Efthimiadis v Hartley
[2006] FMCA 201
•17 February 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| EFTHIMIADIS & ANOR v HARTLEY & ANOR | [2006] FMCA 201 |
| BANKRUPTCY – Application to set aside bankruptcy notice – where the principle sum of the bankruptcy notice is the amount obtained by the judgement creditors against the debtors in the District Court of New South Wales – whether the debtors have a counter claim, set off or cross demand which exceeds the amount of the claim in the bankruptcy notice – whether failure to appeal the decision of the District Court invokes the principle of Anshun estoppel – whether a deed of assignment enables the applicants to bring a claim that the Anshun doctrine might otherwise have barred – whether the assignment is capable of investing the applicants with sufficient rights in respect of certain claims not yet argued to constitute a valid set off – whether the claim are credible and will have a “fair chance of success”. |
| Bankruptcy Act 1966 (Cth), s.40(1)(g) |
| Re Ling ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129 Port o Melbourne Authority v Anshun Pty Ltd [No2] (1981) 147 CLR 58 Henderson v Henderson (1843) 3 Hare 100m Re Daley: Ex parte National Australia Bank Ltd (1992) 37 FCR 390 |
First Applicant: Second Applicant: | LEEANNE WHARE EFTHIMIADIS GEORGE EFTHIMIADIS |
| First Respondent: Second Respondent: | BRIAN HARTLEY ANNE HARTLEY |
| File Number: | SYG 3330 of 2005 |
| Judgment of: | Raphael FM |
| Hearing date: | 7 February 2006 |
| Date of Last Submission: | 7 February 2006 |
| Delivered at: | Sydney |
| Delivered on: | 17 February 2006 |
REPRESENTATION
| Counsel for the Applicant: | Mr T Bors |
| Solicitors for the Applicant: | Hasset Dixon Solicitors and Attorneys |
| Counsel for the Respondent: | Mr M Ford |
| Solicitors for the Respondent: | Matthews Dooley & Gibson |
ORDERS
Bankruptcy Notice NN3786/05 issued on 29 September 2005 be set aside.
Respondents to pay the applicants’ costs to be taxed, if not agreed, pursuant to the Federal Court Act and Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 3330 of 2005
| LEEANNE WHARE EFTHIMIADIS |
First Applicant
GEORGE EFTHIMIADIS
Second Applicant
And
| BRIAN HARTLEY |
First Respondent
ANNE HARTLEY
Second Respondent
REASONS FOR JUDGMENT
This proceeding which was commenced by way of application filed on 14 November 2005 seeks an order that bankruptcy notice number NN3786/05 served on 24 October 2005 be set aside. The bankruptcy notice in question is found as annexure A to the affidavit of Leeanne Whare Efthimiadis sworn on 14 November 2005. The notice claims an amount of $17, 598.36 made up of $17,435 principle sum and $163.36 interest. The principle sum was the amount of a judgment debt obtained by the judgment creditors against the debtors in the District Court of New South Wales following a hearing before her Honour Judge Sidis. The circumstances in which this debt was incurred are of importance for this proceeding.
On 1 May 2003 a company, Nuco Australia Pty Limited (“Nuco”) purchased the business of Castle Hill RC Hobbies which was owned by the judgment creditors. The purchase price of the business was $250,000, made up of good will, equipment and stock of which some $90,000 was paid by way of deposit and the balance was vendor financed. Shortly after the business was purchased Nuco discovered that the vendors were claiming to suppliers that it, the purchasers, wasresponsible for all outstanding debts for stock. The purchaser maintained that the vendors were responsible for pre 1 May 2003 debts. The dispute between the parties over this matter grumbled on for some time. Because the purchaser was having difficulty in obtaining stock from suppliers who complained that they had not been paid for pre May 2003 stock, the purchaser began to make such payments. The dispute came to a head when one supplier sued the vendors and the vendors cross-claimed against Mr and Mrs Efthimiadis as guarantors of the liabilities of the purchaser. The purchaser had by this time been placed into administration. Mr and Mrs Efthimiadis had some representation in the proceedings but they appeared for themselves at the very end. The vendor claimed against the guarantors not just an “indemnity” for the supplier’s account but also for the outstanding payment under the instalment payment plan not made by Nuco.
