Fode v Horne

[2014] FCCA 3041

FEDERAL CIRCUIT COURT OF AUSTRALIA

FODE v HORNE & ANOR [2014] FCCA 3041

Catchwords:
BANKRUPTCY – Administration of property – property available for payment of debts – applicant bankrupt seeking injunction to prevent possession and sale of real property – matter adjourned with directions for trial.

Legislation:  
Bankruptcy Act 1966, ss.104, 162, 167, 178

Stewart v Atco Controls Pty Ltd (in Liquidation) [2014] HCA 15; (2014) 307 ALR 562; (2014) 88 ALJR 594

Applicant: MARCO FODE

First Respondent: STIRLING LINDLEY HORNE (IN HIS CAPACITY AS TRUSTEE OF THE BANKRUPT ESTATE OF MARCO FODE)

Second Respondent: SHERRIFF’S OFFICE VICTORIA

File Number: MLG 2233 of 2014

Judgment of: Judge Riethmuller

Hearing date: 22 December 2014

Date of Last Submission: 22 December 2014

Delivered at: Melbourne

Delivered on: 22 December 2014

REPRESENTATION

Counsel for the Applicant: Mr Ryan

Solicitors for the Applicant: Vincent J Ryan

Counsel for the First Respondent: Mr Evans of Counsel

Solicitors for the First Respondent: White Cleland

ORDERS

1. The parties make disclosure on or before 12.00 pm 23 December 2014, by providing copies of all their relevant documents.

2. The parties provide any further relevant documents on or before 4.00 pm 6 January 2015.

3. The matter be adjourned to 12 January 2015 at 10.15 a.m. for Hearing.

4. Until 4.00 pm on 13 January 2015, or until further order:

   (a)The first Respondent be restrained from dealing with the property situated at 2/19 Nicholas Grove, Heatherton (“the Property”).

   (b)The Second Respondent be restrained from removing the Applicant and his personal property from the Property.

   (c)The First and Second Respondent be restrained from acting on any warrant against the Property.

5. The parties’ costs be reserved.

FEDERAL CIRCUIT COURT
OF AUSTRALIA

AT MELBOURNE

MLG 2233 of 2014

MARCO FODE

Applicant

And

STIRLING LINDLEY HORNE (IN HIS CAPACITY AS TRUSTEE OF BANKRUPT ESTATE OF MARCO FODE)

First Respondent

SHERRIFF’S OFFICE VICTORIA

Second Respondent

REASONS FOR JUDGMENT

(As revised from Transcript)

1. The applicant seeks injunctions to prevent his trustee in bankruptcy from taking possession and selling his home.

2. The applicant was made bankrupt on 12 May 2011.  The procedural history of this matter is set out quite clearly in the judgment of Judge Riley on 30 October 2012, where her Honour said:

   13. The petitioning creditor, or his solicitor, said that:

   (a) in 1998, the bankrupt came to the petitioning creditor’s house and asked him for a loan of $92,500;

   (b) the bankrupt suggested that the petitioning creditor borrow money from the Westpac Bank, lend it to the bankrupt, and the bankrupt would repay the capital and the interest charged by the bank;

   (c) the petitioning creditor borrowed the money from the Westpac Bank via an Assetbuilder account and advanced to the bankrupt:

   (i) $85,000 plus $1,171.67 for loan establishment fees on or about 6 March 1998;

   (ii) $4,000 on or about 16 June 1998;

   (iii) $25,318.11 on or about 2 September 1998; and

   (iv) $7,000 on or about 22 September 1998;

   (d) the account was sufficiently in credit at the relevant times for all of those amounts to be advanced;

   (e) there was no written loan agreement because it was a family matter and the petitioning creditor trusted the bankrupt;

   (f) the bankrupt made numerous repayments, but did not discharge the loan in full, and interest continued to accrue;

   (g) on 11 May 2005, a liquidator was appointed to MGDIW;

   (h) the bankrupt acknowledged the debt on about 1 August 2007 by writing, in Croatian:

   Barry, I pray of you to be patient

   Once this is all calculated it will all be settled

   Marko;

   (i) as at 6 August 2009, $65,185.17 remained outstanding;

