De Nuntiis v BP Australia Pty Ltd
[2018] FCCA 3163
•20 December 2018
FEDERAL CIRCUIT COURT OF AUSTRALIA
| DE NUNTIIS v BP AUSTRALIA PTY LTD | [2018] FCCA 3163 |
| Catchwords: BANKRUPTCY – Application to set aside a bankruptcy notice – judgment debt previously paid by two joint debtors in settlement of earlier bankruptcy proceedings – one joint debtor subsequently made bankrupt – creditor disgorging the amount received to the trustees in bankruptcy – whether the judgment debt remains owing by the other joint debtor pursuant to a Carruthers clause considered. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.30, 40, 41, 122 |
| Cases cited: Analogy Pty Ltd v Bell Basic Industries Ltd, 23 August 1995, SC (WA), Full Court, unreported Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152 Bryant v Commonwealth Bank of Australia (1994) 217 ALR 251 Commercial Bank v Carruthers [1964-1965] NSWR 1197 James v Australia and New Zealand Banking Group Ltd [2018] NSWCA 41 Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217 Victoria v Tatts Group Ltd (2016) 328 ALR 564 |
| Applicant: | ANNA DE NUNTIIS |
| Respondent: | BP AUSTRALIA PTY LTD |
| File Number: | SYG 861 of 2018 |
| Judgment of: | Judge Driver |
| Hearing date: | 30 October 2018 |
| Delivered at: | Sydney |
| Delivered on: | 20 December 2018 |
REPRESENTATION
| Counsel for the Applicant: | Mr P Fary |
| Solicitors for the Applicant: | ERA Legal |
| Counsel for the Respondent: | Ms S Worsfield |
| Solicitors for the Respondent: | Mason Black Lawyers |
ORDERS
The application filed on 28 March 2018 is dismissed with costs with effect from 10 January 2019.
Pursuant to s.41(6A) of the Bankruptcy Act 1966 (Cth), the time for compliance with Bankruptcy Notice BN221786 is extended up to and including 10 January 2019.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG861 of 2018
| ANNA DE NUNTIIS |
Applicant
And
| BP AUSTRALIA PTY LTD |
Respondent
REASONS FOR JUDGMENT
Introduction and background
The applicant (Ms De Nuntiis) seeks to set aside a bankruptcy notice issued on 12 February 2018[1] and served on her by the respondent, BP Australia Pty Ltd (BP). In short compass, the dispute between the parties arises because Ms De Nuntiis, through a company controlled by her, paid a judgment debt which had led to previous bankruptcy proceedings against her and her husband (Mr De Nuntiis), thereby settling the proceedings, but Mr De Nuntiis subsequently became bankrupt on the application of a different creditor. His trustees in bankruptcy demanded that BP pay the settlement sum to them as a preference, which BP did. BP then claimed that amount from Ms De Nuntiis in reliance upon a Carruthers clause in a guarantee agreement which had led to the original debt.
[1] Bankruptcy Notice BN221786 (the Bankruptcy Notice).
The following statement of background facts is derived from the submissions of the parties and the affidavit evidence supporting those submissions.
In 2016, BP obtained judgment against Ms De Nuntiis and Mr De Nuntiis in the sum of $82,675.18 in the Magistrates Court of Victoria (Judgment Debt).[2] BP’s entitlement to the Judgment Debt arose pursuant to a guarantee (Guarantee) executed by both Ms De Nuntiis and Mr De Nuntiis in respect of the obligations of P & A Transport Group Pty Ltd.[3]
[2] The Judgment Debt arises pursuant to orders made by the Magistrates Court of Victoria on 10 May 2016 (page 27 of exhibit “ADN-1” to Ms De Nuntiis’ affidavit made on 28 March 2018).
[3] A copy of the Guarantee appears at pages 5-12 of “PW-1” to Mr Paul Wright’s affidavit made on 5 June 2018.
In November 2016, BP received payment of $92,775.94 from Summer Lawyers Pty Ltd (2016 Payment). The 2016 Payment was:
a)authorised by Bonniefield Transport Pty Ltd (Bonniefield); and
b)made from funds borrowed by Bonniefield from Secured Lending 1 Pty Ltd (Bonniefield Loan).
