Howarth, M.E. v Mortgage Acceptance Nominees Ltd

[1994] FCA 783

JUDGMENT No. ...,.,,, 7 8 3 J .-,,,,, 94-

IN THE FEDERAL COURT OF AUSTRALIA	1
)
BANKRUPTCY DISTRICT OF THE STATE	) No.NP1365 of 1994
1
OF NEW SOUTH WALES	)

Re: MICHAEL EDWARD HOWARTH

Debtor

Ex parte: MORTGAGE ACCEPTANCE NOMINEES LIMITED

Creditor

23 SEPTEMBER 1994

REASONS FOR JUDGMENT	RECEIVED
FEDERAL COURT OF

LOCKHART J.	AUSTRALIA
Historv of the Matter

This is a hearing of a petition presented by Mortgage Acceptance Nominees Limited to sequestrate the estate of the debtor, Mr Howarth. The debtor owes the petitioning creditor the sum of $741,983.97, being the amount of a judgment debt obtained by the petitioning creditor against the debtor in this Court on 7 February 1992, in the sum of $595,414.20, together with interest.

I held that there was no serious question to be tried or no reasonably arguable case to support the application of the

On Friday last week, I heard an application by the debtor to adjourn the petition for two weeks, on the ground that he needed time to organize a third party to pay to the petitioning creditor $250,000, on the basis that the petitioning creditor had agreed to take this sum (approximately one-third of the amount claimed) from the debtor in full satisfaction and discharge of its claim. Alternative arguments were put to the existence of this agreement on the basis of estoppel and negligence.

debtor, and I refused the adjournment. I then proceeded to hear the petition; but it became apparent that the hearing would take substantially longer than the parties had initially said that it would take, so the matter was adjourned part heard until today. When the matter was called on today, the solicitor who appears for the debtor sought a further adjournment of the petition until 14 October 1994 on the basis that, if the petitioning creditor's debt had not been satisfied by then, he would consent to the making of a sequestration order. I have already given reasons as to why that adjournment application was refused, so I shall not repeat them. I then proceeded to continue with the hearing of the petition, part heard from the last occasion. The debtor filed a notice of intention to appear at the hearing of the petition on 2 August 1994. An amended notice was filed yesterday (22 September), which raised an additional ground of opposition to the petition, namely, that there was a fundamental defect in the bankruptcy notice, the non-compliance with which constitutes the act of bankruptcy, on which the petitioning creditor has

founded his petition. I will return to that in a moment.

Whether a sequestration order should be made

Mr Phair, who represents the debtor, has informed me that
he withdraws the initial and amended notice of intention to

appear, so that all that remains from his client's point of view

Court should stay execution of it for the maximum term that it is his application, that if a sequestration order is made, the	can, namely 21 days from today. The reason advanced in support
of this was that his client hoped in the meantime to be able to reorganize his affairs whereby a third party would make available sufficient funds to enable his debts to be discharged, in particular, the debt of the petitioning creditor.
The petitioning creditor has proved the necessary formalities that must be established in a case of this kind, to support the making of a sequestration order, subject to what I may say about the bankruptcy notice being defective. Before I do that, however, I will deal with two other matters, which, though not strictly necessary now to deal with, were before the court on the last occasion.
I need say no more about the original ground of opposition to the petition, namely, that the petitioning creditor was said to have agreed to accept $250,000 from a third party in full satisfaction and discharge of its indebtedness, nor the two related grounds including estoppel, to which I have already briefly referred.
On the evidence that is before the Court on this issue, not only could the original ground of opposition not succeed, but there was not even a serious question to be tried. However, if
I were wrong on that, and there was a serious question to be
tried, then on the evidence, as it exists, that issue would plainly be resolved against the debtor.
The second ground of opposition that was initially advanced, but is no longer pressed, is that the debtor was solvent. I have considered all the evidence that has been adduced on that issue, and I do not propose to set it out in detail, but in brief, the debtor asserts that he has assets valued at about $5.7m and liabilities of about $4.7m, with a net surplus of about $lm. At different times his case has been put on a higher plane so far as net assets are concerned, though he does recognise the
existence of contingent liabilities in the sum of approximately $2.3m. I will not review the evidence advanced by the debtor,
as the issue does not strictly arise, but I wish to make it plain the view the Court has formed on the material it has.
A company called Depiki Pty Limited is apparently a trustee of a trust known as the Vatne Trust, the beneficiaries of which include the debtor. It is said that Depiki's assets are 98.5% of the issued share capital of a company called Ficuga Pty Limited, which in turn has an asset consisting of a hardwood forest at Nambucca, New South Wales. The debtor says he beneficially owns 100% of the shares in Depiki. This is not strictly right, because Depiki is a trustee of the Vatne Trust, which is a discretionary trust, and although the debtor is a director of Depiki, and I will assume may exercise his powers in favour of himself, it does not follow in law that he would necessarily do so, or be entitled to do so.

