Garrett v Cahill
[2015] FCCA 26
•19 January 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| GARRETT v CAHILL | [2015] FCCA 26 |
| Catchwords: BANKRUPTCY – Application to set aside bankruptcy notice – applicant asserting cross claims pursuant to s.41(g) of the Bankruptcy Act 1966 – creditor’s claim clearly personal to creditor – proposed cross claims all clearly made by entities controlled by applicant against entities of which debtor was a director – no mutuality within the meaning of authorities – cross claims not in same right as debtor’s claim against applicant – application dismissed. |
| Legislation: Corporations Act 2001, s.588M |
| Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 HC Legal Pty Ltd v Deputy Commissioner of Taxation [2013] FCA 45 James v Abrahams (1981) 34 ALR 657 |
| Applicant: | ANDREW MORTON GARRETT |
| Respondent: | FRANCIS MICHAEL CAHILL |
| File Number: | MLG 1631 of 2014 |
| Judgment of: | Judge Burchardt |
| Hearing date: | 7 November 2014 |
| Date of Last Submission: | 7 November 2014 |
| Delivered at: | Melbourne |
| Delivered on: | 19 January 2015 |
REPRESENTATION
| The Applicant: | In person |
| Counsel for the Respondent: | Mr Mitchell |
| Solicitors for the Respondent: | Altius Partners Lawyers |
ORDERS
The application filed 11 August 2014 is dismissed.
The applicant pay the respondent’s costs.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1631 of 2014
| ANDREW MORTON GARRETT |
Applicant
And
| FRANCIS MICHAEL CAHILL |
Respondent
REASONS FOR JUDGMENT
Introduction
By an application filed 11 August 2014, the applicant, Mr Garrett, seeks to set aside a Bankruptcy Notice served upon him on 24 July 2014. The application sought a number of interim orders extending the time for compliance until the conclusion of various other proceedings and the provision of materials by way of what, in effect, would be discovery (this latter part of the application was not pressed). The applicant’s affidavits make it clear that he asserts various claims, including claims for exemplary damages and loss incurred by him from actions of the respondent as a director of HC Legal Pty Ltd (in liquidation) (controller appointed) for trading while insolvent.
The respondent opposes the application and the grounds are set out in the Notice stating grounds of opposition to application (“the Notice”) filed 3 November 2014. The Notice asserts that the applicant does not have a counter‑claim, set‑off or cross demand which is equal or greater than the amount claimed in the Bankruptcy Notice. It also asserts that, in any event, the applicant’s alleged claims against the respondent are not due in the same capacity or in the same right as that in which the respondent holds the judgment order upon which the Bankruptcy Notice is based.
For the reasons that follow, I think that the respondent is correct and it follows that the application will be dismissed.
The application for an adjournment
The matter was set down for trial by orders made on 9 September 2014. Those orders set the matter down “with an agreed hearing estimate of one day”.
Thereafter, on 24 September 2014, Mr Garrett wrote to my associate, seeking further time in which to file his materials, (notwithstanding that there had been no objection taken to the posited date of
23 September 2014 on 9 September 2014) because of his involvement in other related proceedings.
The respondent agreed that the applicant could file his material on
7 October 2014. On 24 October 2014 Mr Garrett wrote again to my associate, pointing out inter alia that he had suggested in the previous hearing that the matter would take more than one day. He went on to say that the time required for the hearing would be more likely to take three to four days and would involve extensive cross-examination of deponents of behalf of the respondent. This application was objected to by the respondent. It should be noted that transcript of the proceeding on 9 September 2014 shows that Mr Garrett had then asserted a half day estimate.
On 31 October 2014, Mr Garrett again emailed my chambers, foreshadowing an intention to apply to adjourn the trial because “one day is insufficient to allow for the proper cross‑examination of Mr Cahill and go behind the Bankruptcy Notice and the conduct of Mr Cahill and his previous partner Mr Hambros (a bankrupt)”.
The applicant, in fact, filed an enormous tranche of material on 21 October 2014. The affidavit was only five pages, but the accompanying materials run to many hundreds of pages. It is a credit to the respondent that he was able to file his responding affidavit on 24 October 2014.
