Heywood v Sharpe (No.2)
[2015] FCCA 355
•20 February 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| HEYWOOD v SHARPE (No.2) | [2015] FCCA 355 |
| Catchwords: BANKRUPTCY – Creditor’s petition – application for a sequestration order based on failure to comply with the requirements of a bankruptcy notice – whether at the time the bankruptcy notice was issued the creditor could not enforce the judgment on the basis of which the bankruptcy notice was issued without the creditor first giving notice to the debtor pursuant to s.8(1) of the Farm Debt Mediation Act 1994 (NSW) (FDM Act) – if the creditor could not enforce the judgment without first giving notice under s.8(1) of the FDM Act whether the creditor was a “creditor” for the purposes of s.40(1)(g) and s.41 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) – whether a bankruptcy notice having been issued on the application of a person who is not a “creditor” for the purposes of s.40(1)(g) and s.41 of the Bankruptcy Act is a sufficient cause as to why a sequestration order ought not be made – sequestration order not made. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41, 52, 52(2) Bankruptcy Regulations 1996 (Cth), reg.4.05 |
| Abigroup Limited v Abignano (1992) 39 FCR 74 Tzovaras v Jeandin [2014] FCCA 2039 |
| Applicant: | CHRISTOPHER JOHN HEYWOOD |
| Respondent: | DAVID GEORGE SHARPE |
| File Number: | SYG 1569 of 2013 |
| Judgment of: | Judge Manousaridis |
| Hearing dates: | 16 and 26 May 2014 |
| Date of Last Submission: | 25 September 2014 |
| Delivered at: | Sydney |
| Delivered on: | 20 February 2015 |
REPRESENTATION
| Counsel for the Applicant: | Mr R Chia (on 16 May 2014) |
| Solicitors for the Applicant: | Mr L Juhasz of Coastal Law & Conveyancing (on 26 May 2014) |
| Respondent appeared in person. |
ORDERS
The interim application filed by the respondent on 16 May 2014 is dismissed.
The creditor’s petition is dismissed.
The applicant pay to the respondent such costs to which the respondent may be entitled as an unrepresented party.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 1569 of 2013
| CHRISTOPHER JOHN HEYWOOD |
Applicant
And
| DAVID GEORGE SHARPE |
Respondent
REASONS FOR JUDGMENT
Introduction
The applicant, Mr Heywood, applies for a sequestration order against the estate of the respondent, Mr Sharpe. The act of bankruptcy on which Mr Heywood relies is Mr Sharpe’s failure to comply with a bankruptcy notice served on him on 4 February 2013. The bankruptcy notice demands payment of $90,000. That is the amount of a judgment that Mr Sharpe, on 6 June 2012, consented to being entered against him in favour of Mr Heywood in the District Court of New South Wales.
Mr Sharpe raises a number of grounds of opposition to the making of the sequestration order. The first is a set of grounds based on what Mr Sharpe submits is a breach by a number of people, including Mr Heywood, of the Farm Debt Mediation Act 1994 (NSW) (FDM Act). The central element of this set of grounds is the contention that Mr Heywood was not entitled to seek to enforce the judgment debt, including by issuing a bankruptcy notice, without first issuing a notice to Mr Sharpe under s.8(1) of the FDM Act, which Mr Heywood failed to do.
The other grounds on which Mr Sharpe opposes the making of a sequestration order are that the creditor’s petition incorrectly claims that a security over land that Mr Heywood holds has no value, and it does not include the security Mr Heywood holds over farm equipment; Mr Heywood did not, contrary to reg.4.05 of the Bankruptcy Regulations 1996 (Cth) (Bankruptcy Regulations), give an endorsed copy of the creditor’s petition to the Official Receiver; and Mr Sharpe is able to pay his debts. In addition, Mr Sharpe claims an order that he be given leave to issue interrogatories and an order for discovery of documents.
I propose to deal with the matters before me as follows. First, I will consider whether Mr Heywood has proved the matters he must prove under s.52 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) to obtain a sequestration order against Mr Sharpe’s estate. Second, assuming Mr Heywood has proved his case for the making of a sequestration order, I deal with each of the substantive matters Mr Sharpe raises in opposition to the making of the sequestration order. For reasons that will become apparent, it is unnecessary to consider Mr Sharpe’s application for orders for discovery and interrogatories.
Has Mr Heywood established grounds for the making of a sequestration order?
I am satisfied of the following matters:
a)Mr Sharpe was served with the bankruptcy notice on 5 February 2013.[1]
b)The creditor’s petition filed by Mr Heywood on 10 July 2013, and made returnable before the Court on 14 August 2013, is in the form required by r.4.02(1) of the Federal Circuit Court (Bankruptcy) Rules2006 (Cth) (Bankruptcy Rules).
c)The matters stated in paragraphs 1, 2, 3, and 4 of the creditor’s petition are verified in accordance with Part 2 of the petition.[2] Those matters are that Mr Sharpe owes Mr Heywood $90,000 pursuant to a judgment entered in the District Court of New South Wales; Mr Heywood is willing to surrender the security he holds for the benefit of Mr Sharpe’s creditors general; Mr Sharpe failed to comply with the bankruptcy notice; and that when Mr Sharpe committed the act of bankruptcy he was personally present in Australia.
d)The creditor’s petition was accompanied by an affidavit sworn by Mr Heywood stating that Mr Sharpe had applied to this Court for an order to set aside and extend the time for compliance with the bankruptcy notice, and that application had been finally decided by the Court on 25 June 2013.[3]
e)On 16 May 2014 there was filed in Court an affidavit sworn by John Brian Gorman on 15 May 2014 deposing to the service on Mr Sharpe on 12 July 2013 of a sealed copy of the creditor’s petition, the affidavit of service of the bankruptcy notice, and the affidavit of Mr Heywood to which I refer in paragraph (d).[4]
f)On 16 May 2014 there was filed in Court an affidavit of debt sworn by Mr Heywood on 12 May 2014 confirming that the debt on which Mr Heywood relies is still owing. Given that Mr Heywood appears to reside in Coffs Harbour, I am satisfied that Mr Heywood swore this affidavit as soon as practicable before the hearing of the petition on 16 May 2014.[5]
g)On 16 May 2014, and on 26 May 2014, there was filed in Court affidavits as required by r.4.06(3) of the Bankruptcy Rules.
[1] Affidavit of N R Hennessy, 05.02.13
[2] R.4.02(2) of the Bankruptcy Rules; affidavit of C J Heywood, 09.07.13
[3] R.4.04(1)(a) of the Bankruptcy Rules; affidavit of C J Heywood, 09.07.13
[4] R.4.06(2) of the Bankruptcy Rules.
[5] R.4.06(4) of the Bankruptcy Rules.
In my opinion, therefore, subject to the matters Mr Sharpe has raised, Mr Heywood is entitled to obtain a sequestration order against the estate of Mr Sharpe.
Was Mr Heywood prevented from issuing the bankruptcy notice?
The principal ground on which Mr Sharpe relies to oppose the making of the sequestration order is his contention that the FDM Act prevents Mr Heywood from enforcing the judgment, including by means of bankruptcy proceedings. To assess this contention, it will be necessary first to say something about the FDM Act, and then to set out the factual background against which Mr Sharpe’s contention must be assessed.
