Dairy Farmers Pty Ltd v Issa

[2017] FCCA 1238

FEDERAL CIRCUIT COURT OF AUSTRALIA

DAIRY FARMERS PTY LTD v ISSA & ANOR [2017] FCCA 1238

Catchwords:
BANKRUPTCY – Application for sequestration order based on non-compliance with requirements of bankruptcy notice – going behind judgment - judgment on the basis of which bankruptcy notice issued was entered pursuant to a default clause contained in terms of settlement – whether there are substantial reasons for questioning whether behind the judgment there is in reality a debt because the default clause is a penalty – whether default clause is a penalty - whether there are substantial reasons for questioning whether judgment entered pursuant to unconscionable conduct.

CONTRACTS – Penalties – claim for the payment of money settled on terms that the defendant pay a lesser amount by instalments – term that in the event of default defendant would consent to judgment being entered for the amount originally claimed – whether term a penalty – term not penalty.

Legislation:

Bankruptcy Act 1966, s.52(1)

Federal Circuit Court (Bankruptcy) Rules 2016, rr.4.02(2), 4.04(1)(a), 4.04(5), 4.06(3), 4.06(4)

Cases cited:

Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205
Cameron v UBS AG [2000] VSCA 222

Cheung v Burness (Trustee) [2016] FCA 1381

Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Lachlan v HP Mercantile Pty Ltd [2015] NSWCA 130

McDermott vBlack [1940] HCA 4; (1940) 63 CLR 161

Morris v Baron & Co [1918] AC 1
O’Dea v Allstates Leasing System (WA) Pty Ltd [1983] HCA 3; (1983) 152 CLR 359
Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; (2016) 90 ALJR 835
Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656
Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212

Applicant: DAIRY FARMERS PTY LIMITED
(A.C.N. 010 308 068)

First Respondent: GIHAD ISSA

Second Respondent: MAHA ISSA

File Number: SYG 2656 of 2016

Judgment of: Judge Manousaridis

Hearing date: 15 March 2017

Date of Last Submission: 15 March 2017

Delivered at: Sydney

Delivered on: 13 June 2017

REPRESENTATION

Counsel for the Applicant: Mr G Stapleton

Solicitors for the Applicant: Uther Webster & Evans Solicitors

Counsel for the Respondents: Mr J T Johnson

Solicitors for the Respondents: DC Balog & Associates

ORDERS

1. The estates of Gihad Issa and Maha Issa be sequestrated under the Bankruptcy Act 1966 (Cth).

2. The applicant creditor’s costs fixed in the sum of $5,785 be paid from the estates of the first and second respondent debtors in accordance with the Bankruptcy Act 1966 (Cth).

THE COURT NOTES

1. The date of the act of bankruptcy is 14 September 2016 in respect of the first respondent and 26 September 2016 in respect of the second respondent.

2. A consent to act as trustee signed by Michael Gregory Jones has been filed with the Court.

3. A copy of this order is to be provided to the Official Receiver in Sydney within two business days.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT SYDNEY

SYG 2656 of 2016

DAIRY FARMERS PTY LIMITED
(A.C.N. 010 308 068)

Applicant

And

GIHAD ISSA

First Respondent

MAHA ISSA

Second Respondent

REASONS FOR JUDGMENT

Introduction

1. The applicant applies for a sequestration order against the estates of the respondents. 

2. The acts of bankruptcy on which the applicant relies is the respondents’ failure to comply with the requirements of a bankruptcy notice that was issued on 1 August 2016. The bankruptcy notice demanded payment of $83,416.97. That represented the judgment the applicant entered against the respondents on 1 August 2016 in the Local Court of New South Wales (Judgment).[1]

   [1] The creditor’s petition states that the debt is $75,721.91. The applicant recovered $7,695.06 of the Judgment after the date on which the bankruptcy notice was issued but before the day on which the creditor’s petition was filed.

3. The respondents do not dispute the applicant has satisfied the preconditions for the making of a sequestration order prescribed by s.52(1) of the Bankruptcy Act 1966 (Cth) (Act).[2] The respondents submit, however, there are two sufficient causes why the Court ought not make a sequestration order. The first is based on the Judgment having been entered pursuant to a default clause (Default Clause) contained in a written agreement titled “Terms of Settlement” that was filed with the Local Court on 23 February 2016 (Terms of Settlement). The respondents submit the Default Clause was a penalty and, for that reason, was of no legal effect and, thus, was incapable of authorising the entry of the Judgment. The second cause on which the respondents rely is the applicant’s obtaining the Judgment pursuant to the Default Clause. The respondents submit this constituted unconscionable conduct by the applicant.

