De Bono v Perpetual Nominees Pty Ltd
[2006] FMCA 1554
•23 October 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DE BONO v PERPETUAL NOMINEES PTY LTD | [2006] FMCA 1554 |
| BANKRUPTCY – Application to set aside bankruptcy notice − where applicant debtor in default of loan agreement − where triggering events for default were lodgement of caveats and failure of mortgagors to provide mortgagee with complying contracts − where applicant guarantor claimed respondent had issued an invalid notice of default − where allegedly invalid notice subject of cross claim − where right to bring the cross claim assigned by the liquidator to the applicant guarantor − whether cross claim of sufficient substance that it should be heard and determined without requiring compliance with the bankruptcy notice or committal of an act of bankruptcy − whether court estopped from hearing the cross claim. |
| Bankruptcy Act 1966 (Cth), s.41(7) Federal Magistrates Court (Bankruptcy) Rules 2006 |
Corporations Act 2001 (Cth), ss.459G, 471A(2A)(d), 471(1A)(i)
Real Property Act 1900 (NSW), ss.57(2), 58
Uniform Civil Procedure Rules 2005, Part 13.1
| Perpetual Nominees v Masri Apartments; Perpetual Nominees v AUS Constructions [2004] NSWSC 500 Perpetual Nominees Ltd v Masri Apartments Pty Limited (2004) 49 ACSR 719 Masri Apartments Pty Limited (in liquidation) & Anor v Perpetual Nominees [2004] NSWCA 255 Perpetual Nominees Pty Limited v AUS Constructions Pty Limited (in liq) & Ors (Unreported, 2 November 2004, 11320/04) |
Masri Apartments Pty Limited & Anor v Perpetual Nominees Limited [2004] NSWCA 471
Masri Apartments Pty Ltd v Perpetual Nominees Ltd (Unreported, 7 February 2005, CA 40544/04)
Perpetual Nominees Limited v AUS Consrtuctions Pty Limited & Ors [2005] NSWSC 1199
Re Glew v Harrowell of Hunt and Hunt Lawyers (2003) 198 ALR 331
| Applicant: | LAWRENCE DE BONO |
| Respondent: | PERPETUAL NOMINEES PTY LTD |
| File Number: | SYG 1464 of 2006 |
| Judgment of: | Raphael FM |
| Hearing date: | 16 October 2006 |
| Date of Last Submission: | 16 October 2006 |
| Delivered at: | Sydney |
| Delivered on: | 23 October 2006 |
REPRESENTATION
| Counsel for the Applicant: | Mr J. Chippindall |
| Solicitors for the Applicant: | M.D. Nikolaidis & Co |
| Counsel for the Respondent: | Mr J. Simpkins S.C. |
| Solicitors for the Respondent: | Gadens Lawyers |
ORDERS
Application dismissed.
Applicant to pay the respondent’s costs to be taxed, if not agreed, pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 1464 of 2006
| LAWRENCE DE BONO |
Applicant
And
| PERPETUAL NOMINEES PTY LTD |
Respondent
REASONS FOR JUDGMENT
The application before me seeks to set aside a bankruptcy notice numbered NN4772/05 issued against the applicant and another by the Official Receiver for the bankruptcy district of New South Wales at the request of the respondent on 6 December 2005. The notice was served on 28 April 2006 and is based upon a judgment given by Johnson J on 20 October 2005 and entered on 30 November 2005 in the sum of
$4 773 587.93. The applicant and the other debtor were guarantors of the obligations of AUS Constructions Pty Ltd ACN 103449663 (“AUS Constructions”) and of Masri Apartments Pty Limited ACN 097751669 (“Masri”). Both companies are now in liquidation.