Overview of the FDM Act
As explained by Heydon J in Waller v Hargraves Secured Investments Limited,[6] the scheme provided for by the FDM Act is that if a farmer incurs a “farm debt” that is secured by a “farm mortgage”, the “creditor” is unable to take “enforcement action” under the farm mortgage until, among other things, a certificate is issued that the FDM Act does not apply because satisfactory mediation has taken place. The means by which the FDM Act implements this scheme is as follows.
[6] (2012) 245 CLR 311 at page 322 ([29])
First, the FDM Act defines the persons whose conduct is regulated by the FDM Act. Those persons are “creditors”, but “only in so far as they are creditors under a farm debt”.[7] The expression “farm debt” is defined to mean “a debt incurred by a farmer for the purposes of the conduct of a farming operation that is secured wholly or partly by a farm mortgage”.[8] The expression “farm mortgage”, in turn, is defined to include “any interest in, or power over, any farm property securing obligations of the farmer whether as a debtor or guarantor, including any interest in, or power arising from, a hire purchase agreement relating to farm machinery”.[9] The expression “farm mortgage” does not include any stock mortgage or any crop or wool lien, or the interest of the lessor in any farm machinery that is leased.[10]
[7] FDM Act, s.5(1)
[8] FDM Act, s.4(1)
[9] FDM Act, s.4(1)
[10] FDM Act, s.4(1)
Further, although the FDM Act applies to creditors only in so far as they are creditors under a farm debt, the FDM Act does not apply in respect of a farmer whose property is subject to control under Div.2 of Part X of the Bankruptcy Act, or is the subject of a bankruptcy petition presented by any person, or, where the farmer debtor is a corporation, it is “an externally administered corporation within the meaning of the Corporations Act 2001 of the Commonwealth”.[11]
[11] FDM Act, s.5(2)
Second, the FDM Act identifies the conduct of the persons which is the subject of regulation. That conduct is the taking of “enforcement action against the farmer in respect of the farm mortgage”. The expression “enforcement action”, in relation to a farm mortgage, is defined to mean:
Taking possession of property under the mortgage or any other action to enforce the mortgage, including the giving of any statutory enforcement notice, or the continuation of any action to that end already commenced . . .[12]
[12] FDM Act, s.4(1). The definition contains two exclusions which are not relevant.
Third, the FDM Act prohibits creditors from taking “enforcement action” in relation to farm mortgages in two circumstances. The first is where the creditor has not provided to the farmer a notice in writing in the form approved by the New South Wales Rural Assistance Authority (Authority) informing the farmer of the creditor’s intention to take enforcement action in relation to the farm mortgage, and of the availability of mediation under the FDM Act “in respect of farm debts”.[13] The second is where the creditor has given notice to the farmer and the farmer, within twenty-one days of having been given that notice, notifies the creditor in writing that the farmer requests mediation “concerning the farm debt involved”.[14] Where the farmer has given such notice, the creditor must not take enforcement action “in respect of the farm mortgage concerned unless a certificate is in force under section 11 in respect of the farm mortgage”.[15] Subsection 11(1) of the FDM Act provides:
[13] FDM Act, s.8
[14] FDM Act, s.9(1)
[15] FDM Act, s.10(1)
The Authority must, on the application of a creditor under a farm mortgage, issue a certificate that this Act does not apply to the farm mortgage if:
(a) the farmer is in default under the farm mortgage, and
(b)no exemption certificate is in force in relation to the farm mortgage, and
(c)the Authority is satisfied that:
(i)satisfactory mediation has taken place in respect of the farm debt involved, or
(ii)the farmer has declined to mediate, or
(iii)3 months have elapsed after a notice was given by the creditor under section 8 and the creditor has throughout that period attempted to mediate in good faith (whether or not a mediation session or satisfactory mediation took place during that period).
The final means by which the FDM Act implements the legislative scheme of compulsory mediation in relation to farm debts is by declaring that “[e]nforcement action taken by a creditor to whom this Act applies otherwise than in compliance with this Act is void”.[16]
[16] FDM Act, s.6
Factual background
By a written agreement dated 26 May 2010 Mr Heywood agreed to lend money to Mr Sharpe (Loan Agreement). The Loan Agreement, at least in its entirety, is not in evidence. What is in evidence is a document titled “10. The Schedule”, which I infer is the schedule that forms part of the Loan Agreement.[17]
[17] D G Sharpe affidavit, 03.12.13, page 48
According to the schedule, Mr Heywood agreed to lend to Mr Sharpe $25,800 for ninety days. Mr Sharpe was obliged to pay interest at the rate of 0.666% for each day during the term of the loan which was to be calculated daily on the outstanding principal sum until the principal sum has been repaid in full. Mr Sharpe also granted security over various goods listed in a document titled “Annexure A”.[18] It appears that it was a term of the Loan Agreement that if Mr Sharpe were to default in the repayment of interest or principal, Mr Heywood would be entitled to lodge a caveat over the interest Mr Sharpe held in property situated at Dorrigo.[19] It appears, and for the purposes of these reasons I will assume, that Mr Sharpe operated the property in Dorrigo as a farm.
[18] D G Sharpe affidavit, 03.12.13, page 49
[19] Sharpe v Heywood [2013] NSWCA 192 at [4]
Mr Heywood lent to Mr Sharpe the money referred to in the Loan Agreement, but Mr Sharpe defaulted in repaying the loan. On 28 April 2011 Mr Heywood and Mr Sharpe participated in a mediation in relation to the amount owing under the Loan Agreement. From that I infer that both Mr Sharpe and Mr Heywood accepted that the loan that was made under the Loan Agreement was a “farm debt” within the meaning of s.4 of the FDM Act, that Mr Sharpe was a farmer, and that the loan was made to him for the purposes of Mr Sharpe’s conduct of a farming operation.
The mediation did not result in an agreement. On 8 July 2011 Mr Heywood obtained a certificate under s.11 of the FDM Act from the Authority (s.11 Certificate) to the effect that the FDM Act does not apply to “the farm mortgage, details of which are set out hereunder”. Those details included “Loan Agreement Secured by Goods dated 26 May, 2010”.[20]
[20] D G Sharpe affidavit, 03.12.13, page 51
On 15 September 2011 Mr Heywood commenced proceedings against Mr Sharpe in the District Court of New South Wales. Mr Sharpe did not file a defence and, on 31 January 2012, Mr Heywood obtained default judgment against Mr Sharpe in the amount of $132,692.39.[21]
[21] Sharpe v Heywood [2013] NSWCA 192 at [5] and [6]
On 5 April 2012 Mr Sharpe applied to set aside the default judgment. On 6 June 2012, being the day on which Mr Sharpe’s application to set aside the default judgment was due to be heard, Mr Heywood and Mr Sharpe entered into an agreement (Consent Orders), the principal terms of which are as follows:[22]
a)The default judgment for $132,692.39 that was entered on 31 January 2012 was set aside, and Mr Sharpe consented to judgment against him in the amount of $90,000 (Judgment).
b)Mr Heywood agreed to accept $60,000 in full and final discharge of the Judgment if Mr Sharpe were to pay that amount by 15 October 2012, and would accept $70,000 in full and final discharge of the Judgment if Mr Sharpe were to pay that amount by 15 November 2012.
c)Mr Heywood undertook not to seek the issue of a bankruptcy notice in relation to the Judgment unless the Judgment remained unsatisfied as at 16 November 2012.
d)Mr Sharpe charged the land described in the Consent Orders “as security for the Defendant’s obligation to pay the Judgment debt”, and consented to Mr Heywood lodging caveats on the title to that land. The land Mr Sharpe charged is described in the Consent Orders as “the properties located at “Campbells Hill” 485 Rimbanda Road, Woolbrook, NSW, being all of the land in Folio Identifier 2/567241 and Folio Identifier 3/206327” (Charged Land).
