Jain v Clindo Pty Ltd
[2004] FMCA 442
•19 July 2004
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| JAIN v CLINDO PTY LTD | [2004] FMCA 442 |
| BANKRUPTCY – Application to set aside bankruptcy notice – where applicant debtor and respondent creditor parties to a joint venture – where applicant defaulted under the Joint venture agreement which resulted in proceedings in the Supreme Court – where applicant ordered to pay costs of the proceedings – where respondent used joint venture funds to pay said costs – where judgment debt provides foundation for the bankruptcy notice – whether funds raised by the respondent creditor were part of the joint venture funds – whether respondent entitled to use joint venture funds and simply account to the joint venture the sum borrowed – whether respondent had improperly used joint venture funds to pay debt and was in breach of fiduciary duty to applicant – whether the application of joint venture monies extinguished the obligation of the applicant – where Registrar extended time for compliance with bankruptcy notice – whether in doing so the Registrar miscarried in the exercise of his discretion. |
Bankruptcy Act 1966 (Cth), ss.30, 41(6A), (7)
The Laws of Australia (2004)WD Duncan (Ed), Joint Ventures Law in Australia (1994)
Goodwin v Duggan & Ors (1996) 41 NSWLR 158
United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1
| Applicant: | NARENDRA JAIN |
| Respondent: | CLINDO PTY LIMITED ACN 006 175 433 |
| File No: | SZ 1149 of 2004 |
| Delivered on: | 19 July 2004 |
| Delivered at: | Sydney |
| Hearing dates: | 1 & 15 June 2004 |
| Judgment of: | Raphael FM |
REPRESENTATION
| Counsel for the Applicant: | Mr D Smallbone |
| Solicitors for the Applicant: | Moloney Lawyers |
| Counsel for the Respondent: | Mr J Johnson |
| Solicitors for the Respondent: | Sally Nash & Co |
ORDERS
The bankruptcy notice No. NN693/04 issued on 16 March 2004 is set aside.
The respondent pay the applicant’s costs to be taxed if not agreed according to the Federal Court Act and Rules.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SZ 1149 of 2004
| NARENDRA JAIN |
Applicant
And
| CLINDO PTY LIMITED ACN 006 175 433 |
Respondent
REASONS FOR JUDGMENT
These are proceedings to set aside a bankruptcy notice No NN693/04 issued by the Official Receiver for the Bankruptcy District of New South Wales on 16 March 2004 at the request of the respondent against the applicant. The bankruptcy notice seeks payment of a debt of $25,152.61 together with interest of $207.07. The debt is based upon a judgment of the Supreme Court of New South Wales entered on 9 February 2004 for assessed costs of proceedings between the parties ordered by Barrett J on 18 April 2002 to be paid by the applicant and two other parties to a joint venture agreement to which the respondent was the fourth party.
The matter first came to the court by way of an application dated 19 April 2004 and said to be an application under ss.30 and 41(6A) of the Bankruptcy Act 1966 (Cth) (the “Act”). The application stated that it was made on the basis that:
The judgment obtained by the creditor and providing the foundation of the bankruptcy notice dated 15 March 2004 is not enforceable as against the applicant.
On the same day Registrar Grant made an order in the following terms:
1.Pursuant to sub-section 41(6A) of the Bankruptcy Act 1966 and Rule 30.03 of the Federal Magistrates Court Rules 2001, on condition that Bankruptcy Notice No NN693 of 2004 was served on the applicant on 30 March 2004 the time for compliance by the applicant with the requirements of the Bankruptcy Notice is extended up to and including Tuesday 4 May 2004.
2.There be liberty to any party to apply to vary or discharge Order 1 on 24 hours notice….
No such application was made. But on 23 April 2004 the respondent filed a notice of appearance which also purported to be a notice of objection to the application. It stated:
1.The order for extension of the time for compliance with the Bankruptcy Notice was made under Section 41(6A) of the Bankruptcy Act and there is no evidence filed to support a contention that there is an application to set aside the judgment upon which the Bankruptcy Notice is based or that there is any ground for applying to set aside the Bankruptcy Notice.
