Investec Bank (Australia) Ltd v Bakamovic

[2009] FMCA 441

FEDERAL MAGISTRATES COURT OF AUSTRALIA

INVESTEC BANK (AUSTRALIA) LTD v BAKAMOVIC [2009] FMCA 441

BANKRUPTCY – Creditor’s petition – whether defect or irregularity in petition where nature of security not specified – whether error in particulars of security – whether genuine estimate of value of security – whether further evidence required – whether error could be cured – amendment.

Bankruptcy Act 1966 (Cth), ss.5, 33, 44, 47, 52, 306(1)
Civil Procedure Act 2005 (NSW), s.101

Adams v Lambert (2006) 228 CLR 409
Australia and New Zealand Banking Group Ltd v Elferkh (1999) 92 FCR 195
Biron Capital Limited v Anstee [2005] FMCA 1100
Deputy Commissioner of Taxation v Boxshall (1988) 19 FCR 435
Capital Finance Australia Ltd v Nathan (No.2) [2006] FMCA 1051
Capital Finance Australia Pty Ltd v Nathan [2008] FMCA 1363
Commonwealth Development Bank of Australia v Tancock & Anor (2001) 183 ALR 469
Harvey and Others v The Commercial Bank of Australia Limited (1937) 58 CLR 382
In re Button; Ex parte Voss [1905] 1 KB 602
In re Small; Westminster Bank v Trustee [1934] Ch 541
Joan Freedom Rogers Pty Ltd v Prasad [2000] FCA 1049
Joseph Richard Bryant v Commonwealth Bank of Australia [1995] FCA 1687
MacDonald v Official Trustee in Bankruptcy (2001) 107 FCR 72
Re Florance; Ex parte TurimettaProperties Pty Ltd (No.2) (1980) 39 FLR 400
Re Kwiatek; Ex parte Big J Ltd v Pattison (1989) 89 ALR 631
Re Leppard; Ex parte Fortune (Aust) Pty Ltd (1975) 25 FLR 158
Re O’Leary and Another; Ex parte Bayne and Another (1985) 61 ALR 674
Re Scott; Ex parte Moore [1892] 2 BC (NSW) 55
Re Wiggins; Ex parte Credit Assistance Pty Ltd (1979) 36 FLR 182
Singer v Williams [1921] 1 AC 41
Wright Designed Pty Ltd (subject to deed of company arrangement)ACN 094 558 200 v McClymont and Another (2006) 232 ALR 683

Applicant: INVESTEC BANK (AUSTRALIA) LTD

Respondent: AHMET BAKAMOVIC

File Number: SYG 3188 of 2008

Judgment of: Barnes FM

Hearing date: 23 March 2009

Date of last submission: 16 April 2009

Delivered at: Sydney

Delivered on: 15 May 2009

REPRESENTATION

Solicitors for the Applicant: Gadens Lawyers

Solicitors for the Respondent: Bowles Lawyers

ORDERS

1. That the petition be amended by deleting paragraph two and inserting in lieu the following: “The applicant creditor holds security over the property of the respondent debtor estimated to the value of $8,235,000 and consisting of the land comprised in folio identifiers 1/SP78757, 2/SP78757, 6/SP78757, 7/SP78757, 8/SP78757, 9/SP78757, 11/SP78757, 12/SP78757 and 13/SP78757 situated at and known as Units 1, 2, 6, 7, 8, 9, 11, 12 and 13, 89 Queenscliff Road, Queenscliff in the State of New South Wales, which leaves an unsecured debt of $1,318,940.61.”

2. That a sequestration order be made against the estate of Ahmet Bakamovic.

3. That the applicant’s costs (including reserved costs, if any) be taxed and paid from the estate of the respondent in accordance with the Bankruptcy Act.

4. That under the Bankruptcy Regulations a copy of the sequestration order be given to the Official Receiver in Sydney within two (2) days.

The Court notes that:

The date of the act of bankruptcy is 14 November 2008.

A consent to act as trustee has been signed by Steve Nicols and has been lodged with the Official Receiver in Sydney. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 3188 of 2008

INVESTEC BANK (AUSTRALIA) LTD

Applicant

And

AHMET BAKAMOVIC

Respondent

REASONS FOR JUDGMENT

Background

1. On 3 December 2008 the applicant, Investec Bank (Australia) Ltd (Investec), filed and presented a creditor's petition seeking that a sequestration order be made against the estate of the respondent Ahmet Bakamovic.  The creditor's petition was said to be based on an act of bankruptcy consisting of a failure by the debtor to comply on or before 14 November 2008 with the requirements of a bankruptcy notice issued on 28 August 2008 and served on him on 2 October 2008.  It claimed that the debtor owed the creditor the amount $8,893,037.29 “for the balance of a judgment debt entered in the Supreme Court of New South Wales pursuant to a loan agreement” and a further $660,903.32 being interest accrued from the date of judgment to 24 November 2008 pursuant to s.101 of the Civil Procedure Act 2005 (NSW), making a total debt due and owing of $9,553,940.61.