   (j) on 28 August 2008, the petitioning creditor’s solicitor sent a letter of demand to the bankrupt;*

   (k) on 17 August 2009, the bankrupt wrote the applicant a letter containing a commercially sophisticated proposal concerning the purchase of units in the BJMGD Unit Trust;

   (l) on 14 September 2009, MGDIW was deregistered;

   (m) on 18 November 2009, the petitioning creditor served on the bankrupt a Magistrates’ Court complaint;

   (n) on 7 January 2010, judgment in default of defence was entered against the bankrupt;

   (o) the bankrupt made no attempt to have the judgment set aside;

   (p) on 28 September 2010, a bankruptcy notice was issued against the bankrupt;

   (q) on 8 October 2010, the bankrupt’s de facto wife, Sylvija Milina, told a process server that the bankrupt was not at home or at work but accepted a business card from the process server;

   (r) on 12 October 2010, the bankrupt telephoned the process server and said that he would never make himself available for service at home or at work;

   (s) on 19 November 2010, a Registrar made an order for substituted service of the bankruptcy notice;

   (t) the bankrupt committed an act of bankruptcy on 7 January 2011 (by failing to do any of the things contemplated by the notice);

   (u) the creditor’s petition was filed on 31 January 2011;

   (v) on 16 February 2011, the bankrupt’s de facto wife told the process server that she did not know the bankrupt;

   (w) on 4 April 2011, a Registrar made an order for substituted service of the creditor’s petition;

   (x) a sequestration order was made against the bankrupt’s estate on 12 May 2011; and

   (y) the bankrupt did not attend the hearing of the creditor’s petition.

   14. The evidence given by the solicitor for the petitioning creditor was not challenged and I accept it.

3. On 19 March 2012, the applicant sought an annulment of the bankruptcy on the basis that the judgment which founded the bankruptcy notice and sequestration order was not just and truly owing.  Judge Riley squarely dealt with this issue, traversing the material before her Honour and making a specific finding that:

   33. All in all, I do not consider that the bankrupt was an honest witness.  I am not persuaded that the petitioning creditor, in 1998, lent $92,500 to MGDIW rather than the bankrupt and I am not persuaded that MGDIW, or the bankrupt, repaid that debt.  On the balance of probabilities, and on the evidence before me, I consider that the debt claimed by the petitioning creditor (less the $4,029 that has now been acknowledged as having been repaid) is a true debt owed by the bankrupt.

   34. Even if I am wrong about that, it seems to me that it would not be appropriate to exercise the residual discretion in the bankrupt’s favour. 

4. It seems to me that Judge Riley’s decision, to that extent, creates an issue estoppel as it involves the same parties and the same issue.  That judgment was not the subject of appeal.  In that judgment, the debt to Georgina Fode does not appear to have been at issue, as her Honour said at para.37:

   37. Against that is the debt claimed by Georgina Fode.  At the time of the sequestration order, that debt was about $188,000.  The trustee has admitted the debt, for reasons that are unclear, in the sum of $197,250.  For present purposes, it seems to me to be appropriate to use the lower figure.

5. It is not clear to me, on the face of the judgment, whether that was actually an issue formally conceded or was one that was not actively challenged before her Honour as the focus of the proceedings was upon the judgment obtained by the applicant petitioning creditor for the sequestration order.

6. Ultimately, her Honour dismissed the application to annul the bankruptcy.

7. Subsequently, the bankruptcy was extended to 30 June 2019.  This was the subject of a review decision by ITSA on 10 November 2014, which is annexed to Mr Horne’s affidavit as SLH-03.  It is lengthy and need not be set out in these reasons.  That decision is now the subject of review proceedings in the Administrative Appeals Tribunal and is not before this court. 

8. A summary of the estate of the applicant is neatly set out in Mr Horne’s affidavit, where he says:

   32. I have received the following proofs of debt to date:

   a. $84,623.28 pursuant to a proof of debt lodged by Barry Hajdinjak (“the Petitioning Creditor’s Claim”);

   b. $197,250 pursuant to a proof of debt lodged by Georgina Fode; and

   c. $92,070 pursuant to a proof of debt lodged by BANP Nominees Pty Ltd.

