Glentham Pty Ltd v McPhee (No.3)
[2008] FMCA 284
•11 March 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| GLENTHAM PTY LTD v McPHEE (No.3) | [2008] FMCA 284 |
| BANKRUPTCY – Creditor’s petition – special leave application to High Court pending – applicability of general rule that Court should not sequestrate where appeal pending – different considerations where special leave application – genuine and arguable grounds. |
| Bankruptcy Act, 1966 (Cth) Judiciary Act, 1903 (Cth) s.35A Adamopoulos & Anor v Olympic Airways SA & Anor (1990) 95 ALR 525 Glentham Pty Ltd v Luxer Holdings Pty Ltd & Anor [2006] WASC 132 Glentham Pty Ltd v McPhee [2007] FMCA 1939 Westpac Banking Corporation v Carver (2003) 126 FCR 113; [2003] FCA 22 209 Darvall and Fernon (Eds), Australian Bankruptcy Law and Practice, Volume 1. |
| Applicant: | GLENTHAM PTY LTD (ACN 008 865 692) |
| First Respondent: | MICHAEL JOHN MCPHEE |
| File Number: | PEG 274 of 2006 |
| Judgment of: | Lucev FM |
| Hearing date: | 21 December 2007 |
| Date of Last Submission: | 21 December 2007 |
| Delivered at: | Perth |
| Delivered on: | 11 March 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr MC Hotchkin |
| Solicitors for the Applicant: | Hotchkin Hanly |
| Counsel for the Respondent: | Mr JD Allanson SC |
| Solicitors for the Respondent: | Stables Scott |
ORDERS
The hearing of the creditor’s petition be adjourned to 10.15 a.m. on 9 June 2008 for mention, and directions if necessary.
There be liberty to apply on 2 days notice.
Costs reserved.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT PERTH |
PEG 274 of 2006
| GLENTHAM PTY LTD (ACN 008 865 692) |
Applicant
And
| MICHAEL JOHN MCPHEE |
Respondent
REASONS FOR JUDGMENT
Application
The substantive application in the matter is a creditor’s petition. By way of an interim application by the Respondent, dated 24 November 2006, an adjournment of the petition pending an appeal to the Supreme Court of Western Australia, Court of Appeal, against an earlier judgment of a single judge of that court was made. Relevantly the Supreme Court of Western Australia had ordered the Respondent pay the applicant the sum of $781,594.96, plus $387,950.52 in interest.[1] The Supreme Court of Western Australia, Court of Appeal, dismissed the Respondent’s appeal on 12 October 2007.[2]
[1] Glentham Pty Ltd v Luxer Holdings Pty Ltd & Anor [2006] WASC 132 (“Luxer Holdings”)
[2] Luxer Holdings Pty Ltd v Glentham Pty Ltd [2007] WASCA 209 (“Luxer Holdings Appeal”)
Further application
The Respondent now seeks a further adjournment of the creditor’s petition, pending an application to the High Court for special leave to appeal the Supreme Court of Western Australia, Court of Appeal judgment.
The special leave application was filed on 22 October 2007. At the time of hearing no date had been set for the hearing of the special leave application as various procedural requirements had not been met.[3]
[3] The Court was advised of this by Senior Counsel for the Respondent in the course of the proceedings: Transcript at 1.
The Applicant opposes the application for adjournment of the creditors petition.
Issues
The issue for these proceedings is whether there is a genuine and arguable case for special leave to appeal such that it would be appropriate to adjourn these proceedings until the special leave application is heard.
Law
In Glentham Pty Ltd v McPhee[4] the Court considered this issue and said as follows:[5]
[4] [2007] FMCA 1939 (“Glentham (No. 1)”)
[5] With original footnotes included but renumbered for the purposes of these Reasons for Judgment.
“Ordinarily, this court will not issue a sequestration order where an appeal is pending.[6] In Westpac the Federal Court said that a special leave application was not an appeal and different considerations apply when determining whether there ought to be an adjournment of a creditor’s petition on the basis of a special leave application. They were that the application for special leave is genuine and that there were arguable grounds for concluding special leave to appeal will be granted.[7] In Westpac the question of genuineness was at the heart of the simple formulation that the Court has referred to. That formulation in turn is derived from and has an historical context in relation to the genuine and arguable grounds referred to in earlier cases concerning appeals proper.
