Gardner Corporation Pty Ltd v Sweetman
[1999] FCA 1666
•30 NOVEMBER 1999
FEDERAL COURT OF AUSTRALIA
Gardner Corporation Pty Ltd v Sweetman [1999] FCA 1666
BANKRUPTCY - application for a sequestration order - respondent has filed writ against applicant - whether respondent has shown sufficient cause for a sequestration order not to be made.
Bankruptcy Act 1966, ss 40, 43, 52(2)(b)
Trade Practices Act 1974, ss 51A, 52Wren v Mahony (1972) 126 CLR 212
Love v Pattison (unreported, Federal Court of Australia, Full Court, 24 July 1998)GARDNER CORPORATION PTY LTD v SWEETMAN
W 7067 of 1999BOON JR
30 NOVEMBER 1999
PERTH
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
W7067 OF 1999
BETWEEN:
GARDNER CORPORATION PTY LTD
ApplicantAND:
STEVEN RONALD SWEETMAN
RespondentCOURT:
BOON JR
DATE OF ORDER:
30 NOVEMBER 1999
WHERE MADE:
PERTH
THE COURT ORDERS THAT:
1. A sequestration order be made against the estate of the respondent
2. The respondent pay the applicant’s costs of this matter.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY
W7067 OF 1999
BETWEEN:
GARDNER CORPORATION PTY LTD
ApplicantAND:
STEVEN RONALD SWEETMAN
Respondent
COURT:
BOON JR
DATE:
30 NOVEMBER 1999
PLACE:
PERTH
REASONS FOR JUDGMENT
The applicant, Gardner Corporation Pty Ltd, has applied to the Court for a sequestration order under s 43 of the Bankruptcy Act 1966 against the estate of the respondent, Steven Ronald Sweetman.
The application (as amended pursuant to an order of District Registrar Jan on 12 October 1999) states that the respondent owes the applicant the sum of $63,209.24 inclusive of $2770.47 interest, being the amount due under a judgment of the District Court of Western Australia held at Perth on 23 March 1998. The applicant does not hold security over the property of the respondent. It is alleged that the respondent committed an act of bankruptcy within 6 months before the presentation of the petition, in that the respondent failed to comply either on or before 29 March 1999 with the requirements of a bankruptcy notice served on him on 5 February 1999. It is also alleged that the respondent has failed to show that he had a counterclaim, set-off or cross demand equal to or exceeding the sums specified in the bankruptcy notice, being a counterclaim, set-off or cross demand that he could not have set up in the action in which the judgment referred to in the bankruptcy notice was obtained. The application also states that at the time when the act of bankruptcy was committed the respondent was personally present in Australia, was ordinarily resident in Australia and had a dwelling house or place of business in Australia.
The application in this matter was filed on 28 May 1999.
Affidavits filed in support of the application show that the respondent was served with the bankruptcy notice on 5 February 1999. On 12 February 1999 the respondent filed applications to set aside the bankruptcy notice and for an extension of time to comply with the bankruptcy notice. That matter went before Deputy District Registrar Stanley on 29 March 1999, who made orders that the applications be dismissed.
On 2 July 1999 Deputy District Registrar Rayney made orders including that personal service of the petition on the respondent be dispensed with. The application was served on the respondent’s solicitors. The respondent has sworn and filed affidavits in this matter.
On 23 August 1999 the respondent filed a notice of intention to oppose the petition on grounds including that pursuant to s 52(2)(b) of the Bankruptcy Act 1966 there is sufficient cause for a sequestration order not to be made against the respondent, namely the respondent’s claims against the applicant. The notice of intention to oppose the petition sets out further grounds for opposing the petition. Those other grounds related to certain formalities of the documents served on the respondent and have already been dealt with before District Registrar Jan at an earlier date.
The Evidence
Various affidavits have been filed in this matter. The annexures to some of those affidavits run into over 100 pages each. I do not propose to set out in full all of the documents which have been provided to this Court.