   [2] T2.40

Approach

1. The applicant and the respondents assume the issues I am required to determine are whether the Default Clause is a penalty, and whether the applicant acted unconscionably by relying on the Default Clause to obtain the Judgment. There are other questions, however, I must consider and answer affirmatively before I can consider and determine those questions.

2. In most cases a court of bankruptcy is entitled to accept that the judgment on which a creditor relies for the making of a sequestration order records a true debt. A judgment, however, “is never conclusive in bankruptcy”; it “does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment”.[3] Courts of bankruptcy, therefore, hold in reserve the power to go “behind a judgment”, that is, inquire into whether the judgment debt is in fact based on a true debt. And courts of bankruptcy will embark on such inquiry “where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner”.[4]

   [3]Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212 at page 224 (Barwick CJ).

   [4] Wren v Mahony [1972] HCA 5; (1972) 126 CLR 212 at page 225 (Barwick CJ).

3. The first set of questions I must address, therefore, is whether the respondents’ contentions that the Default Clause is a penalty, and that the applicant acted unconscionably by relying on the Default Clause to obtain the Judgment, constitute substantial reasons for questioning whether behind the Judgment there is in reality a debt. It is only if those questions are answered in the affirmative that I will have to determine whether the Default Clause is a penalty and whether the applicant has engaged in unconscionable conduct. In those circumstances, the applicant will bear the legal burden of proving the Judgment records a true debt.[5]

   [5] Cheung v Burness (Trustee) [2016] FCA 1381 at [79] (Moshinsky J)

4. The remainder of these reasons for judgment are divided as follows. First, I set out the circumstances, which are not disputed, that led to the applicant obtaining the Judgment. I will then consider, in relation to each of the two grounds on which the respondents rely for claiming the Judgment does not record a true debt, whether there are substantial reasons for going behind the Judgment and, if so, whether the applicant is in a position to discharge its burden that behind the Judgment there is a true debt.

Circumstances in which Judgment was entered

1. The applicant and the respondents were parties to a franchise agreement dated 30 April 2007. By notice dated 22 August 2013 the applicant claimed the respondents were in default of the franchise agreement. The notice alleged the respondents had claimed from, and were paid by, the applicant rebates totalling $309,160.09 for the sale of product the respondents falsely represented to the applicant they had purchased from the applicant. The notice demanded the respondents remedy the breach of the franchise agreement by repaying to the applicant the $309,160.09 worth of rebates the applicant claimed were overpaid to the respondents.[6] The respondents did not pay to the applicant the $309,160.09 it demanded in the notice to remedy default; and by notice dated 3 January 2014 the applicant terminated the franchise agreement.[7]

   [6] G J Olzomer affidavit 08.03.17, annexure “A”

   [7] G J Olzomer affidavit 08.03.17, [3], annexure “B”

2. On 23 January 2014 the applicant and the respondents entered into a settlement deed.[8] By that deed the respondents acknowledged they breached the franchise agreement in the manner alleged in the notice to remedy default, and that they failed to remedy the breach. The respondents agreed to pay to the applicant an “Initial Amount” of $200,000 and a “Subsequent Amount” of $109,160.09.[9] The Initial Amount was required to be paid “prior to execution of this Deed”;[10] and the Subsequent Amount was required to be paid by 28 April 2014.[11]

   [8] G J Olzomer affidavit 08.03.17, [4], annexure “C”

   [9] G J Olzomer affidavit 08.03.17, [4], annexure “C”, cl.3.1

   [10] G J Olzomer affidavit 08.03.17, [4], annexure “C”, cl.3.2(a)

   [11] G J Olzomer affidavit 08.03.17, [4], annexure “C”, cl.3.2(b)

3. The respondents paid the Initial Amount on 23 January 2014, but they did not pay the Subsequent Amount. The applicant commenced proceedings in the Local Court in which it claimed $99,999.99 together with interest and costs (Local Court Proceeding). The respondents did not file a defence in time. The applicant, therefore, applied for and, on 12 August 2015 obtained, default judgment in the amount of $109,911.96.[12] The respondents applied to set aside the default judgment and subsequently the applicant and the respondents entered into the Terms of Settlement.[13] It is common ground that the default judgment was set aside.

