Cvitanovic v Arnautovic
[2010] FMCA 888
•1 December 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| CVITANOVIC & ANOR v ARNAUTOVIC & ANOR | [2010] FMCA 888 |
| BANKRUPTCY – Transfer of property void against trustee – equitable charge over bankrupt’s property – guarantee by bankrupt director of expenses of liquidator of family companies – interpretation and effect of guarantee – liquidator’s right to possession of charged property before crystallisation of liability under guarantee – charge not taken ‘in good faith’ – charge declared void – judgment for proceeds of bankrupt’s property given to liquidator. |
| Bankruptcy Act 1966 (Cth), ss.5(1), 30(1)(b), 55(1), 55(4A), 55(4A)(b), 58(1), 58(5), 82(1), 90, 115(1), 115(2), 115(2) item 4, 116(1)(a), 116(1)(b), 122, 122(1), 122(1)(a), 122(1)(b) item 3, 122(2), 122(2)(a), 122(3), 122(4)(c) Corporations Act 2001 (Cth) Duties Act 1997 (NSW), s.211 Federal Magistrates Act 1999 (Cth), ss.8(3), 76(3) Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) |
| Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 Avco Financial Services Ltd v Commonwealth Bank (1989) 17 NSWLR 679 Bellissimo v JCL Investments Pty Ltd [2009] NSWSC 1260 Coghlan v S H Lock (Australia) Ltd (1987) 8 NSWLR 88 Ex parte James (1874) LR 9 Ch App 609 Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 Re Morris; Donnelly as trustee of the Bankrupt Estate of Morris v Colonial Mutual Life Assurance Society Ltd & Ors (No.3), unreported Beaumont J, 8 September 1997 Re Roberts; Ex parte Australian Telecom Employees Credit Co‑operative Ltd, Sweeney J, 5 August 1982 Re Roberts, Official Receiver v Lincoln Investments Ltd (1976) 12 ALR 730 Russo v Aiello (2003) 215 CLR 643 |
| G E Dal Pont and D R C Chalmers, Equity and Trusts in Australia (Lawbook, 4th ed, 2007) |
| First Applicant: | DANIEL I CVITANOVIC AS TRUSTEE OF THE BANKRUPT ESTATE OF ADRIAN LAWRENCE ROSEE |
| Second Applicant: | DANIEL I CVITANOVIC AS TRUSTEE OF THE BANKRUPT ESTATE OF KYLIE ROSEE |
| First Respondent: | SULE ARNAUTOVIC AND RODERICK MACKAY SUTHERLAND T/AS JIRSCH SUTHERLAND & CO (ABN 42 156 835 691) |
| Second Respondent: | JOHN KUKULOVSKI IN HIS CAPACITY AS LIQUIDATOR OF ROSEE ROAD HAUL PTY LTD (IN LIQUIDATION) (ACN 103 475 976) AND PROTRANS TRANSPORT SOLUTIONS PTY LTD (IN LIQUIDATION) (ACN 129 867 705) |
| File Number: | SYG 768 of 2010 |
| Judgment of: | Smith FM |
| Hearing date: | 8 November 2010 |
| Delivered at: | Sydney |
| Delivered on: | 1 December 2010 |
REPRESENTATION
| Counsel for the Applicants: | Mr J Darvall |
| Solicitors for the Applicants: | Meehans Solicitors |
| Counsel for the Respondents: | Ms S Gallant |
| Solicitors for the Respondents: | ERA Legal |
THE COURT DECLARES THAT
The transfers of property to John Kukulovski pursuant to the charge in clause 5 of two deeds of guarantee and indemnity made on or about 4 June 2009 by the bankrupt, Adrian Rosee, are void against his trustee, Daniel I Cvitanovic, pursuant to s.122(1) of the Bankruptcy Act 1966 (Cth).
John Kukulovski is not a secured creditor of Adrian Rosee in relation to the proceeds of bank cheque no.427593 drawn in favour of ‘Jirsch Sutherland’ on behalf of Westpac Banking Corporation on 26 October 2009.
THE COURT ORDERS THAT
The respondents pay to the first applicant the sum of $35,000 together with interest on that amount pursuant to s.76(3) of the Federal Magistrates Act 1999 (Cth), calculated from 1 March 2010 until the date of this order at the rate provided by Federal Court Practice Note CM 16 dated 28 June 2010.
Any party may file and serve a written submission in relation to costs no later than 4pm on the date being 10 working days after the making of these orders, and the other parties may lodge a response to any such submission no later than 10 working days thereafter. If any submission is filed, then questions of costs shall be determined in Chambers upon those submissions.
In the event that no written submission on costs is filed in accordance with order 4, then the respondents must pay the first applicant’s costs including reserved costs as agreed or taxed pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 768 of 2010
| DANIEL I CVITANOVIC AS TRUSTEE OF THE BANKRUPT ESTATE OF ADRIAN LAWRENCE ROSEE |
First Applicant
| DANIEL I CVITANOVIC AS TRUSTEE OF THE BANKRUPT ESTATE OF KYLIE ROSEE |
Second Applicant
And
| SULE ARNAUTOVIC AND RODERICK MACKAY SUTHERLAND (ABN 42 156 835 691) |
First Respondent
| JOHN KUKULOVSKI (IN LIQUIDATION) (ACN 129 867 705) |
Second Respondent
REASONS FOR JUDGMENT
Mr Cvitanovic brings these proceedings as trustee of the bankrupt estates of Mr and Mrs Rosee, appointed after their debtors’ petitions were accepted on 30 November 2009. He claims against Mr Kukulovski and his partners trading as Jirsch Sutherland & Co, alleging that they are withholding $35,000.00, which is property of Mr Rosee’s bankrupt estate. The source of these funds was a bank cheque payable to Mr Kukulovski’s firm, which was in the possession of Mr Rosee’s accountant on the date of his bankruptcy. It was subsequently delivered to Mr Kukulovski. If title to the bank cheque had passed to Mr Kukulovski prior to Mr Rosee’s bankruptcy, then Mr Cvitanovic claims that the transfer was void under s.122 of the Bankruptcy Act 1966 (Cth), because it occurred in the preceding 6 months and was not received “in good faith”, because Mr Kukulovski knew that Mr Rosee was insolvent and that the transfer would give him a preference over other creditors. Alternatively, he claims that, if title to the cheque had not passed on the date of bankruptcy, it vested in Mr Cvitanovic under s.58(1), and that the funds derived from its presentation are recoverable for the benefit of Mr Rosee’s bankrupt estate. In effect, he seeks a monetary judgment in restitution or unjust enrichment for the proceeds of the bank cheque retained by Mr Kukulovski (cf. Re Morris; Donnelly as trustee of the Bankrupt Estate of Morris v Colonial Mutual Life Assurance Society Ltd & Ors (No.3), unreported Beaumont J, 8 September 1997).