[22] Sharpe v Heywood [2013] NSWCA 192 at [7]
Mr Heywood lodged a caveat over the Charged Land on 25 June 2012.[23]
[23] Sharpe v Heywood [2013] NSWCA 192 at [8]
Mr Sharpe applied for an order to pay the Judgment by instalments. On 19 November 2012 the District Court made an order that Mr Sharpe pay the Judgment by monthly instalments of $5,000 commencing on 16 December 2012. Mr Sharpe made no payment.[24] The District Court then issued a certificate of judgment for $90,000, and Mr Heywood obtained the bankruptcy notice demanding payment of the amount of that judgment (Bankruptcy Notice).[25] It is Mr Sharpe’s failure to comply with the requirements of that bankruptcy notice that is the act of bankruptcy on which Mr Heywood relies in these proceedings.
[24] Sharpe v Heywood [2013] NSWCA 192 at [9]
[25] Sharpe v Heywood [2013] NSWCA 192 at [10]
On 21 February 2013 Mr Sharpe filed a notice of motion to set aside the Consent Orders. The motion was heard by his Honour Judge Nielson DCJ on 15 March 2013 who dismissed it.[26] At the hearing, counsel for Mr Sharpe accepted that the Judgment was not obtained contrary to any rule of court, or illegally, or by fraud, or contrary to good faith.[27] Counsel for Mr Sharpe submitted that the Consent Orders created a new “farm debt” within the meaning of the FDM Act and that Mr Heywood could take no further action to enforce the Judgment without further mediation. Mr Sharpe did not, however, submit that the Judgment’s being a new “farm debt” was a ground for setting aside the Judgment. In the event, it appears that counsel did not seek to set aside the Judgment, but instead sought an order staying the Judgment until a case between Mr Sharpe and Hargraves Secured Investments was determined.[28]
[26] Sharpe v Heywood [2013] NSWCA 192 at [11]
[27] Sharpe v Heywood [2013] NSWCA 192 at [13]
[28] Sharpe v Heywood [2013] NSWCA 192 at [13]-[15]
Mr Sharpe applied for leave to appeal against the dismissal by Nielson DCJ of Mr Sharpe’s application to set aside the Consent Orders. Before the Court of Appeal Mr Sharpe submitted that although the Judgment did not involve a different loan to the loan that was the subject of mediation on 29 April 2011, the terms by which Mr Sharpe charged the property at Campbell’s Hill with the payment of the Judgment created a new and distinct “farm mortgage”. Mr Sharpe further submitted that the certificate that was issued on 8 July 2011 was given only in relation to the Loan Agreement. He submitted that the entry of the Judgment as contemplated by the Consent Orders constituted an “enforcement action” within the meaning of s.6 of the FDM Act and that the entry of the Judgment, therefore, was made void by s.8 of the FDM Act.[29] The Court of Appeal refused leave to appeal. It held that “enforcement action” did not include the entry of the Judgment pursuant to the Consent Orders.
[29] Sharpe v Heywood [2013] NSWCA 192 at [22]
After the Court of Appeal dismissed Mr Sharpe’s application, Mr Heywood applied for the issue of the bankruptcy notice on which Mr Heywood relies in these proceedings. Mr Sharpe applied to have the bankruptcy notice set aside. The ground on which he relied was that the bankruptcy notice constituted an “enforcement action” within the meaning of s.4(1) of the FDM Act. That ground was rejected by Judge Altobelli of this Court in Sharpe v Heywood.[30]
[30] [2013] FCCA 1788
The parties’ submissions
It is not entirely clear to me what are the precise grounds on which Mr Sharpe submits the FDM Act prevented Mr Heywood from applying for the issuing of a bankruptcy notice and applying for a sequestration order. At the very least, however, Mr Sharpe makes the following submissions:
a)The Loan Agreement was a “farm mortgage” within the meaning of the FDM Act.
b)The charge granted by Mr Sharpe when he signed the Consent Orders constituted a new and distinct “farm mortgage”.[31]
c)Mr Sharpe’s failure to pay the $60,000 by 15 October 2012 and the $70,000 by 15 November 2012 each constituted a default which gave rise to a right in favour of Mr Sharpe under the FDM Act to have these acts of default mediated.[32]
d)All enforcement action by Mr Heywood after these acts of default constituted “void” action.[33]
e)The bankruptcy notice constitutes an “enforcement action” within the meaning of s.4(1) of the FDM Act.[34]
[31] Notice stating grounds of opposition, [2.ix]
[32] Notice stating grounds of opposition, [2.iv]
[33] Notice stating grounds of opposition, [2.iv], [2.x]
[34] Notice stating grounds of opposition, [2.x], [2.xi]
Mr Heywood does not dispute that the Loan Agreement was a “farm mortgage”. He submits, however, that whether or not the bankruptcy notice is an “enforcement action” has been determined adversely to Mr Sharpe by Judge Altobelli in Sharpe v Heywood.[35]
[35] [2013] FCCA 1788
Questions for determination
Mr Sharpe claims the FDM Act prevented Mr Heywood from obtaining and serving a bankruptcy notice on Mr Sharpe, and now operates to render void the bankruptcy notice that was issued to Mr Heywood and which was served on Mr Sharpe. There is, however, a more direct way non-compliance with the FDM Act may affect the outcome of Mr Heywood’s application for a sequestration order.
If, at the time the bankruptcy notice was issued to Mr Heywood, the FDM Act applied to the enforcement of the Judgment, Mr Heywood may not have been a “creditor” within the meaning of s.40(1)(g) of the Bankruptcy Act. That would be so because, to be a “creditor” for the purposes of s.40(1)(g) of the Bankruptcy Act, the judgment creditor must be entitled unconditionally to execute the judgment debt.[36] That would not be the case if, at the time the bankruptcy notice had been issued, Mr Heywood could not have taken enforcement action in relation to the Judgment without first giving notice to Mr Sharpe under s.8(1) of the FDM Act.
[36] See Tzovaras v Jeandin [2014] FCCA 2039 at [26]
To succeed, therefore, in his opposition based on the FDM Act, Mr Sharpe must establish a number of matters. The first is that the Judgment constitutes a “farm debt” as defined by the FDM Act. That is so because the FDM Act applies “in respect of creditors only in so far as they are creditors under a farm debt”.[37] And to establish that the Judgment is a “farm debt”, Mr Sharpe must establish that:
a)the Judgment constitutes a “debt”;
b)the debt, as constituted by the Judgment, was “incurred” by Mr Sharpe;
c)the debt, as constituted by the Judgment, was incurred by Mr Sharpe “for the purposes of the conduct of a farming operation”; and
d)the debt constituted by the Judgment was secured wholly or partly by a “farm mortgage”.