Judge Sidis found that the vendors were responsible for the account of the supplier. But she also found that the guarantors were responsible for the outstanding instalment payments. Mrs Efthimiadis argued that there should be set against these outstanding payments other amounts paid by Nuco to suppliers for pre 1 May 2003 accounts. Judge Sidis made it clear that if that was to happen the case would have to be reopened and there was some difficulty about this because Nuco was not a party to the proceedings. Mr and Mrs Efthimiadis produced a list of payments from the administrators of Nuco. They did not think that this list was entirely accurate. They asked her Honour to reopen the case so that the matter could be dealt with but she declined. The vendors conceded the amount contained in the administrator’s statement although they alleged that this was for the purpose of convenience and to bring the litigation to a conclusion. The result was that the guarantors were still liable for the balance which her Honour calculated as $17,435. The respondents did not appeal the decision of Judge Sidis not to allow the case to be reopened or her judgment.
On 14 November 2005 Nuco assigned to the debtors “all its rights, title and interest in all matters concerning the purchase of the business of Castle Hill Hobbies and any subsequent litigation related to that purchase.” The creditors do not dispute the assignment to the extent that they do not say that on its face it is an invalid document. The debtors now argue that they have a valid cross-claim which exceeds the amount of the claim in the bankruptcy notice and that I should therefore set aside the bankruptcy notice pursuant to s.40(1)(g) Bankruptcy Act 1966 (Cth). They put their cross-claim as follows:
(a) $51,462.76, the amount which the District Court did not take into account.
(b) loss and damage as a result of misrepresentation of turnover and profit figures.
(c) loss and damage as a result of misleading supplies of Castle Hill Hobbies.
These possible cross-claims have to be looked from the point of view of the debtors qua debtors and the debtors qua assignees of the rights of Nuco. Insofar as the position of the debtors qua debtors is concerned I cannot see how they can have a counter claim, set off or cross demand that they were unable in law to raise in the Judge Sidis proceedings: Re Ling ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129. Insofar as the cross claim relates to the amounts paid by Nuco that were not allowed to be credited. Those matters were raised with her Honour in the proceedings. Her Honour declined to reopen the case. This was an appealable decision. It was not appealed. There was no legal impediment to the advancing of the counter claim, but even if it is considered that her Honour’s ruling was such an impediment it would seem to me that the failure to appeal the decision brings the debtors within the umbrella of the doctrine of Anshun estoppel: Port of Melbourne Authority v Anshun Pty Ltd [No2] (1981) 147 CLR 589. In Henderson v Henderson (1843) 3 Hare 100m an authority which was relied upon and cited with approval by all members of the court in Anshun and which has been applied profusely since, the Vice Chancellor stated at [115]:
"Where a given matter becomes the subject of litigation in and, of adjudication by, a court of competent jurisdiction, the court requires the parties to that litigation to bring forward their whole case, and will not, (unless under special circumstances) permit the same parties to open the same subject of litigation in respect of matter which might have been brought forward as part of the subject in contest, but which was not brought forward, only because they have, from negligence, inadvertence, or even accident, omitted part of their case. The plea of res judicata applies, except in special cases, not only to points upon which the court was actually required by the parties to form an opinion and pronounce a judgment, but to every point which properly belonged to the subject of litigation, and which the parties, exercising reasonable diligence, might have brought forward at the time."
Similarly in Australian Associated Motor Insurers Limited v NRMA Insurance Limited [2002] FCA 1061 Conti J said at [28]:
“…the estoppel operates only where the new litigation involves a point which “properly belonged” to the first proceeding or was unreasonably not included in it (Macquarie Bank Ltd v National Mutual Life Association of Australasia Ltd (1996) 40 NSWLE 543 (CA) at 55)”
Insofar as the cross claim relates to the provision of misleading financial records, this is a claim which the guarantors could have raised against the vendor as defence to the claim under the guarantee. If they had been induced to enter into the guarantee because of misrepresentations about the nature of the business then Sidis J could have declined to enforce the guarantee against them. Insofar as that matter was not raised it was not due to any legal impediment and the failure to raise it brings the applicants within the Anshun doctrine.
Insofar as there is a claim for loss or damage as a result of misleading supplies of Castle Hill Hobbies, it is a claim that the company was unable to trade the business in the manner necessary for it to make a profit because of the restrictions on supply that arose out of the vendors refusal to pay pre 1 May 2003 debts. But this is a claim of Nuco. It is not a claim of the guarantors, except possibly to the extent that it could have been raised in a similar manner to the previous claim to avoid the guarantee. In that regard the guarantors are defeated by the Anshun estoppel doctrine.