   [12] G J Olzomer affidavit 08.03.17, [10], annexure “G”, [2]

   [13] G J Olzomer affidavit 08.03.17, [10], annexure “G”, [3]

4. Clause 1 of the Terms of Settlement provided that the respondents “are to pay the [applicant] the amount of $40,000.00”. Clause 2 provided that the respondents pay that amount in five equal monthly instalments of $8,000 commencing on 26 March 2016.[14] Clause 3 (this is the Default Clause) provided as follows:

   If any of the payments referred to at 2 above are not received in cleared funds by any due date, then the Plaintiff is entitled to enter Judgment against the first and second defendants for the sum of $100,000.00 plus interest and costs as outlined on the statement of claim filed 20 January 2016 [sic] and interest at the scale rate since 20 January 2016 on the amount of $100,000.00 (less any amounts received by or for the benefit of the Plaintiff since the filing of these terms).

   [14] G J Olzomer affidavit 08.03.17, [7], annexure “E”, cl.2

5. Clause 4 of the Terms of Settlement provided that the applicant would be entitled to enter the judgment provided for by cl.3 upon the applicant’s filing an affidavit deposing to the default in payment of the amounts the respondents were required to pay, and “the first and second [respondents] will consent to judgment being given against them for the sum outlined at 3 above”. Clause 5 provided that the production of the Terms of Settlement “shall be conclusive evidence of the consent of the first and second [respondents] to the re-instatement of the proceeding and the giving of judgment as aforesaid”.

6. Finally, clause 6 of the Terms of Settlement provided:

   The parties otherwise hereby and forever release and discharge one another from all actions, claims, suits, demands, damages and costs in any way based on or arising out of or in connection with the matters alleged in the pleadings served in these proceedings or in connection with the franchise agreement between the parties and if called upon to do so shall execute a formal release to be prepared by and at the expense of the party requiring the same.

7. The respondents made the first four payments, but not the fifth. On 1 August 2016 the applicant applied for and obtained the Judgment.

Is the default clause a sufficient cause for not making sequestration order?

1. A “penalty” denotes a term of a contract that possesses the following three qualities:

   a)The term obliges one party (Party A) to pay money or render some other performance[15] to the other party to the contract (Party B) (collateral obligation).

   b)The collateral obligation accrues on the happening or non-happening of some other event stipulated by the contract (stipulated event). The stipulated event is usually, but not necessarily,[16] something Party A is bound by some other term of the contract to perform or to ensure occurs or does not occur (principal obligation).

   c)The performance of the collateral obligation, if it accrues, will have a value to Party B that is out of all proportion to the interest Party B has in the performance of the principal obligation or in the occurrence or non-occurrence of some other stipulated event.[17]

   [15] Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205 at page 217, [12]: “[T]he penalty imposed upon the first party [i.e., Party A in my formulation] upon failure of the primary stipulation [the stipulated event in my formulation] need not be a requirement to pay to the second party a sum of money.”

   [16] Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30; (2012) 247 CLR 205

   [17] Ringrow Pty Ltd v BP Australia Pty Ltd (2005) 224 CLR 656 at [31]; Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28; (2016) 90 ALJR 835 [34], [157], [256]

2. A term of a contract that is a penalty is void; and if the term is collateral to a stipulated event Party A bound himself or herself to ensure occurred or did not occur, and Party B has suffered loss as a result of the stipulated event not occurring or occurring, Party B’s rights are restricted to recovering damages (or, perhaps, to being entitled to some other relief) from Party A for breach of contract.

3. I have deduced the three qualities of a penalty from the High Court’s consideration of the law of penalties in Ringrow Pty Ltd v BP Australia Pty Ltd,[18] Andrews v Australia and New Zealand Banking Group Ltd,[19] and Paciocco v Australia and New Zealand Banking Group Ltd.[20] The judgments in these cases offer a general description of what constitutes a penalty, and identify the circumstances in which a particular term may be held to be a penalty. It is unnecessary, however, to consider these judgments any further because there is no dispute between the parties about the principles that should be applied to determine whether a term is a penalty. The immediate point of dispute between the parties is the proper construction of the Terms of Settlement; and it is the resolution of that issue that will resolve the question whether there are substantial grounds for concluding the Default Clause is a penalty and, if so, whether the Default Clause is a penalty.