[37] FDM Act, s.5(1)
If Mr Sharpe establishes that the Judgment is a “farm debt”, he must then establish that, assuming the s.11 Certificate is not in force “in respect of” the Consent Orders or Judgment, the prohibition contained in s.8(1) of the FDM Act against Mr Heywood taking steps to “enforce the mortgage” prohibits Mr Heywood not only from exercising his rights as chargee over the Charged Land, but also from taking steps that would otherwise be available to him to execute the Judgment. In other words, Mr Sharpe must establish that Mr Heywood’s taking action to enforce the Judgment, as opposed to taking action to enforce his interest as chargee in the Charged Land, would constitute the taking of enforcement action “under the farm mortgage”.
Finally, if Mr Sharpe establishes that, ignoring the s.11 Certificate, the FDM Act prohibits Mr Heywood from taking any steps to execute the Judgment, he must establish that the s.11 Certificate is not in force ”in respect of” the Consent Orders or Judgment.
Is the Judgment a “debt”?
There can be no doubt that the Judgment, being a judgment for a particular sum, is a debt. Where a judgment is for a sum of money, the judgment: [38]
creates an obligation of its own force. The pre-existing obligation, which the judgment is intended to enforce, merges in the new obligation so created, and, for most purposes as between the parties, it is conclusive evidence of the existence of the obligation which it creates.
[38] Corney v Brien (1951) 84 CLR 343 at page 353 (Fullagar J)
That the Judgment is a debt is acknowledged in the Consent Orders. Paragraph 6 refers to Mr Sharpe charging the Charged Land “as security for the Defendant’s obligation to pay the judgment debt”.
Thus, the Judgment constitutes an obligation owed by Mr Sharpe to Mr Heywood to pay the amount of the Judgment, and that obligation is a distinct obligation, different from that of the judgment that was set aside pursuant to the Consent Orders. It is also different from the debt Mr Sharpe owed under the Loan Agreement.
Was the Judgment “incurred” by Mr Sharpe?
One ordinary meaning of the word “incur” is “to run or fall into some consequence”.[39] Thus, to “incur” a debt is to do something that gives rise to a debt. To agree, as Mr Sharpe has agreed, to the entry of the Judgment against him, and hence, to the creation of the obligation constituted by the Judgment, Mr Sharpe agreed to the Judgment, that is, the debt constituted by the Judgment. In my opinion, therefore, if the word “incurred” is given its ordinary meaning, then, by agreeing to the Consent Orders, the Judgment that resulted from those orders is “a debt incurred” by Mr Sharpe within the meaning of the FDM Act.
[39] Macquarie Dictionary, Third Rev ed (1997)
Does the expression “incurred a debt” bear a narrower construction in the statutory context in which it appears in the FDM Act? The meaning of a similar expression, “incurs a debt”, has been considered in cases dealing with provisions that prohibit insolvent trading by directors of corporations. In one case it was said that “a company incurs a debt when, by its choice, it does or omits something which, as a matter of substance and commercial reality, renders it liable for a debt for which it otherwise would not have been liable”.[40] Can it be said that a similar limitation applies to the expression “incurred a debt” in the FDM Act? That is, can it be said that a debt will be incurred for the purposes of the definition of “farm debt” only if, as a matter of substance and reality, the debt that is incurred is one for which the farmer would otherwise not have been liable? In my opinion, the judgments delivered in the High Court in Waller v Hargraves Secured Investments Limited[41] require that I answer that question in the negative.
[40] Standard Chartered Bank of Australia Ltd v Antico (1995) 38 NSWLR 290 at page 314B (Hodgson J) (emphasis added)
[41] (2012) 245 CLR 311
In Waller a farmer defaulted under a loan agreement that was a “farm mortgage” within the meaning of the FDM Act. As a result of a mediation held under the FDM Act, the farmer and creditor entered into a second loan agreement under which the creditor agreed to discharge the farmer’s obligations under the first loan agreement, including the obligation to pay the amount then outstanding under that loan agreement, and advance to the farmer the same amount together with an additional amount. The farmer defaulted under the second loan agreement. At the farmer’s request, the creditor and farmer entered into a third loan agreement under which the creditor agreed to discharge the farmer’s obligations under the second loan agreement, including the obligation to pay the amount then outstanding under the second loan agreement, and to extend the time by which that loan would otherwise have been repayable.
After the creditor and farmer entered into the third loan agreement, the Authority issued a certificate under s.11 of the FDM Act to the effect that the FDM Act did not apply to a “farm mortgage” which it described as “Hargraves – Account No 10294”. The certificate noted an outstanding balance that reflected the outstanding balance immediately before the creditor and farmer agreed to the second loan agreement.
The farmer defaulted under the third loan agreement, and the creditor commenced proceedings in the Supreme Court of New South Wales for possession of the farm, and for a money judgment in the amount of principal and interest outstanding under the third loan agreement. It was accepted that these proceedings constituted “enforcement action” by the creditor within the meaning of s.4 of the FDM Act. The farmer submitted, however, that the action was void under s.6 of the FDM Act because the creditor did not give a notice under s.8(1) of the FDM Act as it was obliged to do. The farmer submitted that s.10(1) of the FDM Act applied because the certificate the Authority had issued was “in force under” s. 11 of the Act only “in respect of” the loan agreement before it was varied by the second loan agreement; it was not “in force . . . in respect of” the second or third agreements . The farmer further submitted that the creditor’s action in the Supreme Court constituted enforcement action in relation to the debt created by the third loan agreement. The creditor, on the other hand, submitted that, as the enforcement action was taken in relation to the farm mortgage that was the subject of the certificate the Authority had issued, the FDM Act did not apply to the enforcement action it had taken against the farmer.
One of the two questions the High Court considered was whether the s. 11 certificate the Authority issued “in respect of the farm mortgage” authorised the creditor to take enforcement action in relation to a debt that was secured by the same farm mortgage, even though that debt was different from the debt which the Authority was satisfied had been the subject of a satisfactory mediation, and which, on the basis of its being so satisfied, the Authority issued the certificate.
The primary judge, and two judges of the New South Wales Court of Appeal, held that the action of the creditor the FDM Act constrained was the taking possession of the secured property or other enforcement action “under the farm mortgage”. [42] On the construction favoured by the majority of judges in the courts below, if a certificate under s.11 of the FDM Act is issued in relation to a particular farm mortgage, that certificate prevents the FDM Act from applying to any enforcement action in relation to any debt that is secured by the same farm mortgage, even though the debt may not have been the subject of mediation under the FDM Act.