I had caused the parties to be made aware that I would propose to take the application for an adjournment at the start of the proceeding. Mr Garrett addressed the Court first. In an endeavour to assist him in his submissions, I referred Mr Garrett to Australian Bankruptcy Law and Practice, McDonald, Henry and Meek, sixth edition at 40.1.340 and read out the text thereof, which explained what is meant by the requirement of a debtor to “satisfy the Court” to establish a counter‑claim, set‑off or cross demand under s.40(1)(g) of the Bankruptcy Act 1966 (“the Act”). I pointed out that cross-examination was not, in these circumstances, appropriate.
The cross-examination aspect of Mr Garrett’s earlier correspondence was not, so far as I recall it, in any event, pressed in any significant way. Rather, Mr Garrett said that he was seeking the adjournment to obtain legal representation. He said he had contacted a lawyer two weeks ago, but that lawyer had been to China and would be returning shortly. That lawyer had agreed to act for him. This would assist Mr Garrett in the application he wished to pursue, pursuant to s.588M of the Corporations Act 2001. He had also sent to the Victorian Civil and Administrative Tribunal (“VCAT”), the previous day, his proposed revised statement of claim, and he tendered exhibit A1, being his letter to the Tribunal and the statement of claim.
Mr Garrett requested that the matter be adjourned, pending the determination of his claim with VCAT. He said that two weeks was all that was necessary for him to be in a position to proceed and that most of his materials were now filed.
Counsel for the respondent opposed the application. He submitted that the further material about the applicant’s proposed cross‑claim (as I will describe it) could be dealt with at the hearing. Counsel referred to the timetable set on 9 September 2014 and submitted there was no explanation why legal representation was being sought so late. He submitted that the Court should infer that the reason was to abort the proceeding. He further submitted that it was not necessary to await the outcome of the VCAT proceeding in any event.
I indicated to the parties, following these arguments, that I was not prepared to adjourn the proceeding and would give my reasons in my decision. These are those reasons.
First, a timetable was set on 9 September 2014, without objection of any significance from the applicant at the time, which culminated in a trial in November 2014. The VCAT proceeding to which Mr Garrett referred has been underway for some considerable period of time and was a matter of which he well knew in September 2014. He also well knew of his apparent other commitments in legal arenas.
The fact is that Mr Garrett has filed hundreds of pages of materials, and it seemed to me that even on a brief acquaintance with his second and very large affidavit (the matter was stood down for over an hour while it was photocopied), that Mr Garrett had had all the opportunity he could fairly be described as requiring, both to put materials before the Court and to prepare his case.
The High Court has made it clear in Aon Risk Services Australia Ltd v Australian National University (2009) 239 CLR 175 that case management principles are not irrelevant to considerations of such matters as an adjournment application. This Court’s time is extremely heavily listed and any adjournment of the proceeding would not have been for a period of two weeks, but more likely for some considerable number of months.
Furthermore, bankruptcy matters are of their nature, in my view, generally attended by a measure of urgency. This arises from public policy considerations to do with the undesirability of insolvent persons continuing to carry on their affairs as though they were solvent. Conversely, if a person is being asserted to be a bankrupt when they are clearly solvent or otherwise have a defence to the proceeding, it is important that the impugned party be released from the proceeding as soon as practicable.
In all the circumstances, and bearing in mind the nature of the test to be applied, it seemed to me that Mr Garrett was in a perfectly appropriate position to pursue his application on the day and accordingly, I declined to adjourn.
The test
It is quite clear from the materials Mr Garrett has filed that it is his position that he has a counter‑claim, set‑off or cross demand equal to or exceeding the amount of the sum payable under the final order, being a cross‑claim, set‑off or cross demand he could not have set up in the action in which the order was obtained, within the meaning of s.40(1)(g) of the Act. It is for the debtor to satisfy the Court that this is the case.