   [18] (2005) 224 CLR 656

   [19] [2012] HCA 30

   [20] [2016] HCA 28

4. The respondents submit the Terms of Settlement constituted a fresh agreement under which the applicant relinquished the causes of action on which it relied in the Local Court Proceeding for claiming $100,000, and instead accepted a promise by the respondents that they pay to the applicant $40,000 by monthly instalments. Counsel for the respondents referred to the Terms of Settlement as constituting an “accord and satisfaction”. Counsel must have intended to use this expression in a sense different from the sense in which Dixon J (as his Honour then was) explained that expression in McDermott vBlack:[21]

   The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one.

   [21] [1940] HCA 4; (1940) 63 CLR 161 at pages 183-184

5. Counsel for the respondents should be understood as submitting that the Terms of Settlement was an agreement that falls within the second of the two types of case referred to in the following passage from the speech of Lord Atkinson in Morris v Baron & Co:[22]

   There is no doubt that the general principle is that an accord without satisfaction has no legal effect, and that the original cause of action is not discharged as long as the satisfaction agreed upon remains executory. . . . If, however, it can be shown that what a creditor accepts in satisfaction is merely his debtor's promise and not the performance of that promise, the original cause of action is discharged from the date when the promise is made . . . .

   [22] [1918] AC 1 at page 35

6. I take counsel for the respondents, therefore, to submit that, by the Terms of Settlement, the applicant accepted the respondents’ promise to pay $40,000 by monthly instalments in satisfaction of the causes of action the applicant pleaded in the Local Court Proceeding. In those circumstances, counsel for the respondents submits the Default Clause is a penalty because, in substance, it obliges the respondents to pay to the applicant $100,000 less any instalments they may have paid under the Terms of Settlement; that obligation was to accrue on the respondent’s defaulting in paying any one of the instalments; and the obligation to pay the $100,000 on default of the payment of any one instalment is out of all proportion to the amounts the respondents were required to pay.

7. Counsel for the applicant, on the other hand, submits the Default Clause is not a penalty. Counsel submits the Default Clause “reinstated the amount of the applicant’s claim in the event the compromise reached to settle it was not honoured” by “reverting back to the liquidated claim in the statement of claim”.[23] In effect, counsel submits the Terms of Settlement was an agreement under which, on the one hand, the respondents acknowledged they owed the applicant $100,000, and, on the other, the applicant agreed it would discharge the respondents of their liability to pay the $100,000, but only if the respondents paid the lesser amount of $40,000 by making each of the five monthly instalments on the days provided for by the Terms of Settlement.

   [23] Applicant’s Outline of Submissions, [25]

8. Although counsel did not put it in this way, the effect of his submission is that the Default Clause falls within the principle that has been held to apply in the class of case described in the following passage from the judgment of Gibbs CJ in O’Dea v Allstates Leasing System (WA) Pty Ltd:[24]

   [T]here is no penalty where it is agreed to charge a certain rate of interest on condition that if payment is made punctually the rate will be reduced . . . or where a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met he will be entitled to recover the original debt . . . . In all the cases of this kind there is a present debt, which, by reason of an indulgence given by the creditor, is payable either in the future, or in a lesser amount, provided that certain conditions are met. The failure of the conditions does not mean that the creditor becomes entitled to damages; the consequence is that the sum which was always owed, but which the debtor was allowed to pay by instalments or in a smaller amount, becomes recoverable at once or in full.

   [24] [1983] HCA 3; (1983) 152 CLR 359 at pages 366-367

9. The principle identified in this passage has been applied to default terms contained in agreements to settle claims for the payment of money. Some of the relevant cases were reviewed by the Court of Appeal of the Supreme Court of New South Wales in Lachlan v HP Mercantile Pty Ltd.[25] The cases concern agreements to settle disputed claims for the payment of money under which one party agreed to pay by a certain day or by instalments a smaller amount than that claimed, in default of which the party agreed to pay the amount originally claimed. The principle that arises from these cases is whether or not the default term is a penalty depends on whether, on the proper construction of the relevant agreement, the party bound by the default clause expressly or impliedly acknowledged that the larger amount that is payable on the default of payment of the smaller amount is a presently owing debt, subject to the debt being discharged by the payment of the smaller amount in accordance with the terms of the agreement.