Mr Kukulovski concedes that he and his partners acquired the bank cheque and its proceeds within 6 months before or after the commencement of Mr Rosee’s bankruptcy, but disputes any obligation to reimburse Mr Cvitanovic. He claims that the bank cheque discharged a liability arising under two deeds signed by Mr Rosee on 4 June 2009, which constituted him as a “secured creditor” as defined in s.5(1) in relation to the cheque and its proceeds. If a transfer of property in the bank cheque occurred before bankruptcy, then it did not give him a “preference, priority or advantage” over other creditors who could prove in the bankruptcy, so as to come within the ambit of s.122(1). If the transfer occurred after bankruptcy, then its ownership had vested in Mr Cvitanovic subject to Mr Kukulovski’s rights as a secured creditor “to realize or otherwise deal with his or her security” within s.58(5). He argued that it is irrelevant to both situations that Mr Kukulovski may have “had reason to suspect” that Mr Rosee was insolvent so as to prevent his claiming a defence under s.122(2) (see s.122(3) and (4)(c)).
Mr Cvitanovic raises three alternative responses to these defences. First, he contends that the deeds were themselves void transfers of property under s.122(1), if they constituted Mr Kukulovski a secured creditor in relation to the cheque and its proceeds. He also contends that on their true construction the deeds did not have that effect, because any security interests in Mr Rosee’s property arising under the deeds did not attach to the cheques, since they were property of Mr Rosee which was not in existence at the time of the deeds. Further, he contends that no security interest arose because the bank cheques were voluntarily paid by or on behalf of Mr Rosee, and were not paid to meet a liability which has yet accrued under the deeds.
The evidence tendered in relation to these disputes is of short compass, and is uncontested, since Mr Kukulovski did not call or tender any evidence. However, the evidence left some factual uncertainties to be filled by inferences. The legal issues are complex, and were poorly focused and addressed by the pleadings, pre‑trial written submissions, and oral submissions. The matter might have been assisted by adjourning the hearing and directing better pleadings and better researched submissions, but no application for this was pressed by either party, perhaps because of the insubstantial amount in issue. Such a situation is not uncommon in this Court.
In particular, notwithstanding the absence of a pleaded reply by Mr Cvitanovic which clearly formulated his above three responses to Mr Kukulovski’s points of defence, I consider that these issues should have been apparent to Mr Kukulovski’s representatives when preparing for the hearing, from the circumstances shown in the evidence filed by both parties, from their pre‑hearing correspondence, from their pre‑trial exchange of written submissions, and from exchanges with me at the opening of the hearing. I take a different view of a contention raised at the tail of Mr Cvitanovic’s oral submissions, which was that by reason of s.211 of the Duties Act 1997 (NSW) any relevant security given by the deeds was “unenforceable to the extent of any amount secured by the mortgage on which duty has not been paid”.
At my invitation, both parties forwarded additional citations of legal authorities after the hearing. I have considered all of these authorities.
The legislation
The following provisions of the Bankruptcy Act are relevant to the issues in this case:
5Interpretation
(1)In this Act, unless the contrary intention appears:
…
secured creditor, in relation to a debtor, means a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to him or her from the debtor.
…
the commencement of the bankruptcy, in relation to a bankrupt, means the time at which his or her bankruptcy is, by virtue of section 115, to be deemed to have commenced.
…
the date of the bankruptcy, in relation to a bankrupt, means the date on which a sequestration order was made against his or her estate or, if he or she became a bankrupt by virtue of the presentation of a debtor’s petition, the date on which he or she became a bankrupt by force of section 55, 56E or 57, as the case requires.
…
the property of the bankrupt, in relation to a bankrupt, means:
(a) except in subsections 58(3) and (4):
(i)the property divisible among the bankrupt’s creditors; and
(ii)any rights and powers in relation to that property that would have been exercisable by the bankrupt if he or she had not become a bankrupt; and
(b) in subsections 58(3) and (4):
(i)the property, rights and powers referred to in paragraph (a) of this definition; and
(ii)any other property of the bankrupt.
55Debtor’s petition
(1)Subject to this section, a debtor may present to the Official Receiver a petition against himself or herself.
…
(4A)Where the Official Receiver accepts a petition presented under this section:
(a) he or she shall endorse the petition accordingly; and
(b) upon the Official Receiver endorsing the petition, the debtor who presented the petition becomes a bankrupt by force of this section and by virtue of presentation of the petition.
58Vesting of property upon bankruptcy—general rule
(1)Subject to this Act, where a debtor becomes a bankrupt:
(a) the property of the bankrupt, not being after‑acquired property, vests forthwith in the Official Trustee or, if, at the time when the debtor becomes a bankrupt, a registered trustee becomes the trustee of the estate of the bankrupt by virtue of section 156A, in that registered trustee; and
(b) after‑acquired property of the bankrupt vests, as soon as it is acquired by, or devolves on, the bankrupt, in the Official Trustee or, if a registered trustee is the trustee of the estate of the bankrupt, in that registered trustee.
…
(5)Nothing in this section affects the right of a secured creditor to realize or otherwise deal with his or her security.
82Debts provable in bankruptcy
(1)Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.
90Proof of debt by secured creditor
(1)A secured creditor is entitled to prove the whole or a part of his or her secured debt in the debtor’s bankruptcy in accordance with the succeeding provisions of this Division, and not otherwise.
(2)A secured creditor who surrenders his or her security to the trustee for the benefit of creditors generally may prove for the whole of his or her debt.
(3)A secured creditor who realizes his or her security may prove for any balance due to him or her after deducting the net amount realized, unless the trustee is not satisfied that the realization has been effected in good faith and in a proper manner.
(4)A secured creditor who has not realized or surrendered his or her security may:
(a) estimate its value; and
(b) prove for the balance due to him or her after deducting the value so estimated.
(5)A secured creditor to whom subsection (4) applies shall state particulars of his or her security, and the value at which he or she estimates it, in his or her proof of debt.
115Commencement of bankruptcy
(1)If a person becomes a bankrupt on a creditor’s petition and subsection (1A) does not apply, then the bankruptcy is taken to have relation back to, and to have commenced at, the time of the commission of the earliest act of bankruptcy committed by the person within the period of 6 months immediately before the date on which the creditor’s petition was presented.
…
(2)The bankruptcy of a person who becomes a bankrupt as a result of the acceptance of a debtor’s petition is taken to have relation back to, and to have commenced at, the time indicated in the following table.
Debtor’s petition bankruptcy—time to which bankruptcy has relation back and time bankruptcy commences
Circumstances in which debtor’s petition was presented or acceptedTime to which bankruptcy has relation back and time of commencement of bankruptcy 1 Petition accepted by the Official Receiver under a direction of the Court Time specified by the Court as the commencement of the bankruptcy 2 Petition presented when at least one creditor’s petition was pending against the petitioning debtor (whether alone, as a member of a partnership or as a joint debtor), and accepted by the Official Receiver without a direction from the Court Time of the commission of the earliest act of bankruptcy on which any of the creditor’s petitions was based 3 Petition presented when no creditor’s petitions were pending but the debtor had committed at least one act of bankruptcy in the past 6 months, and accepted by the Official Receiver without a direction from the Court Time of commission of the earliest act of bankruptcy within the 6 months before the petition was presented 4 Petition presented when no creditor’s petitions were pending and the debtor had not committed any act of bankruptcy in the past 6 months, and accepted by the Official Receiver without a direction from the Court Time of presentation of the petition
116Property divisible among creditors
(1)Subject to this Act:
(a) all property that belonged to, or was vested in, a bankrupt at the commencement of the bankruptcy, or has been acquired or is acquired by him or her, or has devolved or devolves on him or her, after the commencement of the bankruptcy and before his or her discharge; and
(b) the capacity to exercise, and to take proceedings for exercising all such powers in, over or in respect of property as might have been exercised by the bankrupt for his or her own benefit at the commencement of the bankruptcy or at any time after the commencement of the bankruptcy and before his or her discharge; and …
…
is property divisible amongst the creditors of the bankrupt.