The applicant is a director and shareholder of Masri and of AUS Constructions. Masri is a wholly owned subsidiary of AUS Constructions. It is the registered proprietor of certain land situated at 16-18 George Street, Liverpool NSW (“the land”). AUS Constructions intended to carry out a development on the land by erecting a block of units and entered into financing arrangements with the respondent in September 2003, whereby, pursuant to two loan agreements, the respondent agreed to lend Masri approximately $12m. The loan was secured by a first registered mortgage over the land, by fixed and floating charges over AUS Constructions and Masri and by guarantees from the applicant and his co-director. There were a number of events of default contained in the loan agreement, which included, pursuant to cl 7.18,
“If a caveat or other encumbrance was registered against the land without Perpetual’s consent.”
and, pursuant to cl 7.21,
“Masri Apartments failed to provide Perpetual with certified copies of at least fifteen (15) complying contracts within 60 days of the advance date.”
On 17 September 2003 Perpetual advanced to Masri the sum of $2 447 550.00 pursuant to the first loan agreement, and on the same day, advanced the sum of $492 450.00 pursuant to the second loan agreement.
On 2 February 2004 a caveat was lodged on the land by a finance broker, Global Capital Corporation Limited, which had been instrumental in obtaining the finance from the respondent for the development. On the same day, a caveat was lodged on the land by one of AUS Construction’s former shareholders, Bassen Elmasri.
On 3 March 2004, Perpetual served on Masri a notice under s.57(2) of the Real Property Act 1900 (NSW) claiming that the mortgage was in default and seeking to exercise the power of sale conferred on the mortgagee by s.58 of the Real Property Act. Other notices relating to events of default followed. The triggering events of default, for the purposes of these proceedings, were the lodgement of the two caveats and the failure by the mortgagors to provide the mortgagee with the 15 complying contracts by 23 December 2003.
On 5 March 2004 Perpetual caused a statutory demand to be addressed to Masri under s.459G of the Corporations Act 2001. On the same day a similar demand was sent to AUS Constructions. These demands were the subject of a decision of Austin J in the Supreme Court of NSW on
9 June 2004: Perpetual Nominees v Masri Apartments; Perpetual Nominees v AUS Constructions [2004] NSWSC 500. His Honour determined that the statutory demands were properly served upon the companies. On 24 June 2004, Austin J, after hearings on 7 and 21 June, determined the winding up proceedings against the two companies: Perpetual Nominees Ltd v Masri Apartments Pty Limited (2004) 49 ACSR 719. During the course of those proceedings it was argued by Perpetual, inter alia, that the companies had fallen into default because of the failure to provide at least 15 complying contracts. There was considerable argument about whether or not the agreements had been varied. In regard to this claim, his Honour said at [53]
“If it were necessary for me to make a decision on the balance of probabilities, I would conclude from the evidence as a whole that there was no agreement between the defendants and the lender to reduce the number of complying contracts required under the loan agreement from 15 to 10 or 11.”
The defendants also raised the question of the lodgement of the caveats. The caveat lodged by Mr Elmasri had been removed immediately upon complaint by the company. The caveat lodged by the finance company had not been removed but it was argued that there was no caveatable interest held by the finance company and that in any event Perpetual should not be allowed to take advantage of the lodgement of the caveat because it was, allegedly, its fault that the outstanding fees had not been paid. In regard to the arguments concerning the caveat, his Honour, after concluding at [58] that
“…I can see from the evidence that there is a ground for concluding that there is a genuine dispute between the parties on that [number of complying contracts] matter.”,
said at [59]
“But Perpetual relies on two other events of default. The lodgement of each of the two caveats, without the lender’s consent, was itself an event of default under cl 7.18 of the loan agreements, entitling the lender to require the borrower and the guarantor to pay all advances in interest. It seems to me plain beyond argument, from the language of cl 7 that it is the very lodgement or “registration” of the caveat that gives rise to the default, regardless of whether the caveat might be open to removal or other challenge. That construction is hardly surprising, since a commercial lender is likely to be more concerned about the fact that there is a caveat on the title to the secured property and that the caveat might at some future time, perhaps after litigation, be removed. To the extent that Perpetual relies upon lodgement of the caveats as a default entitling it to require payment of all advances and interest, I cannot see that there is any substantial basis for disputing its claim.”
Austin J then went on to make a finding that both companies were insolvent, based upon a report from their administrators, and proceeded to make winding up orders against both of them.
