James v Commonwealth Bank of Australia and; Commonwealth Bank of Australia v James
[2015] FCCA 1056
•24 April 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| JAMES v COMMONWEALTH BANK OF AUSTRALIA and COMMONWEALTH BANK OF AUSTRALIA & ANOR v JAMES | [2015] FCCA 1056 |
| Catchwords: BANKRUPTCY – Application to set aside the bankruptcy notice – application to review the decision of a registrar. |
| Legislation: Civil Procedure Act 2005 (NSW) |
| Re Baker; ex parte Baker v Staples [1995] FCA 1520 Burrell v Reavill Farm Pty Ltd [2014] FCCA 1449 GE Capital Australia v Davis [2002] NSWSC 1146 O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71 |
| Applicant: | DAVID ANTHONY JAMES |
| Respondent: | COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) |
| File Number: | SYG 3346 of 2014 |
| First Applicant: | COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) |
| Second Applicant: | AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522) |
| Respondent: | DAVID ANTHONY JAMES |
| File Number: | SYG 95 of 2015 |
| Judgment of: | Judge Street |
| Hearing date: | 24 April 2015 |
| Date of Last Submission: | 24 April 2015 |
| Delivered at: | Sydney |
| Delivered on: | 24 April 2015 |
REPRESENTATION
| Counsel for the Applicant: | Mr D.R. Pritchard SC |
| Solicitors for the Applicant: | Allsop Glover Lawyers |
| Solicitors for the Respondent: | Ms Skinner Gadens |
| Counsel for the Supporting Creditor (AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522)): | Mr R. Foreman |
| Solicitors for the Supporting Creditor (AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522)): | Kemp Strang |
ORDERS
SYG 3346 of 2014
The application dated 1 December 2014 for the review of the decision of the Registrar and to set aside the Bankruptcy Notice issued on 11 November 2014 be dismissed.
The costs of the Respondent to these proceedings be paid out of the estate of David Anthony James and have the same priority as the costs of the petition.
ORDERS
SYG 95 of 2015
A Sequestration order is made against the estate of David Anthony James.
The costs of the Applicant being the petitioning creditor in these proceedings be paid of the estate of David Anthony James and have the same priority as the costs of the petition.
| FEDERAL CIRCUIT COURT AT SYDNEY |
SYG 3346 of 2014
| DAVID ANTHONY JAMES |
Applicant
And
| COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) |
Respondent
SYG 95 of 2015
| COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124) |
First Applicant
| AUSTRALIA AND NEW ZEALAND BANKING GROUP LIMITED (ACN 005 357 522) |
Second Applicant
And
| DAVID ANTHONY JAMES |
Respondent
REASONS FOR JUDGMENT
These two applications are within in the Court’s jurisdiction under s.27 of the Bankruptcy Act 1966 and have been heard concurrently. Mr James filed the first application on 1 December 2014 for a review of the orders of Registrar Wall dismissing the application to set aside the original bankruptcy notice issued on 11 November 2014 and to extend time for compliance. The second application, filed after the first application was dismissed by the Registrar, is a creditor’s petition by the Commonwealth Bank of Australia. Australia and New Zealand Banking Group Limited (ANZ) were given leave to appear in both matters as a supporting creditor.
The bankruptcy notice served by the petitioning creditor gave rise to an act of bankruptcy on 19 December 2014 subject to the application filed by Mr James. The application to set aside the bankruptcy notice was required by r.3.02 to be accompanied by a supporting affidavit that met the requirements of r.3.02(2) (Federal Circuit Court (Bankruptcy) Rules 2006).
Mr Pritchard SC for Mr James properly conceded that the affidavit did not comply with the requirements of r.3.02. Mr Pritchard sought to obtain an extension of time for compliance under s.33 of the Act and alternatively, advanced an argument that the requirements of r.3.02 were ones that could be treated as an irregularity under s.306 of the Bankruptcy Act. Section 306 does not provide a power to dispense with the requirements of r.3.02. The non-compliance was not something that amounts to a defect or an irregularity of the kind identified under s.306.