2. In paragraph two of the creditor's petition the creditor disclosed that it held security over the property of the debtor "estimated to the value of $8,235,000 and consisting of lots 1, 2, 6, 7, 8, 9, 11, 12 and 13 at 89 Queenscliff Road, Queenscliff, which leaves an unsecured debt of $1,318,940.61".

3. On 10 February 2009 Mr Bakamovic filed a notice of opposition to the creditor's petition on the ground that the creditor had failed to comply with s.44(3) of the Bankruptcy Act 1966 (Cth) and that the estimate of the value of the security held by the applicant was “inaccurate and/or not reliable.”

4. The only evidence relied on by Mr Bakamovic in support of the notice of opposition is an affidavit sworn by him on 6 February 2009.  He was given the opportunity to file and serve further evidence before the hearing, but did not do so.

5. The creditor filed and relied on a number of affidavits in support of the creditor's petition, consisting of an affidavit of Tomas Butlin sworn 27 October 2008 as to service of the bankruptcy notice, an affidavit of Marie-Lyse Eliatamby sworn 24 November 2008 verifying paragraphs one, two and three of the creditor's petition, an affidavit of Craig Bain sworn 4 December 2008 verifying paragraph four of the creditor's petition, affidavits of Kylie Maree Britton sworn 4 December 2008 and Mark Ruthven sworn 9 January 2009 as to service of the creditor's petition, an affidavit of final search sworn by Kylie Maree Britton on 20 March 2009, and an affidavit of final debt sworn by Marie-Lyse Eliatamby on 20 March 2009.  The creditor has also filed a consent by Steve Nicols to act as trustee.  It is convenient to consider first the grounds in the notice of opposition. 

Section 44(4) Bankruptcy Act

1. The notice of opposition refers to s.44(3) of the Bankruptcy Act. The solicitor for the respondent stated that it should have referred to s.44(4). The Court granted leave to the respondent to amend ground one in the notice of opposition to refer to s.44(4) of the Bankruptcy Act instead of s.44(3).

2. Section 44(1)(a) of the Act provides that a creditor’s petition shall not be presented against a debtor unless he or she owes the petitioning creditor a debt that amounts to $2,000. Subsections (2) – (4) are as follows:

   (2)    Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security.

   (3)    A secured creditor may present, or join in presenting, a creditor's petition as if he or she were an unsecured creditor if he or she includes in the petition a statement that he or she is willing to surrender his or her security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.

   (4)    Where a petitioning creditor is a secured creditor, he or she shall set out in the petition particulars of his or her security.

The nature of the “security” and the identity of the property secured

1. The debtor contended first that paragraph two of the creditor's petition did not satisfy the requirements of s.44(4) because while it stated that the creditor held security over property of the respondent debtor, it did not identify the nature of that security, for example, whether it was in the form of a mortgage, charge or lien on the property of the debtor. It was also submitted that it was not clear whether there was one security or nine individual securities over the nine lots referred to in the petition.

2. The debtor submitted that the provisions of s.44 of the Act were both very explicit and strict (see Re Kwiatek; Ex parte Big J Ltd v Pattison (1989) 89 ALR 631 at 638), and that to set out the particulars of security by merely inserting the word "security" was circuitous and would seem to render s.44 of the Act nugatory. It was suggested that the creditor was obliged to set out the precise nature of the security in the creditor’s petition.

3. It was contended that a failure to comply with s.44(4) could have significant ramifications in the proceedings and that the respondent debtor was disadvantaged because he was required to make certain assumptions in relation to the nature of the security and identity of the property secured. This was said not to be appropriate in the context of an application for an order such as a sequestration order which had far-reaching consequences.

4. The debtor also contended that the Court's ability to understand the rights and alternative remedies that may be available to the creditor may be hindered and that any attempt to establish what alternative remedies may be available to the creditor or what attempts had been made by the creditor to enforce the security may be frustrated (see Re Kwiatek at 640).  In addition it was submitted that the failure to provide particulars would hinder a trustee appointed on the making of any sequestration order who was required under the Act to act quickly to establish what property vested in the trustee and to take action to protect the trustee's interest in such property.

5. On this basis it was contended that as the applicant had failed to comply with s.44(4) of the Act, it was not entitled to present a creditor's petition (see Wright Designed Pty Ltd (subject to deed of company arrangement) ACN 094 558 200 v McClymont and Another (2006) 232 ALR 683 at [49]).