The companies appealed against the decision of Austin J, and sought a stay of his orders. His Honour declined to grant a stay and so an application was made to Ipp JA in the Court of Appeal. On 30 July 2004, in a decision Masri Apartments Pty Limited (in liquidation) & Anor v Perpetual Nominees [2004] NSWCA 255, his Honour granted a stay. At [14] of his judgment his Honour said
“Masri and AUS now contend that, on a proper construction of cl 7.18, there will be an event of default arising from the registration of a caveat only if the caveat is lawfully registered and the person registering the caveat has a relevant caveatable interest. In my view, this proposition is reasonably arguable and raises a serious issue for an appellate court.”
His Honour granted the stay on certain conditions relating to the way in which the hearing of the appeal would be financed and requiring that the company would not trade in the meantime.
Before the appeal was heard, Perpetual sought possession of the land in proceedings which were heard before Smart AJ on 2 November 2004: Perpetual Nominees Pty Limited v AUS Constructions Pty Limited (in liq) & Ors (Unreported, 2 November 2004, 11320/04). The defendant sought in those proceedings to raise the argument concerning the use of the caveat as founding an event of default. At [30] Smart AJ opined
“As to the caveats point Perpetual did not suggest that Ipp JA was wrong in the view he took in para 14 of his reasons and summarised earlier. Rather, Perpetual submitted that it had not been demonstrated that neither of the caveators had a caveatable interest. As earlier mentioned and found by Ipp JA in para 10 of his reasons, the caveat lodged by Bassem El Masri was withdrawn immediately after it was challenged and Perpetual’s finance broker lodged a second caveat apparently because Perpetual had not paid the broker’s fees under the loans. If this be so it is not easy to see how this gives rise to a caveatable interest. Nor is it easy to see how the caveats are correct as to form. Austin J decided the caveat point on the correct construction of cl 7.18 of the loan agreements, as mentioned earlier, which he thought was plain. Ipp JA thought that its correct construction was reasonably arguable.
[31] Perpetual pointed out that Austin J had concluded that the amount claimed by Perpetual in the two statutory demands is an amount which cannot be disputed on any substantial ground having regard to the lodgement of the two caveats under the terms of the loan agreement. Perpetual submitted that the judgment of Austin J created an issue estoppel between Perpetual and the two companies and that the appeal which had been lodged did not cut across any issue estoppel unless and until the judgment was reversed.”
At [38], his Honour said
“In the absence of the reversal of the decision of Austin J Perpetual’s point that an issue estoppel arises on the caveats point is a sound one.”
Smart AJ then went on to grant an injunction pending the hearing of the appeal.
The appeal was heard by a court consisting of Spigelman CJ, Mason P and Beazley JA: Masri Apartments Pty Limited & Anor v Perpetual Nominees Limited [2004] NSWCA 471. The decision was given by Beazley J, with Spigelman CJ and Mason P agreeing. Her Honour noted at [13] that Austin J had found it was the registration of the caveat that gave rise to the default under cl 7.18, regardless of whether the caveat might be open to removal or other challenge, but determined that it might not be necessary to make any particular finding on that aspect of the matter:
“For present purposes, I will proceed upon on the assumption, and without deciding the point, that Austin J was wrong in finding that the mere registration of a Caveat was a sufficient event of default under cl 7.18. On that assumption, Perpetual was not able to rely upon presumed insolvency. However, Austin J found on the evidence that the AUS Constructions and Masri Apartments were in fact insolvent.” [25]
The Court of Appeal dismissed the appeal against Austin J’s decision and confirmed the winding up of the company. The applicants then sought special leave from the High Court. At a hearing before Giles JA on 7 February 2005: Masri Apartments Pty Ltd v Perpetual Nominees Ltd (Unreported, 7 February 2005, CA 40544/04), his Honour declined to grant a further stay.
The decision of Smart AJ not only granted the companies a stay, his Honour also made an order at [58] that
“…leave be granted to AUS and Masri Apartments by their directors, Lawrence De Bono and Samir Masri pursuant to s.471A(1A)(d) of the Corporations Act 2001 to bring an application for leave to file and serve a cross-claim and for injunctions to maintain the status quo in respect to 16-18 George Street, Liverpool, until the determination of the Court of Appeal.”
