Damien v JKAM Investments Pty Ltd
[2015] FCCA 3431
•21 December 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| DAMIEN v JKAM INVESTMENTS PTY LTD | [2015] FCCA 3431 |
| Catchwords: BANKRUPTCY – Application to set aside bankruptcy notice – set-off or cross-claim – amount set-off not greater than amount claimed in bankruptcy notice – application dismissed. |
| Legislation: Acts Interpretation Act1901 (Cth), s.15C Bankruptcy Act 1966 (Cth), ss.30(1)(b), 40(1), 41(7) Civil Procedure Act 2005 (NSW) |
| Damien v JKAM Investments Pty Ltd [2015] NSWCA 368 Jagatramka v Coeclerici Asia (Pte) Ltd (No.2) [2015] FCCA 2743 Glew v Harrowell [2003] FCA 373; (2003) 198 ALR 331 Olivieri v Stafford (1989) 24 FCR 413 Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 |
| Applicant: | KARL DAMIEN |
| Respondent: | JKAM INVESTMENTS PTY LTD (ACN 159 084 018) |
| File Number: | SYG 1650 of 2015 |
| Judgment of: | Judge Smith |
| Hearing date: | 20 October 2015 |
| Date of Last Submission: | 20 October 2015 |
| Delivered at: | Sydney |
| Delivered on: | 21 December 2015 |
REPRESENTATION
| Counsel for the Applicant: | Mr J. Cohen |
| Solicitors for the Applicant: | Duffy Law Group |
| Counsel for the Respondent: | Mr G. McDonald |
| Solicitors for the Respondent: | JK Solicitors |
ORDERS
The application filed on 17 June 2015 to set aside the bankruptcy notice BN 181540 issued on 27 May 2015 and served on the applicant on 2 June 2015 be dismissed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 1650 of 2015
| KARL DAMIEN |
Applicant
And
| JKAM INVESTMENTS PTY LTD (ACN 159 084 018) |
Respondent
REASONS FOR JUDGMENT
Karl Damien owned a commercial property at Ironbark Avenue Camden, a suburb on the outskirts of Sydney. In 2012 he organised for some construction work to be undertaken on the property. At least part of that work was undertaken by JKAM Investments Pty Ltd.
In September 2012 Mr Damien leased the property to JKAM for a period of 15 years. In December 2012 Mr Damien and JKAM entered into an agreement (“Agreement”) whereby Mr Damien agreed to sell the property to JKAM or its nominee for a price of $2,081,000 plus GST. It was a term of the agreement that JKAM would be responsible for all mortgage repayments and outgoings in respect of the property on and from 1 January 2013. It was acknowledged in the agreement that the value of the construction works undertaken by JKAM on the property was $480,000 plus GST (if applicable).
At all relevant times National Australia Bank Ltd held a first registered mortgage over the property. Mr Damian had fallen behind in his obligations under the loan facility secured by that guarantee. On 27 August 2012 Mr Damien and entities controlled by him had entered into an agreement with National Australia Bank Ltd recorded in a document entitled “Forbearance Deed”. That document records that, as at 10 August 2012, the loan agreement and securities were in default and the amount owing under them was $1,706,183.55. In return for Mr Damien maintaining interest payments falling due under the loan and repaying the amount owing by 31 December 2012, the bank agreed to forbear from taking any further action to enforce its rights under the loan and securities until 31 December 2012.
In breach of its obligations under the Agreement, JKAM did not pay any of the mortgage repayments in respect of the property. In October 2013 the National Australia Bank appointed a receiver to the property. It also commenced proceedings for possession of the property, although it is not clear from the evidence when those proceedings were commenced. JKAM, was joined to those proceedings and resisted orders for possession in reliance upon a caveat which apparently related to its rights under the lease from Mr Damien (although, once again, the evidence about this is very unclear).
In addition to those proceedings, there were proceedings involving various parties claiming an interest in the property. Part of those proceedings was a cross-claim by JKAM against Mr Damien and a cross-claim by Mr Damien against JKAM. Those cross-claims were listed for separate determination and heard by Rein J in the Supreme Court of New South Wales on 11 and 12 March 2015. Judgment in those matters was delivered on 20 March 2015. It will be necessary in due course to consider in more detail each of those claims. For present purposes it is sufficient to note that Rein J essentially allowed each cross-claim and, after setting one off against the other, found that there was a net difference of $138,000 in favour of JKAM and accordingly gave judgment in favour of JKAM in that amount. Mr Damien then appealed that judgment.