6. The debtor submitted that no amendment should be allowed as it was apparent that the alleged non-compliance with s.44(4) was not as a result of an inadvertent mistake of fact or some other reasonable excuse. The applicant was said to have made an informed decision not to provide particulars of its security and to have maintained and defended this position in the course of the hearing and in submissions.

7. The creditor submitted first that there was no requirement to specify the nature of the security in the creditor’s petition.  Reference was made to Capital Finance Australia Pty Ltd v Nathan [2008] FMCA 1363 in which no specific opposition had been raised by the respondent in that case to the lack of detail regarding the nature of the security and the Court made no reference to such lack of detail. However the fact that a debtor in some other case did not raise a particular issue is not dispositive. I note in relation to Nathan, that the nature of the security over the property had been addressed in an earlier decision of this Court (Capital Finance Australia Ltd v Nathan (No.2) [2006] FMCA 1051) in which Riethmuller FM found that a hire purchase agreement constituted a security. His Honour did suggest, without discussion, that a proposed amendment to the creditor's petition to refer to the applicant creditor holding “security” over the property of the respondent (which did not identify that the security was in the nature of a hire purchase agreement) complied with the Act and Rules (at [27] – [30]).

8. No authority directly in point was cited by either party in relation to this issue.  Re Kwiatek, relied on by the debtor, was an application to the Federal Court to review an order of a Registrar extending the time (after a sequestration order had been made) in which the trustee in bankruptcy could deliver a request under s.44(5) to a petitioning creditor to surrender securities it held over the property of bankrupts. Section 44(5) is as follows:

   Where a secured creditor has presented, or joined in presenting, a creditor’s petition as if he or she were an unsecured creditor, he or she shall, upon request in writing by the trustee within 3 months after the making of a sequestration order, surrender his or her security to the trustee for the benefit of the creditors generally.  

9. In Re Kwiatek the creditor had petitioned as an unsecured creditor. Northrop J found that it seemed clear that the petitioning creditor was in fact a secured creditor and had failed to comply with the requirements of s.44(4) (at 633). The creditor sought leave after the sequestration order was made to amend the petition to disclose its security and an estimate of value. The effect of such an amendment, if granted, would be that there would be no basis for the application of s.44(5) (at 636). In considering the creditor’s explanation for non-disclosure of its security in the petition Northrop J had regard to “the very explicit and strict provisions of s 44 of the Act” (at 637) and found it was difficult to see how the Court could be justified in granting leave to amend the petition.  However this is not a case in which the creditor failed to disclose its security at all or to provide any particulars in the petition.  Rather issue is taken with the adequacy of the description of the security and the particulars.  That issue was not addressed in Re Kwiatek. 

10. In Wright Designed the creditor deliberately, although mistakenly, asserted it was not a secured creditor in the creditor’s petition and maintained that stance on the hearing of the petition in the Federal Court.  Rares J considered factors such as the creditor’s state of mind, whether it had acted in good faith and the manner in which the hearing was conducted in deciding whether to afford Wright Designed an opportunity to apply for an amendment (which had not been sought) and to file further evidence (at [40] – [49]).

11. Contrary to the respondent’s submission, it is not apparent from what Rares J stated in Wright Designed (at [23]) that if a creditor failed to comply with s.44(4) it was not entitled to present a creditor’s petition. Rather, his Honour considered when a secured creditor was entitled to present a petition as if he or she was an unsecured creditor and stated at [22] – [25]:

    Wright Designed argued that by reason of s 44(5) a secured creditor could present a creditor’s petition as if an unsecured creditor and that if it did so the trustee, within three months after making the sequestration order can require it to surrender its security to the trustee for the benefit of creditors generally.

    Failure to surrender in accordance with a request is made a contempt of court by force of s 44(6).  The expression in s 44(5) that the secured creditor has presented a creditor’s petition ‘as if he or she were an unsecured creditor’ links back to that expression as used in s 44(3), namely, that the secured creditor is given the right to present a creditor’s petition as if he or she were an unsecured creditor if, and in my opinion only if, the secured creditor includes in the petition the statements required by ss 44(3) and (4).

    That is, that the secured creditor must include in the petition the statements that he or she is willing to surrender the security for the benefit of the creditors generally in the event of a sequestration order being made and must set out the particulars of the security.  In that circumstance s 44(5) operates to create an entitlement in the trustee to require the surrender in accordance with the statement pursuant to s 44(3) that the secured creditor would be willing to do so.  And, it is in those circumstances that it makes sense for s 44(6) to provide that it is a contempt of the Court for the secured creditor to refuse to comply with the request.  That is because the Court has been moved to sequestrate the estate of the debtor upon the basis of a statement under s 44(3) that the creditor would be willing to do that which, if the contempt is proved, he or she is clearly not doing, namely surrendering the security.