[6] Ahern v DCOT (1987) 76 ALR 137 (“Ahern”); Westpac Banking Corporation v Carver (2003) 126 FCR 113; [2003] FCA 22 (“Westpac”).
[7] Westpac at para.18 per Beaumont J.
The word “genuine” relevantly means not spurious or authentic.[8] A brief historical overview of the genuine and arguable ground criteria necessarily commences with Ex parte Heyworth; in re Rhodes[9] to which the Court was referred in the course of argument by the applicant. That was a case which specifically concerned s.7(4) of the Bankruptcy Act, 1883 (UK) which provided in part that the Court may, if it thinks fit, stay or dismiss the petition on the ground that an appeal is pending from the judgment. It is different in its context to the relevant provisions today, for example, of the Bankruptcy Act, 1966 (Cth). But in Heyworth, Lord Justice Baggalley, said:
[8] The Shorter Oxford English Dictionary on Historical Principles, Vol. 1 at 844. (“Shorter Oxford Dictionary”).
[9] (1884) 14 QBD 49 (“Heyworth”).
“But the bona fide character of the appeal is an essential matter to be considered. If the court was satisfied that the appeal was not bona fide the discretion under subsection (4) of section 7, ought to be exercised by making a receiving order on the petition. In the present case it appears to me that there is a substantial question raised by the appeal and it is possible that on the hearing of the appeal the alleged debt may be got rid of altogether. I think the registrar has exercised a very wise discretion. He has not adjourned the petition until after the appeal has been heard he has only adjourned it generally with liberty to apply, so that if the appeal is not duly prosecuted the petitioner can apply to the court to allow him to proceed with the petition.”[10]
[10] Heyworth at 51 per Baggalley LJ.
Lord Justice Bowen agreeing with Lord Justice Baggalley observed:
“If it could be shown that the appeal from the judgment must be a frivolous one we might reverse his decision.”[11]
[11] Heyworth at 52 per Bowen LJ.
Likewise Lord Justice Fry in agreeing with Lord Justice Baggalley said:
“If the appeal from the judgment appeared to be an entirely frivolous one the proceedings on the petition ought not to be stayed.”[12]
[12] Heyworth at 52 per Fry LJ.
Thus, it would appear that in its origins there was a necessity for the appeal to be brought and prosecuted bona fide; that is in good faith. The Court notes that their Lordships also referred to or used the word “frivolous” and suspects that they did so in a legal pleading sense of the word; namely, that something be “manifestly futile”.[13]
[13] Shorter Oxford Dictionary, Vol. 1 at 809.
In Lipov v Alexander Fraser and Son,[14] Sweeney J observed, obiter, that an appeal instituted:
“…which appears bona fide is a good reason for adjourning the hearing of a bankruptcy petition based upon the judgment subject to the appeal.” [15]
That view was seemingly based on the practice under the earlier English bankruptcy legislation[16]
The view in Lipov was doubted in Re Lewin and Glasson; Ex parte Milner,[17] where the Federal Court seemed to consider that the granting of the adjournment in Heyworth was conditioned by the particular statutory provision there under consideration.[18] Nevertheless, in that case the Court did say:
“The question whether the appeal is brought bona fide and on substantial grounds is, however, a circumstance to be taken into account in exercising the discretion whether or not to adjourn the petition.”[19]
Lipov and Lewin have this much in common: they suggest that before an adjournment can be granted an appeal must be bona fide. That they have in common with Heyworth.
In Re Verma; Ex parte Deputy Commissioner of Taxation[20] the Federal Court put the question as being whether:
“The present debtor demonstrated the existence of a genuine contest ?”[21]
that is, a dispute genuinely based on substantial grounds, and went into some detail in relation to the particular evidence in that case. It is unnecessary to canvass that in this case but the Federal Court did examine the evidence to determine whether or not there was a genuine dispute. 1987 saw the now leading case of Ahern[22] decided. In Ahern the Full Court of the Federal Court held as follows:
“It is also well-established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings, provided the appeal is based on genuine and arguable grounds.”[23]
[14] (1978) 36 FLR 126 (“Lipov”).
[15] Lipov at 130 per Sweeney J.
[16] And in particular the 1883 and 1924 Acts.
[17] Re Lewinand Glasson; Ex parte Milner (1986) 67 ALR 591 (“Lewin”).