2.The judgment dated 9 February 2004 in Supreme Court Equity proceedings 2201 of 2002 relates to costs in the sum of $25,152.61 and is payable forthwith. Page 37 of the Affidavit of Narendra Jain sworn 19 April 2004 is clearly the order from which the costs judgment has been entered.
3.If the evidence before the Court in the Affidavit of Narendra Jain sworn 19 April 2004 is admitted, at its highest, it makes reference to issues between the Respondent and a corporation Goldcrest Properties (No 2) Pty Ltd. There is no reference to any issue concerning the Applicant.
The matter came before me on 1 June 2004 where I made orders including an order that the applicant file and serve an amended application stating the grounds and reasons for setting aside the Bankruptcy Notice including the statutory provisions relied upon. The applicant complied with this order and an amended application was filed on 3 June 2004. That application stated:
1.The judgment obtained by the creditor and providing the foundation of the bankruptcy notice dated 15 March 2004 is not enforceable as against the applicant. The liability has been extinguished by payment or set-off or alternatively, there is a cross demand, arising out of the application of joint venture funds by the respondent to pay the liabilities which are the subject of the judgment, which payment, set off or cross demand could not have been set up in opposition to the order by reason that the funds were applied after the order for costs was made on 18 April 2002.
[Words in bold underlined in original text].2.Not pressed.
The respondent filed an amended notice of appearance of which the relevant parts are set out below.
4.The respondent is entitled to be paid. There is no claim for set off by the applicant properly made under s.41(7) of the Bankruptcy Act.
5.There is no evidence that the asserted set off or cross demand is:
a.One which could not have been raised previously, or
b.Exceeds the amount for which costs were awarded on 18 April 2002; or
c.Will be ordered in relation to the applicant.
Any such claim for application of joint venture funds is not by the applicant but by a company, Goldcrest Properties (No 2) Pty Ltd. The applicant is a guarantor of the obligations of Goldcrest Properties (No 2) Pty Ltd under the terms of the joint venture agreement but it is jointly and severally liable under the judgment which is the foundation for the Bankruptcy Notice.
6.There is not joinder of the same parties to the alleged set off. The joint venture which was before Justice Barrett was clearly between Goldcrest Properties (No 2) Pty Ltd and the Respondent. Goldcrest Properties (No 2) Pty Ltd is not a party to the present application. The Bankruptcy Notice was only issued against Narendra Jain and this court has no jurisdiction in relation to corporations under the Corporations Act 2001.
7.The respondent paid its solicitor and client costs and says that it is entitled to be indemnified for party and party costs ordered by the Supreme Court of New South Wales and assessed by a costs assessor appointed under the Legal Profession Act, 1987 to assess those costs. It is the determination of that costs assessor which, upon filing, became the final judgment or order relied upon the issue of the Bankruptcy Notice the subject of these proceedings.
8.The respondent denies that there has been any asserted overstatement which gives rise to the operation of s.41(5) of the Bankruptcy Act. The applicant does not assert that he has paid any money to the respondent.
9.…
10.…
11.The determination of matters concerning an accounting between Goldcrest Properties (No 2) Pty Ltd and the respondent concerning a joint venture agreement between those parties and the applicant are the subject of proceedings in the Supreme Court of NSW being proceedings number 6508 of 2003. The question of the balance of account is not relevant to determination of matters concerning the validity of Bankruptcy Notice NN 693 of 2004.