    I am of opinion that s 44(5) does not permit Wright Designed to claim falsely in the petition that it holds no security and, if that is proved wrong, to turn around and say that it could present the petition anyway without having voluntarily offered, under s 44(3), to surrender the security for the benefit of creditors generally. Such a construction of s 44 reflects the principle of bankruptcy law that all unsecured creditors should be treated equally and a secured creditor should not be allowed to prove for its full debt as an unsecured creditor as well as keeping its security: see Harvey v Commercial Bank of Australia Ltd [1937] HCA 81; (1937) 58 CLR 382 at 392-393 per Dixon J with whom Rich J agreed at 386; see too per Starke J at 387.

12. In this case the creditor disclosed the fact that it was secured.  It did not seek to petition as an unsecured creditor.  The question is whether the disclosure of the security was adequate or amounted to a defect or irregularity.  If the latter, it is necessary to consider the effect of an error in the petition. 

13. The first issue is whether the nature of the security must be disclosed. The concept of security is not defined under the Bankruptcy Act. As Viscount Cave stated in Singer v Williams [1921] 1 AC 41 at 49:

    The normal meaning of the word “securities” is not open to doubt.  The word denotes a debt or claim the payment of which is in some way secured.  The security would generally consist of a right to resort to some fund or property for payment, but I am not prepared to say that other forms of security (such as personal guarantee) are excluded.

14. The extent of the notion is clarified for the purposes of the Bankruptcy Act insofar as a secured creditor in relation to a debtor is defined in s.5 to mean “a person holding a mortgage, charge or lien on property of the debtor as a security for a debt due to him or her from the debtor”.  It is not disputed in this case that the creditor was a secured creditor (cf Nathan (No.2) and Wright Designed).  In these circumstances, having regard to the legislative purpose (as to which see generally Adams v Lambert (2006) 228 CLR 409), what is of significance about the obligation of disclosure imposed under s.44 is whether the petitioning creditor is secured (rather than the nature of the security in question) and whether, apart from that security, there is owing by the debtor to the petitioning creditor a debt that amounts to $2,000 in the sense specified in ss.44(1) and (2). What is necessary is that a “global value” be placed on the creditor’s security “not a separate value for each mortgage, charge or lien” (see Joseph Richard Bryant v Commonwealth Bank of Australia [1995] FCA 1687 at [25]).

15. It has been said that material facts in a petition should be stated in a clear and unambiguous way (Re Leppard; Ex parte Fortune (Aust) Pty Ltd (1975) 25 FLR 158). However the omission of the characterisation of the nature of the security (and whether there is more than one security) has to be considered in light of what other information is disclosed in the creditor’s petition and whether the information contained in the creditor's petition complies with the obligation in s.44(4) that the creditor set out "particulars of his or her security" in the petition. 

16. It is important that the existence of any security be disclosed and that the property subject to the security be identified.  In a case such as this, an estimate of the value of the security must be provided (Re Wiggins; Ex parte Credit Assistance Pty Ltd (1979) 36 FLR 182 at 186). Consistent with such requirements in Re Florance; Ex parte TurimettaProperties Pty Ltd (No.2) (1980) 39 FLR 400 Lockhart J considered an application to amend a petition in circumstances where the Court had previously held that the petitioning creditor (which believed itself to be an unsecured creditor) was a secured creditor. His Honour granted leave to amend the petition by inserting a paragraph which simply stated that the company "holds security over part of the property of the debtor for payment of the amount specified in the last preceding paragraph".  The nature of the security was not described. 

1. In all the circumstances I am not persuaded that the creditor's petition is defective in that it fails to comply with s.44(4) by reason of the fact that it refers to a security without specifying the nature of the security (in the sense of whether it is a mortgage, charge or lien) or because it does not elaborate on whether the security is a single security or a number of securities.