The Bonniefield Loan was secured by guarantees from both Ms De Nuntiis and Mr De Nuntiis and by a mortgage provided by both Ms De Nuntiis and Mr De Nuntiis.
On 21 March 2017, this Court made a sequestration order in respect of Mr De Nuntiis’ estate.
In July 2017, Alexander Clark, one of two joint trustees of Mr De Nuntiis’ estate (Trustees) demanded that BP pay $92,775.95 to the Trustees on the basis that the 2016 Payment was a preference and void against the Trustees pursuant to s.122 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).[4]
[4] Letter of demand from Wallmans Lawyers dated 6 July 2017: pages 16-20 of “PW-1” to Mr Wright’s affidavit.
Following an exchange of correspondence with the Trustees (in which BP initially sought to reject the Trustees’ claim),[5] on 20 December 2017 BP paid $92,775.95 to the Trustees.[6]
[5] Letter from Forbes Dowling Lawyers dated 21 July 2017: pages 21-22 of “PW-1” to Mr Wright’s affidavit.
[6] Mr Wright’s affidavit at [19].
The current Bankruptcy Notice requires payment of the Judgment Debt, plus an amount for interest on the Judgment Debt.
Relevant material
Ms De Nuntiis relies upon her application filed on 28 March 2018 and her affidavit made on the same day. BP relies upon the affidavit of Mr Wright made on 5 June 2018 and a second affidavit of Mr Wright made on 26 October 2018. There was no dispute about the affidavit evidence and none of the deponents were required for cross-examination. Both parties filed pre-hearing written submissions and made oral submissions through their representatives at the trial on 30 October 2018.
Consideration
Ms De Nuntiis’ contentions
Ms De Nuntiis seeks orders setting aside the Bankruptcy Notice.
Ms De Nuntiis contends that:
a)her liability under the judgment was discharged by payment using the Bonniefield Loan; and/or
b)BP’s rights under the Carruthers clause (clause 6.1) merged in the judgment; and/or
c)the 2016 payment was not voidable in Mr De Nuntiis’ bankruptcy; and/or
d)the Carruthers clause did not operate so as to revive the 2016 Judgment and her obligation to make payment to BP; and/or
e)the Bankruptcy Notice is overstated and the applicant has or will give notice of overstatement under s.41(5) of the Bankruptcy Act.
Ms De Nuntiis contends that her liability under the judgment was discharged or satisfied by the 2016 Payment.
Ms De Nuntiis contends that the evidence establishes that the payment was made by Secured Lending 1 Pty Ltd (Secured Lending) at the direction of Bonniefield and herself, and not Mr De Nuntiis.
Ms De Nuntiis contends that BP’s rights under the Carruthers clause merged in the judgment and did not continue to have a separate existence after judgment.
Significantly, the Carruthers clause did not purport to reinstate those rights in the event that the debt became a judgment debt that was satisfied.
Section 122 of the Bankruptcy Act operates on a “transfer of property by a person who” later becomes a bankrupt.
The relevant transfer was by Secured Lending,[7] albeit a transfer at the direction of Bonniefield Transport and/or Ms De Nuntiis.
[7] See Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt) [2017] FCAFC 217.
Ms De Nuntiis has deposed that:[8]
On 2 November 2016, Secured Lending, upon my direction, paid BP the amount of $92,775.94 in respect of the Judgment Debt the subject of the Creditor’s Petition. At page 78 is a copy of the payment receipt.
[8] Ms De Nuntiis’ affidavit at [22].
Ms De Nuntiis submits that on no view could it be said that the payment was a transfer of property by Mr De Nuntiis. He was neither borrower nor payer.
Accordingly, the 2016 Payment is said not to be voidable under s.122 of the Bankruptcy Act.
Ms De Nuntiis submits that the liability of the surety is strictissimi juris and that ambiguous contractual provisions should be construed in favour of the surety.[9]
[9] Ankar Pty Ltd v National Westminster Finance (Australia) Ltd (1987) 162 CLR 549 at 559; Brighton v Australia and New Zealand Banking Group Ltd [2011] NSWCA 152.