122Avoidance of preferences
(1)A transfer of property by a person who is insolvent (the debtor) in favour of a creditor is void against the trustee in the debtor’s bankruptcy if the transfer:
(a) had the effect of giving the creditor a preference, priority or advantage over other creditors; and
(b) was made in the period that relates to the debtor, as indicated in the following table.
Periods during which transfers of property may be void Description of petition leading to debtor’s bankruptcy Period during which the transfer was made 1 Creditor’s petition Period beginning 6 months before the presentation of the petition and ending immediately before the date of the bankruptcy of the debtor 2 Debtor’s petition presented when at least one creditor’s petition was pending against a petitioning debtor or a member of a partnership against which the debtor’s petition was presented Period beginning on the commencement of the debtor’s bankruptcy and ending immediately before the date of the bankruptcy of the debtor 3 Debtor’s petition presented in any other circumstances Period beginning 6 months before the presentation of the petition and ending immediately before the date of the bankruptcy of the debtor (1A)Subsection (1) applies in relation to a transfer of property by the debtor in favour of a creditor:
(a) whether or not the liability of the debtor to the creditor is his or her separate liability or is a liability with another person or other persons jointly; and
(b) whether or not the property transferred is the debtor’s own property or is the property of the debtor and one or more other persons.
(2)Nothing in this section affects:
(a) the rights of a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property; or
(b) the rights of a person who is making title through or under a creditor of the debtor in good faith and who gave consideration at least as valuable as the market value of the property; or
(c) a conveyance, transfer, charge, payment or obligation of the debtor executed, made or incurred under or in pursuance of a maintenance agreement or maintenance order; or
(d) a transfer of property under a debt agreement.
(3)The burden of proving the matters referred to in subsection (2) lies upon the person claiming to have the benefit of that subsection.
(4)For the purposes of this section:
(a) a transfer of property is taken to have been made in favour of a creditor if it is made in favour of a person in trust for the creditor; and
(b) a payment of tax, or of any other amount payable to the Commonwealth, or to the Commissioner of Taxation, under or because of an Act of which the Commissioner has the general administration, is taken to be made for consideration equal in value to the payment and in the ordinary course of business; and
(c) a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect:
(i)that the debtor was unable to pay his or her debts as they became due from his or her own money; and
(ii)that the effect of the transfer would be to give him or her a preference, priority or advantage over other creditors.
(4A)A reference in this section (other than subsection (5)) to a creditor of the debtor shall be read as including a reference to a person who would be a creditor of the debtor in relation to a contract, agreement, transaction or other dealing if the contract, agreement, transaction or other dealing were not, in whole or in part, void or unenforceable, or had not been voided in whole or in part, by or under a law of the Commonwealth or of a State or Territory of the Commonwealth.
(5)If a transfer of property is set aside by the trustee in a bankruptcy as a result of this section, the creditor to whom the property was transferred may prove in the bankruptcy as if the transfer had not been made.
(7)In this section:
tax means tax (however described) payable under a law of the Commonwealth or of a State or Territory, and includes, for example, a levy, a charge, and municipal or other rates.
(8)For the purposes of this section:
(a) transfer of property includes a payment of money; and
(b) a person who does something that results in another person becoming the owner of property that did not previously exist is taken to have transferred the property to the other person; and
(c) the market value of property transferred is its market value at the time of the transfer.
The Deeds of Guarantee
In 2009 Mr and Mrs Rosee were operating a transport business through a number of companies, including Rosee Road Haul Pty Ltd (“Rosee Road Haul”), and Protrans Transport Solutions Pty Ltd (“Protrans”). They gave guarantees in relation to substantial business loans and equipment leases. The business was conducted from their residential address at St Andrews, NSW. Mr Rosee seems to have been a driver by occupation, and Mrs Rosee seems to have attended to the paper work.
In April 2009, they discussed their financial situation with their accountant, Mr Lord of Pinnacle Taxation Services. He told them that the situation of their companies and themselves personally “requires some specialised insolvency advice”. He referred them to Mr Kukulovski, who is a registered liquidator, and is a partner in a firm of accountants trading as ‘Jirsch Sutherland’ who describe themselves on their letterhead as “insolvency, turnaround & forensic specialists”.
Mr Rosee’s affidavit gave the following short account of his meetings with Mr Kukulovski, leading to the execution of two deeds on or about 4 June 2009:
4.A few weeks later in approximately mid May 2009 my wife and I attended at the Accountant’s office and he introduced us to John Kukulovski. This was a preliminary meeting and we provided all of the financial information relating to the companies and ourselves personally to John Kukulovski (“the first meeting”).
5.Approximately one (1) week after the first meeting my wife and I had a second meeting with John Kukulovski. At this second meeting John Kukulovski wrote on a white board all of the companies’ financial issues and my wife’s and my financial issues. During this meeting my wife and I had the following conversation with John Kukulovski:
JK:“Based on this information (referring to the white board) it is obvious that the companies will need to be put into liquidation.”
AR:“Ok then.”
KR:“What will that do to us.”
JK:“You will have no other option than to go bankrupt as well. Once the companies are in liquidation people will start calling in the personal guarantees on you. I can’t do your bankruptcy but I can put you on to someone else.”
AR:“Who?”
JK:“His name is Andrew from Core Cordis, but we’ll do that after we’ve dealt with the company issues.”
6.At this second meeting John Kukulovski wrote on the white board in the Accountant’s office all the debts of the company, all of the liabilities of the company, details of the personal guarantees my wife and I had provided, and my wife’s and my personal assets and liabilities.
7.A few weeks after the second meeting and in consultation with my wife we decided to [go] ahead with John Kukulovski being appointed liquidator of the companies.
8.In early June 2009 I attended a meeting with John Kukulovski at which he produced two (2) documents headed Deed of Guarantee and Indemnity. John Kukulovski said to me:
JK:“I need you to sign these documents prior to me commencing the matter.”
AR:“What are they?”
JK:“They are to guarantee that my fees will be paid and lock in any amount that I’ll be charging you.”
AR:“Ok.”
I then signed the two (2) Deeds of Guarantee and Indemnity documents as requested by John Kukulovski. I was not given a copy of either of those documents and have only recently seen the Deeds again when deposing to this affidavit. Annexed hereto and marked “A” is a true copy of the two (2) Deeds of Guarantee and Indemnity (“the 2 Deeds”).
Mrs Rosee’s affidavit corroborated her husband’s recollections of these conversations and events, and I accept their evidence. They were not cross‑examined, and an affidavit by Mr Kukulovski which had been filed was not read in the proceedings.
Copies of two deeds bearing Mr Rosee’s signatures and entitled “Deed of Guarantee and Indemnity” were later produced to Mr Cvitanovic’s solicitors. They were tendered by Mr Cvitanovic, and the hearing was conducted upon an assumption that they had become fully binding upon Mr Rosee according to their terms on or about the date inserted in one of them: 4 June 2009. They are in the same terms, except in the identification of the relevant ‘company’ and the ‘maximum liability of the Guarantor’. Mr Rosee is the ‘guarantor’ and Mr Kukulovski is the ‘appointee’ in both deeds. One of them identifies Protrans as the ‘company’ and the guarantor’s maximum liability as $25,000. The other identifies Rosee Road Haul as the ‘company’ and the guarantor’s maximum liability as $20,000.