2. If I am wrong and it is necessary to include in the creditor's petition a statement as to the nature of the security I would, having regard to the approach in Adams v Lambert (2006) 228 CLR 409, regard such a defect as a mere formal defect or irregularity (see s.306(1)) that could be cured under that section (see Re Collier; Ex parte Dan Rylands Limited (1891) 8 MOR 80; In re Small; Westminster Bank v Trustee [1934] Ch 541). On the purposive approach taken in Adams v Lambert (at [29] – [30]) I am not satisfied that the legislative purpose is that such an omission would invalidate the petition. It has not been established that there has been a failure to meet a requirement made essential by the Act such that it cannot be cured. The form of creditor’s petition is prescribed under the Rules and not under the Act (see s.47(1A) and Rule 4.02(1)). A failure to comply with the form is a formal defect which in appropriate circumstances can be rectified under s.306 (see Australia and New Zealand Banking Group Ltd v Elferkh (1999) 92 FCR 195 and Joan Freedom Rogers Pty Ltd v Prasad [2000] FCA 1049). In MacDonald v Official Trustee in Bankruptcy (2001) 107 FCR 72 (at [22]) the Full Court of the Federal Court referred with approval to the statement in Deputy Commissioner of Taxation v Boxshall (1988) 19 FCR 435 at 440 that: “A formal defect or an irregularity, in the context of a defect of form [in a petition], is one that could not reasonably mislead the debtor.” The failure to specify the nature of the security over property of the debtor could not, on an objective view, mislead the debtor as to whether the creditor was a secured creditor, or as to the basis on which it petitioned within s.44 of the Act. There is no evidence of substantial injustice or that the debtor has been misled or unfairly prejudiced in any way.

3. On this basis amendment of the petition to include the nature and number of securities would be unnecessary, as s.306 “operate[s] automatically … to prevent invalidation of the proceedings” (MacDonald at [22]). In any event, even if the failure to satisfy the nature of the security is more significant than “a formal defect or an irregularity” it could be cured by leave being granted pursuant to s.33(1)(b) to amend the petition (MacDonald at [23] – [24]).

4. The Full Court suggested in MacDonald at [24] that s.33(1)(b) conferred on the Court an “unqualified discretion to amend process in bankruptcy, a discretion exercisable in all cases according to the circumstances of the particular case and, in particular, whether the exercise of discretion would inflict injustice on or avoid injustice to any person”. 

5. The debtor claimed that he would be disadvantaged by any such amendment.  This is not made out on the evidence before the Court.  As set out above the creditor disclosed the existence of its security.  The factors considered in Re Kwiatek in relation to alternative remedies available to the creditor do not support the debtor’s contentions.  The issue of whether the petitioning creditor in Re Kwiatek had attempted to enforce its securities was considered in relation to whether the petitioning creditor had suffered any loss as a result of the failure of the trustee to give a s.44(5) notice within three months after the date of the sequestration order (at 639 – 640).

6. Nor has injustice or any hindrance been established in relation to any possible post-bankruptcy action by the Trustee, given that the existence of security was disclosed.  While “the state of mind of the secured petitioning creditor is also relevant to the exercise of the Court’s discretion” (Wright Designed at [43] per Rares J) the fact that the creditor (which disclosed the fact that it was secured) maintained the contention that it was not necessary to include the nature of the security in the petition is not such as to satisfy me that it would not be appropriate to allow an amendment. The creditor has sought leave to amend the petition should the Court not agree with its submissions. Its conduct and the circumstances are not akin to those considered in Wright Designed (at [48] – [49]). I would grant the applicant leave to amend the petition to address these issues were it necessary to do so.

Identification of the property the subject of the security

1. The second aspect of this ground is that the particulars of the security are deficient in that the property of the respondent debtor is not properly identified because the petition refers to a “hybrid” of particulars consisting of lots at a street number rather than to either lots in a strata plan or deposited plan or a reference to, for example, unit numbers at a particular street address.  Paragraph two of the petition described the property of the debtor over which security is held as “consisting of lots 1, 2, 6, 7, 8, 9, 11, 12, and 13 at 89 Queenscliff Road, Queenscliff.”

2. The creditor contended generally that the reference to "lots" was not a fatal defect in the petition.  It was submitted that the debtor could not have been under any misapprehension as to what property was being referred to in paragraph two of the petition and that he had not provided any evidence that he was misled in any way or to suggest that the reference to lots had led to any confusion or injustice or error on his behalf (see Nathan (2008)). The applicant sought the Court's leave to amend the petition pursuant to s.306(1) of the Act, if the Court did not agree.