While s.33, on its terms, provides a power to extend time limited by the Act, it does not in fact refer to the Rules. There is no express power in the Federal Circuit Court (Bankruptcy) Rules that provides for waiving or dispensing of the requirements under r.3.02. Rule 1.06 of the Federal Circuit Court Rules provides that the Court:
…may in the interests of justice dispense with compliance, or full compliance, with any of these Rules at any time.
The reference to “these Rules” in Rule 1.06 are the Federal Circuit Court Rules not the Federal Circuit Court (Bankruptcy) Rules. There is a discretionary power to apply relevantly the Federal Court Rules where “the Rules are insufficient or inappropriate” under r.1.05 of the Federal Circuit Court Rules. When engaged, this power picks up the Federal Court Rules “in whole or in part and modified or dispensed with, as necessary”. The pre-condition to the power is that the Federal Circuit Court Rules are insufficient or inappropriate.
Unlike the Federal Court (Bankruptcy) Rules in r.1.03(1) this Court is not given a discretion to apply the Federal Circuit Court (Bankruptcy) Rules. That provision in the Federal Court does create a discretionary power to order that specific rules do not apply to a proceeding to which the Bankruptcy Act applies in the Federal Court. Whereas in this Court r.1.03 requires application of the Federal Circuit Court (Bankruptcy)Rules in proceedings to which the Bankruptcy Act applies and other rules of Court apply “so far as they are not inconsistent with these Rules, to a proceeding to which the Bankruptcy Act applies”. Application of the Federal Circuit Court Rules so as to permit dispensing with the requirements of r.3.02 in these proceedings to which the Bankruptcy Act applies, given the mandatory term “must” would, in my opinion, be inconsistent with “these Rules”.
In my opinion there is no discretionary power not to apply r.3.02 of the Federal Court (Bankruptcy) Rules given the word “must” whereby it is a mandatory or essential provision not within the reach of s.306 of the Bankruptcy Act, Weeden v Rambaldi (2012) FCA 552 at [61-63]. A different view was expressed in Burrell v Reavill Farm Pty Ltd [2014] FCCA 1449 but no reference was made to the difference between the Rules applicable in this Court and the Rules applicable in the Federal Court. To the extent that the decision in Burrell suggests otherwise, I am clearly satisfied that it is plainly wrong, and that there is no power under Rule 1.06 of the Federal Circuit Court Rules to dispense with Rule 3.02 of the Federal Circuit Court (Bankruptcy) Rules and being an essential requirement it is not an irregularity of defect within s.306 of the Bankruptcy Act. Further being an essential or mandatory provision the application of r.3.02 to the affidavit filed in this case does not give rise to a formal defect or irregularity within s.57 of the Federal Circuit Court Act. Mr Pritchard led evidence from Mr James that he was not aware of the requirements of r.3.02 at the time that he filed the application to set aside the bankruptcy notice and for an extension of time.
I am prepared to accept that evidence, albeit it is clear that Mr James could have turned his mind to what appears on page 4 of his affidavit in para.5 that identifies the requirements for applying to set aside the bankruptcy notice. Whether or not Mr James was aware of the rule is not a proper reason for this Court to depart from its application. Rule 3.02 is intended to perform an important public purpose in identifying promptly the material facts that are said to give rise to the counterclaim, set-off or cross-demand by specifying or stating the full details of the counterclaim, set-off or cross-demand and stating the amount of the counterclaim, set-off or cross-demand. Dispensing with compliance is inconsistent with the Federal Circuit Court (Bankruptcy) Rules as the provision is a mandatory or essential provision. It is regrettable that this Court is not given the same power not to apply the Rules as found in the Federal Court (Bankruptcy) Rules, but the distinction identified above is in my opinion clear. Even if there were a discretionary power or the non-compliance were properly characterised as a defect or irregularity, for the reasons given in this decision, I would not have dispensed with the requirements of r.3.02 in this case as the substance of the counterclaim, set-off or cross demand are clearly wanting and have no sufficient prospect of success.