In each deed, the recitals and first five terms are:
RECITALS
A.It is proposed that the Appointee be appointed as liquidator of the Company.
B.In consideration of the Appointee accepting the appointment, the Guarantor agree to guarantee the payment of all fees rendered by the Appointee and all expenses incurred by the Appointee and to indemnify the Appointee for all other costs incurred whilst acting in his capacity as the Appointee.
NOW IT IS COVENANTED AND AGREED as follows:
1.GUARANTEE
In consideration for the Appointee, at the request of the Guarantor, acting in relation to the Company, the Guarantor jointly and severally guarantee the payment of all expenses incurred by the Appointee in acting in relation to the Company (in accordance with the attached schedule notified to the Guarantor from time to time) and guarantee punctual payment to the Appointee whilst acting as Appointee of the Company.
2.INDEMNITY
The Guarantor jointly and severally covenant that they will at all times hereafter save harmless and keep indemnified the Appointee from and against:
2.1all liability incurred by the Appointee in the course of the appointment;
2.2any offsetting claims alleged by the Guarantor concerning any aspect of the Appointee’s conduct whatsoever;
2.3all costs, charges, and expenses incurred by the Appointee in respect of any actions, proceedings, accounts, claims and demands arising out of the said appointment which may be made on the Appointee by any person or corporation whatsoever including:
2.3.1the Company;
2.3.2any of the shareholder(s) of the Company;
2.3.3any director(s) of the Company;
2.3.4any creditor(s) (secured or unsecured) of the Company;
2.3.5any voluntary administrator, receiver or manager, liquidator, provisional liquidator or trustee in bankruptcy;
2.4any liabilities, actions, proceedings, accounts, claims, demands, loss and damage whatsoever (including all profit costs, charges, expenses and remuneration of the Appointee) arising out of or as a result of:
2.4.1any defect whatsoever in the appointment of the Appointee;
2.4.2any defect whatsoever in the legality, enforceability, validity or illegality, unenforceability or invalidity of the instrument appointing the Appointee to the Company;
2.4.3any cancellation or termination of the appointment of the Appointee by reason of an order of the court.
3.PAYMENT
3.1Subject to clause 4 below, the Guarantor shall pay to the Appointee the maximum liability by 2 September 2009 or within seven (7) days upon receiving written demand for all the monies hereby guaranteed by the Guarantor.
4.EXTENT OF GUARANTOR’S LIABILITY
4.1The maximum liability of the Guarantor under this Guarantee and Indemnity is fixed at [$25,000 and $20,000] (“Maximum Liability”). This amount cannot be reduced by any offsetting claims made by the Guarantor, for which the Guarantor has indemnified the Appointee.
4.2Subject to clause 4.3 below, the Appointee shall not call on this Guarantee and Indemnity if the Appointee generates recoveries with a net value in excess of the Maximum Liability from the assets of the Company or otherwise in the course of his/her appointment.
4.3To the extent that the Appointee does not recover an amount sufficient to meet all of his remuneration and expenses, the Guarantor shall be liable to the Appointee for the deficit of any amount up to the Maximum Liability.
4.4Interest shall accrue in respect of any unpaid balance of the Maximum Liability at a rate equivalent to the rate set by Schedule 5 of the Uniform Civil Procedure Rules as at the date of the first written demand for payment of the whole of the unpaid balance of the Maximum Liability.
4.5Any legal costs incurred by the Appointee in respect of any recovery actions required to collect any unpaid balance of the Maximum Liability in accordance with this Deed shall be a cost indemnified and guaranteed by the Guarantor in addition to the Maximum Liability.
5.CHARGE
The Guarantor hereby agree to charge any property (within the meaning of Section 9 of the Corporation Act 2001 (Cth)) to which the Guarantor have legal title, in favour of the Appointee in respect of any liabilities of the Guarantor under this Deed. The Guarantor further acknowledge that the Appointee is entitled to lodge a caveat in respect of any real property the subject of this charge. Further, within (7) days of receiving a written request from the Appointee the Guarantor undertake to grant the Appointee an unregistered mortgage in respect of any real property the subject of this charge.
The deeds then contain provisions as to the ‘proper law’, the modes of service of ‘a notice of demand to the Guarantor’, severability, ‘no waiver’, variation, and entire agreement. A schedule sets out the Jirsch Sutherland hourly remuneration rates and out of pocket disbursement rates.
The Liquidation of the Companies
An ASIC search shows that Mr Kukulovski was appointed as liquidator in a creditors’ voluntary winding up of both companies on the same date as the deeds.
Creditors’ meetings were called for 18 June 2009. According to Mr Kukulovski’s reports, the companies’ statements of affairs noted unsecured creditors for Protrans at $72,929, and for Rosee Road Haul at $5,818. Realisable assets were ‘TBA’. The creditors were asked to approve the liquidator’s remuneration estimated at $30,000 for Protrans, and $25,000 for Rosee Road Haul. They were informed:
The director of the company, Adrian Rosee, has provided Jirsch Sutherland with a Deed of Guarantee and Indemnity in the amount of [$25,000 and $20,000] on account of my future costs that I may incur in this matter.
It is common ground that no formal demand was ever made on Mr Rosee by Mr Kukulovski in relation to his guarantees. In two letters to Mr Cvitanovic dated 3 February 2010, after being informed of his appointment as trustee of Mr Rosee’s estate in bankruptcy, Mr Kukulovski informed him in relation to each company:
I refer to your correspondence dated 22 December 2009 and confirm that I was appointed as Liquidator of the company on 4 June 2009.
I advise that the director of the company, Adrian Lawrence Rosee has submitted a proof of debt in the amount of $3,098.85. I will forward you all future correspondences which Mr Rosee is entitled to receive as a creditor of the company in this regard.
Further, I advise that Mr Rosee has provided the company with a Deed of Guarantee and Indemnity in the amount of [$25,000 and $20,000] on account of my costs in this matter, which currently remains unpaid.
At this stage, I will not be lodging a proof of debt on behalf of the company against Mr Rosee’s bankrupt estate until a dividend is declared in this regard. Accordingly, please ensure that the company is listed as a creditor in the bankrupt estate of Mr Rosee and forward a copy of all future correspondences to my office.
Please find attached a copy of my notice to creditors dated 9 June 2009. I advise that a dividend is unlikely in this matter.
Should you have any queries, kindly contact [a representative] of my office.
Mr Kukulovski’s accounts lodged with ASIC on 10 June 2010 anticipated that his appointments would be completed in December 2010. In relation to Rosee Road Haul they recorded receiving remuneration and expenses totalling $15,000 which were paid to Jirsch Sutherland on 11 February 2010, and which was constituted by one payment from Mr Rosee which is explained as “Contingent Assets: Directors Fee Guarantee”. No other receipts are recorded in that liquidation. In relation to Protrans, $20,000 was paid to Jirsch Sutherland as remuneration and expenses, and $33,508.55 is recorded as being received, being the proceeds of a company bank account and a payment from Mr Rosee of $20,000 explained as “Contingent Assets: Directors Fee Guarantee”.