3. There is evidence before the Court in relation to the property in question.  In his affidavit, the debtor Mr Bakamovic himself describes the property which includes the “lots” in question as “lots 1-13 situated at 89 Queenscliff Road Queenscliff in the State of New South Wales”.  Annexed to the affidavit is a valuation of those properties which are described in the valuation in the same manner (that is as lots at a street address).  It is also apparent from the valuation that the lot numbers correlate to apartment or unit numbers.  The orders of the Supreme Court of New South Wales attached to the bankruptcy notice were made by consent.  Those orders provide that the plaintiff (the creditor) be given possession of certain land described in the First Schedule to the judgment as land comprised in certain folio identifiers situated at, and known as specified “unit” numbers at, 89 Queenscliff Road, Queenscliff in the State of New South Wales.  This description confirms the correlation between lot numbers and unit numbers, although it also supports the debtor's contention that it is technically incorrect to describe the property as consisting of certain lot numbers at 89 Queenscliff Road, Queenscliff (and see Re Florance; Ex parte TurimettaProperties Pty Ltd (No.2) (1980) 39 FLR 400). However, I regard this as at most a formal defect which is able to be cured (see Adams v Lambert).  As discussed above, such a defect is not such that it could reasonably mislead the debtor, particularly in light of the correlation between the description of the property in the creditor’s petition and the description in the valuation the debtor sought to rely on.   In any event, to put the matter beyond doubt, I will grant leave to amend the petition.  There is no evidence of substantial injustice or, indeed, any evidence from the debtor to support the contention of his solicitor that he is in some way at a disadvantage because he is required to make certain assumptions as regards the nature of the security and the identity of the property secured. 

4. I consider it appropriate, for the reasons discussed above, to grant the leave sought to amend the petition so that the relevant lots are described in the form which appears in the Supreme Court orders.  The petition should be amended by deleting paragraph two and substituting a paragraph that fully identifies the property the subject of the securities.  I consider that no injustice will be done to the debtor by allowing such an amendment as there is no evidence to suggest that proper identification of the property subject to the security would put the debtor in any worse position than if the correct material had been inserted in the first place (see generally in relation to amendments In re Small; Westminster Bank v Trustee [1934] Ch 541).

Estimate of value of security

1. The second ground in the notice of opposition is that the estimate in the creditor’s petition of the value of the security held by the applicant is “inaccurate and/or not reliable.” 

2. In the petition the creditor estimated its security to be to the value of $8,235,000.  On the basis that there was an amount of $9,553,940.61 due, this was said to leave an unsecured debt of $1,318,940.61.

3. The debtor submitted that it was necessary for the creditor to establish that the estimate was reasonably based and bore a close relationship to the realities of the matter and that it was not arbitrary or capricious.  Re O’Leary and Another; Ex parte Bayne and Another (1985) 61 ALR 674 at 682 was said to be authority for this proposition. It was also submitted that when a secured creditor sought to estimate the value of its security, the Court needed to satisfy itself that the estimate was a genuine one (Biron Capital Limited v Anstee [2005] FMCA 1100 at [28], Capital Finance Australia Pty Ltd v Nathan [2008] FMCA 1363 at [95]).

4. More contentiously, the debtor contended that in order to establish that the estimate was genuine, the creditor was required to put evidence before the Court (in addition to the affidavit verifying the petition and the affidavit of debt), of a kind that would set out the factual basis and reasoning process of the person making the estimate.  It was suggested that Biron (at [21]), Nathan (at [93]) and Commonwealth Development Bank of Australia v Tancock and Another (2001) 183 ALR 469 (at [11]) were cases in which there was such further evidence before the Court. It was submitted that in contrast in this case the affidavit verifying the petition alone had no probative force or insufficient probative value to sustain the proposition that the estimate was genuine and that the creditor had put the Court in a position where it was unable to satisfy itself that the estimate was genuine.

5. The solicitor for the respondent also submitted that the only evidence before the Court with any probative force which set out the factual basis, reasoning process and relevant expertise of the person expressing an opinion was the affidavit of Mr Bakamovic sworn on 6 February 2009 which annexed a valuation of the lots at 89 Queenscliff Road, Queenscliff prepared by CB Richard Ellis Pty Ltd dated 5 June 2007.  It was submitted, on the basis that the lots set out in the paragraphs of the petition corresponded with the lot numbers set out in the valuation, that the gross realisation value of the nine lots over which the applicant creditor asserted that it had security as at June 2007 was $11,075,000.  Reference was also made to the fact that the valuation stated that properties in the region were expected to have forecast growth of 8% over the next five years.  On this basis it was submitted that neither the Court nor the respondent had been provided with any evidentiary basis to substantiate the estimate by the applicant's internal lawyer that the subject lots had a value of $8,235,000.

6. It was contended that in situations where it was possible to value the secured property the Court would usually require evidence as to the value of the security to be tendered (Re Kwiatek) and that in the absence of such additional evidence the Court would not proceed to make a sequestration order (Capital Finance Australia Ltd v Nathan (No.2) [2006] FMCA 1051).