[42] Hargraves Secured Investments Limited v Waller [2009] NSWSC 1210 at [26] (Harrison J) (emphasis in original)
Macfarlan JA was of a different view. His Honour held that, because s.11 of the FDM Act required the Authority to issue a certificate only if, among other things, it was satisfied that a “satisfactory mediation has taken place in respect of the farm debt”, the certificate that is issued under s.11 of the FDM Act applies only in relation to enforcement action of the farm debt that was the subject of mediation. His Honour concluded that the third loan agreement discharged the second loan agreement and gave rise to a new debt. For that reason, his Honour found that the debt that was the subject of the creditor’s enforcement action was not covered by the certificate that had been issued by the Authority, even though both debts were secured by the same “farm mortgage” referred to in the certificate.
In the three judgments that were delivered in the High Court, all five justices held that a certificate issued under s.11 of the FDM Act authorised the creditor taking enforcement action only in relation to a farm debt that had been the subject of mediation under the FDM Act; such certificate did not authorise enforcement action of a separate debt secured by the farm mortgage that also secured the debt which had been the subject of mediation. The reasons the plurality gave for so concluding, however, differed in emphasis from those given by Heydon and Hayne JJ.
For the plurality, the question was whether the extinguishment of the debts under the first and second loan agreements and the creation of new obligations under the second and third loan agreements respectively gave rise in each case to a new “interest” or “power” over the farm property within the meaning of the definition of “farm mortgage”.[43] The plurality held that the extinguishment of debts by, and the creation of new obligations under, the second and third loan agreements did create a new interest or power over the farm property.[44] That meant that the certificate the Authority issued related to a different farm mortgage than the farm mortgage under which the creditor took enforcement action. That, in turn, meant that the exception provided for by s.8(3) of the FDM Act to the prohibition against taking enforcement action under s.8(1) without issuing a notice did not apply.
[43] (2012) 245 CLR 311 at page 318 ([12]) (French CJ, Crennan and Kiefel JJ)
[44] (2012) 245 CLR 311 at page 320 ([16])
On the other hand, most of Heydon J’s reasons for judgment dealt with the creditor’s argument that once a satisfactory mediation has taken place between a farmer and a creditor which is secured by a farm mortgage, there is no s.8(1) ban on enforcement action in relation to other debt obligations secured by that farm mortgage, even though the disputes arising from those other debt obligations might involve quite different issues from those involved in the mediation.[45] His Honour rejected the creditor’s argument. His Honour held that a certificate issued under s.11 of the FDM Act permits enforcement action only in relation to the particular farm debt that was the subject of the mediation of which the Authority is satisfied has been satisfactorily mediated. His Honour held that the debt that was the subject of the enforcement action by the creditor was a different debt from that which the Authority was satisfied had been mediated.
[45] (2012) 245 CLR 311 at page 328 ([44])
Hayne J agreed with Heydon J. His Honour said:[46]
As Heydon J explains, the “farm mortgage concerned” to which reference is made in s 10 cannot be identified without identifying the particular “farm debt” that it secures. The mediation which is the necessary precursor to the Authority issuing a certificate under s 11 is a mediation “concerning the farm debt involved” (s 9(1)) or “in respect of the farm debt involved” (s 11(1)(c)(i)). In this case “the farm debt involved” that was the subject of the mediation was the debt owing under the first loan agreement (the mediation having occurred before the second and third loan agreements were made); it was not the debt due under the third loan agreement that the lender sought to recover by the proceedings brought in the Supreme Court of New South Wales.
[46] (2012) 245 CLR 311 at page 321 ([24])
For all the justices in Waller, the reason the s.11 certificate that had been issued in that case did not apply to the enforcement action the creditor took was that the farm debt for which the creditor took action was different from the farm debt that was secured by the farm mortgage in respect of which the certificate had been issued. None of the justices considered it to be relevant to ask whether the farm debt that replaced the discharged farm debt was greater or less than the discharged debt, or whether, as a matter of substance and commercial reality, the debt that replaced the discharged farm debt was one that the debtor would otherwise not have incurred. The only question the justices considered to be relevant was whether the farm debt the creditor sought to enforce was different from the debt which was the subject of a mediation. From this I conclude that to incur a debt for the purposes of the definition of “farm debt”, it is unnecessary to consider whether the debt the farmer incurred was one which as a “matter of substance and commercial reality” the farmer would not otherwise have been liable to pay.
Did Mr Sharpe incur the debt constituted by the Judgment for the purposes of the conduct of a farming operation?
The Judgment was entered in substitution of the default judgment Mr Heywood had obtained. The default judgment, in turn, had been obtained in relation to a claim for the payment of money owing under the Loan Agreement which, in turn, was a loan agreement that I have already found was entered into by Mr Sharpe for the purposes of a farming operation Mr Sharpe conducted. It follows, in my opinion, that the purposes for which Mr Sharpe entered into the Consent Orders which provided for the entry of the Judgment was that for which the Loan Agreement had been made, namely, the conduct of a farming operation.
Is the Judgment secured by a “farm mortgage”?
There can be no doubt that the term of the Consent Orders by which Mr Sharpe charged the Charged Land with the payment of the Judgment created an interest in, or power over, the Charged Land:
A charge is a hypothecation creating a security interest in respect of property without transfer of either title or possession. Such a security interest is a proprietary interest, conferring rights in rem. . . . The proprietary interest created by a charge entitles the holder to resort to the property only for the purpose of satisfying the liability actually secured by the charge. The owner of the property remains as owner and retains the entitlement to have the property restored to it when the secured liability has been discharged or performed. Ordinarily, the holder of the charge will have no right to the property in question other than to sell it upon default in the performance of the secured obligation . . . . The proceeds of sale must be applied first in satisfaction of the expenses of sale, second in satisfaction of the secured obligation and third by return of any surplus to the owner of the property. [47]
[47] IMF (Australia) Limited v Meadow Springs Fairway Resort Limited (in Liquidation) [2009] FCAFC 9 at [57] and [58] (North, Emmett & Rares JJ)
There is little evidence, however, about whether the Charged Land is “farm property”. In his affidavit of 3 December 2013 Mr Sharpe asserts that the “$90,000 amount entered by the Court in the Consent Orders” was incurred by “a Farmer”, by which I infer Mr Sharpe intends to mean himself, “for the purpose of the conduct of a farming operation secured wholly or partly by farm property”. Mr Heywood has not disputed this. Further, in Hargraves Secured Investments Limited v Sharpe,[48] her Honour Justice McCallum described “Campbell’s Hill” as a farming property.
[48] [2013] NSWSC 177 at [1]; D G Sharpe affidavit, 20.03.14, annexure “D”
Although the evidence is scant, I find on the basis of the matters to which I refer in the previous paragraph that the Charged Land is a “farm property” within the meaning of the FDM Act.
Scope of prohibition under s.8 of the FDM Act
I have concluded that the debt constituted by the Judgment is a “farm debt” within the meaning of the definition of that expression in the FDM Act. I have also found that the Judgment is secured by a farm property. That means that Mr Heywood is a creditor to whom money is owed under a “farm mortgage”. But what exactly is the “farm mortgage” on the facts of this case? That question is important, because the prohibition under s.8(1) of the FDM Act applies only to the taking of enforcement action against the farmer “in respect of the farm mortgage”.
Guidance in answering this question is provided by the High Court’s determination in Waller of a second question that arose in that case. That question was whether the prohibition under s.8(1) of the FDM Act extended to the creditor’s taking action to obtain a money judgment for the amount of the debt secured by the mortgage, as opposed to taking action for the possession of the land the subject of the mortgage. The answer to that depended on whether applying for a money judgment for the debt constituted an “action to enforce the mortgage”.