The sale of the St Andrews property
The monies received by Mr Kukulovski in February 2010 derived from the sale of Mr and Mrs Rosee’s St Andrews property prior to their bankruptcy. It is uncontentious that they were co‑owners of this property when Mr Rosee signed the two deeds, although the title details are not in evidence. They sold the property and received its proceeds shortly before they filed debtors’ petitions on 30 November 2009.
Mr Cvitanovic’s investigations in relation to this, were reported by him to the creditors of their bankrupt estates on 23 December 2009:
3.00COMMENTS ON THE STATEMENT OF AFFAIRS
…
3.04Real Property
The Bankrupts disclosed in their Statement of Affairs as not owning real property.
The Trustee’s investigations revealed the Bankrupt’s sold their home at [the St Andrews address] on 2 November 2009. The Settlement Statement for the property is set out as follows;
$
$
Sale Price after adjustments for rates etc.
347,042.91
Add: Funds contributed by Rosee Family Investments Pty Limited atf the Rosee Family Superannuation Fund
3,028.32
350,071.23
Less: Disbursements:
Selling and Conveyancing Costs
(i) Legal Costs
3,000.00
(ii) Agents Commission
9,982.50
(iii) Rates etc
878.05
Mortgagee
Bank of Western Australia
266,210.68
280,071.23
Gives: Surplus from sale of Real Property
70,000.00
Surplus distributed as follows;
Jirsch Sutherland
35,000.00
Adrian and Kylie Rosee
5,000.00
40,000.00
Gives: Balance Held in
Meehans Trust Account
30,000.00
As shown above, there was a $70,000 surplus from the sale of the property.
The Bankrupts received $5,000 of the surplus. The Bankrupts have advised the Trustee that the $5,000 received from the Sale of Real Property was used for day to day living expenses prior to the date of Bankruptcy.
The Bankrupts instructed Meehans Solicitors to pay $35,000 of the surplus to Trajan Kukulovski of Jirsch Sutherland, being the Liquidator for two of the bankrupt’s associated Companies, being Rosee Road Haul Pty Limited (In Liquidation) and Protrans Transport Solutions Pty Limited (In Liquidation) as set out in Sections 3.05, 4.01 and 4.02 of this Report. It appears that this was for the Liquidator’s remuneration.
It also appears that the $35,000 paid to Jirsch Sutherland may be a preference payment pursuant to Section 122 of the Bankruptcy Act. The Trustee has written to the bankrupts requesting further information regarding the $35,000 payment and will be investigating this matter further. I refer to Section 4.02 of this Report for further details.
The balance of the funds held in Meehans Solicitors Trust Account, being $30,000, are funds available for the benefit of creditors, as set out in Section 3.02 of this Report.
Searches conducted with the New South Wales Land Titles Office have not identified any other real property in the name of the Bankrupts as at the date of Bankruptcy, 30 November 2009.
The settlement sheet for the sale, directed the clerk for Mr and Mrs Rosee’s solicitor to attend on a settlement on 27 October 2009, and to receive from the purchaser’s solicitor six bank cheques for various amounts, including “BANK cheque in favour of Jirsch Sutherland for $35,000”. There is in evidence a photocopy of such a cheque drawn by the Corrimal branch of Westpac bank on 26 October 2009 (“the bank cheque”).
Mr and Mrs Rosee’s affidavits confirm that they gave instructions to their solicitor to request the purchaser to provide part of the sale price by way of this bank cheque. Mrs Rosee gave the following evidence, which I accept:
8.On 27 October 2009 the contract for the sale of the St Andrews property settled and from the sale proceeds my husband and I directed a cheque to be drawn to Jirsch Sutherland in the sum of $35,000.00.
9.In early October 2009 my husband and I approach Daniel Cvitanovic in relation to becoming bankrupt.
10.In November 2009 I received a bank cheque payable to Jirsch Sutherland in the sum of $35,000.00 from the proceeds of the sale of the St Andrews property (“the Jirsch Sutherland cheque”).
11.After receiving the Jirsch Sutherland cheque I telephoned the Accountant and had the following conversation:
KR:“Michael, I have the cheque for the sale of the house payable to the liquidator what do you want me to do with it.”
ML:“Send it to me and I will give it to John.”
12.In about mid November 2009 I posted the Jirsch Sutherland cheque to the Accountant.
13.On 30 November 2009 I became a bankrupt and Daniel Cvitanovic was appointed Trustee after lodging a Debtor’s Petition.
According to his statement of affairs, Mr Rosee owed his unsecured creditors “$1,408,178.23 plus”. Mr Cvitanovic has reported to the creditors that Mr and Mrs Rosee have virtually no assets available to their unsecured creditors, that they have joint unsecured creditors totalling $1,330,000, and that Mr Rosee has additional unsecured creditors totalling $78,178. His opinion was:
It appears that the majority of the above debts are due to personal guarantees provided by the Bankrupts in relation to the Companies they have an interest in.
Transfer of the bank cheque
On the above evidence, physical possession of the bank cheque was held by Mr Lord on the date on which Mr and Mrs Rosee became bankrupt, 30 November 2009 (see s.55(4A)(b)). That date became ‘the date of’ their bankruptcies and also ‘the commencement’ of their bankruptcies, applying s.115(2) item 4.
I find, for reasons which I shall explain below, that title to the cheque and its proceeds had not been irrevocably appropriated or transferred by Mr and Mrs Rosee to the payee prior to the date of their bankruptcy. It was held at that time by their agent, Mr Lord, as their bailee only. The right to take physical possession of the bank cheque, and to obtain any valuable rights attaching to it by reason of Mr and Mrs Rosee’s rights under their contract with the purchaser of their home, therefore vested on that date in Mr Cvitanovic (see s.58(1), invoking the definition of ‘the property of the bankrupt’ in s.5(1)).
It was not disputed before me that, in practical and legal effect, if Mr Cvitanovic had been able to recover the cheque from Mr Lord before it was delivered to Mr Kukulovski and then presented to Westpac, Mr Cvitanovic would have been able to procure by the cancellation or endorsement of the bank cheque a transmission to his own bank account of the underlying funds. The failure of Mr Lord and Mr Kukulovski upon demand by Mr Cvitanovic to return the cheque and any funds acquired when it was presented to Westpac, therefore constituted a wrongful conversion or misappropriation of property vested in the trustee in Bankruptcy, unless Mr Kukulovski had a right to retain the funds as a secured creditor in relation to the bank cheque.
This is because, if the bank cheque constituted property which was subject to rights of the payee as a secured creditor, then Mr Cvitanovic would have held the cheque, and rights in relation to the underlying funds, subject to ‘the rights of’ the payee to receive the benefit of the security pursuant to s.58(5). If the cheque and its funds were not subject to any rights by way of security, then the funds are recoverable from Mr Kukulovski as damages for wrongful conversion or as monies had and received, and become available for the benefit of the unsecured creditors of Mr and Mrs Rosee’s bankrupt estates, including Mr Kukulovski in relation to any current or future unsecured indebtedness.
Mr and Mrs Rosee gave the above evidence, and were not cross‑examined, as to the circumstances in which the bank cheque came to be in the possession of their accountant at the date of their bankruptcies. They did not explain why they gave directions to receive part of the sale proceeds by way of this bank cheque. Mr Lord gave no evidence in the proceedings as to receiving the cheque, nor as to any instructions he received from Mr and Mrs Rosee about its disposal. The evidence suggests that at all relevant times he performed the role of their personal accountant only, acting as bailee of their property in the cheque. In that position, the ordinary implication would have been that he held the bank cheque subject to their past and future instructions as to its disposal, including whether and when it was to be delivered to its payee, or returned for endorsement or cancellation by Westpac.