The applicant and the respondent were two of the four parties to a joint venture agreement, a copy of which is found as Exhibit PJM1 to an affidavit of P J Moloney sworn 30 April 2004 (the “JVA”). The JVA was signed on 11 March 1997. Simply put it provided that the respondent, the owner of property at 66 Kurraba Road Neutral Bay put in the property and Goldcrest Properties No 2 Pty Ltd (“Goldcrest”) agreed to develop the property for the benefit of both joint venturers. Goldcrest was to raise money for the development on the security of the property and was to have control of the building process. The applicant and another person who were directors of Goldcrest became parties to the agreement in order to personally guarantee the performance of Goldcrest under the JVA and any associated documents including financing loan security. They also brought to the joint venture technical and business management expertise as required to research, acquire and manage the development of the land from a dwelling house into six strata title townhouses. The respondent was paid $1,250,000.00 by Goldcrest and its liability under the re-financing arrangements that were to take place were strictly limited. Goldcrest was entitled to register a caveat over the land to protect its interest under the JVA.
Clause 3.4 of the agreement provided that the respondent held the land and improvements and all sale proceeds on trust for Goldcrest and bound itself to perform the terms of the agreement. Clause 4 of the agreement deals with joint funds.
It is in the following form:
4.The Joint Funds
4.1Funds of the CG Joint Venture (“the Joint Funds”) include all funds received after the Completion Date for working capital, loan funds (including but not limited to advances made under the refinancing loan security), and all other receipts or advances made to the CG Joint Venture in connection with the Works.
4.2The following outgoings and expenses are paid out of the Joint Funds:
4.2.1all the costs, charges, expenses and liabilities directly incurred in connection with the Works;
4.2.2the costs of all engineering, technical, legal, audit, marketing and other services required in connection with the Works, including but not limited to all rates and taxes, introduction fees, procuration fees, commissions, architects fees and the like;
4.2.3any such other amounts as the parties may agree;
4.2.4all costs of interest on loans, project management fees and administration and accounting services incurred by the CG Joint Venture;
The JVA went on to provide that one event of default was if the works were not completed on or before what was described as the final date. If Goldcrest was deemed to be in default of the agreement for that reason the respondent could terminate the agreement or could demand possession of the works and take such steps as may be necessary to secure possession and evict Goldcrest [Clause 7.6]. Clauses 7.7 and 7.8 provided that on the default of Goldcrest the respondent could take over its responsibilities including organising a refinancing and continuing the works to completion. Clause 15 of the agreement stated:
15.Partition
During the term of this joint venture agreement no party may seek or is entitled to partition any of the property of the CG Joint Venture or any part of the CG Joint Venture whether by way of physical partition, judicial sale or otherwise. No party may withdraw from the CG Joint Venture except upon terms and conditions satisfactory to and with the prior consent of the other parties.
As matters transpired Goldcrest did default and the respondent did take over its responsibilities including the responsibility to refinance the project which it did by way of a loan from Parker Simmonds Securities. This is documented in a letter dated 14 February 2002 found under guide card 5 of Exhibit A in these proceedings. The secured property under that loan agreement was the joint venture property at Kurraba Road but also two other properties. The special conditions of that loan agreement make it clear that the money was to be used to complete the joint venture.
Goldcrest had placed a caveat on the Kurraba Road land as it was entitled to do under the joint venture agreement. By the time the refinancing came to be settled it had gone into receivership. The directors of the company declined to allow the receiver to release that caveat in order that the caveat of the mortgagee under the refinancing could be placed on the property. This was in breach of the terms of the JVA and the respondent took the matter to the Supreme Court of New South Wales where on 18 April 2002 Barrett J handed down a judgment requiring the caveat to be removed for that purpose. At [14] His Honour said:
[14] “As I view matters, the default of Goldcrest and its express reference to the possibility of Clindo taking over the project and completing the venture coupled with the actions of Clindo to obtain necessary refinancing and Clindo’s clear intention to adhere to the joint venture agreement in bringing the project to completion all militate in favour of the caveat being removed for the limited and closely confined purpose which the orders sought contemplate. On that basis it is appropriate that Orders 1 and 2 in the Summons be made and I now make orders in those terms…
[16] “As to the question of who should bear the costs, it has been confirmed that Goldcrest was not set in motion by its receivers from which I infer that it was set in motion by its directors who were the other defendants and who took action to suit and further their own personal objectives. On that basis I believe that the costs order should be against all three defendants.”