Clause 6.1 of the Guarantee operates to the extent:
a)“BP is obliged to”; or
b)“BP agrees to”,
make a refund in respect of a request made by a trustee in bankruptcy or a liquidator “Under law”.
Ms De Nuntiis contends that the request for repayment made by Mr De Nuntiis’ Trustees was not a request made “Under law”. It was not a request made under s.122 of the Bankruptcy Act, because that section had no application to the 2016 Payment.
Similarly, BP is said to have had no relevant obligation to make the 2017 refund.
BP contends that clause 6.1 gave it a discretion to agree to make a payment, but Ms De Nuntiis responds that on its proper construction, such agreement could only be one in respect of an obligation under the Bankruptcy Act (“Under law”).
Alternatively, any discretion under clause 6.1 was required to be exercised reasonably.[10]
[10] To the extent necessary, such a term would be implied: BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282-3.
BP has said in correspondence:[11]
The Trustees alleged the following:
(1) The Bankrupt borrowed money from Secured Lending.
(2)The payment was to discharge his debt to BP Australia Pty Ltd.
(3)The Bankrupt was a Guarantor on that loan and had executed documents to complete the Loan application.
(4)The Bankrupt had mortgaged his interest at the property 5a Bonniefield Close, Catherine Fields NSW 2557 in support of the Loan.
[11] Page 106 of Annexure ADN1 to Ms De Nuntiis’ affidavit.
Accordingly, they alleged that the payment is void pursuant to Section 122 of the Act and is recoverable by the Bankrupt as a preference (in accordance with Re Kitts; Ex parte: Bernard Putnin v Advanced Commercial Finance Ltd [1992] FCA 796, Commissioner of Taxation v Kassem and Secatore as Trustee of Mortlake Hire Pty Ltd (in liq) [2012] FCAFC 124).
Barrister’s Memorandum of Advice
Our client has sought barrister’s advice with respect to this preference matter, who appeared to confirm the Bankrupt’s Trustees position. Accordingly, the payment made to BP was refunded to the Trustees in full on or about 13 December 2017.
The flaw in the Trustees’ claim is said to be “obvious”: the bankrupt did not borrow money from Secured Lending. The relevant borrower was Bonniefield.
Each of the authorities relied upon by BP is said to be clearly distinguishable. BP “appears to have overlooked” the decision in Analogy Pty Ltd v Bell Basic Industries Ltd,[12] which was “relevantly indistinguishable” and concerned the concept of voidable preferences on third party payments.
[12] 23 August 1995, SC (WA), Full Court, unreported.
BP’s conduct in refunding the 2016 Payment is said to have been unreasonable, even if relying on advice of counsel.[13] There was no evidence that the payment, which was made by Bonniefield, was a transfer of property by Mr De Nuntiis.
[13] whose conduct would relevantly be attributable to BP under agency principles.
Further, there is no evidence of any attempt by BP to negotiate a lesser amount with the Trustees.
Ms De Nuntiis submits that, in any event, the 2016 judgment was satisfied by payment and the Carruthers clause cannot revive it. The Guarantee provides that “BP is then entitled to its rights against You under this guarantee and indemnity as if the payment had never been made” (emphasis added). BP’s rights “under this guarantee and indemnity” are contractual rights to sue for debt.
Further or in the alternative, Ms de Nuntiis submits that the debt claimed in the notice was overstated and Ms De Nuntiis says that she will give notice of overstatement (misstatement) in accordance with s.41(5) of the Bankruptcy Act.
BP’s contentions
Ms De Nuntiis contends that the 2016 Payment “discharged” her liability to BP for the Judgment Debt.[14] However, as set out above, BP has not retained the 2016 Payment, having transferred funds in that amount to the Trustees in December 2017.
[14] Ms De Nuntiis’ submissions at [14(a)], [15]-[16].