[18] Lewin at 594-595 per Pincus J referring to Bankruptcy Act, 1883 (UK) s.7(4).
[19] Lewin at 594-595 per Pincus J.
[20] (1984) 4 FCR 181 (“Verma”).
[21] Verma at 187 per Beaumont J.
[22] (1987) 76 ALR 137.
[23] Ahern at 148 per Davies, Lockhart and Neaves JJ. The Full Court referred to Heyworth and Verma , as well as the early High Court case of Bayne v Baillieu (1907) 5 CLR 64.
The Full Court then continued as follows:
“These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt.”[24]
So like Verma, Ahern adverts to the question of whether or not there is or is not a genuine dispute as to the relevant debt. Ahern has been followed many times.[25]
In summary it can be said of genuineness in relation to a special leave application or an appeal. that they involve a consideration of whether the application or the appeal is brought in good faith, that is, that it is authentic and not spurious, and that part of that is whether it is related to the substance of the grounds and the authenticity of those grounds. The other part of the consideration that is involved, looking at Heyworth and some of the subsequent cases, is whether the appeal is then prosecuted in good faith. Here the genuineness of the special leave application is relevant in that first context rather than the latter context. ”[26]
[24] Ahern at 148 per Davies, Lockhart and Neaves JJ.
[25] See the cases set out in paragraph 52.1.35 of Darvall and Fernon (Eds), Australian Bankruptcy Law and Practice, Volume 1.
[26] Glentham (No 1) at paras 8-20 per Lucev FM.
The Respondent also drew to the Court’s attention:
a)that part of the judgment in Heyworth where Bowen LJ described a receiving order made while an appeal is pending as “a monstrous thing”;[27] and
b)the nature of bankruptcy, especially the adverse change to status of a person declared bankrupt and the quasi-criminal consequences for the bankrupt,[28] and thus the need for satisfaction “when making an order of such gravity that the foundation is secure.”[29]
[27] Heyworth at 52 per Bowen LJ.
[28] Ahern at 148 per Davies, Lockhart and Neaves JJ; Adamopoulos & Anor v Olympic Airways SA & Anor (1990) 95 ALR 525 at 532 per Burchett and Gummow JJ (“Adamopoulos”).
[29] Adamopoulos at 532 per Burchett and Gummow JJ.
Background facts
The Respondent, who is and was a partner in a law firm, guaranteed obligations of Luxer Holdings Pty Ltd[30] in respect of a lease of level 15 of the BGC Centre, a multilevel office block in the Perth central business district. There was:
(a)a failure to pay rent;
(b)a notice given in March 1996 requesting that the failure to pay rent be remedied;
(c)in April 1996 re-entry by the Applicant and forfeiture of the premises by the Respondent;
(d)a demand given in July 1996 for the Respondent to comply with the guarantee.
[30] “the Company”
The lease expired on 30 November 2000. On 31 January 2001 the Applicant wrote to the Respondent saying that its damages had crystallised and it demanded payment of those damages.
The relevant terms of the lease were as follows:
(a)Clause 6 of the lease contained a the guarantee in the following terms:
“In consideration of the Lessor having granted this Lease to the Lessee at the request of the Guarantor named and described in Item 12 of the First Schedule (herein called ‘the Guarantor’) the Guarantor HEREBY GUARANTEES to the Lessor the due and punctual payment by the Lessee of the rent reserved by and the performance and observance by the Lessee of the covenant, conditions and stipulations contained or implied in this Lease during the time hereby granted and any extension or renewal thereof upon the following terms and conditions:
(a)if and whenever any instalment of the rent or any part thereof is in arrears or unpaid for the space of one (1) month after it has become due and payable the Guarantor will upon demand pay the same to the Lessor;
(b)if and whenever there is a breach of the Lessee of any of the covenant, conditions or stipulations herein contained the Guarantor will upon the written request of the Lessor cause the breach to be remedied within a reasonable time and pay to the Lessor all losses, damages, expenses and costs which the Lessor is entitled to recover by reason of the breach;
(c)the liability of the Guarantor hereunder is not impaired or discharged by reason of any time or other indulgence granted by the consent of the Lessor;
(d)this guarantee is a continuing guarantee …”
(b)Under Clause 5.3(a) the Lessor and Lessee mutually covenanted and agreed, relevantly, that the covenant to pay rent was an essential term of the lease;
(c)Clause 5.3(b) of the lease dealt with re-entry in the following terms:
“THEN … the Lessor or any person or persons duly authorised by the Lessor at any time or times thereafter may re-enter into and upon the demised premises or any part thereof in the name of the whole and to have again repossess and enjoy the same as if this Lease had not been made but without prejudice to the right of action or other remedy which the Lessor has in respect of any antecedent breach of the Lessee’s covenant herein contained AND following such forfeiture the Lessor is entitled to recover from the Lessee damages for the loss of benefits which performance of the covenant of the Lease by the Lessee would have conferred on the Lessor between the date of forfeiture and the expiry of the Lease by the affluxion of time.”