The value of the forest is put at some $2.5m. It is based

upon a valuation of a firm of Sydney valuers, made as at 25 January 1993. I am not persuaded that the property has, on the material I have before me, the value that it is claimed to have. Another asset is said to be interest of the debtor in a company Ivymere Pty Limited, which he values at $3.25m. That company is

a trustee for the debtor of a property at Camden known as

vCamelotu. The property is an old one, by Australian standards, and is obviously a home of some historical interest. A valuation exists of that property. Again, I have serious reservations about whether that figure can be regarded as a correct value to be placed upon it today. However, having considered all the evidence, which consists of interlockingtrusts and inter-company indebtedness, I am not persuaded that the debtor's assets are valued at the figure which he attributes to them.

Also, the debt of the petitioning creditor is not $250,000, but some $741,000. I have already mentioned the contingent liabilities that exist. If the issue of solvency had been before the Court for determination today, I would not have found that issue in favour of the debtor. I mention these matters simply

was resumed today. If the matter should go further, it would be	because they were issues before the Court until after the matter
of benefit to those who wish to read the judgment to know what my views were on those issues.
Validitv of the Bankruptcv Notice
The only remaining matter is the valldity of the bankruptcy notice. The debtor has withdrawn the point from his notice of intention to appear, but I have taken the view that if there is a fundamental defect in a bankruptcy notlce that is before the Court, the Court cannot lgnore it, because the Court cannot make
a sequestration order, where the act of bankruptcy is non-
compliance with a bankruptcy notice which is fundamentally flawed.
I realise there may be a difference of opinion among judges on this point, but that is the view I hold. I know of no authority to the contrary, and none has been brought to my attention. The point arises from the form of the notice in these terms :

Whereas Mortgage Acceptance Nominees Limited whose address is at Level 27 State Bank Centre, 91 King William Street, Adelaide, in the State of South Australia, here and after referred to as the judgment creditor, has claimed that the sum of $595,414.20, together with interest thereon of the rate of 15 per centum per annum on so much of the judgment debt (including costs) as is from time to time unpaid, from 7 February 1992 to 27 September 1993 which amount to

$146,569.77, making a total of $741,983.97, is due by you

to it under a final judgment obtained by it against you in the Federal Court of Australia at Sydney on 7 February

1992, being a judgment, the execution of which has not been

stayed.

It is common ground that although the judgment entered in

favour of the petitioning creditor by this Court on 7 February

1992 carried with it an order for costs in favour of the

petitioning creditor, in fact no order for costs was made. Order 4 made by the Court was that the applicants (which would include