7. While there is no express requirement in s.44(4) of the Act that the creditor set out an estimate as to the value of its security, it is well established that a secured creditor must either estimate the value of its security (in which case it will deemed to be an unsecured creditor of the debtor for the amount by which the value of the debt exceeds the value of the security) or state its willingness to surrender the security for the benefit of creditors generally in the event of a sequestration order being made against the debtor (see Re Wiggins; Ex parte Credit Assistance Pty Ltd (1979) 36 FLR 182). A genuine estimate must be made as to the value of the security and a false, intentionally illusory or excessively low estimate can be grounds for dismissing a petition. This does not mean, however, that in all cases the creditor must provide affidavit evidence of the basis for the estimate beyond that contained in the affidavit verifying the petition and the affidavit of debt.

8. Indeed, in In re Button; Ex parte Voss [1905] 1 KB 602 Vaughan Williams LJ rejected a submission that the Court should, when the petitioning creditor estimates his security, enquire whether the estimate is right and continued at 605:

   In my opinion, when one arrives at the conclusion that the estimate is real and not a sham, we ought not to go into the question of what is the true value after the declaration of the estimated value.

9. In Re Wiggins; Ex parte Credit Assistance Pty Ltd (1979) 36 FLR 182 Lockhart J expressed the opinion (at 185) that s.44 meant that “a petitioning secured creditor may in his petition estimate the value of his security or state that he is willing to surrender his security for the benefit of creditors generally in the event of a sequestration order being made against the debtor”.  If the first approach was taken, the creditor was “not bound by the estimate” when he sought to prove his debt.  His Honour made the point (at 185) that:

   I do not think that this construction of s. 44 would enable an unscrupulous petitioning creditor to value his security at a deliberately low figure for the purpose of obtaining a sequestration order against the debtor and later either rely solely on his security or prove in the bankruptcy with a higher estimate of the value of his security. In those circumstances the sequestration order may be rescinded, unless the order has been taken out, in which case the appropriate remedy is the annulment of the bankruptcy under s. 154(1)(a): see Re Deriu (1970) 16 FLR 420.

10. This is relevant to the approach to be taken to any “estimate” of value of the security.  Moreover in Re O’Leary and Another; Ex parte Bayne and Another (1985) 61 ALR 674 Sheppard J rejected a submission that the petitioning creditor was obliged to establish positively the value of its security. As his Honour stated at 682:

    It is the fact that the petitioning creditor is not bound by the estimate when he comes to prove his debt in the bankruptcy of the debtor ... that leads me to think that a petitioning creditor is obliged to do no more than make the best estimate he can of the value of his security when he presents his petition.  As I have earlier said, what must be shown is that he has an unsecured indebtedness which amounts to more than $1000 [now $2000].  That is the only purpose of the provision.  But his estimate must bear a close relationship to the realities of the matter.  It must certainly not be arbitrary or capricious.

11. Re O’Leary does not establish that the applicant bears an onus to put evidence before the Court to address the possibility that the estimate could be arbitrary or capricious.  I also note that, as mentioned above, in Joseph Richard Bryant v Commonwealth Bank of Australia [1995] FCA 1687 the Full Court of the Federal Court referred (at [25]) to the fact that in Re Wiggins Lockhart J had rejected the submission that s.44(2) required a petitioning creditor to state in its petition “the actual value thereof” rather than “its estimate of the value of its security” and  observed that the prescribed form of the petition envisaged “a global value being placed on a creditor's security and not a separate value for each mortgage, charge or lien” (at [25]).  The Court rejected an argument that an estimated value was a misstatement in the petition. 

12. Further, in Biron Capital Limited v Anstee [2005] FMCA 1100 Driver FM suggested that it was only necessary that the Court be satisfied that the estimate was a "genuine one" and that if it was, the Court would not inquire into the correctness of the estimate even if the result of the inquiry might be to show that the unsecured balance of the debt was not sufficient to support the petition (see Re Button and also Re Scott; Ex parte Moore [1892] 2 BC (NSW) 55). His Honour also expressed the view that it was not necessary for the Court to determine that the petitioning creditor's estimate was more likely to be correct than a valuation placed on the property by the debtor.

13. In this case both the affidavit verifying the petition and the affidavit of debt were sworn by Marie-Lyse Eliatamby, a solicitor who is a legal and compliance officer in the employ of the applicant with access to its books and records.  It is her evidence that the statements in paragraphs one, two and three of the petition, including the estimate of the value of the security, are “within [her] own knowledge true”. She reiterated that the security was estimated to the value of $8,235,000 in her affidavit of debt sworn on 20 March 2009. The debtor did not seek to challenge Ms Eliatamby’s evidence through cross-examination (and see s.52(1)(a)). The evidence before the Court is not such as to suggest that the estimate given by the applicant and verified by Ms Eliatamby is not a genuine one or is arbitrary or capricious.