Genuine and arguable case
The Respondent says that the question for the Supreme Court, both at first instance and on appeal, was how does the obligation assumed by the Respondent as guarantor under the lease extend so as to make the guarantor liable for loss of bargain damages.
Genuineness
The Respondent says that there is no doubt that the Application for special leave is genuine as it was instituted:
(a)within time; and
(b)following advice from Counsel (Junior Counsel at the hearing at first instance) that there was a reasonably strong prospect of special leave being granted.
The Respondent suggests that for Junior Counsel to suggest to the Respondent, as he did, that the application for special leave is relevant to a possible negotiated settlement of the issues does not demonstrate that the application for special leave is not genuine, but if anything, to the contrary, supports the view that the application is genuinely made.
The Court does not disagree with that argument, in principle. Furthermore, as a matter of practice, it might not be unusual for an application for special leave to give rise to further negotiations as to the disposition of the underlying proceedings or any bankruptcy proceedings which might be on foot. There is no evidence here that the Respondent has in any even taken up the suggestion made by Junior Counsel.
In all circumstances, the Court is not prepared to find that the application for special leave, in this instance, is not genuinely made by reason of Junior Counsel’s view that it might afford a basis for further negotiations between the parties with respect to the various proceedings between them, or otherwise.
In any event, it does not now appear that the Applicant relies on this aspect of the matter for the view that the application for special leave is not genuine. Rather, the Applicant simply says that the Respondent argument is so untenable that it cannot be genuine.
Section 35A Judiciary Act factors
In determining the application for special leave the High Court’s discretion is open ended and it may have regard to any matter that it considers relevant.
The High Court must consider whether or not there is a question of sufficient public importance, either generally or otherwise, to warrant the grant of special leave.
The Respondent argues that this is a case where the construction of a particular document might give rise to a question of public importance. The Respondent argues that this is also a case that goes conceptually to the nature of the obligations of guarantors.
In the Court of Appeal the primary judgment in relation to the issue before this Court was delivered by Buss JA.
Buss JA characterised the guarantee given by the Respondent as having two limbs:
(a)the guarantee of the payment by the company of the rent; and
(b)a guarantee of the performance and observance of covenants, conditions and stipulations contained or implied in the lease.[31]
[31] Luxer Holdings Appeal at para 81 per Buss JA.
Buss JA then referred to Clause 5.3 of the lease, as set out above. Having regard to Clause 5.3 of the lease Buss JA found that the Company impliedly promised to pay the Applicant damages for loss of benefit which the performance of the covenants would have conferred between the date of forfeiture and the expiry of the lease.[32] Buss JA then found that the breach of the implied covenant by the Company to pay damages under Clause 5.3 (b) of the lease enlivened the obligation of the Respondent as guarantor to meet those damages and remedy the defect or remedy the failure.[33]
[32] Luxer Holdings Appeal at para 82 per Buss JA.
[33] Luxer Holdings Appeal at para 84-85.
The Respondent argues that there is an important question of principal as to whether a guarantor who has undertaken an obligation after receipt of a notice and a request to rectify defect by a lessee can become liable in circumstances where no notice is received. And, whether in those circumstances, payment of loss of bargain damages was an obligation that the guarantor undertook.
The Respondent argues that the matter is of sufficient importance that there is a sufficiently genuine and arguable case that the High Court might consider requires further consideration, and that the High Court therefore would grant special leave to appeal the Judgment in Luxer Holdings Appeal.
The Applicant says that there is no sufficient matter of public importance, whether by way of general application or otherwise, such as to why the High Court granting the special leave application, and indeed, that the special leave application is so unarguable as not to be genuine.