The background circumstances of Mr and Mrs Rosee’s contemplated bankruptcies, and the fact that no demands had been made by Mr Kukulovski under the deeds of guarantee, tends to confirm this interpretation of Mr Lord’s possession of the bank cheque. It was not put to Mr and Mrs Rosee in cross‑examination, and no evidence was tendered by Mr Cvitanovic to suggest, that Mr Lord’s possession of the bank cheque occurred as a response to any demand, instruction or request on the part of Mr Kukulovski. Nor is there any evidence that anything had changed in relation to the terms of his custody of the cheque prior to the date of the bankruptcies.
In correspondence between Mr Cvitanovic’s solicitor and Mr Lord, it was put to Mr Lord that “we note your advice that you are holding in your trust account the sum of $35,000.00 on behalf of the bankrupts” (see letter from Meehans Solicitors dated 5 February 2010). They directed him that “you are not to deal with those funds without the authority of the Bankruptcy Trustee”. He responded on 10 February 2010: “we confirm that we did receive a cheque payable to Jirsch Sutherland for $35,000. We can confirm that we did hold this in our trust account but advise that the funds were forwarded onto the Liquidator”. This letter seems disingenuous, since the evidence before me suggests that he probably forwarded the bank cheque to the liquidator at the same time as writing this response to Mr Cvitanovic’s demand.
Mr Lord’s reference to holding the money in a ‘trust account’ for Mr and Mrs Rosee appears to be inaccurate, and I prefer other evidence suggesting that, in fact, Mr Lord probably held physical custody of the bank cheque only, and on or about 11 February 2010 he delivered it to its payee on his own initiative. I am not satisfied that at any time he acted in a capacity as a ‘trustee’ in relation to either the cheque or its underlying funds, whether for Mr and Mrs Rosee or for Mr Kukulovski, except in so far as he might have been under fiduciary obligations to Mr and Mrs Rosee in relation to his custody of the cheque.
Mr Kukulovski gave an explanation in correspondence as to how he acquired the bank cheque from Mr Lord and appropriated its proceeds. He said in a letter dated 3 March 2010, when justifying his refusal to account for the proceeds to Mr Cvitanovic:
I refer to your letter of 1 March 2010 and the payment of $35,000 referred to in your letter (“the payment”).
Clearly, you have issued a demand without firstly contacting me to establish all facts of the matter. Had you have done so, you would have been aware of the following:
·The guarantees you refer to, which are also referred to in my initial notifications to creditors, are dated 4 June 2009 and were executed prior to my appointment as liquidator of the companies. Such guarantees are entered into in the normal course of business.
·The guarantee was given in respect of future services provided. There was at that time, no trading relationship between me and the bankrupts. I have not raised an invoice to the bankrupts, nor have I enforced the guarantee. I have received payment in good faith in return for valuable consideration at least as valuable as the market value of property received by me.
·I had no knowledge at the time of the guarantee being executed that the bankrupts were to become bankrupt, nor that they had provided the payment to Mr Lord, as set out in your correspondence. Following Mr Lord’s advice to me that he was holding the payment on trust in respect of my future costs and expenses, I requested that he forward payment to this office. Mr Lord was not holding the payment to my instructions and I have not given him any instructions, other than the usual statutory notifications to him as the companies’ accountant.
Having regard to the above (and the fact that you have not specified a date of solvency), you may take this letter as a formal response that, because the payment does not meet the criteria for a preference payment, I will not be forwarding the payment as requested. Further, in the event that legal action is commenced against me, I shall vigorously defend such proceedings and seek costs against your client. However, after considering the circumstances set out in our correspondence, I trust this course of action will not be necessary and request your confirmation that no further action will be taken in this matter.
Should you have any enquiries, please do not hesitate to contact [representatives] of this office.
(emphasis in original)
As I shall explain, I do not accept Mr Kukulovski’s assertion in this letter that he had no knowledge that Mr and Mrs Rosee “were to become bankrupt”. Nor can I find any persuasive evidence that Mr Lord in fact “was holding the payment on trust in respect of my future costs and expenses”. I would expect that if, in fact, Mr Kukulovski had evidence of a transaction giving rise to ‘a trust’ for his benefit in any legal sense, he would have presented that evidence to the Court in the present proceedings. Otherwise, his letter tends to confirm an inference from the other evidence before me. This is that the procuring of the bank cheque by Mr and Mrs Rosee as part of the proceeds of the sale of their home, and its transfer into the custody of Mr Lord, occurred by reason of entirely voluntary conduct on the part of Mr and Mrs Rosee, in anticipation of a possible future demand by Mr Kukulovski under the deeds of guarantee, but without any intention irrevocably to appropriate the bank cheque or its underlying funds to meet any such future demand.
Weighing all of the evidence before me “according to the proof which it was in the power of one side to have produced, and in the power of the other to have contradicted” (cf. Russo v Aiello (2003) 215 CLR 643 at [11]), I find that at the date of Mr and Mrs Rosee’s bankruptcy Mr Lord held possession of the cheque as their agent, subject to their future directions, and without any obligations on Mr Lord or on Mr and Mrs Rosee to deliver the cheque to Mr Kukulovski in payment of any current or prospective liability to him. Their rights to dispose of the bank cheque therefore vested in Mr Cvitanovic pursuant to s.58(1) upon their bankruptcy. Mr Lord thereupon became custodian of the cheque on the same terms, but becoming answerable to the directions of their trustee in bankruptcy.
Mr Lord’s reasons for declining to recognise that obligation were not explained in any evidence before me, and I do not need to make any findings about them. I note that he is not being sued for wrongful conversion of the funds in the present proceedings.
Nor is it necessary to examine any other correspondence between the parties to the present proceedings. It is common ground that Mr Kukulovski’s letter, and his subsequent contesting of Mr Cvitanovic’s present application, have constituted an unequivocal refusal to answer a demand made by letter from Mr Cvitanovic’s solicitor dated 1 March 2010 that he “forward the preferred payment of $35,000 to our office within seven (7) days”.
The issues
Arising from the above circumstances, I consider that Mr Cvitanovic’s right to recover the monies received by Mr Kukulovski and his firm turns upon a consideration of the following three issues, which appear to me to have been raised by the parties’ submissions:
i)Whether cl.3.1 of the deeds of guarantee imposed a liability on Mr Rosee to pay to Mr Kukulovski any amount immediately upon execution of the deeds or at any time subsequently, without receiving a written demand. If it did not, then Mr Cvitanovic contends that, on the concession that no demand under the guarantee has ever been served, whatever rights Mr Kukulovski might have under cl.5 which would need to be recognised under s.58(5), they would not justify his retention of the funds in the face of the trustee’s demand that he return property of the bankrupt which was received by Mr Kukulovski after the date of the bankruptcy and had previously vested in Mr Cvitanovic under s.58(1).
ii)Whether any ‘charge’ created on 4 June 2009 under cl.5 of the deeds of guarantee on Mr Rosee’s ‘legal title’ in his St Andrews property, extended to cover the proceeds of sale of that property, and his rights in relation to the bank cheque in particular, in circumstances where no caveat had been lodged on its title, and where Mr Rosee had not been required to “grant the Appointee an unregistered mortgage” in relation to that property. If the charge did not extend to the funds received by Mr Kukulovski in February 2010, then he cannot maintain any right to retain the funds as a secured creditor, whether in relation to an accrued debt or a contingent future debt.
iii)Whether, assuming that Mr Kukulovski has a right under deeds of guarantee to claim security interests in the bank cheque and the funds he received, and for that reason to resist Mr Cvitanovic’s demand, the security interest was acquired by transfers of property which are void under s.122(1) of the Bankruptcy Act.