The cross claim referred to was a cross claim by the companies against Perpetual for the damages which they argued arose out of Perpetual’s wrongful calling of events of default, based upon the registration of the caveats.
The final piece of litigation, prior to these proceedings, was the claim brought by Perpetual against the two companies and the directors as guarantors for a money judgment. This claim was heard by Johnson J on 20 October 2005: Perpetual Nominees Limited v AUS Consrtuctions Pty Limited & Ors [2005] NSWSC 1199. By the time of these proceedings the two companies were well into liquidation. No cross claim had been lodged by either company. The companies were the only entities entitled to cross claim against Perpetual, although the two guarantors were entitled to set up the wrongful issue of notices of default as a defence to the money judgment claim. The application, which was heard in the absence of the guarantor defendants, although they were aware of the proceeding and had tried to have it adjourned, was conducted by way of an application for summary judgment under Part 13.1 Uniform Civil Procedure Rules 2005. The plaintiff was obliged to establish its case. His Honour’s judgment is full and contains reference to the possible defences raised by the guarantors, including the defence raised in [6] that the caveators never had a caveatale interest, and on a proper construction of cl 7.18 in order for there to be an event of default there had to be the lodging of a valid caveat. At [39] of his judgment Johnson J referred to [59] of Austin J’s judgment, set out above, and to the conclusion of Austin J at [61] where his Honour said
“My conclusion is that the amount claimed by Perpetual in the two statutory demands is an amount which can not be disputed on any substantial ground, having regard to the effect of the lodgement of the two caveats under the terms of the loan agreements.”
Johnson J then went on to discuss the remarks made by Ipp JA and the manner in which the point about the caveats was dealt with in the Court of Appeal. Johnson J referred to the remarks made by Smart AJ at [14] of his judgment, before saying at [59]
“I turn to consider the first basis upon which relief is sought. I have given consideration to the reasons for judgment of Austin J and I have examined the relevant agreements. With respect, I consider that the reasoning of Austin J (at para 59) is clearly correct. His Honour relied upon the clear words of cl 7.18 of the loan agreements.
[60] I agree with his Honour’s conclusion that, from the language of that clause, the very lodgement or registration of the caveat gave rise to default regardless of whether the caveat might be open to removal or other challenge. Apart from the plain words of the clause, his Honour’s reasoning, which calls in aid the practical reality of commercial lending, is in my view supportive of that construction.”
Having determined that there was no defence available to the guarantors or the companies on the basis of a wrongful calling of an event of default because of the caveats, his Honour considered the issue estoppel question between [63] and [70]. At [65] his Honour said
“I am satisfied that the elements of issue estoppel exist in this case. Firstly, as Smart AJ observed, the same question was decided by Austin J, albeit in different proceedings, the question being whether there was an arguable defence or a triable issue with respect to the plaintiff’s claim based upon the alleged breach of clause 7.18 of the loan agreement. Secondly, the decision of Austin J was, in my view, a judicial decision which was final. Thirdly, the parties to the judicial decision before Austin J, although not identical in the sense that the third and fourth defendants were not actual parties to those proceedings, were, in my view, privies. The third and fourth defendants were the controllers of the first and second defendants. Austin J so held, and that it is apparent from his Honour’s decision that those persons who are the heads and hands of those corporations.
[66] I am satisfied that the third and fourth defendants would be caught by the doctrine of issue estoppel in raising this defence. Accordingly, I am satisfied that, even if the plaintiff’s first ground for relief failed and the caveatable interest ground was arguable, it was not open in this case because of the application of the doctrine of issue estoppel.”
There is one other matter of importance in the judgment of Johnson J, at [67], under the heading of “The Cross Claim Question” his Honour said
“Insofar as the third and fourth defendants before Smart AJ had indicated a desire to file a cross claim with respect to these proceedings, Mr Gyles has advanced a number of submissions. He contends that any cross claim filed by the third and fourth defendants based upon a breach by the lender of the primary contract could have no bearing upon this claim. No cross claim has been filed in any event, although the orders of Smart AJ opened the door for that to be done.”