   [25] [2015] NSWCA 130, [37]-[51]

1. The decision of the Court of Appeal of the Supreme Court of Victoria in Cameron v UBS AG[26] provides a relevant example of this approach. There the plaintiff applied to enforce in the Supreme Court of Victoria a judgment of a Swiss Court for the Australian dollar equivalent of $8.4 million. The defendant initially resisted the enforcement of the judgment, but then settled with the plaintiff on the terms set out in a deed of settlement. By that deed, the defendant agreed to pay by instalments a smaller amount than the $8.4 million foreign judgment, but consented to judgment for $8.4 million being entered if the defendant were to default in paying any one of the instalments. The defendant defaulted and the plaintiff applied to enter judgment for the $8.4 million it originally claimed.

   [26] [2000] VSCA 222

2. The defendant unsuccessfully submitted that the clause of the deed pursuant to which the applicant applied for judgment for $8.4 million was a penalty. Phillips JA (with whose reasons Winneke JA agreed) said:[27]

   That is the key to this appeal. Although the defendant was wont in argument to approach this case as if the deed was simply an agreement for the payment by the defendant to the plaintiff of $1 million, that is not what it was; it was a bargain about the enforcement of the Swiss judgment. The sum of $8.4 million for which judgment in Victoria was to be obtained by consent under clause 3 was the sum for which judgment had already been recovered in Switzerland, the judgment which the plaintiff was seeking to enforce in this proceeding as successor to the Swiss Bank in the Swiss proceeding. That sum was quantified before the terms of settlement were entered into; the dispute was only over the plaintiff's right to enforce the Swiss judgment in Victoria, a right asserted in the statement of claim in this proceeding and denied by the defendant in his defence. By the terms of settlement the defendant secured to himself one last opportunity to pay a much lesser sum in full and final satisfaction of what the plaintiff was claiming in Victoria in reliance upon the Swiss judgment. For the opportunity to pay that lesser sum the defendant bargained away any defence he had to enforcement of the judgment in Victoria, consenting to judgment here if he made default in payment of the lesser sum modo et forma. That makes this case quite different from those in which the Courts have refused to lend assistance to the enforcement of a penalty. It is more akin to those cases described by Gibbs, C.J. in O'Dea where the sum payable upon default is already due and owing and the chance to pay a lesser sum or on terms is being afforded as a privilege or indulgence . . . .

   [27] [2000] VSCA 222, [20]

3. Phillips JA also said:[28]

   In my opinion, when read fairly these terms of settlement did contain, by implication, an acknowledgment by the defendant of his liability for the $8.4 million should there be default, and thus an acknowledgment of liability which, though conditional, was effective when the terms of settlement were agreed. Immediately before the terms of settlement there was a dispute about the enforceability of the Swiss judgment and so about the amount owing by the defendant under it; but, as I see it that dispute was finally resolved by the terms themselves and the deed. From that point onwards, the defendant was acknowledging his liability in respect of the Swiss judgment subject only to this: that if he paid a lesser sum according to clause 2 he could have a release from the larger sum. In those circumstances, according to the cases to which I have referred, the provision in clause 3 for consent to judgment is not a penalty.

   [28] [2000] VSCA 222, [22]

4. The third member of the Court, Buchanan JA, said:[29]

   The obligation to pay $8,400,000 was not one which sprang from the deed unheralded. Its genesis lay in the past dealings between the appellant and the respondent's predecessor. In my opinion the case is to be equated with those in which a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt. At one end of the spectrum covered by those cases is an undisputed judgment debt. Further towards the middle of the range is a sum ascertained in a suit in Chancery before a final decree has been made. At the other end of the spectrum, but still within it in my view, is the present case where the debt is the subject matter of a claim which is disputed but is not suggested to be a colourable device.