In the Court of Appeal Macfarlan JA noted that the creditor in Waller applied for a money judgment based on a covenant contained in the mortgage instrument that the farmer would pay the creditor amounts owing under any agreement secured by the mortgage. His Honour noted, however, that the third Loan Agreement itself contained a term under which the farmer agreed to pay the debt which the creditor was seeking to recover by the action it took in the Supreme Court. His Honour said that, had the “claim been framed” as a claim under the third loan agreement “there would have been no doubt that the [FDM] Act did not preclude” the creditor’s action in debt.[49] His Honour, however, held that it did not matter that the creditor based its action in debt on the covenant contained in the mortgage instrument, rather than on the term of the third loan agreement. That is so because the FDM Act “is concerned with action to enforce a “farm mortgage” as defined in s 4” of the FDM Act, and a “claim for a debt due under a mortgage instrument is not an “enforcement action” for the purposes of the [FDM] Act because it does not involve the enforcement of security over the farm property”. The action to enforce a debt “is a purely personal action”.[50]
[49] Waller v Hargraves Secured Investments Ltd [2010] NSWCA 300 at [88]
[50] Waller v Hargraves Secured Investments Ltd [2010] NSWCA 300 at [88]
In the High Court, Heydon J (with whom the plurality agreed on this point[51]) held that the action to recover the debt did constitute “enforcement action” within the meaning of the FDM Act. Heydon J identified terms in the mortgage instrument that had the effect of providing that a failure to pay the interest in question on time was an event of default entitling the creditor “to sue for it and take possession”.[52] His Honour then said (emphasis added):[53]
The respondent contended that a claim for a debt is not “enforcement action” because it does not involve the enforcement of security over the farm property. The better view, with respect, is that the definition of “enforcement action” is wide enough to extend beyond enforcement of the security by taking possession to include reliance on any of the rights in the farm mortgage. And since the claim to the order for possession was solely based on the breach of the money obligations arising under the Registered First Mortgage and the Third Loan Agreement, it was inextricably interlinked with the claim for a money judgment.
[51] (2012) 245 CLR 311 at page 320, [17]
[52] (2012) 245 CLR 311 at page 335, [65]
[53] (2012) 245 CLR 311 at page 335, [66]
Heydon J considered two other matters as supporting the conclusion that “enforcement action” extended to claiming a money judgment. The first was the definition of “enforcement action” in s.4(1) of the FDM Act, and in particular, the exclusion from that definition of “the enforcement of a judgment that was obtained before the commencement of this Act”.[54] His Honour observed that the word “judgment” is not limited to judgments other than money judgments. That indicates that the exclusion leaves the enforcement of judgments, including money judgments, open if they were obtained after the commencement of the FDM Act and that, therefore, an action to obtain a money judgment after the commencement of the FDM Act is “enforcement action” so long as it is an action to enforce the mortgage.[55]
[54] (2012) 245 CLR 311 at page 335, [66]. That paragraph incorrectly refers to the definition of “enforcement order”.
[55] (2012) 245 CLR 311 at pages 335-336, [66]
The second matter on which Heydon J relied for his Honour’s conclusion that enforcement action included an action to enforce a debt, provided the action formed part of an action to enforce a mortgage, is one of the consequences of not accepting as correct the construction his Honour favoured:[56]
One of those consequences is that if the effect of the definition of “enforcement order” read with s 8(1) was to debar the claim for possession but not the money claim, the appellant’s victory would be a hollow one. The respondent could simply obtain the money judgment, use it to bankrupt the appellant, and then take whatever its share of her bankrupt estate was. Depending on the extent of claims by other secured creditors and by unsecured creditors, this might be, for the respondent, an inferior result to that obtainable by enforcement of the respondent’s security interest in priority to the general creditors. But it would be just as damaging to the appellant, for she would have lost her farm despite s 8(1).
[56] (2012) 245 CLR 311 at page 336, [68]
Returning to the facts before me, Mr Sharpe did not execute any mortgage in favour of Mr Heywood. Mr Sharpe simply signed the Consent Orders, one term of which provided for the charging of the Charged Land. Further, the Consent Orders do not contain a term to the effect that Mr Sharpe must pay $60,000 by 15 October 2012, or $70,000 by 15 November 2012, or the Judgment on 16 November 2012; nor do the Consent Orders contain an express term to the effect that Mr Sharpe’s failure to pay the Judgment will constitute an event of default. Do these matters, then, mean there is no “farm mortgage”? In my opinion, they do not; and that is because the true effect of the arrangement Mr Sharpe agreed to by signing the Consent Orders is not exhaustively described by the express terms of the Consent Orders.
The starting point is the creation of the charge over the Charged Land. The charge conferred rights on Mr Heywood to sell the Charged Land. Being a charge, the right to sell could only arise if Mr Sharpe does not comply with an obligation, and only for the purpose of using the proceeds of sale to discharge Mr Sharpe’s obligation (after allowing for prior interests in the Charged Land). What is the obligation secured by the charge? It can only be Mr Sharpe’s obligation to pay the Judgment. But that obligation was subject to conditions. On the proper construction of the Consent Orders, Mr Sharpe was obliged to pay the Judgment debt on 16 November 2012, but only if Mr Sharpe did not tender payment to Mr Heywood of $60,000 by 15 October 2012 or $70,000 by 15 November 2012.
The arrangement created by the Consent Orders is in substance the same as the arrangement that was created by the mortgage and third loan agreement that were considered in Waller. As with the farmer in Waller, Mr Sharpe agreed to pay a certain amount of money by a certain day - $90,000 on 16 November 2012, unless Mr Sharpe paid $60,000 by 15 October 2012 or $70,000 by 15 November 2012. As with the farmer in Waller, Mr Sharpe also gave a farm property as security for the payment of that amount. And, finally, like the mortgage in Waller, the Consent Orders in effect provided that if Mr Sharpe were not to make the payment by the specified day - 16 November 2012, unless Mr Sharpe paid $60,000 by 15 October 2012 or $70,000 by 15 November 2012 - the creditor, Mr Heywood, would have the right to sell Mr Sharpe’s farm property and use the proceeds of sale (subject to prior encumbrances) to pay the Judgment. It follows, therefore, that the relevant “farm mortgage” in the case before me is the express and implied terms of the agreement constituted by the Consent Orders.
The final question I must address, then, is this: would Mr Heywood’s taking action to enforce the Judgment, other than taking action to exercise his rights to sell the Charged Land, constitute enforcement “in respect of” the Consent Orders? In my opinion, it would. The taking of such enforcement action would involve Mr Heywood relying on rights in the Consent Orders, those rights being his right to claim the full amount of the Judgment in circumstances where Mr Sharpe failed to pay $60,000 by 15 October 2012 or $70,000 by 15 November 2012. Mr Heywood’s right under the Consent Orders to take action to enforce the Judgment, therefore, is inextricably linked with the exercise of his rights to sell the Charged Land. The accrual of both rights depended on the combined happening of the same two events, namely, Mr Sharpe’s not paying to Mr Heywood $60,000 on 15 October 2012 or, if Mr Sharpe did not make that payment by 15 October 2012, Mr Sharpe’s not paying to Mr Heywood $70,000 by 15 November 2012.