In this case the amount by which the alleged counterclaim, set-off or cross demand exceeds the amount claimed in the bankruptcy notice and why the counterclaim, set-off or cross-demand was not raised in the proceedings which resulted in judgment or in order in relation to which the bankruptcy notice was issued were not addressed by Mr James in the mandatory r.3.02 affidavit. This is a sad case, in which it appears that Mr James was let down by his solicitor in relation to the entry of judgment in the District Court. Nonetheless, the requirements of r.3.02 are ones that were not satisfied in respect of the application to set aside the bankruptcy notice. Given the lack of a real and sufficient counterclaim, set-off or cross demand, even if there was power to do so arising under s.40 (1)(g), s.41 and s.33 of the Bankruptcy Act, I decline to exercise any power to dispense with or not apply r.3.02 as the application has no sufficient prospect of success.
Mr James has put before the Court, material seeking to advance that he has a counterclaim, set-off or cross-demand equal to or exceeding the amount of the judgment debt based on a valuation of a Mr Stephen John Skipper, identified in an affidavit sworn 5 March 2015 so as to satisfy the Court of the requirements to set aside the bankruptcy notice under s.40 (1) (g) of the Bankruptcy Act. The counterclaim, set-off or demand was said to mean there was no underlying debt the subject of the guarantee or alternatively was a derivative claim dependent upon the shareholding interests of Mr James of a corporate vehicle that is in liquidation. No evidence was lead as to the financial affairs of that company, the unsecured creditors, liquidators costs or the basis of upon which the alleged higher sale value would have provided any meaningful surplus available for distribution to Mr James.
Mr Skipper identifies himself as a non-practising qualified valuer and identifies that he is retired as a fellow from the Australian Institute of Valuers and it is apparent from his resume that since 2008 he has not been carrying on valuation work.
In his affidavit, Mr Skipper purports to opine that the value of the property at 872 Pacific Highway, Lisarow would not have been less than $2,350,000 as at 23 September 2013 and subsequently the relevant property was sold on 19 March 2014 for $1.65 million. Mr Skipper’s affidavit failed to identify any comparable sales consistent with proper practice for the purpose of a proper valuation. Further Mr Skipper opined on matters as to what an officer of the bank should have done, an area outside and beyond his expertise. Mr Skipper’s valuation is not a proper valuation and reflects an inadequate basis upon which to allege a sale of the property at an undervalue. The want of comparable sale figures means in my opinion that this is not a valuation that provides a proper arguable basis for a sale at an undervalue by the receivers appointed by the Bank and does not establish any arguable breach of statutory duty of care by the mortgagee in the sale price achieved for the land. The evidence does not establish a real or sufficiently arguable counterclaim, set-off or cross demand.
Mr Pritchard of senior counsel conceded that Mr Skipper had no qualifications as a banker in opining in relation to what a banker should do and this willingness to travel beyond his limited and out of date area of expertise further diminishes any weight being place upon Mr Skipper’s valuation. Mr Skipper’s valuation, if it were to be accepted, is one in respect of which the creditor’s petition before this Court is owed an amount of $737,000 plus costs. Even if one were to accept the opinion of Mr Skipper that the market value at the time of sale should have been $2,350,000, that would give rise to a difference of $700,000, ignoring the other costs of sale, and this would still be less than the amount owing today, or at the time of presentation of the creditor’s petition. Accordingly I am not satisfied there is a counterclaim, set-off or cross demand equal to or exceeding the amount of the judgment creditor’s debt. I am not satisfied that there is no underlying debt owed under the guarantee by Mr James.
For the above reasons the alleged derivative claim of Mr James as a shareholder would not give rise to a surplus available for distribution not taking into account the corporate unsecured creditors, receivers and liquidators costs. Mere differing opinions as to valuation fall along way short of an arguable breach of a statutory duty of care by a mortgagee. Further earlier valuations at a different time are not a sufficient basis to establish an arguable breach of statutory duty by the mortgagee. In this case even if the Court were to accept Mr Skipper’s valuation as arguable, which I do not, there is a clear shortfall owing to the petitioning creditor as at the date of the presentation of the petition.