   33. Further, my investigations reveal the following unsecured creditors that may be entitled to lodge a proof of debt, but have not yet done so:

   a. Westpac – in respect of $25,070, being a credit card debt.

   b. Sylvia Milina – in respect of $455,000 alleged to have been loaned by Ms Milina to MGD Australia Pty Ltd between 2004 and 2007 and personally guaranteed by the Applicant.

9. It appears that the debt owing to the petitioning creditor was also the subject of security, which was the basis of an action in the Supreme Court, number SCI4155 of 2003.  This was ultimately settled for the sum of $60,000 and a deed of settlement entered into.

10. There is one point of argument, arising from this settlement: whether or not the petitioning creditor is entitled to take its costs from the settlement sum before applying the balance to the judgment debt upon which the bankruptcy proceedings were founded or must apply the entirety of that amount against the judgment debt. 

11. This was not addressed in detail before me. As a matter of ordinary principles, one would expect that the costs of realising the security would be able to be taken on the basis that there would be a lien for the costs of realising the security in priority to applying those moneys to other debts. It seems to me this is analogous to the recent liquidation decision in the High Court in Stewart v Atco Controls Pty Ltd (in Liquidation) [2014] HCA 15; (2014) 307 ALR 562; (2014) 88 ALJR 594.

12. However, that will ultimately be a matter that can be properly explored on the next occasion.

13. The reality is that on the petitioning creditor’s case, that leaves around $20,000 that was available to be applied against the debt and on the case of the bankrupt, $60,000 available to be applied against the debt.  The trustee in this regard says:

    38. The Petitioning Creditor claims that he is entitled to apply the settlement sum of $60,000 firstly in payment of his costs associated with Proceeding SCI 2013 4155, being $39,214.21, with the balance of $20,785.79 being applied in reduction of the Petitioning Creditor’s Claim.  Therefore, the Petitioning Creditor  claims he is entitled to prove in the Bankrupt Estate for $53,780.21 ($74,566 less $20,785.79).

    39. I have not yet determined whether the Petitioning Creditor is entitled to prove for $53,780.21, as I am presently without funds to pay a dividend to creditors.

    40. However, I note that if the settlement sum is applied in full in reduction of the Petitioning Creditor’s Claim, the Petitioning Creditor will still be entitled to prove in the Bankrupt Estate for $14,566 ($74,566 less $60,000).

14. The current situation with the estate appears to be that the trustee has recovered around $148,000, effectively from an inheritance due to the bankrupt.  Of that, over $120,000 has been spent on costs of which over $20,000 is the remuneration to the trustee.  The trustee says that he is owed over $95,000 in fees.  It appears clear that unless the debts were all successfully challenged, there is no possibility of avoiding the sale of the bankrupt’s home. 

15. The only other potential asset, aside from the bankrupt’s home in Australia, is his claim that he has an interest in land in Croatia.  This interest is, at best, nebulous.  The specific land does not appear to have been ever identified by the bankrupt.  There does not appear to be any title documents.  There is no clear explanation of how it is said that he holds an actual interest.  It is said to be a family interest that he holds with other family members.  No process has been suggested or described that would enable any realisation of that interest and clearly the bankrupt has not yet done anything to realise that interest.  In substance, at least for this application, it seems to me that it does not assist to look to any claimed interest in land in Croatia and it becomes little more than a distraction in the proceedings at this stage at least. 

16. The bankrupt has sought to mount a broad ranging attack on the administration of the estate, seeking the following orders:

    FINAL ORDERS SOUGHT BY APPLICANT

    1. A declaration that the first Respondent has erred in admitting proofs of debt of Barry Hajdinjak, BANP Nominees Pty Ltd (A.C.N. 005 374 345) and Georgina Fode.

    2. The decision of the first Respondent to admit the proofs of debt of Barry Hajdinjak, BANP Nominees Pty Ltd (A.C.N. 005 374 345) and Georgina Fode be revoked.