The first two issues give rise to questions both of construction of the terms of the deeds, and principles of law concerning the rights of a holder of a ‘charge’ which are enforceable in equity. Debate on the issues of construction occupied most of the hearing, and revealed substantial ambiguities and uncertainties in the language of cll.3, 4 and 5. The submissions of the parties’ representatives did not take me to authorities which were directly on point, in relation to issues of bankruptcy law or the interpretation and enforcement of equitable charges in the present circumstances. The solicitor for Mr Cvitanovic cited only Bellissimo v JCL Investments Pty Ltd [2009] NSWSC 1260, which suggests a need closely to analyse the effect of cl.5, but does not substantially assist that analysis. The solicitor for Mr Kukulovski cited only Re Roberts; Ex parte Australian Telecom Employees Credit Co‑operative Ltd, Sweeney J, 5 August 1982, which tends to support the general structure of his submissions, but concerns a different factual situation. Other authorities were cited after the hearing, but none was directly on point.
In relation to the first and second issues, on general principles of construction of guarantees, I would construe the ambiguities of cll.3 and 4 in favour of Mr Rosee and against the proponent of the document (see Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 561, Coghlan v S H Lock (Australia) Ltd (1987) 8 NSWLR 88 at 92).
Adopting this approach, and attempting to make sense of the syntax of the sentence and the context provided by the other clauses, I construe cl.3.1 as if a comma was inserted after ‘(7) days’, so that its obligation to pay the ‘maximum amount’ or a lesser amount adjusted in accordance with cl.4 arises only “upon receiving written demand for all the monies hereby guaranteed by the Guarantor”. That is, so that the liability to pay any amount under the guarantee arose only upon service of a written demand, that liability arising either immediately upon service of a demand prior to 2 September 2009, or “within seven (7) days” if served after that date. I consider that this construction accords with the other provisions of the deeds, particularly cll.4 and 6.2, and is consistent with the surrounding circumstances, in which Mr Kukulovski’s fees and expenses were primarily recoverable from the proceeds of his future liquidations.
I therefore accept the submission of Mr Cvitanovic that, on the conceded fact that no demand has been made under the guarantee, no liability to make any payment under the guarantee accrued against Mr Rosee prior to his bankruptcy, nor has yet arisen subsequent to his bankruptcy.
However, the fact that no liability in debt has accrued, may not necessarily disentitle Mr Kukulovski from resisting Mr Cvitanovic’s demand. This would depend upon a construction of the ambit and enforceability of the charge created under cl.5. The duty on a trustee in bankruptcy to recognise the ‘rights of a secured creditor’, must, in my opinion, extend to securities which cover future and contingent debts of that creditor, and not only debts which accrued prior to bankruptcy. This would seem to follow from the definition of debts provable in bankruptcy under s.82(1), and the position of a secured creditor under ss.90 and 58(5). Mr Cvitanovic’s success under the first and second issues therefore turn upon a consideration of the rights acquired by Mr Kukulovski under cl.5 of the deeds.
On my above construction of cl.3, cl.5 read in its context is intended to provide security in relation to a future contingent liability to pay a debt quantified and accruing upon the making of a future demand by the ‘appointee’ liquidator, in the event that he decides that he needs to call upon the guarantee because his recoveries in the liquidation are insufficient to cover his own remuneration and expenses. The reference in cl.5 to “any liabilities of the Guarantor under this Deed” would not, therefore, be understood as a reference to liabilities accrued and existing at the date of the deed, but would be directed at future contingent liabilities to meet future demands made by the appointee. If so, the ‘charge’ would be construed to cover such liabilities, and s.58(5) would require its recognition by the trustee in bankruptcy in relation to the charged property, even if they arose upon a demand made after the date of bankruptcy.
Mr Kukulovski’s claim that he holds security over the bank cheque and its proceeds encompasses two interpretations of the ambit of the charge given by cl.5. On one view, it is a ‘floating’ charge over not only property of Mr Rosee owned at the date of the deed, but also all future property. Such an intention might appear from the adoption of the Corporations Act 2001 (Cth) definition of ‘property’:
any legal or equitable estate or interest (whether present or future and whether vested or contingent) in real or personal property of any description and includes a thing in action.
On that construction, rights by way of equitable charge existed over all of Mr Rosee’s property which vested in his trustee in bankruptcy, including the bank cheque, even though the liability secured could not arise until the service of a demand. Mr Rosee’s trustee in bankrupt would be bound by s.58(5) to recognise that contingent right to security, even though “the charge is dormant in the sense that it does not specifically affect any asset until it crystallises into a fixed security on the occurrence of a prescribed event” (see G E Dal Pont and D R C Chalmers, Equity and Trusts in Australia, Lawbook, 4th ed, 2007, at [1.80] and cases cited therein). This would include the proceeds of the sale of the St Andrews property, including the funds represented by the bank cheque which was later given by Mr Lord to Mr Kukulovski.
The same result may arise, if cl.5 charged only Mr Rosee’s property owned by him on 4 June 2009. Even on that construction, the contingent charge over Mr Rosee’s St Andrews property may be regarded in equity as being converted to a contingent charge on its proceeds, to the extent that there was a surplus after payment to prior security (cf. Avco Financial Services Ltd v Commonwealth Bank (1989) 17 NSWLR 679 at 682‑683).
On both constructions of cl.5, it is necessary to examine what rights are conferred by it on Mr Kukulovski in relation to Mr Rosee’s property in the bank cheque and its proceeds subject to the charge. In particular, whether it gave him a right to take and retain possession of the property secured, before the liability secured by the charge has crystallised by the making of a demand under the deeds.
In my opinion, if possession of the cheque and its proceeds had been obtained by Mr Cvitanovic upon Mr Rosee’s bankruptcy, then Mr Kukulovski would not have been entitled to possession of that property nor, it seems, any other remedies in relation to it or its proceeds before service of a demand under the guarantee. The authors of Equity and Trusts in Australia (supra) explain:
Where an equitable charge exists (see [1.65]‑[1.80]), the chargee (being the person who takes the benefit of the security) may resort to the charged property only for the purpose of satisfying a liability due to her or him. The chargee is not entitled to possession of the property, but to enforce the charge by an order for sale or the appointment of a receiver. The availability of these remedies means that an equitable charge has proprietary qualities; in fact, it has been said that a right that does not confer a proprietary security interest in the alleged charge, or that does not secure the discharge of a debt or other legal obligation of the alleged charger, is by definition not a charge. Yet because these remedies can only be gained through an application to, and an order of, the court, the proprietary interest remains “inchoate and ineffectual until an order of the court is made”. A contract between the parties may, however, confer on the chargee further remedies not dependent on an order of the court. Property subject to an equitable charge can only be sold subject to that charge, which then attaches to the fund produced by the sale.