On 27 May 2015 a bankruptcy notice addressed to Mr Damien was issued in respect of the judgment in the Supreme Court as well as interest claimed under the Civil Procedure Act 2005 (NSW). The total amount claimed was $140,088.45.
Mr Damien seeks orders setting aside the bankruptcy notice pursuant to s.41(7) of the Bankruptcy Act1966 (Cth). That section relevantly provides:
(7)Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter-claim, set-off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.
Although that provision does not in fact give jurisdiction to this Court to set aside a bankruptcy notice as there is no other express provision in the Bankruptcy Act1966 (Cth) that does so the source of the power is said to arise from sub-s.30(1)(b) which provides:
(1) The Court:
…
(b)may make such orders … as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.
(See Olivieri v Stafford (1989) 24 FCR 413 and, more recently, Jagatramka v Coeclerici Asia (Pte) Ltd (No.2) [2015] FCCA 2743 at 19 per Judge Manousaridis. I would add that s.15C of the Acts Interpretation Act 1901 (Cth) assists in identifying the source of the power.)
Section 40(1) of the Act provides that a person commits an act of bankruptcy:
…
(g)if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i)where the notice was served in Australia--within the time specified in the notice; or
(ii)where the notice was served elsewhere--within the time fixed for the purpose by the order giving leave to effect the service;
comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;
The effect of that section has been described in various ways which sometimes overlap. It was described by Lindgren J in Glew v Harrowell [2003] FCA 373; (2003) 198 ALR 331. At [12] his Honour said that the effect of the section was, in broad terms that a debtor must satisfy the Court that the counter-claim set-off or cross-demand is made in good faith and that:
[12] … there is sufficient substance to the counterclaim, set-off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.
It should be noted that part of the requirement is that the counter-claim, set-off or cross demand is one that the applicant could not have set up in the action or proceeding in which the judgment or order was obtained. That phrase has been construed narrowly: see Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 at 139 per Lockhart J. In that matter, his Honour said:
The words “that he could not have set up in the action or proceeding in which the judgment or order was obtained” mean “which he could not by law set up in action”.
Consideration
Mr Damien relies on four matters to establish that he has a set-off or cross claim equal to or greater than the amount of the amount claimed in the bankruptcy notice:
i)JKAM was liable for a number of further payments between the date of Rein J’s judgment and the date on which it vacated the premises, namely 22 May 2015. These amounted to roughly $40,000;
ii)the National Australia Bank incurred legal and other costs in excess of $200,000 as a direct result of JKAM’s failure to make the mortgage repayments in accordance with the Agreement. Mr Damien was liable to pay that amount pursuant to the mortgage with the bank and had a right to claim it as damages from JKAM;
iii)there were a number of costs orders made against JKAM in favour of Mr Damien. Ultimately, Mr Damien relied only upon costs orders amounting to about $13,000referable to a hearing before Sackar J in April 2015; and
iv)the judgment of Rein J was affected by a number of errors that are the subject of an appeal to the Court of Appeal.
After judgment was reserved in this matter the New South Wales Court of Appeal heard and dismissed Mr Damien’s appeal from the judgment of Rein J: Damien v JKAM Investments Pty Ltd [2015] NSWCA 368. For that reason, the fourth basis for this application falls away and need not be considered any further.
First basis: the payments due after the decision of Rein J
The applicant’s bank records for the period 6 December 2014 to 5 June 2015 show that he continued to be debited with interest payable in respect of the loan secured by a mortgage over the property. Justice Rein’s judgment was given on 20 March 2015. After that date, the amounts of $21,109.50 and $16,536.82 were debited in respect of interest on 8 April 2015 and 5 May 2015 respectively. The total of these amounts is $37,646.32. The applicant claims that in light of the findings made by Rein J and the fact that the respondent was obliged to, but did not pay these amounts, he is entitled to claim that amount as a set-off against the amount claimed in the bankruptcy notice.
On 4 June 2015 an amount of $18,370.29 was debited to the applicant’s account in respect of interest. The applicant only claims a portion of this amount. I will assume for the purposes of the application that the applicant is entitled to half of that amount, namely, $9,185.15,
Second basis: National Australia Bank’s legal costs in connection with obtaining possession of the property
The applicant argues that the fact that the respondent did not immediately hand over possession of the property to the National Australia Bank, but defended possession proceedings means that he has a cross-claim against the respondent for any costs incurred by the bank in obtaining that possession. The argument is based on the claim that the applicant will be liable for those costs pursuant to the mortgage and will be deducted by the bank from the proceeds of sale of the property.