His Honour then entered judgment against the companies and the two guarantors, one of whom is the applicant in these proceedings.
After the issue of the bankruptcy notice, but before the time for compliance with that notice had expired, the applicant had obtained from the liquidator of the two companies an assignment of those companies’ rights to bring the cross claim against Perpetual. Although the respondent disputes the validity of the assignment, the matter was not argued orally before me and I do not think it is necessary to determine that issue. The real issue is whether, in the circumstances which occurred, the cross claim passes the test, formulated by Lindgren J in Re Glew v Harrowell of Hunt and Hunt Lawyers (2003) 198 ALR 331, that it was of sufficient substance that it should be heard and determined in the usual way without the cross claimant being forced to comply with the requirements of the bankruptcy notice or commit an act of bankruptcy. His Honour also expressed the test as requiring the court to be satisfied that there was a prima facie case; a fair chance of success; or that the claim is one the applicant is fairly entitled to litigate and that it contained a triable issue which he was fairly entitled to litigate.
In coming to a view about these matters I am mindful of the fact that the caveatable interest point, which occupied the majority of the time before me, is not the only integer of the cross claim. There is also the argument concerning the number of contracts. It is accepted that Perpetual were entitled to call an event a default in the event of any one event occurring so that whatever my views may be about the second event, if I am satisfied that the first constituted a default (or that I am not in a position to argue against that suppostion) then the validity of the second event is irrelevant.
Although the alleged invalidity of the notice of default constituted a defence for the guarantors, it does not, to my mind, provide them with a cross claim. Any damages that might be payable would be payable to the companies. And although Smart AJ gave them leave to file the cross claim as directors under s.471A(2A)(d) he was giving them leave to exercise a power of the company which was otherwise prohibited pursuant to s.471(1A)(a) Corporations Act 2001. I am unable to see that otherwise than as a right obtained by virtue of the assignment the applicant can be said to have a cross claim of the type referred to in s.41(7) Bankruptcy Act 1966. And in any event, I accept the argument put by Mr Simpkins SC that to the extent that the applicant might claim to have some cross claim in his own right, Johnson J found against the existence of the right upon which that cross claim was predicated in his decision in the summary judgment case. Any attempt by the applicant to have the cross claim determined would be met with the argument of issue estoppel.
The second claim made by the applicant, namely that he has a right to bring the cross claim pursuant to the assignment, would suffer from any impediment to bringing that cross claim that the companies would have because an assignee takes “subject to the equities”. He has no greater rights than those of the assignor. The rights of the companies in respect of the caveat issue have been determined by Austin J.
His Honour’s decision was not overturned in the Court of Appeal.
Both Smart AJ and Johnson J were of the opinion that an issue estoppel existed. Insofar as there may be a requirement to consider whether or not the applicant is a privy to the estoppel Johnson J has said that he was at [65]. If the issue estoppel exists, and I am satisfied that neither Smart AJ nor Johnson J are so clearly wrong that I could say that it does not, it matters not what my views may be of Austin J’s original decision to hold that cl 7.18 operated upon the lodgement of the caveat. For what it is worth, I would tend to agree with Mr Chippindall, Ipp JA and Smart AJ, that the lodgement of a clearly invalid caveat is arguably not able to trigger an event of default. If this was all I had to decide then, following Lindgren J, I would set aside the notice. But I cannot do this because the issue has been decided for me under the principle of issue estoppel and thus the cross claim is, to my mind, doomed to fail and its existence should not be allowed to hold up the procedures which follow from a failure to repay the sum of nearly $5m.On that basis I dismiss the application. The applicant shall pay the respondents’ costs to be taxed if not agreed under the Federal Magistrates Court (Bankruptcy) Rules 2006.
I certify that the preceding seventeen (17) paragraphs are a true copy of the reasons for judgment of Raphael FM.
Associate:
Date:
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