The prospect of BP having to disgorge a payment in the nature of the 2016 Payment is expressly contemplated by the terms of the Guarantee. Clause 6.1 of the Guarantee provides as follows:
Under law, a trustee in bankruptcy or liquidator may ask BP to refund a payment BP has received in connection with the guaranteed agreement or this guarantee and indemnity. To the extent that BP is obliged to, or BP agrees to, make a refund, BP may treat the payment as if it had not been made. BP is then entitled to its rights against You under this guarantee and indemnity as if the payment had never been made. This applies despite anything in the guarantee and indemnity or the fact that You may have ended it.
This clause is said not to be ambiguous and its intended operation in the current circumstances is said to be clear. As BP agreed to refund the 2016 Payment, it submits that it is entitled to enforce its rights against Ms De Nuntiis as if the 2016 Payment “had never been made”. Consequently, it is said not to be open to Ms De Nuntiis to rely upon the 2016 Payment as having “discharged or satisfied” her liability for the Judgment Debt (including as BP did not enter any agreement having that effect at the time of the 2016 Payment,[15] such as may have served to alter BP’s rights otherwise arising under the Guarantee).
[15] Contrary to the assertion at [32] of Ms De Nuntiis’ submissions, BP did not agree that the 2016 Payment satisfied or discharged Ms De Nuntiis’ liability for the Judgment Debt (such that it now needs to be “revived”). While BP consented to its creditor’s petition against Ms De Nuntiis and Mr De Nuntiis being dismissed (as described [23] of Ms De Nuntiis’ affidavit), that did not result in the Judgment Debt being released or discharged.
Ms De Nuntiis seeks to critique BP’s decision to disgorge the 2016 Payment, including by asserting that the 2016 Payment was not voidable. BP submits that the submission ignores the clear wording of clause 6.1 of the Guarantee, which does not require (as a condition of its operation) that BP has a legal obligation to refund a payment. Rather, the clause applies where BP “agrees to, make a refund” (irrespective of whether or not BP is “obliged to” do so).
In BP’s submission, it follows that analysis of whether or not, as a matter of law, the 2016 Payment was voidable against the Trustees is unnecessary. The opening words of clause 6.1 (“Under law”) do no more than serve to explain the context in which a trustee in bankruptcy or a liquidator may seek to recover a payment made in connection with the Guarantee. It is said to be evident, including from the full text of clause 6.1, that the words “Under law” do not require, before the clause is operative, that the legal basis for the request made by a bankruptcy trustee or liquidator be beyond dispute.[16]
[16] Ms De Nuntiis’ submissions at [26] is premised upon BP being able to ascertain definitively, prior to agreeing to refund a payment, whether or not the request for that payment (by a trustee in bankruptcy or a liquidator) would, if heard and determined by a Court, satisfy the applicable legislative provisions. BP contends that it would be an absurd outcome (including having regard to the text of clause 6.1 of the Guarantee) if, to be entitled to rely upon clause 6.1 of the Guarantee, BP would first need to litigate the claim the subject of the demand (being the only means by which satisfaction as to the status of the demand could be definitively obtained).