An affidavit of Anthony John Prentice, solicitor for the applicant, sworn 7 October 1999 annexes a copy of the reasons for decision of Judge French of the District Court delivered on 23 March 1998 in District Court Action 1081 of 1997. That judgment forms the basis of the bankruptcy notice filed in the present application. The reasons for decision show that French DCJ heard an appeal from a decision of the Registrar of the District Court in which the Registrar dismissed Gardner Corporation Pty Ltd’s application for summary judgment against Mr Sweetman. French DCJ stated in the reasons for judgment that in broad terms the plaintiff’s claim was for monies said to be due and owing to it pursuant to the terms of a deed of surrender dated 11 December 1996 made, on the face of it, between Gardner Corporation Pty Ltd and the defendant Mr Sweetman. The deed of surrender was stamped and recited that pursuant to an agreement of franchise dated 4 October 1995 between Gardner Corporation, called the franchisor, and Steve Sweetman as the franchisee, there were certain terms and conditions. The deed of surrender contained an acknowledgment by the defendant that he was indebted to the Gardner Corporation, the plaintiff, in the sum of $55,357.97. The deed of surrender recited that it had been agreed between the parties that the franchise would be surrendered as from midnight on 17 September 1996. The deed contained a condition of surrender, namely, that the franchisee Mr Sweetman acknowledged that he was indebted to the plaintiff in the sum of $55,357.97. The plaintiff’s claim was that pursuant to the deed of surrender there was money due and owing. The defendant in that matter argued that what in effect had occurred was that the original franchise agreement was intended to be entered into between the plaintiff, Gardner Corporation, and a trading company called Ocyst Pty Ltd of which Mr Sweetman was a director. In the District Court action Mr Sweetman argued that there were a variety of negotiations between himself and Mr Charles Gardner, a director of Gardner Corporation, relating to the franchise, and that it was always intended that the franchisee would in fact be a corporate entity operated by Mr Sweetman and not Mr Sweetman personally. Her Honour noted that somewhat of a scattergun approach had been adopted by the defendant in the case. Her Honour expressed the opinion that the defence was something that was only raised for the purpose of delay and was unmeritorious. French DCJ rejected the argument of the defendant that the deed was signed by mistake because he had not had time to read the document or obtain legal advice in relation to it. Her Honour found that there was no triable issue and described Mr Sweetman’s defence as “spurious”. Summary judgment was entered for the plaintiff.
In an affidavit filed in this matter and sworn 23 August 1999, Mr David Eley, the solicitor for the respondent in this matter, states that the respondent’s claim against the applicant which forms the basis of the notice of intention to oppose the petition, is for damages for breaches of ss 51(A), 52 and 59(2) of the Trade Practices Act 1974. Mr Eley states in the affidavit that the respondent’s claims against the applicant are outlined in District Court of Western Australia writ of summons number 3158 of 1999, which was filed in the District Court of Western Australia on 20 August 1999.
The affidavit goes on to state that the respondent’s claim against the applicant was not raised in the District Court action which formed the basis for this petition. This was because the defence to that action was that the respondent was not carrying out the business of the franchise and only contracted with the applicant in his capacity as a director of Ocyst Pty Ltd, the company which operated the franchise known as Gardner Electronics Melville. The affidavit goes on to state that at no stage was the respondent able to file any defence in the previous District Court action, as the matter never went past the stage of a summary judgment application by the applicant, and the respondent filed affidavits setting out the facts of his defence. Mr Eley states that unlike a pleading, the respondent was not in the position to swear alternative scenarios, but was required to swear that he was not conducting the business and not a party to the contracts. The affidavit goes on to state that the District Court eventually entered judgment for the applicant in that action and by implication found that the respondent was conducting the business personally, despite the documentary evidence to the contrary. It is stated in the affidavit that the District Court action was then disposed of, with the respondent not being in a position to even plead a counterclaim in the action.
Mr Eley states in his affidavit that the respondent has a valid claim against the applicant which has been delayed in being processed, as a result of serious concerns by the respondent as to the solvency of the applicant, and as a consequence of the number of legal actions that the applicant is involved in. Mr Eley states that from his own knowledge he was aware of a number of legal actions that are pending between the applicant and third parties, all of which expose the applicant to considerable legal fees, whether he is ultimately successful or not. Further, Mr Eley is aware of debt recovery action being initiated against the applicant for unpaid accounts of $17,234.00 and $539.00 respectively.