Thus, subject to considering the effect, if any, of the s.11 Certificate, I am of the opinion that Mr Heywood’s taking action to enforce the Judgment would be the taking of enforcement action under a “farm mortgage”, the “farm mortgage” being the Consent Orders; and that Mr Heywood would be required to issue a notice under s.8(1) of the FDM Act before he could take such action. I must now consider whether the s.11 Certificate is a certificate that is in force “in respect of the farm mortgage”, namely, the Consent Orders.
Scope of the s.11 Certificate
In my opinion, the s.11 Certificate is not in force “in respect of” the Consent Orders. That is so because the Consent Orders are not the “farm mortgage” referred to in the s.11 Certificate. The farm mortgage referred to in the s.11 Certificate is the “Loan Agreement Secured by Goods dated 26 May, 2010”[57] and, possibly, a charge over land other than the Charged Land. Could it also be said that the s.11 Certificate does not apply to the Consent Orders because they provide for the creation of a debt, namely, the Judgment, which is different from the debt that was the subject of the mediation?
[57] D G Sharpe affidavit, 03.12.13, page 51
That Mr Sharpe’s pre-existing obligation under the Loan Agreement merged into the Judgment does not by itself prevent the s.11 Certificate from applying to the Consent Orders. The purpose of obtaining a certificate under s.11 of the FDM Act is to authorise the creditor to take enforcement action in relation to the debt that had been unsuccessfully mediated. Such enforcement action would usually result in the recovery of a judgment. Where, however, there is an agreement which not only provides for the entry of judgment into which a pre-existing obligation merges, but also contains terms concerning the granting of security for the payment of the judgment, and what the judgment debtor must do to discharge the judgment debt, the debt that is created by such judgment is different from the debt that was the subject of mediation. In my opinion, that is the position under the Consent Orders.
The Consent Orders do not simply provide for the entry of judgment in relation to all or part of the debt Mr Sharpe owed under the Loan Agreement which was the subject of the mediation; the Consent Orders also contain terms for the granting of a charge, and what Mr Sharpe was required to do to discharge the Judgment, these things being the tender of payment of $60,000 by 15 October 2012 or the tender of payment of $70,000 by 15 November 2012. It follows, therefore, that the s.11 Certificate is not in force in relation to the Consent Orders for the additional reason that the debt that is the subject of the Consent Orders is different from the debt under the Loan Agreement that was the subject of the mediation.
Cases on which Mr Heywood relies
Mr Heywood submits that judges in two cases in which he and Mr Sharpe were parties have decided that the FDM Act does not apply to the Consent Orders. The first is the decision of the New South Wales Court of Appeal in Sharpe v Heywood,[58] a decision to which I have already referred. In that case Mr Sharpe sought leave to appeal against the District Court’s order dismissing Mr Sharpe’s application to set aside the Consent Orders.
[58] [2013] NSWCA 192
The Court of Appeal recorded that Mr Sharpe contended that the Consent Orders constituted a new farm mortgage in respect of which the s.11 Certificate did not apply, and that any enforcement action on the Judgment would be void.[59] The Court of Appeal, however, did not determine the merits of Mr Sharpe’s contentions because, the Court held, those contentions, even if correct, did not afford a ground for setting aside the Consent Orders. That is so because Mr Sharpe, in his application for leave to appeal, sought to set aside the Consent Orders themselves. He claimed that the mere making of the Consent Orders pursuant to an agreement recorded in the judge’s notation at the time those orders were made constituted an “enforcement action”. The Court of Appeal found that the mere making of the Consent Orders did not constitute an “enforcement action” in relation to what Mr Sharpe claimed was the new farm mortgage. In that regard, Gleeson JA said:[60]
In my view, it is not fairly arguable that the mere making and entry of the Consent Order constituted an “enforcement action” in relation to a new farm mortgage within the meaning of s 4 of the Act, even assuming that the agreement recorded in [6] of the notation to the Consent Order constituted a new farm mortgage.
[59] [2013] NSWCA 192 at [31]
[60] [2013] NSWCA 192 at [33]
The second case is the decision of Judge Altobelli in Sharpe v Heywood refusing Mr Sharpe’s application to set aside the Bankruptcy Notice.[61] The ground on which Mr Sharpe relied to set aside the Bankruptcy Notice was seen by Judge Altobelli to be the same ground on which Mr Sharpe relied before the Court of Appeal. That is apparent from his Honour considering it necessary to examine that decision,[62] and his Honour’s examining the decision in some detail. It is also apparent from the following passage from his Honour’s reasons for judgment:[63]
When it was suggested by the Court to the applicant that he was asking this Court to accept an argument about the interpretation of the Farm Debt Mediation Act 1994 that had been rejected by the NSW Court of Appeal in Sharpe v Heywood he could not really explain how this Court would get around that decision. Clearly the applicant does not accept what Gleeson JA says at paragraph 33 of the judgment and, indeed, hinted at the desire to have this issue aired in the High Court.
[61] [2013] FCCA 1788
[62] [2013] FCCA 1788 at [7]
[63] [2013] FCCA 1788 at [12]
It also appears that his Honour dismissed Mr Sharpe’s application to set aside the bankruptcy notice for the same reasons the New South Wales Court of Appeal dismissed Mr Sharpe’s application for leave to appeal against the District Court’s judgment dismissing his application to set aside the Consent Orders. That is apparent in the following passage from Judge Altobelli’s reasons for judgment:[64]
The entry of the Consent Order on 6 June 2012 does not constitute a new farm mortgage within the meaning of s.4 of the said Act, even assuming that the agreement recorded in the notations to the consent order constituted a new farm mortgage.
[64] [2013] FCCA 1788 at [17]
This passage closely reflects the passage from the reasons for judgment of Gleeson JA that I have set out above. It appears, however, that his Honour inadvertently omitted the words “an “enforcement action” in relation to” that appear in Gleeson JA’s reasons for judgment. Judge Altobelli omitted these words before the words “a new farm mortgage” where those words first appear in the passage from Judge Altobelli’s reasons for judgment I have reproduced in the preceding paragraph.
Consequence of FDM Act applying to the Judgment
If, as I have found, the FDM Act applies to the Consent Orders, and Mr Heywood was required to issue a notice under s.8(1) of that Act before he could take any enforcement action in relation to the Judgment, it does not follow that s.6 of the FDM Act applies to render the bankruptcy notice void. The most obvious reason is that the bankruptcy notice takes its effect under the Bankruptcy Act, a Commonwealth statute. The FDM Act, a State law, could not reasonably be construed as purporting to invalidate something that is provided for under a valid law of the Commonwealth.
As I have noted earlier in these reasons, however, Mr Heywood’s obligation to issue a notice under s.8(1) of the FDM Act in relation to the Judgment at the time he applied for the issue of the Bankruptcy Notice demanding payment of the Judgment is relevant. Its relevance goes to whether Mr Heywood could be said to have been a “creditor” within the meaning of s.40(1)(g) and s.41 of the Bankruptcy Act if, at the time he applied for the issue of the bankruptcy notice, he was required to first serve a notice under s.8(1) of the FDM Act before he could take any enforcement action in relation to the Judgment.