Ms De Nuntiis also asserts that the Guarantee contained an implied term to the effect that BP was required to act “reasonably” in order to have the benefit of clause 6.1 of the Guarantee.[17] If such a requirement applied, it is said to be satisfied in this case:
a)BP did not volunteer the payment that it made to the Trustees. Rather, the payment was only made following receipt of multiple demands from the Trustees (in circumstances where BP rejected the Trustees’ initial demand).[18] Those demands were in letters from the Trustees’ solicitors, which provided a detailed explanation of the legal grounds for recovery by the Trustees (including by citing authority in support of the Trustees’ claim);
b)while Ms De Nuntiis now contends that the 2016 Payment was not voidable by the Trustees, the correctness of that contention was and is attended by uncertainty. By way of illustration, Keay’s Insolvency contains the following statement regarding the avoidance of “third party payments” under the Bankruptcy Act: [19]
Although s 122 refers to the debtor entering the transaction, a transaction entered into by others on behalf of the debtor (and with the debtor’s express or implied authority) with a creditor of the debtor, can nevertheless be sufficient: Quality Publications Australia Pty Ltd v Commissioner of Taxation [2012] FCA 256; (2012) 202 FCR 574; Sheahan v Carrier Air Conditioning Pty Ltd (1997) 189 CLR 407. There is therefore a preference if a party associated with a debtor paid the creditor with moneys provided by the debtor…
c)as noted above, the 2016 Payment was made possible in circumstances where Mr De Nuntiis provided security for the Bonniefield Loan (by the provision of both a guarantee and a mortgage). This feature of the transaction was relied upon by the Trustees in the demands sent on their behalf, in support of the contention that the 2016 Payment was made at Mr De Nuntiis’ direction and with his “express or implied authority” (with citations of the authorities referred to in the above extract from Keay’s Insolvency);
d)while reference is made in Ms De Nuntiis’ submissions to Rambaldi (Trustee) v Commissioner of Taxation, in the matter of Alex (Bankrupt),[20] that judgment was delivered on 18 December 2017. It follows that BP could not be expected to have taken the reasoning in Rambaldi into account when it determined to make the payment to the Trustees (that payment ultimately being made on 20 December 2017). It is also said to be instructive that, in 2017 (when BP ultimately acceded to the Trustees’ demands), the appellant trustees in Rambaldi pursued an unfair preference claim in respect of a “third party payment” to the Full Federal Court (in reliance upon the same authorities cited by the Trustees). The trustees in Rambaldi doubtless took that course in accordance with advice from their lawyers that there was not only a proper basis for such a claim but that it had genuine prospects of success. Ms De Nuntiis apparently contends that BP should be denied the benefit of clause 6.1 of the Guarantee for proceeding on the basis of an equivalent assessment of the Trustees’ claim; and
e)BP’s payment to the Trustees was based on a considered assessment of the commercial and legal risks associated with the claim upon which the Trustees’ demand was based.
[17] Ms De Nuntiis’ submissions at [27].
[18] Letter of demand from Wallmans Lawyers dated 6 July 2017 (pages 16-20 of “PW-1” to Mr Wright’s affidavit); letter of demand from Wallmans Lawyers dated 28 August 2017 (pages 23-24 of “PW-1” to Mr Wright’s affidavit).
[19] Keay’s Insolvency (9th edition) at [5.165].
[20] [2017] FCAFC 217.
BP submits that, including in light of these matters, its decision to make the payment to the Trustees cannot be characterised as “unreasonable”. Clause 6.1 of the Guarantee was intended to provide BP with protection in the very scenario that has arisen in this case. BP did not act in a fashion that disentitles it from that contractual protection.
Resolution
Ms De Nuntiis’ submissions helpfully set out the relevant statutory and contractual provisions and traverse relevant legal principles.
Legislation – setting aside bankruptcy notice
Section 30(1) of the Bankruptcy Act provides:
(1) The Court:
(a) has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and
(b) may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.
Section 40(1) of the Bankruptcy Act relevantly provides:
(1)A debtor commits an act of bankruptcy in each of the following cases:
…
(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;
Section 41 of the Bankruptcy Act provides:
(1) An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor:
(a) a final judgment or final order that:
(i) is of the kind described in paragraph 40(1)(g); and
(ii) is for an amount of at least $5,000; or
(b) 2 or more final judgments or final orders that:
(i) are of the kind described in paragraph 40(1)(g); and
(ii) taken together are for an amount of at least $5,000.
(2) The notice must be in accordance with the form prescribed by the regulations.
(3) A bankruptcy notice shall not be issued in relation to a debtor:
(a) except on the application of a creditor who has obtained against the debtor a final judgment or final order within the meaning of paragraph 40(1)(g) or a person who, by virtue of paragraph 40(3)(d), is to be deemed to be such a creditor;
(b) if, at the time of the application for the issue of the bankruptcy notice, execution of a judgment or order to which it relates has been stayed; or
(c) in respect of a judgment or order for the payment of money if:
(i) a period of more than 6 years has elapsed since the judgment was given or the order was made; or
(ii) the operation of the judgment or order is suspended under section 37.
(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.