    3. The proofs of debt of Barry Hajdinjak, BANP Nominees Pty Ltd (A.C.N. 005 374 345) and Georgina Fode be rejected.

    4. The second Respondent be removed as Trustee of the bankrupt estate of the Applicant.

    5. The Applicant be discharged from his bankruptcy.

    6. The land situated at 2/19 Nicholas Grove, Heatherton 3202 (“the Property”) be transferred from the first Respondent to the Applicant.

    7. The costs of this Application be paid by the first Respondent.

    8. Such further and other orders as the Court deems appropriate.

    INTERIM ORDERS SOUGHT BY APPLICANT

    1. The first Respondent be stayed from dealing with the Property until further order by this honourable Court.

    2. The second Respondent be restrained from removing the Applicant and his personal property from the Property.

    3. The first and second Respondents be stayed from acting on any warrant against the property until further order by this honourable Court.

    4. The Court make directions as to the further conduct of this Action.

17. Of those, at least to the extent that the petitioning creditor’s debt is challenged, it seems to me to be clear that an issue estoppel arises.  Subject to the issues relating to the application of the monies received from the mortgage proceedings, it is no longer open to the bankrupt to challenge that debt.

18. Whilst the bankrupt did challenge the conduct of the trustee generally and seek to have him removed, that is no longer pursued by the bankrupt.

19. The issues in the case with respect to the Fode debt, of which a proof of debt has been admitted (see the trustee’s affidavit at para.41(a)), are set out in the solicitor’s affidavit of 17 December at para.5:

    5. I seek leave to refer to paragraph 41 in which Mr Horne deposes to

    (a) admitting the proof of debt lodged by Georgina Fode, the Applicant’s former wife, at $185,345.00.  The claim arises from 5 guarantees that Georgina Fode claims the Applicant gave her in respect of a loan she made to MGD Australia Pty Ltd.  On their face, the “guarantees” are really acknowledgments given by the Company.  The Applicant’s former solicitors, Truman Dawson, obtained the advice of Martin Pirrie of counsel and wrote to Mr Horne’s solicitors in August 2013 objecting to the guarantee.  In addition, the Applicant has advised Mr Horne that on the “guarantee” for $30,000 dated 24 August 2004, his signature has been forged.  Despite this Mr Horne admits the full debt and has declined to investigate the forgery allegation;

    (b) being willing to admit a debt claimed to be owed to BANP Nominees Pty Ltd (“BANP”) for $84,234.00.  I am informed by the Applicant and I believe that BANP is the family trust company of the petitioning creditor and that not only did he not know anything about this alleged debt before his bankruptcy but that he has never been given any evidence that the debt exists or given the opportunity of examining any so-called proof nor of raising an objection to it.  If this claim is accepted, it means that the petitioning [creditor] and his family trust [loaned] a total of $456,570.00 to the Applicant in 3 years from 1998;

    (c) being unable to assess whether any proof is likely to be admitted on the ground that she has not lodged a proof of debt.  By my letter dated 15 April to Mr Horne, I included copies of

    (i) Loan guarantee executed by both the debtor and Gordon Fode as to $205,000.00 dated 4/10/06;

    (ii) Loan guarantee executed by both the debtor and Gordon Fode as to $100,000.00 dated 15/6/00;

    (iii) Extract of Bank of Melbourne Statement showing receipts of payment of $88,040.71 and a note of cash receipt of $1,960.00;

    (iv) deposit signed by Ms Milina of $5,000.00 dated 18/8/00;

    (v) copy deposit slip endorsed as received from Ms Milina for $3,000.00 dated 15/8/00;

    (vi) copy deposit slip endorsed as received from Ms Milina for $1,000.00 dated 22/9/00;

    (vii) copy deposit slip endorsed as received from Ms Milina for $1,000.00 dated 6/10/00;

    Which evidence her claim for $403,040.71.  I also sent copies of supporting bank statements under cover of my letter to Mr Horne on 7 May 2014 as is described in my letter of that date exhibited in Exhibit C to my affidavit sworn on 6 November 2014.  By contrast, his position on the other creditor not to have lodged a proof of debt, West Banking Corporation, he says he its proof is likely to be admitted despite it not having submitted anything.