In Tzovaras v Jeandin[65] I considered the decision of the Full Federal Court in Abigroup Limited v Abignano[66] which, I concluded, stands as authority for the following two propositions:
The first is that a “creditor” for the purposes of s.40(1)(g) of the [Bankruptcy] Act must be a person who is a judgment creditor or some other creditor who is entitled to issue execution under the judgment; the judgment or other creditor must be “a person who had taken all steps which entitled him to reap the fruits of the judgment”. It is only a creditor who is entitled to issue execution under the judgment who is also entitled to apply to have issued a bankruptcy notice under s.41(1) of the Act. The second principle is that a bankruptcy notice that has been issued on the application of a person who is not a “creditor” in this sense is liable to be set aside.
[65] [2014] FCCA 2039, [27]-[32]
[66] (1992) 39 FCR 74 (Lockhart, Morling and Gummow JJ)
A person who is required to issue a notice under s.8(1) of the FDM Act before he or she can execute a judgment would not be a “creditor” within the meaning of s.40(1)(g) and s.41 of the Bankruptcy Act. He or she would be a creditor only after he or she issues a notice under s.8(1) of the FDM Act and either the farmer did not request a mediation or, if the farmer did request a mediation within 21 days of the notice being given under s.8(1), the Authority issued a certificate under s.11 of the FDM Act that the FDM Act did not apply “in respect of” the farm mortgage that secured the payment of the Judgment.
If, therefore, as I have found, Mr Heywood was required to serve a notice on Mr Sharpe under s.8(1) of the FDM Act before he could execute the Judgment, he was not a “creditor” for the purposes of s.40(1)(g) and s.41 of the Bankruptcy Act. That means Mr Heywood was not entitled to have had issued to him the Bankruptcy Notice or to have served the Bankruptcy Notice on Mr Sharpe. That, in turn means, that the Bankruptcy Notice was invalid, and Mr Sharpe’s not complying with its requirements cannot constitute an act of bankruptcy on the basis of which the Court can make a sequestration order.
Conclusions on application of FDM Act
I have concluded that:
a)the Judgment is a “farm debt” within the meaning of the FDM Act, and the Consent Orders constitute a “farm mortgage” that secures the Judgment;
b)the s.11 Certificate was not in force “in respect of” the Consent Orders or Judgment at the time the Bankruptcy Notice was issued;
c)the execution of the Judgment would constitute the taking of “enforcement action against the farmer [Mr Sharpe] in respect of the farm mortgage”, namely, the Consent Orders; therefore, on the day the Bankruptcy Notice was issued, Mr Heywood could not execute the Judgment without first having given Mr Sharpe a notice under s.8(1) of the FDM Act, which Mr Heywood failed to do; and
d)accordingly, Mr Heywood was not, as at the day the bankruptcy notice was issued to him, a “creditor” within the meaning of s.40(1)(g) and s.41 of the Bankruptcy Act and, therefore, was not entitled to be issued with the Bankruptcy Notice.
It follows that the act of bankruptcy on which Mr Heywood relies for the making of a sequestration order is Mr Sharpe’s failing to comply with the requirements of a bankruptcy notice which ought not to have been issued to Mr Heywood and which, therefore, ought not to have been served on Mr Sharpe. That constitutes a sufficient cause within the meaning of s.52(2) of the Bankruptcy Act why a sequestration order ought not be made against the estate of Mr Sharpe. For that reason, therefore, I am of the opinion that a sequestration order ought not be made against the estate of Mr Sharpe, and that I should dismiss the creditor’s petition.
Mr Sharpe’s other grounds of opposition
I will now deal with Mr Sharpe’s other grounds of opposition.
Conspiracy
This ground bears little comment. Mr Sharpe submits that Mr Heywood and his solicitor are each a party to a conspiracy with another creditor or creditors of Mr Sharpe to file a creditor’s petition against Mr Sharpe’s estate to bring into play s.5(2)(b) of the FDM Act. There is no evidence before me on the basis of which it would reasonably be open to me to find the conspiracy asserted by Mr Sharpe.
Incorrect assignment of value to Charged Land
Mr Sharpe submits that the creditor’s petition incorrectly claims the Charged Land has no value. Even if, however, the creditor’s petition incorrectly states the Charged Land has no value, Mr Heywood has elected not to assert his interests as chargee, and to surrender his interest for the benefit of Mr Sharpe’s creditors in general. This ground of opposition, therefore, is not available to Mr Sharpe.
Failure to include security interest in farm equipment
Mr Sharpe submits that Mr Heywood failed to disclose the security interest in the equipment referred to in the Loan Agreement.
This by itself would not necessarily afford an answer to the making of a sequestration order. If I had not held that Mr Sharpe has established a ground of opposition based on the FDM Act, I would have caused enquiries to be made of Mr Sharpe as to whether the equipment were in his possession and, if so, I would have caused enquiries to be made of Mr Heywood whether he intended to surrender his interest as chargee of the equipment. If, as a result of these inquiries, it would have transpired either that the equipment had been sold or, if not sold, that Mr Heywood intended to surrender his interest in the equipment, this ground of opposition would not have been available to Mr Sharpe.
Failure to provide creditor’s petition of Official Receiver
Mr Sharpe submits that Mr Heywood was required to provide to the Official Receiver under reg.4.05 of the Bankruptcy Regulations a sealed copy of the creditor’s petition within two working days of its filing, but he did not do so. Mr Sharpe submits that Mr Heywood’s failure renders the creditor’s petition invalid.
I do not understand Mr Heywood to dispute that he did not provide to the Official Receiver a sealed copy of the creditor’s petition, at least within the time required by reg.4.05 of the Bankruptcy Regulations. In my opinion, however, a creditor’s not complying with reg.4.05 does not invalidate the proceedings that have been commenced by a creditor’s petition. There is nothing in the Bankruptcy Regulations or in the Bankruptcy Rules which expressly or impliedly provides that a breach of reg.4.05 of the Bankruptcy Regulations renders the creditor’s petition to be a nullity or otherwise of no effect.
Solvency
I have discussed elsewhere what a debtor must prove to show he or she is able to pay his or her debts.[67] Mr Sharpe has not put before the Court evidence from which it could reasonably be concluded that he is able to pay his debts. This ground of opposition, therefore, is not available to Mr Sharpe.
[67] Australia and New Zealand Banking Group Limited v Daher [2014] FCCA 365 at [30]-[32]
The interim application
Given that I have concluded that a sequestration order ought not be made against Mr Sharpe’s estate, it is unnecessary to consider whether Mr Sharpe should obtain an order for discovery or interrogatories.
Disposition
I propose to order that the creditor’s petition be dismissed, and that the interim application Mr Sharpe filed on 16 May 2014 also be dismissed. I also propose to order that Mr Heywood pay to Mr Sharpe such costs to which Mr Sharpe may be entitled as an unrepresented party.
I certify that the preceding eighty-seven (87) paragraphs are a true copy of the reasons for judgment of Judge Manousaridis
Date: 20 February 2015
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