But the applicants have another way of putting their claim. It arises out of the deed of assignment. They say that they are now entitled to bring any claim that the company might have been able to bring. The company could not have brought the claims in the Judge Sidis proceedings because the company was not a party to those proceedings. I do not believe that the Anshun doctrine extends to require non parties to become parties to proceedings. In John Anthony Jeans v John Richard Bruce & Ors [2004] NSWSC 539 Einstein J discussed the issue of whether or not, under the doctrine of Anshun estoppel, parties and their privies will be estopped from presenting a claim or defence in subsequent proceedings that are “so relevant to the subject matter of the first action that it would have been unreasonable not to rely on it”. At [306-307] of that judgment His Honour said:
“306 A res judicata estoppel, in whatever form, is of binding effect only in respect of the parties to the prior proceedings and those in a relationship of privity with such parties. As stated by Mellish LJ in Parker v Lewis (1873) LR8ChApp 1056 at 1059-60:
“It is unquestionably not the general rule of law that a judgment obtained by A against B is conclusive in any action by B against C ... a judgment inter partes is conclusive only between the parties and those claiming under them.”
307 More specifically, "[i]t has always been said" by the common law that for a non-party to be bound by a res judicata, "there must be privity of blood, title or interest": Carl Zeiss Stiftung v Rayner & Keeler Ltd (No 2) at 910, per Lord Reid”In the earlier High Court decsion of Trawl Industries of Australia Pty Ltd (in liq) & Ors v Effem Foods Pty Ltd (1992) 108 ALR 335 Gummow J applied the test used by Barwick CJ in Ramsay v Pilgram (1968) 118 CLR 271 to determine privity of interest at [31]:
“The requirement of identity of parties between the parties in the concluded action and the action in which the estoppel is raised is satisfied where there is privity in interest. The basic requirement of a privy in interest is that the privy must claim "under or through" the person to whom he is said to be a privy.”
However as was clearly put the in the Western Australian Supreme Court decision of Guiseppina Dissidomino by her next friend Maria Rosa Dissidomino v Butcher Paull & Calder & Anor [2004] WASC 122:
“Part of the public policy considerations underpinning the application of the principles of estoppel is that it obviates the risk of inconsistent verdicts being reached between the two courts (Anshun at 603; Brewer v Brewer (1953) 88 CLR 1 at 15.) For those reasons, "a judicial determination directly involving an issue of fact or of law disposes once for all of the issue so that it cannot afterwards be raised between the same parties or their privies" (per Dixon J (as he then was) in Blair v Curran (supra) at 531).”
In the current case and in light of the above authorities it appears that it is unnecessary to delve into a determination as to whether a privity exists between the applicants and the company from which their current rights and interests were assigned. The company was not a party to the initial proceedings and thus did not make the arguments it could have were it a party. This prevents the dictation of a judgment that would be inconsistent with that of Sidis J.
This being the case the applicants submit that the company could bring a claim against the vendors for the payment of creditors pre 1 May 2003 that were not taken into account by her Honour, could argue that it was induced to enter into the contract by false and misleading statements concerning profitability and could argue that it had a claim against the vendors for the damage done as a result of the vendors declining to pay suppliers who they should have paid. Is the assignment capable of investing the applicants with sufficient rights in respect of those claims to constitute a valid set off in excess of the amounts claimed in the bankruptcy notice? This question was considered by Heerey J in Re Daley: Ex parte National Australia Bank Ltd (1992) 37 FCR 390. In that case Mr Daley obtained an assignment of certain rights of action that two companies of which he was a director had against the NAB for approximately $170,000. His Honour, after considering whether or not the assignment constituted an assignment of a “bare right of action” or was “a sham” concluded that it was not a sham and that the argument against the assignment of a bare right could not run where the assignee can show a genuine commercial interest in the enforcement of the claim, unless by the terms of that assignment he falls foul of the law of champerty: Trendtex Trading Corporation v Credit Suisse [1982] AC 679 at 703. As Heerey J said:
“Applying that test, it can hardly be denied that Mr Daley has a genuine commercial interest in the enforcement of the claims by Opal and Dewmask against the Bank. He is the sole beneficial shareholder of the companies and has also guaranteed their liability of some $48,000 to the Bank. It was not suggested that the assignments in their terms infringed the law against champerty.”