Mr Eley states that of more importance to the respondent is an action commenced by the applicant in the Supreme Court of Western Australia, being action CIV 1864 of 1999, in which judgment has been handed down (although final orders are yet to be made) which found the applicant liable for breaches of the Trade Practices Act 1974 in very similar circumstances to those of the respondent. Mr Eley states that other parts of the action were not found against the applicant, but in relation to those aspects, the fact scenario was quite different from that involving the applicant and the respondent. Mr Eley has annexed a copy of the Supreme Court decision of the matter.
Mr Eley states further in his affidavit that the respondent instructed him that he did not wish to proceed with his claim against the applicant because he had a real and genuine belief that the applicant was facing insolvency and he did not wish to incur the cost of a major legal action if there was no prospect of recovery from the applicant. The respondent had however instructed Mr Eley to proceed with this application against the applicant because of the actions of the applicant in presenting a creditor’s petition against the respondent.
The District Court writ of summons annexed to Mr Eley’s affidavit contains a lengthy statement of claim. The substance of the action, however, relates to the franchise agreement which formed the subject of the judgment handed down by Judge French in the District Court which has already been referred to. In the current District Court action Mr Sweetman argues that he was induced to enter into the franchise by misleading representations made by or on behalf of Gardner Corporation. The representations said to have been misleading relate to the likely profitability of the franchise. It is said that the representations constituted misleading or deceptive conduct and contravenes s 52 and s 51(A) of the Trade Practices Act. The writ does not quantify the amount of loss and damage alleged to have been incurred by Mr Sweetman as a result of the matters complained of.
The Supreme Court decision which is annexed to Mr Eley’s affidavit is between Zed Bears Pty Ltd and Krishell Pty Ltd as plaintiffs and Gardner Corporation Pty Ltd and Charles Daniel Gardner as defendants. Steytler J’s judgment runs into some 110 pages. However, it is apparent that the plaintiffs were successful in seeking damages in relation to the conduct of the defendant concerning the acquisition of franchises by the plaintiffs in a similar way to that which is now alleged by Mr Sweetman against the respondent. The damages have not yet been quantified. What is also apparent from the judgment is that that case is different from the present case because no deed of surrender was entered into between the plaintiffs and defendants in the Supreme Court action.
In an affidavit sworn 4 October 1999, Mr Sweetman states that he is solvent, with the only debt owed by him being the claim made by the applicant. He states that he has personal effects of $10,000.00 and cash in the bank of $5,000.00. He has income of $500 per week as a consultant to Ascotvale Investments Pty Ltd. He is also a beneficiary under a discretionary family trust.
The Legislation
Section 43 of the Bankruptcy Act states in part as follows:
“43 (1) Subject to this Act, where:
(a) a debtor has committed an act of bankruptcy; and
(b) at the time when the act of bankruptcy was committed, the debtor:(i) was personally present or ordinarily resident in Australia;
(ii) had a dwelling house or place of business in Australia;
(iii)was carrying on business in Australia, either personally or by means of an agent or manager; or
…
the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.”
Section 40(1)(g) sets out that a debtor commits an act of bankruptcy if a creditor who has obtained against the debtor a final judgement has served on the debtor a bankruptcy notice and the debtor does not comply with the requirements of the notice.
It is not being argued in this case that the requirements of s 43 and s 40 have not been met. The only issue is whether a sufficient cause has been shown that a sequestration order ought not to be made.
Section 52(2) states in part as follows:
“(2) If the court… is satisfied by the debtor:
…
(b) that for other sufficient cause a sequestration order ought not to be made;
it may dismiss the petition.
In written submissions filed on behalf of the respondent, it is stated that the basis of the opposition to the summary judgment in the District Court was that the respondent was not the franchisee and that the franchisee was always intended to be and always was a corporate entity called Ocyst Pty Ltd. There was no other defence put forward by the respondent, as the requirement in a summary judgment application is to put on sworn affidavit before the Court, the basis for the defence. It is stated that unlike the position if a defence had been pleaded, the respondent was not in a position to positively swear to the fact that the franchisee was Ocyst and/or in the alternative was himself personally. This was because the respondent put before the Court positive documentary evidence that the franchise had always been operated by Ocyst and not himself personally and it is not possible to swear positively to an alternative set of facts at the same time.
The submissions state that once judgment was entered against the respondent in the District Court action prior to any defence or counterclaim having been pleaded by the respondent, the action ended with judgment. The only option available to the respondent was to pursue an appeal or to counterclaim in the District Court on the basis that the applicant would be estopped from refuting the finding of fact that the respondent was the franchisee. It is stated that if the respondent took action in another jurisdiction it would be possible that the applicant could have argued that the franchisee was Ocyst, a company which had been liquidated and which could not maintain any action against the applicant.