There are a number of significant problems with this argument.
First, the evidence does not establish that any conduct by the respondent in fact caused the bank to incur any costs and expenses. Secondly, even if it did, there is nothing to link that to any liability of the respondent to the applicant; and third, the evidence of the amount incurred by the bank is at such a high level of generality that it cannot be given much weight. It is convenient to deal with that evidence first.
The only evidence relied on by the applicant is a letter from lawyers acting for the National Australia Bank addressed to the applicant’s former lawyer dated 16 June 2015. Omitting formalities, that letter stated:
We understand that you act for Karl Damien and we refer to your letter dated 28 May 2015.
We confirm that NAB has now taken possession of the Property.
In relation to the information requested in your letter, as at 15 June 2015 NAB has incurred the following costs:
1.Total legal costs of $68,835 (excluding GST and disbursements);
2.Disbursements including counsel’s fees of $18,031.82 (excluding GST); and
3.Costs and expenses of the agent of mortgagee in taking possession of the Property of $136,873.34.
As you are aware, Mr Damien provided a consent judgment in Supreme Court of New South Wales Proceedings No. 2014/213106 (Proceedings) on 1 August 2014. From 1 August 2014 to the finalisation of the Proceedings on 13 March 2015, NAB incurred legal costs of $39,586 (excluding GST and disbursements) in relation to enforcing its rights under the mortgage over the Property and obtaining possession of the Property.
Pursuant to the terms of the mortgage provided by your client in respect of the Property, you client is liable for all costs, including legal costs, on an indemnity basis and any receivers’ costs, incurred by NAB in enforcing or attempting to enforce the mortgage over the Property. As such, NAB would likely seek to recover those above costs from the proceeds of the sale of the Property in the event the Property was sold.
This letter does not disclose what, if any costs were incurred by the bank in connection with any action, or inaction, by the respondent. It is insufficient, in this respect, that the respondent actively opposed the possession proceedings. There is no evidence as to what this opposition involved and what was incurred as a result of it. Further, and more importantly, it is not the case that the applicant has any claim against the respondent simply because the respondent’s action or inaction caused the bank to incur expenses that may ultimately be borne by the applicant. The only cause of action identified by the applicant was that the bank’s actions were caused by the respondent’s failure to make the mortgage repayments. He argued that, as the respondent was contractually responsible to the applicant to make those payments, any loss suffered as a result of his failure to pay can be claimed by the applicant.
I am not satisfied on the evidence that there is any such cause of action. First, there is no evidence to show that the reason the bank took any action was the respondent’s failure to pay the mortgage amounts. If that was the case, it would need to be inferred solely from the fact that the bank took steps to control and then to take possession of the property. However, as noted above, at the time the applicant and respondent entered into their agreement, the applicant owed some $1,706,183.55 to the bank. The Forbearance Deed between the applicant and the bank only took effect up to 31 December 2012. Further, the applicant remained responsible to the bank for the mortgage repayments. There is nothing in the evidence to suggest that it was not his failure to make the payments, rather than the respondent’s failure, that led to the bank’s actions. This could be seen an aspect of remoteness of the loss or the applicant’s failure to mitigate the loss.
Third basis: costs order in favour of the applicant by Sackar J in the Supreme Court of New South Wales
The applicant relied on a tax invoice from “Cambridge Lawyers” dated 29 June 2015 to support his argument that he has a claim in the amount of $13,255 in respect of the costs order made by Sackar J in April 2015. However, even if I accepted that amount and that it gave rise to a cross-claim that might be relied on for the purposes of this application, it would be insufficient to warrant an order setting aside the bankruptcy notice. Taken with the amounts of $37,646.32 and $9,185.15 (see [14] and [15] above) the total amount only comes to $60,086.47. Given the total amount claimed in the bankruptcy notice was $140,088.45, that is not an amount equal to or exceeding the amount of the judgment debt or sum payable under the final order: sub-s.40(1)(g).
Conclusion
For those reasons, the application to set aside the bankruptcy notice is dismissed.
I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Judge Smith
Associate:
Date: 21 December 2015
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