In the passage I have earlier referred to from Australian Bankruptcy Law and Practice (paragraph 40.1.340), the learned editors say relevantly, and omitting authorities quoted:
“The degree to which a debtor needs to “satisfy the Court” to have a bankruptcy notice set aside on the grounds of “a counter‑claim, set‑off or cross demand” has been variously formulated as follows:
· the debtor must satisfy the Court that he has a genuine demand…But…a demand must be more than bona fide: the Court must be satisfied that it has a reasonable probability of success.
· the debtor must show that he or she has a prima facie case, even if there and then he or she does not adduce the admissible evidence which would make out a prima facie case before a Court trying the issues that are involved.
· the matter to which the Court looks is this – whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate.
· the state of satisfaction referred to in ss.40(1)(g) and 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await determination of the claim.
· the application of the criteria above requires the Court to some kind of preliminary assessment, though, obviously, not to determine the counter‑claim, set‑off or cross demand finally. …. Plainly, in order to “satisfy” the Court for the purposes of para 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was finally being determined, but by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined…a debtor must satisfy the Court that there is sufficient substance for a counter‑claim, set‑off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.
· the applicant must satisfy the Court of three interrelated, and sometimes, overlapping matters: first, that he or she has a “prima facie case”, even if evidence is not adduced which would be admissible on a final hearing; second, that he or she has a “fair chance of success”; third, that the claim is genuine or bona fide.”
Some background
It should be noted that both parties have filed materials that are, in a sense, objectionable. On the part of the respondent, there is reference to findings of the Supreme Court of South Australia that Mr Garrett is a vexatious litigant. That may be so, but that is not a relevant consideration in these circumstances. The applicant has not been found to be a vexatious litigant by this Court and it is inappropriate for the respondent to seek to besmirch this application in that way.
On the other hand, Mr Garrett has included substantial tranches of self‑serving submissions which he has tended to approach as though the assertions constituted facts. Objection was taken on this ground and validly so.
Nonetheless, and noting the reservations about admissibility of evidence already referred to above, it is clear that at some point, Mr Garrett engaged the services of a firm called Hambros & Cahill. It would appear, notwithstanding its trading name, that it was in fact at least initially, a firm called Hambros & Cahill Legal Pty Ltd (“HCL”). A further company called Hambros & Cahill Legal Services Pty Ltd (“HCLS”) appears to have entered upon the scene at some time. It should be noted that much of the history is far from entirely clear.
On any view of the matter, Mr Garrett paid a not insubstantial amount of money to HCL in the sum of at least $310,000. A further $90,000 was paid to HCL, but HCL say that this was paid to them mistakenly by the applicant, and indeed against their advice, and was immediately applied to settle a totally unrelated set of legal proceedings in which Mr Garrett, who has clearly been a significant litigator over the years, was involved.
As recorded in the decision of Murphy J in HC Legal Pty Ltd v Deputy Commissioner of Taxation [2013] FCA 45 (exhibited as AMG-13 to Mr Garrett’s affidavit sworn 11 August 2014), HCL executed a management rights legal services purchase deed with an entity which I will refer to as Holy Grail (one of the large number of companies controlled by Mr Garrett, and which at that time, according to him, was trustee of his relevant family trust) for the exclusive rights to provide legal services to Mr Garrett’s associated entities. The figure proposed to be paid, inclusive of GST of four and a half million dollars, was $49.5 million. That money was to be paid pursuant to a vendor finance agreement between Holy Grail and HCL which his Honour records at [9] of his judgment, but I note that repayment was limited to 60 per cent of the distributable EBIT in any payment period.
It seems reasonably clear, at least for present purposes, that no money passed hands in terms of being loaned to HCL nor is there any suggestion in any of the materials that any monies were actually repaid. What did, of course, happen, was that a GST credit of some four and a half million dollars was created in HCL’s favour, and as Murphy J records, in excess of $4,491,000 was paid by the Commissioner in February 2012 to HCL’s operating account.
According to counsel for HCL, those funds were utilised inter alia to make two loans to the two directors, Mr Hambros and Mr Cahill, of $2 million each, although his Honour recorded that it was asserted that each director had paid back $350,000 of those loans.