There were delays in the actions of the respondent in taking action against the applicant, based upon the perceived insolvency of the applicant and the risk of losing more money by the respondent.
It is stated further in the submissions that when this matter first came before this Court in relation to a creditor’s petition, the respondent opposed the petition on the basis that the counterclaim could not have been raised at the District Court hearing of the matter. This was because no opportunity had been afforded for a counterclaim to be pleaded and the respondent was unable to have positively sworn to alternative sets of facts. It was also put to the Court at that time that the claim could not be quantified until it was resolved at a hearing, as it was a claim for unliquidated damages, which would need to be assessed based on a number of factors. Ultimately the opposition to the petition was not upheld.
It is argued that the respondent’s claim is strong and with merit. The applicant is a corporate franchisor that has already been involved in litigation before the Supreme Court of Western Australia on very similar issues as are raised by the respondent in its District Court writ, with one issue being identical.
It is stated that there has been a clear finding by the Supreme Court that the franchise proposal prepared by the applicant was not accurate or correct and was misleading and deceptive. It is said that the franchise proposal is the common proposal that the applicant provided to all potential franchisees and is the basis of part of the respondent’s claim.
Although the applicant resists the respondent’s District Court action on the basis of the release contained in the deed of surrender of franchise, the respondent refutes that that document provides an absolute bar to any proceedings and maintains that he can successfully prosecute a claim despite the terms of the surrender. The respondent submits that this is because of:
· the circumstances surrounding the signing of the surrender;
·the argument of mistake, in that there was a genuine mistake as to the identity of the parties and as to who was providing releases to whom;
·the terms of the surrender itself permit the action to proceed, as Clause 17 of the surrender states that the release is “in consideration of the franchisee and the guarantor and the franchisor complying with the terms of this deed”, and as there has not been compliance with the surrender the provisions of that clause have not been activated and the releases contained therein are not activated; and
·as the merits of the respondent’s action are clearly strong and there is clear evidence before the Court that the applicant has engaged in misleading and deceptive conduct in relation to the operation of at least one of its other franchises, it would be unjust in all the circumstances to allow the applicant to avoid facing the consequences of its actions and to deprive the respondent of its legal remedies, by allowing a sequestration order to be made against the respondent.
On behalf of the applicant it is submitted that the respondent is now seeking to oppose the petition on the basis that he has a claim against the applicant for damages as a result of breaches of the Trade Practices Act. It is said that the respondent previously raised an identical argument before Deputy Registrar Stanley when he attempted to set aside the bankruptcy notice giving rise to this petition. On 29 March 1999 Deputy Registrar Stanley dismissed the respondent’s application on the basis that the Trade Practices claims could have been raised at the summary judgment hearing. It is submitted that the argument now contended for by the respondent has already been considered and dismissed by this Court and should not be revisited.
It is submitted in any event that the alleged breaches of the Trade Practices Act occurred in 1995 and nothing has been done to prosecute an action in that regard. It is stated that the argument that Mr Sweetman’s claim was delayed as a result of concerns as to the solvency of the applicant was not raised in Mr Sweetman’s application to set aside the bankruptcy notice. It is submitted that the only reason Mr Sweetman’s claim is now being pursued is to defer the bankruptcy petition.
The applicant submits that the judgment upon which the bankruptcy notice was founded was handed down on 23 March 1998. The judgment is therefore 18 months old, has not been overturned and none of the monies outstanding pursuant to the judgment have been paid.
It is further submitted that the judgment against Mr Sweetman in favour of the Gardner Corporation arose out of a deed of surrender document. Clause 17 of the surrender document provided that the parties released each other from any further actions or claims. Mr Sweetman, it is argued, is therefore barred from raising a counterclaim. It is further submitted that where the debtor seeks to establish “any other cause” on the grounds of a claim against the creditor or someone else for an amount equal to or greater than the amounts the debtor owes the creditor, the debtor must show that the claim is a genuine and serious one which he or she has not been reasonably able to litigate, and that it is a real claim that is likely to succeed, having sufficient validity to justify a dismissal or adjournment of the petition.