I think the same situation pertains here. Mr and Mrs Efthimiadis are shareholders and directors of the company. They have guaranteed the debts of the company. It is that very guarantee that is the subject matter of the judgment against them and the subsequent bankruptcy notice. I think they have every right to take an assignment from the company. As I have said, I have heard no argument about the invalidity of the assignment because, e.g. it is not stamped, or a proper notice was not given, or that it was champertous. For the purpose of this proceeding I am prepared to accept the assignment as valid.
I am therefore required to consider whether the claims that the company says it has against the vendors are credible claims that will have a “fair chance of success” in the terms described by Lockhart J in Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135. I am not required to undertake a preliminary trial of the cross demand. This was articulated in Re A Debtor; ex parte Bowlam (1909) 9 SR (NSW) 580:
“The court need only be satisfied that the claim is a substantial and bona fide claim such that the debtor should be allowed to pursue it before the determination of the bankruptcy proceedings”
I am satisfied that the company does have an arguable cross claim to make against the vendors. The applicants were able to produce evidence of a sort that more than the amount admitted was paid by the company to satisfy pre 1 May 2003 debts. The respondents argue that this claim should not be capable of being pursued. They say that to pursue it would be to reopen the case already determined by Judge Sidis. It should not proceed on the basis of admissions made before Judge Sidis which were made for the purposes of bringing the proceedings to an end. I agree that this may cause problems but I do not believe they are unsurmountable. Any admissions that were made were made towards the applicants as guarantors. This is a claim by the company. The vendors may be entitled to argue, as against the company, no liability to pay pre 1 May 2003 debts but if they fail in that then the company would have a valid claim. Likewise, the company would have a valid claim for what it has argued were the restrictions placed upon its business by the requirement to make those stock payments. Few small businesses have sufficient capital to be responsible for some $100,000 or so of stock that it did not believe was its responsibility. It is not difficult to imagine that such a company would have difficulty with suppliers and might not be able to achieve a sufficient turnover to create its planned profits. I have very little evidence before me of the amount of the clam but I do note that the amount of money required to satisfy the bankruptcy notice is only some $17,000. I am satisfied that if successful the company would be awarded a sum in excess of that amount, taking into account both claims I have discussed. The third claim is a trade practices claim relating to representations made inducing the company to enter into the contract. The applicants argue that the vendors made certain admissions in the case before Judge Sidis concerning this. I am not clear that that is the case but Ms Efthimiadis states at [27] of her affidavit:
“Another matter that came to our attention in the course of the trial and Mr Hartley’s cross examination was the confession by Mr. Hartley that he has taken cash out of the business and not declared business income for tax purposes. I was in court and I heard him say words to the effect that:
“Yes, I took some cash out of the business and did not declare it for income tax purposes.”
Prior to our purchase of the business, Mr. Hartley had provided revenue and profit figures to us. Annexed and marked “F” is a copy of figures he provided in his handwriting. Materially, he said in connection with these figures:
“We forecast that in January we would receive $93,585. However, we actually made sales to the value of $112,066. But, December is out best month we made $134,204 in 2001 and each year since 1995 the business has been growing well”
I do not now believe these figures are correct. It seems obvious they will not coincide with Mr. Hartley’s tax returns, and I think they are wrong in any event. After our takeover, the figures were not as good as this.”
Mrs Efthimiadis was not cross examined on this evidence. The respondents limited themselves to a comment that if cash was being taken out of the business the figures shown would be less than they actually were rather than more. In my view the claim is an arguable one that should be given an opportunity to be heard before the conclusion of bankruptcy proceedings which may well have the effect of preventing any such case being commenced.
I am satisfied that the debtors, as assignees of the rights of Nuco have a cross claim, cross demand or set off which falls within the terms of s.40(1)(g) of the Bankruptcy Act. I am satisfied that the applicants have gone further than merely propounding their claim; Ebert v Union Trustee (1960) 104 CLR 346; and that the claim is a reasonable and proper one to litigate; Vogwell v Vogwell 1939 (11 ABC 83); Guss v Johnstone (2000) 171 ALR 598. For these reasons I would set aside the bankruptcy notice and order that the respondents pay the applicants costs to be taxed, if not agreed, pursuant to the Federal Court Act and Rules.
I certify that the preceding ten (10) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
Date: 17 February 2006
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