The Commissioner’s concern regarding the transaction and the claim for credits was, as his Honour said, “immediately apparent” and the proceeding before Murphy J involved a statutory demand for the $4.9 million, plus penalties, to be repaid.
Mr Garrett has formulated his claims and demands in a variety of different ways from time to time. At times, it has been a claim for the repayment of the $400,000 to which I have already referred (in paragraph 24). At times, it is that amount less the $90,000 allegedly disbursed to settle another matter. At times, it has been a sum of $20,000 advanced by various entities (part of the $310,000) and at times, it appears to be a $5,000 payment made by Holy Grail, which was the subject of particular consideration by the Legal Services Commissioner. At further times, Mr Garrett has sought repayment of the entire GST credit originally paid by the Australian Taxation Office, or all the loans of some $2 million advanced to each of the two directors, Mr Hambros and Mr Cahill. At other times again, he has sought repayment of the full $49,500,000.
In November 2012, Mr Garrett made a complaint to the Legal Services Commissioner about Mr Cahill, Mr Hambros and HCL in respect of the $400,000 paid by the Garrett entities to HCL. On 31 March 2014, the Commissioner dismissed the complaint (see FMC-2 to the affidavit of Mr Cahill sworn 24 October 2014), although subsequently, the investigation was reopened in respect of the $5,000 payment made by Holy Grail. That aspect of the controversy between the parties, as best I construe matter, is not concluded. I note that Mr Cahill has deposed that that amount of money would have been applied to the general commercial matters in which his former partner, Mr Hambros, had care and conduct of the matter. Mr Cahill’s affidavit deposes that he has no direct appreciation of these matters, save that this would have been for work already performed before the money was paid.
The above is by no means, in any possible way, a comprehensive analysis, but it serves to paint some of the relevant background.
Mr Garrett’s case against the respondent
So far as I can see, there are three matters, either presently underway or at some sort of stage of development, that may be relevant.
The first – because it appears in that order in the applicant’s materials – is a proceeding between the Deputy Commissioner of Taxation and Mr Garrett as trustee for the Andrew Garrett Family Trust and Oenoviva (Australia & New Zealand) Plant & Equipment Trust No. 2, which is a proceeding in the Supreme Court of Victoria.
On 26 May 2014 (exhibit AMG 1 to Mr Garrett’s affidavit sworn 11 August 2014), Derham AsJ made an order setting aside a subpoena issued by Mr Garrett against Mr Cahill personally and ordering Mr Garrett to pay the costs of Mr Cahill, fixed at $8,586.50. It is common cause that it is that order which granted the Bankruptcy Notice.
There has been no challenge to the order that Mr Garrett pay that sum.
On 6 August 2014, Mukhtar AsJ made orders in the same proceeding, which, relevantly, dismissed Mr Cahill’s application to file and serve a third party notice. That third party notice is AMG 12. It is set out at pages 182 to 193 of the exhibits to Mr Garrett’s first affidavit. It was found by Mukhtar AsJ to have no common question with the principal proceeding. Although Mr Garrett may well be right to say, as he does in his first affidavit, that his Honour may have been in error in saying that the Notice seemed to be directed to Mr Garrett’s prior trustees in bankruptcy, which is asserted by Mr Garrett to have finished in 2007 and 2009, nonetheless his Honour’s broader observations seem to me to be correct. I am informed by Mr Garrett that the decision of Mukhtar AsJ is now the subject of an application for leave to appeal, but it appears that that application faces an additional difficulty, in that it will be out of time.
The next proceeding underway is one in the VCAT. That claim arises, once again, to an extent, out of the matters I have broadly described earlier in the background to this proceeding.
The VCAT application filed on 11 June 2014 (but dated 6 May 2014) is exhibit FMC-6 to the affidavit of Mr Cahill and seeks, essentially, the repayment of the $310,000 referred to, together with claims in negligence for professional conduct.
It suffices to say that on 3 October 2014 (exhibit FMC-11 to Mr Cahill’s affidavit), Jonathan Smithers, Senior Member of VCAT, struck out Mr Garrett’s claim with a right of reinstatement. It was further ordered that any application to reinstate the proceeding must be accompanied by a document entitled ‘Points of Claim’ that are in numbered paragraphs containing, in chronological order and in clear and concise form, the allegations of fact and law relied upon by Mr Garrett and the loss and damage claimed and the relief or remedies sought.