It is further submitted that because it is important in the public interest that creditors’ petitions be dealt with before they expire, a claim, even one genuinely made by the debtor against someone else, may not be other sufficient cause if the litigation in which it is asserted is long running and unlikely to be resolved soon. It is submitted that it is not in the public interest to allow insolvent debtors to prosecute a litigation generally.
The applicant further submits that a court should also look to see whether there is any explanation for delay in prosecuting the proceedings, why there was no attempt to set aside the bankruptcy notice, or whether the proceedings relating to the existence of the counterclaim had been pursued with due diligence. It is submitted that the debtor cannot establish other sufficient cause in this case as there is no adequate explanation for the delay in prosecuting the action. It is said that it is unlikely to be resolved soon, and it cannot be said that the litigation is likely to succeed as it is precluded by a deed of surrender document.
I am satisfied that the formal requirements for the making of a sequestration order have been met. Mr Sweetman has committed an act of bankruptcy, and at the time when that act of bankruptcy was committed he was personally present or ordinarily resident in Australia. Further, I am satisfied that the petition was properly served and that the debt on which the petitioning creditor relies is still owing.
The evidence provided to me in relation to Mr Sweetman’s ability to pay his debts as and when they full due is scant. No documentary evidence of the terms of the discretionary trust referred to by Mr Sweetman has been provided to me. The fact remains that Mr Sweetman has not paid the amount due to Gardner Corporation pursuant to the order of French DCJ in the District Court in March of 1998. This Court does have the power to go behind a judgment: Wren v Mahony (1972) 126 CLR 212. In this case however I am not satisfied that sufficient reasons have been given for questioning the judgment of French DCJ.
There is authority for the proposition that the existence of a set-off, cross-demand or counterclaim will often be a “sufficient cause” to exercise the discretion of the Court within the meaning of s 52(2)(b) - see for example Love v Pattison (unreported, Federal Court of Australia, Full Court, 24 July 1998, Branson, Sackville and Finkelstein JJ). The respondent also points to the judgment of Steytler J in the recent Supreme Court matter as supporting his contention that he has a good claim against Gardner Corporation Pty Ltd. Although Deputy District Registrar Stanley has previously ruled in relation to that claim, I do not consider that Mr Sweetman is thereby barred from arguing that matter before this Court. The issues to be considered by Deputy District Registrar Stanley in relation to the setting aside of a bankruptcy notice were different from the issues to be decided under the provisions of s 52(2)(b). Having said that, I am not satisfied that Mr Sweetman has shown sufficient cause within the meaning of s 52(2)(b) to show that a sequestration order ought not to be made. I have arrived at this conclusion for a number of reasons, including the fact that Mr Sweetman signed a deed of surrender of franchise which is quite clear in its terms and which it appears to me would bar Mr Sweetman from pursuing his present claim against Gardner Coroporation; Mr Sweetman only filed the District Court action on 20 August 1999 despite the fact that the alleged cause of action arose in 1995; the fact that Mr Sweetman now alleges that the delay was caused by his concerns over the solvency of the applicant but this was not raised earlier in his application to set aside the bankruptcy notice; the judgment upon which the bankruptcy notice was founded was handed down on 23 March 1998 and has not been appealed, and no application to stay the execution has been made; the quantum of damages sought by Mr Sweetman in the District Court action has not been specified; and the Supreme Court decision Mr Sweetman now relies upon as supporting his claim is based on circumstances different from the present case because the plaintiff in that case had not signed a deed of surrender document. In all of the circumstances of this case, I am not satisfied that Mr Sweetman’s claim is a genuine and serious one which he has not reasonably been able to litigate, and I am not satisfied that it is a real claim that is likely to succeed. I am not convinced by Mr Sweetman’s explanation for delay, and it appears to me that the District Court writ was filed purely in an effort to prevent a sequestration order being made.
The Court makes the following orders:
1 A sequestration order be made against the estate of the respondent
2 The respondent pay the applicant’s costs of this matter.
I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment of Boon JR. Associate:
Dated: 30 November 1999
Counsel for the Applicant: Mr A J Prentice Solicitor for the Applicant: Messrs Mossensons Counsel for the Respondent: Mr D E Eley Solicitor for the Respondent: Messrs Eley & Partners Date of Hearing: 28 October 1999 Date of Judgment: 30 November 1999
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