I made it clear at the conclusion of the hearing that although I announced the orders to be made in this matter that course is always subject to the receipt of submissions as to final form of the orders and in particular the wording of the sequestration order and the costs order. Hence by consent I am prepared to defer the finalisation of the orders.
I order therefore as follows:-

The further hearing of the Application be adjourned by consent to 3 pm on

20 July 2001 pending receipt of submissions from the parties as to the final form of orders arising out of this judgment.

I certify that the preceding thirty-three (33) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate:

Date: 20 June 2001