   [29] [2000] VSCA 222, [28]

5. I am now in a position to consider the first question that this part of the respondents’ submissions raise; and that is whether the respondents’ submissions that the Default Clause constitutes a substantial reason for questioning whether behind the Judgment there is in reality a debt. That question is to be answered in the affirmative. The respondents’ submission that the Default Clause is a penalty is reasonably arguable; and a court has not determined that question.

6. The next question is whether the applicant has discharged the burden of proving the Default Clause is not a penalty. In my opinion, the applicant has. I am satisfied that, on the proper construction of the Terms of Settlement, viewed in the context in which they were agreed, the respondents agreed to bargain away their right to resist the claim for $100,000 the applicant made in the Local Court Proceeding in return for their acknowledging they were indebted to the applicant for $100,000 the applicant was claiming in that proceeding, subject to the respondents discharging that indebtedness by paying $40,000 by five monthly instalments of $8,000. The facts of the case before me are materially indistinguishable from those in Cameron. The Terms of Settlement, therefore, are to be equated with those cases in “which a creditor agrees to accept payment of part of his debt in full discharge if certain conditions are met but stipulates that if the conditions are not met, he will be entitled to recover the original debt”.[30]

   [30] Cameron v UBS AG [2000] VSCA 222, [28]

7. Counsel for the respondents objected, on the grounds of relevance, to my receiving any evidence about the events preceding the parties entering into the Terms of Settlement (Preceding Events). I reserved my ruling on that objection, indicating I will give my ruling on that question when I deliver my reasons for judgment on the substantive issues. In my opinion the evidence of the Preceding Events is admissible. First, whether or not the Default Clause is a penalty depends on the proper characterisation of the $100,000 referred to in that clause. The evidence of the Preceding Events revealed that the $100,000 was not only an amount the applicant claimed in the Local Court Proceeding; it represented the balance of the amount the respondents had acknowledged they owed the applicant in the settlement deed they entered into on 23 January 2014. That is evidence capable of proving that the $100,000 referred to in the Default Clause was not an amount included in the Terms of Settlement in terrorem of the respondents’ paying the $40,000, but as the amount the applicant claimed was a debt the respondents owed to the applicant.

8. Second, the Terms of Settlement may fairly be characterised as a commercial contract or, at least, as being sufficiently analogous to a commercial contract, so as to attract the general principles for construing contracts stated by the High Court in Electricity Generation Corporation v Woodside Energy Ltd:[31]

   The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption “that the parties ... intended to produce a commercial result”. A commercial contract is to be construed so as to avoid it “making commercial nonsense or working commercial inconvenience”.

   [31] [2014] HCA 7; (2014) 251 CLR 640, [35] (references to citations omitted)

Conclusion

1. I am satisfied the Default Clause is not a penalty. For that reason, I am not satisfied the Default Clause is a sufficient cause for my not making a sequestration order against the estates of the respondents.

Unconscionable Conduct?

1. In their notice of grounds of opposition, the respondents rely on the following matters for claiming the Judgment was entered as a result of unconscionable conduct:

   a)The respondents had given the applicant an explanation for the delay in making the final payment, and arrangements had been put in place for the payment of that amount.

   b)The applicant gave the respondents no prior notice of its intention to obtain the Judgment because of the respondents’ non-compliance, or of its intention to apply for the issue of a garnishee order.

   c)The applicant recovered an amount equal to the last instalment by garnishee order.

2. None of these matters raises any arguable case of unconscionable conduct.

   a)There is evidence the respondents informed the applicant they would be unable to make the last payment on time because they did not have the money.[32] The applicant, however, was not required to accept what the respondents said as a reason for not exercising its rights under the Terms of Settlement. And there is no evidence the applicant agreed to provide the respondents further time to pay the final instalment.

   b)The evidence indicates the applicant gave the respondents notice of its intention to apply for judgment if the last instalment was not received by the following day.[33] Even if the applicant had given no such notice, however, it would not have been unconscionable for it to apply for Judgment under the Terms of Settlement, because the Terms of Settlement did not oblige the applicant to give notice.

   c)Assuming, as appears to be the case, the applicant applied for the issue of a garnishee order, and it did not give notice of its intention to do so, there is nothing to suggest the applicant had no right to do so.