(citations omitted)
On these principles, it is difficult to identify any principle of equity or bankruptcy law which now allows Mr Kukulovski to resist Mr Cvitanovic’s demand for possession of the property of the bankrupt which has vested under s.58(1), and which is not yet subject to a crystallised equitable charge. He has no current right under the terms of cl.5 to take possession of nor to retain this property, even though Mr Cvitanovic might in the future become obliged by s.58(5) to recognise Mr Kukulovski’s rights as a secured creditor “to realize or otherwise deal with his security”, if and when those rights accrue in the future. The rule in Ex parte James (1874) LR 9 Ch App 609, would not appear to assist him (see Re Roberts, Official Receiver v Lincoln Investments Ltd (1976) 12 ALR 730).
In the present circumstances, Mr Kukulovski appears to be in the position of a holder of an equitable charge who has prematurely taken possession of the charged property, before he has any right to realise that property to discharge a secured liability. He has not established any relief now available to enforce the terms of the charge from a court exercising equitable jurisdiction, which includes this court exercising bankruptcy jurisdiction (see s.30(1)(b) of the Bankruptcy Act, and s.8(3) of the Federal Magistrates Act 1999 (Cth)). I am therefore inclined to conclude that he cannot resist the present proceedings, by relying upon any rights in contract or equity arising under the terms of cl.5.
However, my above reasoning took paths which were not adequately explored in the submissions made to me, and in which I consulted texts and authorities which were not cited to me. My conclusions on issues one and two are tentative for that reason. After further reflection on the matter, I have concluded that the s.122(1) issue in relation to the source of Mr Kukulovski’s claimed rights as a secured creditor emerges as the clearest basis upon which Mr Cvitanovic’s application should be supported.
My consideration of this third issue proceeds upon assumptions which give Mr Kukulovski the benefit of uncertainties as to the scope and current enforceability against Mr Cvitanovic of the charge created under cl.5 of the deeds in relation to the funds which Mr Kukulovski acquired via the bank cheque. Essentially, this is the case which was implicit in Mr Cvitanovic’s invocation of s.122(1) before and during these proceedings, when alleging that Mr Kukulovski has been seeking to take advantage of a voidable preference.
The only contended source of a right in Mr Kukulovski and his firm to retain the bank cheque and its proceeds as security for any indebtedness of Mr Rosee to Mr Kukulovski is cl.5 of each of the deeds made on 4 June 2009.
I can see no reason why the conferral of a security interest in the bank cheque and its proceeds pursuant to the terms of cl.5 should not be regarded as “a transfer of property” by Mr Rosee within the language of s.122(1). Section 122(2) confirms the breadth of this phrase, at least by showing that it extends to the giving of rights to an ‘encumbrancer’. No authority was cited to me contrary to such an interpretation.
The security undoubtedly had the effect of giving Mr Kukulovski “a preference, priority or advantage over other creditors” within the language of s.122(1)(a). The contrary is not submitted by him.
The making of the deed occurred within 6 months before the presentation of Mr Rosee’s debtor’s petition, and the giving of security pursuant to that clause can only have occurred within the period provided under item 3 of the table in s.122(1)(b).
The elements of s.122(1) are, in my opinion, clearly made out on evidence which is conceded or uncontested.
The voiding effect of s.122(1) on any rights of security over the bank cheque and its proceeds is subject to s.122(2)(a), which protects “the rights of a … encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property”. Under s.122(3) the onus of proof of these elements “lies upon the person claiming to have the benefit of that subsection”.
Assuming that the taking of a security interest from Mr Rosee by a prospective liquidator in the present circumstances is capable of being regarded as occurring “in the ordinary course of business”, and assuming that Mr Kukulovski may be regarded as giving sufficiently valuable consideration when accepting appointment as liquidator of Mr Rosee’s two companies, I am far from satisfied that Mr Kukulovski “acted in good faith” when acquiring that security.
It is established that:
The existence of knowledge or suspicion of insolvency negatives good faith: and the knowledge of circumstances from which ordinary men of business would conclude that the debtor is unable to meet his liabilities is knowledge of insolvency. (per Barwick CJ in Queensland Bacon Pty Ltd v Rees (1966) 115 CLR 266 at 287).
Moreover, good faith is negatived by s.122(4)(c):
(4)For the purposes of this section:
…
(c)a creditor shall be deemed not to be a purchaser, payee or encumbrancer in good faith if the transfer of property was made under such circumstances as to lead to the inference that the creditor knew, or had reason to suspect:
(i) that the debtor was unable to pay his or her debts as they became due from his or her own money; and
(ii) that the effect of the transfer would be to give him or her a preference, priority or advantage over other creditors.
In my opinion, the evidence before me clearly leads to that inference, and prevents my being satisfied by Mr Kukulovski that he acted in good faith when obtaining security for his remuneration from Mr Rosee. I have above extracted Mr Rosee’s evidence that before requesting Mr Rosee to execute the deed of guarantee, Mr Kukulovski was informed of the hopeless financial position of Mr Rosee and his companies. The subsequent reports to creditors of both Mr Kukulovski and Mr Cvitanovic confirmed that information probably given to Mr Kukulovski inevitably pointed to Mr Rosee’s being “unable to pay his debts as they became due” upon the insolvency of his companies. The companies’ insolvency occurred on the day on which the guarantee was given, when Mr Kukulovski accepted his appointment. Moreover, Mr Kukulovski has not contested that he expressly told Mr Rosee prior to that date that “you will have no other option than to go bankrupt as well”. This was an opinion by an insolvency expert, not just an “ordinary man of business”. I find that Mr Kukulovski did not act as a creditor “in good faith” within s.122(2)(a) when obtaining the security whose benefit he now asserts.
In my opinion, Mr Kukulovski has not established grounds for resisting a declaration that his claimed security interests in the bank cheque and its proceeds are void against Mr Rosee’s trustee in bankruptcy.
I am satisfied that such a declaration should be made, and that Mr Cvitanovic has established an entitlement to consequential orders requiring reimbursement of the monies withheld by Mr Kukulovski and his partners, with interest at the usual rate calculated from the date of Mr Cvitanovic’s demand, being 1 March 2010.
The stamp duties issue
I have above referred to Mr Cvitanovic’s counsel raising this issue at the tail of his submissions. It was very poorly developed, as well as being raised too late. Copies of the deeds had already gone into evidence – as part of his own case. Argument had proceeded upon the basis that the unstamped copies of the deeds, which he had tendered as annexures to Mr and Mrs Rosee’s affidavits, evidenced documents which had taken legal effect according to their terms.
My short conclusion on his submission invoking s.211 of the Duties Act 1997 (NSW) is that I am not satisfied that duty has not been paid on duly executed original copies of the deeds. I therefore have no need to explore the issues – not addressed by counsel – whether the deeds are being ‘enforced’ in the present proceedings, and the significance of my exercising Federal jurisdiction under the Bankruptcy Act.
Costs
My above findings point in favour of a normal costs order following the event. However, at the request of Mr Kukulovski’s solicitor, I shall make a costs order which is subject to my further consideration in the light of any written submissions which may be filed in accordance with a directed timetable.
I certify that the preceding sixty-six (66) paragraphs are a true copy of the reasons for judgment of Smith FM
Date: 1 December 2010
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