20. These do not appear to have been addressed in any detail in the trustee’s affidavit, focusing instead upon the petitioning creditor’s debt.  I have some sympathy for the trustee in answering the initial material from the bankrupt, given the almost scattergun approach that it took. However, now it seems clear that in substance the challenges by the bankrupt are with respect to the proofs of debt with respect to all claimants save for Westpac, if Westpac seeks to prove the Visa card debt at $25,000. To the extent that those proofs of debt relate to the petitioning creditor, the issue is narrowed down to what amount of the mortgage moneys that were obtained in the settlement must be applied against the debt.

21. Challenges to proofs of debt are heard in substance as a de novo review under either ss.104 or 178 depending upon the state that the proceedings have reached. Those sections provide:

    104.Appeal against decision of trustee in respect of proof

    (1)  A creditor, or the bankrupt, may apply to the Court for review of a decision of the trustee under subsection 102(1), (3) or (4) in respect of a proof of debt.

    (2)  The Court may, upon the application, confirm, reverse or vary the decision of the trustee.

    (3)  Subject to the power of the Court to extend the time, an application under this section to review a decision shall not be heard by the Court unless it was made within 21 days from the date on which the decision was made.

    …

    178.Appeal to Court against trustee’s decision etc.

    (1)  If the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court, and the Court may make such order in the matter as it thinks just and equitable.

    (2)  The application must be made not later than 60 days after the day on which the person became aware of the trustee’s act, omission or decision.

22. It seems to me that the bankrupt has, at least, an arguable issue in this regard and that the most suitable method of resolving this in such a small estate is to have the parties exchange the relevant documents and have the matter listed for hearing as soon as possible.  Fortunately, as a result of the recent appointment a hearing date has become available on 12 January 2015.  I will therefore set those issues down for that date.

23. There are a number of challenges raised about the costs that the trustee has incurred in administering the estate. Direct challenges to the costs incurred and remunerated to the trustee are provided for in ss.162 and 167 of the Bankruptcy Act 1966 and the regulations that are provided therein. It seems to me that the appropriate course for the bankrupt is to pursue those challenges through the review provisions in s.167 rather than a direct application to challenge the costs in the court. Indeed, a direct challenge doesn’t seem to be available under the Bankruptcy Act. I note that the amount of costs involved in this case appears large for the size of the estate, however, having reviewed Judge Riley’s judgment it does not seem to me that one could say that the estate has not been without its complexities in administration. It is an unfortunate irony in the law that often cases that involve very little money can have issues as complex as the largest cases. Given what has happened in the estate it does not seem to me that on the face of it the amounts involved are so large that one would draw any prima facie adverse inference about the costs. At this stage there are no details of the actual costs but I am certain that proper bills can be prepared if need be.

1. Unfortunately, the trustee does not go to detail about the Fode and BNAP debts and in that regard it is difficult to form a prima facie view about the strength of the challenges.  Similarly, these debts were not addressed in any detail by Judge Riley in her Honour’s judgment.

2. It seems to me that the applicant’s case is certainly not a strong one as he would need to be successful on very many fronts to avoid what appears to be a strong case that his property will have to be sold. However, there is a faint glimmer of hope remaining for him on challenging the proofs of debt if he also lodges a challenge to the review of the remuneration under s.167 that succeeds.

3. I, therefore, then turn to considering the balance of convenience.  In this case because the matter can be listed so soon on 12 January, given the timeframes that will be involved in a sale and the inevitable delays that would occur at Christmas and frankly the unfortunate incident of having to put somebody out of their home in Christmas week given the difficulties that ensue for making alternative arrangements and finding accommodation when so many businesses close down over Christmas, I am ultimately persuaded that the balance of convenience in this case favours an injunction until 13 January.

4. I will set the matter down for trial on 12 January 2015.  I will order that there be disclosure by way of provision of copies of relevant documents on 23 December at midday and any further documents by 6 January at 4 pm. There will, of course, be ongoing disclosure obligations but any documents that come to hand after the 6^th can be provided on the morning of hearing.

I certify that the preceding twenty-seven (27) paragraphs are a true copy of the reasons for judgment of Judge Riethmuller

Associate: 

Date:  9 January 2015