The costs in the proceedings were eventually assessed pursuant to the Legal Practitioners Act (NSW) and judgment entered for the amount of the assessment also in accordance with that Act. However, in the meantime the respondents had utilised funds from the refinancing to pay their solicitors and counsel. The financiers were aware of this from drawdown letters which also formed part of Exhibit A. Thus by the time the judgment came to be entered the costs had actually been paid. The applicant says that the funds which were used to pay those costs were joint venture funds belonging both to the respondent and to Goldcrest (and, it could be argued, to the applicant himself as a party to the JVA). The costs order had been satisfied by Goldcrest out of its funds and therefore no execution could be leviable against Goldcrest or either of the other obligors to enforce the judgment. If, on the other hand, the money paid had been paid improperly out of joint venture funds then Goldcrest would have a set off against the respondent which would operate pro tanto to extinguish the debt. To the extent that the two directors and Goldcrest were jointly and severally liable any payment made by one of them goes to reduce the amount owed by all, subject to their rights of contribution inter se: Goodwin v Duggan & Ors (1996) 41 NSWLR 158 at 167.
The applicant argued that the set off referred to was not one that could have been raised before Barrett J as the liability only arose under his judgment.
The respondent argues that the moneys which were used to pay the solicitor’s fees were moneys belonging to the respondent and were not moneys that were part of the joint venture funds. The respondent borrowed those moneys on the security of its properties and was the obligor under that arrangement. Goldcrest had no obligations to Parker Simmonds. The respondent argues alternatively that if the money was to be considered joint venture money then it was entitled to use it to pay these costs subject only to an accounting with the joint venture parties and was entitled to seek reimbursement from the applicant prior thereto.
The respondent also argues that there were no grounds upon which the Registrar could have extended the time for compliance with the Bankruptcy Notice as there was no application to set aside the judgment upon which the Bankruptcy Notice was based and there were no other grounds for applying to set aside the notice. The applicant argues that this is not correct and that s.41(6A) of the Act had been complied with because an application had been made to the court to set aside the Bankruptcy Notice before the expiration of the time fixed for compliance. The ground then stated was that the judgment was unenforceable. This description is infelicitous. It would have been better if the applicant had stated that the judgment had been satisfied. But there was filed with the application an affidavit of the applicant. This affidavit refers to certain proceedings commenced by Goldcrest against the respondent in the Supreme Court of New South Wales seeking an account of the joint venture together with damages for breach of fiduciary duty. That affidavit does not refer to any of the matters canvassed in these reasons but appears to be referring to some cross claim that Goldcrest rather than the applicant has. At best this would be an application under s.41(7) and not under 41(6A) of the Act.
Under s.41(7) the extension of time for compliance is automatic. The situation appears to be this. The original application was made under s.41(6A) which required the Registrar to exercise his discretion. There is no particularisation in the affidavit of the grounds upon which the judgment was unenforceable and the affidavit itself goes more to s.41(7) than to s.41(6A). The Registrar gave the applicant the extension of time requested and there was no review of that decision sought. The respondent now seeks to argue that the Registrar’s discretion miscarried. But that is something which should be done in review proceedings. The difficulty the respondent would have had in a review is that I would have been hearing the matter de novo and the applicant could have particularised the claim found in the application that the judgment had been satisfied. With that information before me I could have confirmed the Registrar’s decision. I think that in all the circumstances the respondent’s failure to seek review means that the decision of the Registrar stands, the time for compliance having been extended by me remains extended and the applicant has not committed an act of bankruptcy.
The more difficult question is that relating to the effect of the respondent satisfying its legal advisers from the moneys loaned by Parker Simmonds.