The Applicant says that it cannot be reasonably contended that the Court of Appeal erred in law in Luxer Holdings Appeal. Further, it says that the cases show that the High Court on special leave applications distinguishes between the construction of a particular contract and the construction of a term in a contract that on the evidence, or by virtue of public knowledge, is of widespread application.
The Applicant argues that clause 5.3(b) leaves no room for doubt that the lessor is entitled to recover from the lessee (the Company) for loss of benefit damages.[34]
[34] Luxer Holdings Appeal at para 53 per Buss JA.
The Applicant says that the Respondent seeks to narrow the scope of the obligation under the guarantee by restricting or narrowing the terms of the guarantee.
The Applicant says that a simple reading of the terms and conditions of the lease leads to the obvious conclusion, reached by the Court of Appeal, that the guarantor had an ongoing obligation to guarantee the performance and observance by the lessee of the covenants, conditions and stipulations contained or implied in the lease. The Applicant argues that the proper application of the relevant principles in this case means that there is no doubt that the guarantee is for the performance of the lessee’s obligations, which include an obligation to pay rent as an essential term, and an entitlement upon breach of that term for the lessor to recover damages. The Applicant acknowledges that the Court of Appeal has then implied, from the entitlement to recover damages against the lessee, an obligation on the part of the lessee to pay them, which then leads to the guarantor being obliged to pay those damages if the lessee does not.
The Applicant says that the Court of Appeal’s reasoning is simple and straight forward, and that the Respondent’s obligation to pay loss of benefit damages arises from an unremarkable application of the law and construction of the relevant clauses in the lease.
Consideration
Prejudice
The Respondent argues that:
a)there is no prejudice to the Applicant other than delay;
b)any delay will only be until the hearing and determination of the special leave application, and that if that application is successful then there will be an appeal on foot, but if unsuccessful the matter can be re-listed;
c)there is no immediate time delay because the expiry of the creditors petition has been extended to October 2008;
d)no delay has been caused by him, and that he has been complying with the High Court timetable;
e)earlier delay was as a consequence of this Court’s orders in Glentham Pty Ltd v McPhee (No 2)[35] to allow an adjournment whilst alternative Counsel was appointed;[36]
f)he has been disposing of assets or otherwise acting to the prejudice of his creditors.
[35] [2007] FMCA 2052 (“Glentham No.2”).
[36] Glentham (No 2) at para. 16 per Lucev FM.
The Applicant does not point to any particular prejudice, save that which is usual in the adjournment of such matters.
Solvency
The Respondent argues that it is only the present creditors petition application which potentially makes him insolvent.
The Respondent acknowledges that he has another substantial creditor: the Commissioner of Taxation. However, he says that discussions are ongoing with the Commissioner of Taxation, and he is confident he can either meet his debts or make arrangements with his creditors for payment of those debts. The only exception to that is the Judgment Debt.
For present purposes it suffices to say that the Respondent’s solvency position might be radically altered if the special leave application were to be granted, and any appeal succeed.
The Court considers that the Applicant’s argument that the Court of Appeal in Luxer Holdings Appeal applied the ordinary and sensible meaning of the terms and conditions of the lease is a strong and logical argument, with considerable persuasive force.
The Court nevertheless considers that there is also considerable force in the Respondent’s argument. It does seem to this Court that the question of whether a guarantor ought be liable for loss of benefit damages, on the basis of a covenant implied, might be a question of sufficient public important to warrant the grant of special leave. The question might arise both generally, as a matter of principle, and otherwise as a matter of construction of this particular lease, and like commercial leases. The nature of the obligations of a guarantor might be a matter which in this case is seen by the High Court as a suitable vehicle for dealing with these obligations, in the context of the issues in this case. Equally it may not, but in all the circumstances of this case, this Court does not consider that a refusal to adjourn the hearing of the creditors petition and the making of a sequestration order would necessarily rest upon a secure foundation. In those circumstances the hearing of the creditors petition ought be adjourned.
Conclusions and Orders
The Court will therefore order that the hearing of the creditor’s petition be adjourned. It will be adjourned to a fixed time and date 10.15 a.m., 9 June 2008 for mention, and if necessary, further directions dependant upon the outcome of the special leave application, if it has been determined by that time. There will also be liberty to apply on 2 days notice. Costs reserved.
I certify that the preceding thirty-eight (38) paragraphs are a true copy of the reasons for judgment of Lucev FM
Associate: Rachel Peattie
Date: 11 March 2008
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