As earlier indicated, exhibit A1 shows that Mr Garrett has filed a letter with the Tribunal enclosing his revised pleading. Although Mr Garrett asserted before the Court that his proceeding is now underway again, it is clear that the right to reinstate is contingent upon the Tribunal accepting that the proposed statement of claim complies with the order to which I have just referred. The pleading, in common with a number of Mr Garrett’s documents, is by no means easy to construe. It is not necessary for me to determine this aspect of the matter, but I would go so far as to say that the status of the VCAT proceeding is by no means certain. I have not researched the matter in any detail, but it would seem to me that some of the remedies that Mr Garrett seeks may not be within VCAT’s jurisdiction.
The final proceeding to which I should make reference is a claim in the Federal Court of Australia which a Registrar has refused for filing. Mr Garrett told me from the bar table that this was because it did not contain enough detail, but it seems to me to be, in substance, a reworking of a number of the issues earlier put forward.
Mr Garrett’s claims as articulated in court
It should be noted that Mr Garrett is, on any view of the matter, no stranger to the law. His materials prepared from time to time show an easy familiarity with phrases such as “chose in action” and an understanding, at least of a sort, of the duties of a trustee. Supplementary submissions filed without leave following the proceeding, likewise, are articulate and suggest a familiarity with litigation. I pause to say that I have both allowed Mr Garrett to file his materials and not required the respondent to respond. The reasons will become apparent.
Mr Garrett asserts, and I am prepared to accept, that he is now the trustee of his family trust number 4. He also asserts that he is the controller appointed to HCL, which is in liquidation, and asserts (paragraph 5 of his affidavit filed 11 August 2014), “I am entitled to be exonerated by the property of the company that is subject to the charge.”
It is clear that Mr Garrett purported to appoint himself as controller of HCL and he has held himself out in that capacity on a number of occasions. There is, however, a very serious difficulty with this assertion. The materials filed in the case show, as the liquidator sets out in correspondence, that the charge on which Mr Garrett relies was never signed by the company before it was placed into liquidation. It was, therefore, never a perfected security and Mr Garrett’s purported self‑appointment was clearly lacking in power. It was also, in any event, not registered within the timeframe under the relevant legislation and never became a security interest for that reason also. It appears to be uncontested (it is asserted and has not been denied by Mr Garrett) that Mr Garrett is, in any event, disqualified from being a company director until 2015. I am not quite sure whether this would operate upon circumstances of being a controller of a company in your personal capacity, but it is yet another difficulty that Mr Garrett faces.
Mr Garrett asserts that the monies paid to HCL (and/or, possibly, HCLS) were trust funds, a matter in issue on Mr Cahill’s admittedly arguably hearsay evidence. Mr Garrett says accordingly, they should be repaid to him as trustee, but of course, none of the funds advanced were advanced, on any view of the matter, by Mr Garrett personally, even though he clearly controls and is the owner/shareholder, as I would understand it, of the entities that paid the $310,000 to HCL.
Furthermore, Mr Garrett says that whether as constructive trustee or as the controller, he is entitled to have both Mr Hambros (albeit that he is now bankrupt and it is conceded he cannot be proceeded against) and Mr Cahill repay the $2 million loan fees they paid themselves out of the GST credit. It is put by Mr Garrett, and in the strongest terms, that he does not act as an agent. He acts as an agent solely of the body that appointed him and not HCL, and accordingly, the monies would be properly vested in him personally.
All these arguments, of which the above are only some and which give the relevant tenor of the claims, were designed to defeat an argument which, I suspect, Mr Garrett knew was coming. It is the argument foreshadowed in the Notice of Opposition filed by the respondent.