I have come to the view that the moneys lent by Parker Simmonds were moneys lent for the purpose of the joint venture. That is clear from the way in which it was advanced in stages for purposes clearly associated with the building works. It is also clear that the primary security was the joint venture property although other properties were given as additional security. The definition of joint funds in the JVA includes loan funds and specifically refers to advances made under the refinancing loan security. The original refinancing loan security was one taken out by Goldcrest with Suncorp Metway but that had to be repaid because of the delays. Goldcrest’s inability to extend that finance or refinance was one of the reasons why the respondent considered them to be in default under the JVA and took over the running of the development. The only difference between these moneys and the moneys that were intended to be raised by Goldcrest was that under the Goldcrest loan it would be responsible as primary obligor subject only to the lender having security over the land. The respondent would have no personal liability under the agreement (see Clause 3 of JVA). Under the Parker Simmonds’ loan the situation was reversed. Goldcrest appears to have no liability, the primary obligor and security giver is the respondent. It seems to me that the “differences” that I have pointed out are merely two sides of the same coin under which finance was provided for the joint venture which only one of the joint venturers is primary obligor for. If the money obtained from Suncorp Metway was considered under the JVA to be part of the joint funds then this money from Parker Simmonds should be similarly considered.
This joint venture is not a partnership (para 6(c) JVA) but the joint venturers stand in the nature of fiduciaries to one another: United Dominions Corporation Ltd v Brian Pty Ltd (1985) 157 CLR 1. Money that belongs to the joint venture does not belong to some separate entity because a joint venture is not a separate entity. Legal commentators frequently point out that one of the most prominent characteristics of a joint venture is that it does not have separate legal personality. As J Fahey noted in The Laws of Australia: Joint Ventures at [151] “A joint venture comprises an unincorporated association of persons (whether natural or corporate), and accordingly does not have a separate legal personality”. See also generally WD Duncan (Ed), Joint Ventures Law in Australia (1994) as to common features of joint venture relationships. As such, it is the money of the joint venturers. It is owned by them in accordance to various rights and obligations contained in the joint venture agreement: UDC v Brian (1985) supra at 16. To that extent they were as much monies of Goldcrest as they were of the respondent. When the respondent sought to satisfy its costs obligations to its legal advisers by utilising joint venture money it utilised money that was (at least in part) the money of Goldcrest. The obligation of the applicant to pay the costs assessed has been met by the application of these monies. Furthermore, to the extent that these monies have been used to pay more than the assessed costs the respondent has acted in breach of its fiduciary obligations to Goldcrest and the applicant. It was not argued before me that the proceedings between the parties involved the protection of the trust property, so this expenditure and the borrowing of money to make it could be said to constitute an equitable fraud by the respondent in the same way that the taking of joint venture money by UDC to satisfy another joint venturer’s obligations to that company outside the relevant joint venture was held to be an equitable fraud in UDC v Brian. The vice was that more money was being borrowed for the joint venture than was strictly necessary for it. Therefore when the proceeds were to be divided up between the two joint venturers Goldcrest would have been disadvantaged even though extra the joint venture it owed Clindo money under the judgment for costs.
The applicant’s obligations as guarantor require the existence of an unsatisfied debt by Goldcrest. The applicant would also have the same rights as Goldcrest to allege a cross-claim for breach of trust to the extent of the monies needed to satisfy the costs judgment. But I do not think this claim is necessary, because, as I have said, the judgment was satisfied by funds in respect of which Goldcrest had an interest and no argument has been put to me that such interest was definable at something less than 100 percent. What was put was that Goldcrest had no interest in the joint venture funds because the joint venture was going to end up in a loss. That would seem to be likely from the evidence but was not certain until all the accounts had been done and possibly until a claim by Goldcrest against the respondent for breaches of the joint venture agreement had been decided. But, even if there was a loss then, the respondent made that loss greater by borrowing as joint venture funds monies which it used for his own purposes.
I find that the bankruptcy notice No. NN693/04 issued on 16 March 2004 to be invalid and I set it aside as the judgment upon which it is based has been satisfied by one of the judgment debtors. I order that the respondent pay the applicant’s costs to be taxed if not agreed according to the Federal Court Act and Rules.
I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Raphael FM
Associate:
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