(6) Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with subsection (5), he or she shall be deemed to have complied with the notice if, within the time allowed for payment, he or she takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it.
(6A)Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a) proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b) an application has been made to the Court to set aside the bankruptcy notice;
the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.
(6C) Where:
(a)a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and
(b)the Court is of the opinion that the proceedings to set aside the judgment or order:
(i) have not been instituted bona fide; or
(ii) are not being prosecuted with due diligence;
the Court shall not extend the time for compliance with the bankruptcy notice.
(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.
Setting aside a bankruptcy notice
While there is no express power in the Bankruptcy Act to set aside a bankruptcy notice, it has been held that such power exists by necessary implication and is within the power of the court under s.30(1) of the Bankruptcy Act.[21]
[21] Bryant v Commonwealth Bank of Australia (1994) 217 ALR 251.
Carruthers clause
Clause 6.1 of the Guarantee is known as a Carruthers clause.[22]
[22] Commercial Bank v Carruthers [1964-1965] NSWR 1197
Rule against double recovery
The rule against “double recovery” applies to a guarantor, but only in respect of actual receipts by the creditor.[23]
[23] James v Australia and New Zealand Banking Group Ltd [2018] NSWCA 41.
Whether transfer of money borrowed from third party preferential
In Rambaldi, the Full Federal Court held that a payment made by a lender at the direction of the bankrupt was not a “transfer of property by a bankrupt” within the meaning of s.122 of the Bankruptcy Act, and therefore not voidable.
Contractual construction
In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd,[24] the High Court[25] restated the principles of contractual constructions as follows:[26]
The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose.
In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding “of the genesis of the transaction, the background, the context [and] the market in which the parties are operating”. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption “that the parties ... intended to produce a commercial result“. Put another way, a commercial contract should be construed so as to avoid it “making commercial nonsense or working commercial inconvenience“.
These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales and Electricity Generation Corporation v Woodside Energy Ltd. We agree with the observations of Kiefel and Keane JJ with respect to Western Export Services Inc v Jireh International Pty Ltd.
(footnotes omitted)
[24] (2015) 256 CLR 104 at 116–7 [46]–[52]; applied in Victoria v Tatts Group Ltd (2016) 328 ALR 564 at 575 [51].
[25] French CJ, Nettle and Gordon JJ.
[26] [46]-[52].
Guarantee
The Guarantee relevantly provides:
a)Clause 3.1:
(1) You guarantee to BP the performance by the Applicant of its Obligations when they are due. Your guarantee continues until all these amounts have been paid in full or you end the guarantee and indemnity under clause 5. You cannot otherwise withdraw from, end or limit this guarantee or indemnity.
(2) If BP asks, You must pay BP any amount which the Applicant does not pay BP when it is due. BP need not ask the Applicant first to pay BP.
b)Clause 3.2:
(1) You indemnify BP against, and You must therefore pay BP for, loss BP suffers if the guaranteed agreement is unenforceable solely because of the Applicant’s death, insolvency or incapacity or because of any other act or omission by, or circumstance affecting, the Applicant.
(2) This indemnity is continuing Obligation, separate and independent from your other Obligations under this guarantee and indemnity. It continues after those other Obligations end unless you end the guarantee and indemnity under clause 5 or it is ended by law.
c)Clause 6.1:
Under law, a trustee in bankruptcy or liquidator may ask BP to refund a payment BP has received in connection with the guaranteed agreement or this guarantee and indemnity. To the extent BP is obliged to, or BP agrees to, make a refund, BP may treat the payment as if it had not been made. BP is then entitled to its rights against You under this guarantee and indemnity as if the payment had never been made. This applies despite anything in the guarantee and indemnity or the fact that You may have ended it.