The respondent’s arguments
The respondent’s arguments can be put shortly. It was submitted that the materials filed, including those of the applicant, showed beyond any doubt that all of the $310,000 paid, including the funds allegedly paid to HCLS, were paid to companies, albeit that of course Mr Cahill was a director of those companies. They were payments made by companies controlled by the applicant and not paid by him personally. Although it was said by Mr Garrett that these payments were said to be made by trustees and Mr Garrett is now the successor trustee, they, nonetheless, were not monies advanced by Mr Garrett personally.
It was further submitted that insofar as any claims were made by
Mr Garrett in respect of the monies advanced by way of loans to
Mr Hambros and Mr Cahill, these on any view were claims made either as trustee or as controller and certainly on any view not by Mr Garrett in any personal capacity. Counsel took the Court to the authority of James v Abrahams (1981) 34 ALR 657. At p.666-668, Fisher J reviewed the authorities. At p.667 his Honour said:
“Prior to applying this principle to the cross demand in question, in the words above mentioned, Long Innes J had this to say (at 298): “It was decided by the Court of Appeal in Re Molesworth (51 Sol Jo 653) that when a judgment debtor applies to set aside a bankruptcy notice on the ground that he has a counter-claim or cross demand which equals or exceeds the amount of the judgment on which the bankruptcy notice is founded, such counter-claim or cross demand must be mutual and due in the same right — eg in answer to a judgment obtained against him by executors the debtor cannot set up a claim against their testator's estate.”
Having referred to a number of cases in which that principle was applied, albeit in slightly different circumstances, Fisher J continued on p.667:
“Starke J referred to this principle in Vogwell v Vogwell (1939) 11 ABC 83 at 89 as follows: “Further I think it could be found upon examination 34 ALR 657 at 668 that the counter-claim which the appellant puts forward is against her brother as an executor, whilst his claim is upon a judgment debt due to him in his own right. In order that debts or claims may be set-off they must be due respectively in the same right.”
In the House of Lords, Lord Kilbrandon in National Westminster Bank Ltd v Halesowen Presswork Ltd [1972] 1 All ER 641 ; [1972] AC 785 at 821, noted the necessity for debts to be in the same right when he said: “In all these cases the funds may be said to have been impressed with quasi-trust purposes and that is sufficient to destroy the mutuality which is a prerequisite of the right to set off arising, since it is necessary that the debts were between the parties in the same right, a condition which the holding of a sum as trustee would destroy: see Lee v Chapman's case (1885) 30 Ch D 216.”
Conclusion
In my view, the decision in this case can be stated shortly. All of Mr Garrett’s possible claims against Mr Cahill as he has articulated them thus far do not bear the mutuality that the authorities I have just quoted require. The judgment debt in favour of Mr Cahill is plainly a debt to Mr Cahill personally. Mr Garrett issued a subpoena upon him personally in a proceeding to which he was not a party and Mr Cahill obtained a costs order upon which the Bankruptcy Notice is based.
All the payments made by various entities to HCL and/or HCLS were not made by Mr Garrett personally. Indeed, no $49,500,000 was ever advanced at all.
The conduct of Mr Cahill and Mr Hambros, as indicated by these papers, would certainly give rise to concerns. The GST input credit is certainly consistent with an elaborate sham. The payment of the $2 million by way of loans would bear careful investigation.
But putting the matter shortly, as I fear I think it can be, the fact is that the claims for the $49,500,000, the claim for the $4.91 million of GST credit, the claim for $310,000 (or even the $400,000) paid to HCL and/or HCLS, were all payments made both by companies that Mr Garrett controlled and to companies which Mr Cahill controlled. The mutuality required between the debt owed personally by Mr Garrett to Mr Cahill is simply not present.
I have dealt in what I would readily concede is a rather summary way with this matter. If this judgment were to traverse each and every matter asserted by Mr Garrett both in his written materials and in his oral submissions, the judgment would be prolix. I have endeavoured to set out a sufficient amount of the materials filed to make the matter comprehensible. But in the face of the, in my view, obviously correct, submissions advanced by the respondent, it is not necessary to do so. The application will be dismissed with costs.
I certify that the preceding fifty-five (55) paragraphs are a true copy of the reasons for judgment of Judge Burchardt.
Associate:
Date: 19 January 2015
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