   [32] G J Olzomer affidavit 08.03.17, annexure “F”

   [33] G J Olzomer affidavit 08.03.17, annexure “F”

3. At the hearing before me, counsel for the respondents also relied on the respondents not having been legally represented at the time they agreed to the Terms of Settlement. The respondents, however, have not given any evidence of the circumstances in which they agreed to the Terms of Settlement, or of their understanding of the Terms of Settlement, or of the reasons they agreed to enter into the Terms of Settlement. There is no evidence, for example, that the respondents misunderstood the Terms of Settlement and, in particular, the Default Clause, or that they agreed to the Terms of Settlement in circumstances where they were unable to consider properly whether they should agree to the Terms of Settlement.

4. Further, the evidence suggests the Terms of Settlement were favourable to the respondents. There is no evidence the respondents had any grounds for resisting the claim for $100,000 the applicant made in the Local Court Proceeding. On the contrary, the evidence suggests the respondents had no defence, given the $100,000 the applicant claimed in the Local Court Proceeding represented most of the balance of the amount which, in the settlement deed of 23 January 2014, the respondents acknowledged they owed to the applicant. The Terms of Settlement reduced by over 50% the amount the applicant claimed, and gave the respondents five months within which to pay the substantially reduced amount.

5. In my opinion, the grounds on which the respondents rely for claiming the Judgment was entered as a result of unconscionable conduct by the applicant do not constitute a substantial reason for questioning whether the Judgment records a true debt. In any event, I am satisfied the grounds on which the respondents rely do not establish the applicant engaged in any unconscionable conduct.

Proof of matters prescribed by s.52(1) of Act

1. As I have noted, the respondents accept that the preconditions prescribed by s.52(1) of the Act for the making of a sequestration order have been satisfied. The applicant nevertheless led evidence to establish those matters at the hearing. That evidence satisfies me of the following matters:

   a)The creditor’s petition filed by the applicant on 29 September 2016, and returnable before the Court on 3 November 2016, is in accordance with Form 6 of the Federal Circuit Court (Bankruptcy) Rules2006. That form is slightly different, although not materially different, from Form B6, being the form prescribed by the Federal Circuit Court (Bankruptcy) Rules 2016 (Rules). The respondents have made no submission about this, and I am satisfied that, by itself, this gives rise to no issue that would prevent me from being satisfied the preconditions prescribed by s.52(1) of the Act are satisfied.

   b)The matters stated in paragraphs 1, 2, 3, and 4 of the creditor’s petition are verified in accordance with Part 2 of Form 6 and those matters, therefore, are proved.[34] Those matters are that the first and second respondent each committed an act of bankruptcy by failing to comply on or before 14 September 2016 and 26 September 2016 respectively with the requirements of the bankruptcy notice, the respondents owe the applicant $75,721.91, the applicant holds no security over the property of the respondents, and, at the time of each act of bankruptcy, the respondents were personally present, ordinarily resident, and owned real property, in Australia.

   c)The creditor’s petition was accompanied by an affidavit made by Z Gazzard on 28 September 2016 stating that on 28 September 2016 the computer records of the Federal Court and of this Court had been searched, and that no application had been made in relation to a bankruptcy notice issued to the respondents.[35]

   d)Two affidavits sworn by J Khoury on 17 October 2016 deposed to the creditor’s petition having been served on each of the first and second respondents on 6 October 2016, being more than five days before the date fixed for the hearing of the creditor’s petition filed by the applicant, together with the affidavit verifying the creditor’s petition, the affidavits of service of the bankruptcy notice, the affidavit of search, and a consent to act as trustee.[36]

   e)On 14 March 2017, being the day before the hearing of the creditor’s petition, the applicant filed an affidavit of search and affidavit of debt as required by r.4.06(3) and r.4.06(4) of the Rules.

   f)The applicant has also filed a consent to act as trustee signed by Mr Michael Gregory Jones.

   [34] Rules, r.4.02(2)

   [35] Rules, r.4.04(1)(a)

   [36] Rules, 4.04(5)

Conclusion and disposition

1. I am satisfied the preconditions prescribed by s.52(1) of the Act for the making of a sequestration order are satisfied. I am not satisfied there is any sufficient cause not to make a sequestration order against the estates of the respondents. I propose, therefore, to make an order sequestrating the estates of the respondents. I also propose that the applicant’s costs be paid out of the estates of the respondents.

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

Associate: 

Date:  13 June 2017