14. The debtor relied on his affidavit of 6 February 2009 which annexed the valuation obtained by him on 5 June 2007.  He was given the opportunity to file and serve further evidence but did not do so.  The 2007 valuation is not current.  It falls short of evidence such as to satisfy me that the creditor acted in an arbitrary or capricious manner or that the estimate of current value is not a genuine estimate.  As Driver FM stated in Biron, it is not necessary to determine generally whether a petitioning creditor's estimate is more likely to be correct than any valuation obtained by the debtor. 

15. Moreover, as the creditor submitted, there was no attempt by the debtor to put to Ms Eliatamby that the statement in paragraph two of the petition was in any way capricious or had been made in bad faith, was deliberately wrong or was other than a bona fide statement of the creditor's understanding of the value of the security. 

16. It is not necessary in such circumstances for the creditor to put further evidence before the Court in relation to the estimate of value of the security.  While the applicant referred to cases in which there had been further evidence before the Court as to the value of a security (Biron, Nathan (2008) and Commonwealth Development Bank of Australia v Tancock) there was no suggestion in those cases that such further evidence was mandatory.  In each of Biron and Nathan what was in issue was a petition in which a creditor gave security a nil value.  That is a matter which on its face could appear to require some explanation beyond the usual verification of the petition and affidavit of debt.  It might, for example, be based on advice or information from a third party (see Biron at [28] – [30]). In Nathan (2008) at [85] – [95] a nil valuation for a vehicle was given on the basis that the value of the security was currently not ascertainable, the debtor having the vehicle in his control.  In Commonwealth Development Bank of Australia v Tancock a particular issue was raised in relation to the difference between an estimate of value on the basis of open market values and forced sale values.  In those circumstances, each of the parties put evidence before the Court.  No such issue was raised in the present case.  The fact that the debtor relied on a 2007 valuation does not give rise to the suggested obligation on the creditor in the circumstances of this case. 

1. Insofar as the debtor relied on Re Kwiatek as authority for the proposition that in situations where it is possible to value the secured property the Court would usually require evidence as to the value of the security, in Re Kwiatek what was in issue was an application by the creditor to amend the petition to rely on its security (which it had failed to do before the sequestration order was made) in circumstances where the trustee was seeking that security be surrendered pursuant to s.44(5). It was in that context that the Court referred to the need for evidence to show the value of the security in its application to all the property of the bankrupt. That is not the position in this case. There is evidence before the Court consisting of the affidavit of Ms Eliatamby in verifying paragraph two of the petition and the estimate of value in the creditor's petition such as to satisfy me that the estimate is genuine in the sense considered in Re O’Leary.

2. Nor is Capital Finance Australia Ltd v Nathan (No.2) [2006] FMCA 1051 authority for the proposition that in the absence of additional evidence the Court will not proceed to make a sequestration order. In Nathan there was no estimate given of the value of the security in the original petition and an amendment to the petition was sought by the creditor.  The Court found that the amendment should not be permitted because the affidavit verifying the creditor's petition had verified the petition without reference to the security and there was no evidence at all to verify or support the estimate in the amendment sought by the applicant.  Again that is not the position in this case.  There has been verification of the estimate of value of the security in the petition.  (Also see Joseph Richard Bryant v Commonwealth Bank of Australia [1995] FCA 1687). This ground of opposition is not made out. In these circumstances it is appropriate to consider whether a sequestration order should be made.

Section 52 requirements

1. I am satisfied on the evidence before me as to service of the bankruptcy notice on Mr Bakamovic on 2 October 2008 and that he committed the act of bankruptcy alleged in the petition by failing to comply with the requirements of bankruptcy notice NN3189/08 within the time specified.  He made an application to set aside the bankruptcy notice that was dismissed by this Court on 14 November 2008.  I am satisfied that, as stated in the creditor’s petition, the date of the act of bankruptcy was 14 November 2008, which is within six months of presentation of the petition. 

2. On the evidence before the Court I am satisfied with proof of the matters required by s.52(1) of the Act, including proof of matters stated in the petition (in relation to which I note that s.52(1)(a) provides that for this purpose the Court may accept the affidavit verifying the petition as sufficient); that the petition was presented in correct form for a debt of more that $2,000; with service of the petition and with the fact that the debt on which the petitioning creditor relies is still owing.

3. The debtor did not satisfy the Court of his ability to pay his debts (no submissions were made in this respect) and the material before the Court, including the grounds relied on in opposition discussed above, is not such as to satisfy me that for other sufficient cause a sequestration order ought not to be made. 

4. In all the circumstances, being satisfied that the respondent committed the act of bankruptcy alleged in the petition and with proof of the other matters required by s.52 of the Act, a sequestration order should be made against the estate of Ahmet Bakamovic with the usual order as to costs.

I certify that the preceding fifty-five (55) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate: 

Date:  15 May 2009