d)Clause 6.2:
(1) Rights given to BP under this guarantee and indemnity and your liabilities under it are not affected by any act or omission by BP or by anything else that might otherwise affect them under law relating to guarantees and indemnities, including:
(a) the fact that BP may vary or replace the guaranteed agreement, such as by increasing the credit limit, increasing the amount of credit agreed to be provided or extending the term;
(b) the fact that BP gives the Applicant or a Guarantor a concession, such as more time to pay;
(c) the fact that the Applicant opens another account with BP;
(d) the fact that BP releases, loses the benefit of or does not obtain any security;
(e) the fact that BP dose not register any security which could be registered;
(f) the fact that BP releases any Person who guarantees the applicant’s Obligations under the guaranteed agreement;
(g) the fact that the Obligations of any person who guarantees the Applicant’s Obligations under the guaranteed agreement may not be enforceable;
(h) the fact that any Person who was intended to guarantee the Applicant’s Obligation under the guaranteed agreement does not do so or does not do so effectively;
(i) the fact that rights in connection with the guaranteed agreements are assigned, varied or released; or
(j) the death (or the receipt by us of notice of the death), mental or physical disability or insolvency of any Person including you or the Applicant.
(2) This guarantee and indemnity does not merge with or adversely affect, and is not adversely affected by, any of the following:
(a) any other guarantee or indemnity, or any security, right or remedy, to which BP is entitled; or
(b) judgment or order which BP obtains against You in respect of an amount payable under this guarantee and indemnity.
(BP can still exercise its rights under this guarantee and indemnity as well as under the judgment, order, other guarantee or indemnity, security, right or remedy.)
Does the Carruthers clause operate?
On receiving the demand from the Trustees, BP notified Ms De Nuntiis and initially resisted it, essentially on the basis that no payment had been received from Mr De Nuntiis, the bankrupt. However, when the demand was pressed, BP obtained counsel’s advice and ultimately acted on it in paying the amount demanded by the Trustees. That advice is in evidence as a result of interlocutory orders I made requiring BP to produce the advice under a Notice to Produce, on the basis that privilege had been waived in it because the substance of the advice had been disclosed.
Relevantly, the advice of counsel was as follows:
Pursuant to section 122 of the Bankruptcy Act, a transfer of property by a person who is insolvent 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 beginning 6 months before the presentation of the petition and ending immediately before the date of the bankruptcy of the debtor.
It is irrelevant that the liability is a joint liability between the bankrupt and Anna De Nuntiis.
It is uncontroversial that the payment was within 6 months of the presentation of the second petition. It is assumed that BP received more than if they were to prove their debt in a hypothetical bankruptcy, it is also assumed that the bankrupt was insolvent.
The only realistic argument is that the payment was a transaction by an unrelated third party. In Commissioner of Taxation v Kassem and Secatore as liquidators of Mortlake Hire Pty ltd (in liq) [2012] FCAFC 124, the Full Court of the Federal Court in interpreting similar preference provisions in the Corporations Act, found that:
a.payments made by third parties would be preferences unless the payment is made by way of bona fide gift; or
b.some other "white knight" arrangement whereby the debt created in the third party is subordinated to the other debts of the insolvent debtor; or
c.a statutory defence can be made out by the recipient.
As BP had presented a petition against the bankrupt at the time of receiving the funds, notwithstanding that petition was dismissed, [it] cannot seek relief under section 123 as a result of the effect of section 123(1)(f).
The reasoning behind the 'third party preference' doctrine is explained in Re Emanuel (No 14) Pty Ltd v Blacklaw (1997) 147 ALR 281. In short, a debt cannot be discharged without the consent of the debtor, thus, notwithstanding that Bonnie Transport paid BP, it was in discharge of an obligation not owed by it, but by the bankrupt (and Anna De Nuntiis) as guarantors for P&A. Accordingly, in order to discharge the bankrupt's debt, the bankrupt must consent to that payment. Courts consider that payment to be in effect a payment from the bankrupt to the BP using a third party as an instrument of that payment.
It may be possible to structure such a transaction so it does not involve the bankrupt, such as selling BP's liability to Secure Lending 1 Pty Limited for consideration. However, this does not appear to have happened. In addition, even if that were to have happened, a Court is likely to find such an arrangement sham-like where a creditor's petition has been presented.
I don't have any information regarding the terms of the guarantee and indemnity held in favour of BP. However, I am proceeding on the assumption that it is joint and several.