the petitioning creditor) have liberty to apply on the question	of costs and particularly "special costs" referred to in the
statement of claim. No liberty to apply was invoked by any party. In the result, the Court has not yet made an order for costs.
Therefore, the bankruptcy notice, in stating that interest has accrued on the amount of the judgment debt inclusive of costs, is incorrect, because costs have not yet been awarded. The question is whether that is a fundamental defect or not. In my view, it is not a fundamental defect. This area of bankruptcy law is intricate and, as the cases demonstrate, turns very much upon the question of the particular defect that is said to arise
in a particular bankruptcy notice. However, by analogy I would refer to the cases which decide that an understatement of interest claimed at the date of a bankruptcy notice does not invalidate the bankruptcy notice, on the basis that it could not be regarded as capable of misleading the debtor, I shall not refer to the cases except Kleinworth Benson Australia Limited v
Crow1 (1988) 165 CLR 71. The point here is of course different,
because here a claim is made for interest on a cost component which has not in fact been ordered, and indeed, may not be ordered. Nevertheless, in this case, the debtor is the person to whom the bankruptcy notice was addressed, and upon whom it was served, and he has been represented throughout by lawyers. In these circumstances, he must have known the terms of the order of the Court of 7 February 1992, and he would know therefore that he had not yet been ordered to pay costs. I cannot believe that the debtor could maintain a case that the notice was liable to mislead or perplex him; nor do I think that a hypothetical debtor could be so misled.
In my opinion, the defect is not a fundamental defect, but rather a formal defect or irregularity under s.306 of the Bankruptcy Act 1966. Accordingly, I am satisfied that the petitioning creditor is entitled tothe making of a sequestration order.
Other Creditors I should add that there was an appearance today by a solicitor for two other creditors, namely, the Commonwealth Bank of Australia and the Commonwealth Development Bank, who support the petitioning creditor. The solicitor representing those two entities asserted that they are owed moneys, which, even after the realisation of securities, would leave an unsecured deficiency of over $lm. The claims of those creditors are disputed by the debtor, so I shall simply say that they have been noted, but I have not taken them into account.
The petitioning creditor asks for an order for indemnity costs and the solicitor for the debtor made no submissions with respect to costs, but left it to the Court to decide. There is much substance in the argument of counsel for the petitioning creditor, that in the light of the history of this matter, including the culmination of it by the withdrawal of both the original and the amended notice of intention to appear, that the proper order for costs in this case should be an indemnity order.
I therefore order that costs including reserved costs be taxed on an indemnity basls and pald according to the Act.
Avvlication for stay of ~r0ceedinaS
Mr Phair seeks a stay of the proceedings under the sequestration order for seven days on the basis that his client has been a resourceful and successful businessman and that he should be given time to reorganize his affairs and find money to discharge his indebtedness to the petitlonlng creditor. The application is opposed.
I take into account all that I have been told in support of the application for the stay. I am not persuaded that it is
in the forthcoming seven days as to be able to satisfy the debt likely that the debtor will be able to so organize his affairs
of the secured creditor.
There are, I think, powerful public interest considerations why the stay should be refused. The evidence as to his assets, liabilities and the interlocking trusts and inter-company indebtedness, to which I have already referred, and evidence about offers to buy the property "Camelot" that have been made as recently as in the last 48 hours, leads me to the conclusion that the affairs of the debtor should be placed under public administration in bankruptcy, and that no stay should be allowed. Orders
The Court makes the following sequestration order:
1. I am satisfied that the debtor committed the act of

bankruptcy alleged in the petition.

2 .    I am satisfied with the proof of the other matters of which

s.52(1) of the Act requires proof.

1. I make a sequestration order agalnst the estate of the

   debtor.

4 . I order that costs (~ncluding reserved costs) be taxed on

an indemnity basis and pald according to the Act.

1. The stay application by the debtor be refused.

   I certify that this and the

   preceding seven (7) pages are a true copy of the reasons of the reasons for ludgment hereln of the Honourable Justice Lockhart.

Associate:  6 A!r&

Dated:  23 September 1994

Counsel for the Debtor	Mr Phalr
Solicitors for the Debtor	Proctor Phair & Associates
Counsel for the Credltor	Mr M Skinner
Solicitor for the Creditor	Smits Newton & Partners
Date of Hearing	23 September 1994
Date of Judgment	23 September 1994