Accordingly, my opinion is if the trustee issues proceedings, BP is exposed as having received a preference in the bankruptcy of Piero De Nuntiis. However, BP would retain an indemnity against Anna De Nuntiis as co-guarantor, for what it is worth. Of course, that depends on the financial capacity of Anna De Nuntiis.
The trustee may decide not to proceed to recover the preference, or may be unable to raise funds to do so. Further, they may target Anna De Nuntiis and/or Bonnie Transport Pty Ltd for recovery under the transaction. However, by the notice provided it appears that they have BP in their sights for a recovery.
There is an argument that the payment was made to discharge the liability of Anna De Nuntiis by an entity that she controls for her own benefit. On my instructions, Anna De Nuntiis is not a bankrupt. For the reasons set out above, unless there are substantially different facts I have not been provided regarding the payment to BP, such an argument is problematic.
As with all litigation, there are risks and potential matters arising out of evidence at trial. A Court may determine that the transaction was outside of the knowledge and control of Mr De Nuntiis and the existence of a co-guarantor changes how the payment were to be received in a hypothetical bankruptcy. How such an argument is received at trial is very difficult to predict.
My opinion is that BP has a case with moderate to limited prospects of success should the trustee bring a preference action. Should one be issued, focus should be given to attempt to resolve the dispute on a commercial basis at an appropriate opportunity.
I am satisfied that BP acted reasonably and responsibly in complying with the Trustees’ demand for the purposes of the Carruthers clause, being clause 6.1 of the Guarantee. It cannot be said that BP was legally obliged to make the payment to the Trustees as no legal proceedings were involved and, on the authority of Analogy Pty Ltd v Bell Basic Industries Ltd and Rambaldi (which post dated the advice of counsel relied upon by BP), BP had at least an arguable defence available to the claim made by the Trustees. For the purposes of clause 6.1, however, the advice relied upon by BP provided a reasonable and proper basis for the payment made by BP. The question in these proceedings is not whether the Trustees were entitled to the money paid to them but whether clause 6.1 of the Guarantee operates as a contractual term. In my view, the clause operates to permit further recovery by BP under the Guarantee where a voluntary payment to trustees in bankruptcy is made on a reasonable and proper basis. Further, in the light of clause 6.2(2), the payment of the Judgment Debt in the earlier bankruptcy proceedings does not defeat a further contractual claim by BP by reason of merger or otherwise.
The remaining question is whether BP is entitled to rely upon the judgment establishing the Judgment Debt for the purposes of the present Bankruptcy Notice.
On its face, the Bankruptcy Notice was properly issued, based upon the earlier default judgment. A fresh bankruptcy notice was required because the earlier bankruptcy notice is now stale and could not support a subsequent creditor’s petition. In essence, therefore, BP is not relying upon the earlier act of bankruptcy, although it is relying on the Judgment Debt. Although it may seem unjust that Ms De Nuntiis has to pay the debt to BP in order to avoid committing an act of bankruptcy again, the circumstances are that the first payment has been applied by the Trustees for the benefit of all creditors of Mr De Nuntiis, rather than one creditor (BP). Importantly, no proceedings to set aside the default judgment have been taken and it remains available to BP to support the present Bankruptcy Notice.
Neither am I persuaded that the amount due on the Bankruptcy Notice is overstated. It is the amount of the Judgment Debt plus interest. Ms De Nuntiis and Mr De Nuntiis were jointly and severally liable to BP and the payment made to settle the earlier bankruptcy proceedings benefitted them both. The payment was legally ineffective to discharge the debt by reason of clause 6.1 and clause 6.2 of the Guarantee and it did not reduce the liability of either Ms De Nuntiis or Mr De Nuntiis by any amount.
The appropriate order is for the application to be dismissed with costs. The date of effect of that order will be a date 21 days hence, to enable Ms De Nuntiis to further consider her position. I will further extend time for compliance with the Bankruptcy Notice until that date.
I certify that the preceding fifty-eight (58) paragraphs are a true copy of the reasons for judgment of Judge Driver
Date: 20 December 2018
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