This is not a case where the opinion evidence advanced by the plaintiff, taking it at its highest, is in excess of the amount owing to the judgment creditor. Mr Pritchard of senior counsel skilfully sought to advance that the Court should look at the date and the amount claimed as at the time of the filing of the statement of claim by the judgment creditor. That is not, in my opinion, the appropriate time at which to assess whether or not there is a 872 Pacific Highway, Lisarow counter-claim, set off or cross-demand. This is not a case in which the merits or prospects of success warrant extension of time for compliance with the bankruptcy notice as the dispute is not in my opinion of sufficiently arguable. I have taken into account the general desirable course given the proceedings on foot in the Court of Appeal as identified as Re Baker; ex parte Baker v Staples [1995] FCA 1520 at [5] and Beckwith v Pedler (1999) FCA 1312 but I am satisfied the proceedings on foot will not give rise to a counterclaim, set-off or cross demand equal to or in excess of the amount of the judgment debt.
In determining the concurrent application under the petition I take into account what was said in Clapham v Commonwealth Bank of Australia [2013] FCAFC 84, at [54]and [57] but for the reasons given this is not an appropriate case to adjourn the petition as I am satisfied that the counterclaim, set-off or cross demand will not give rise to an amount equal to or in excess of the judgment debt and I am satisfied there is an underlying debt and that this is not a case in which there is any merit or basis to go behind the judgment debt.
Mr James in evidence acknowledged that the bank sold the property for the amount in respect of which it had a valuation. That valuation obtained by the Bank was in evidence before the Court, and on its face appears a proper valuation, taking into account comparable sales. That valuation strongly supports there being no substance in the alleged breach of statutory duty by the mortgagee in the sale of the corporate entity’s property. Mr Pritchard sought to criticise the valuation on two grounds: first, that there were a series of other valuations that had earlier been obtained in support of a loan application for a proper amount, and secondly on the basis that the valuer, it was alleged, gave a nil value to part of the vacant land. Contrary to that contention, the valuer does identify beyond the fair building land, that there is land that falls away with moderate gradient which is predominantly timbered and includes a drain and a creek. The valuer identifies that surplus land being affected by riparian areas, and future development would require compliance with Australian standards in relation to noise attenuation due to its proximity to the main northern railway line. It is in those circumstances that the valuer said:
It is our opinion that the market is not prepared to pay anything for surplus land given the current weak sentiment in the industrial sector. Surplus land has been reflected in the adopted yield.
I do not regard that proposition as meaning that the valuer has disregarded the surplus land. I was taken to the capitalisation, Approach Evaluation, which identifies the building area of 2512.6 square metres, and a valuation derived from that which informed the petitioning creditor’s valuer’s current market value by vacant possession, at 1.650, GST exclusive. The valuer was asked to take into account the value on forced sale and identified a value of $1.5 million. There is in my opinion no substance in either criticism of the Bank’s valuation as advanced by Mr James. Further it is apparent from the material put into evidence by Mr James that Mr James was well aware of that proposed sale price of $1.65 million, plus GST, from 11 December 2014 up until the time it was sold on 19 March 2015. It is not necessary to explore the earlier steps taken for sale and it is apparent that the property was on the market at its sale price for almost 3 months.
There is no evidence that Mr James took any steps to suggest, in that timeframe, that the advertised sale price was at an undervalue, that there was some deficiency in relation to the marketing, or that there was some other step that the mortgagee should have taken in selling the property. On the face of the valuation obtained by the bank, dated 24 September 2013, the relevant property was not sold at an undervalue and I do not accept that there is an arguable case of a sale at an undervalue. The evidence supports that the property was sold its market value. There is no doubt that, before the general financial crisis, there were many valuations that were higher obtained by borrowers and used in relation to obtaining funds from lenders. Valuations of property change because the market value changes. Earlier higher valuations do not establish that a late valuation is wrong. Earlier higher valuations do give rise to an arguable case that a subsequent valuation and sale price achieved at that subsequent valuation reflects a breach of a duty of care where the seller was a mortgagee. Nor do earlier higher valuations establish an arguable case that there must have been some deficiency in the marketing of the property sold at the sale price of a lower subsequent valuation. The earlier valuations in this case do not support the existence of an arguable case of breach of duty by the mortgagee. The different opinion of Mr Skinner given the deficiencies in his valuation with the proper valuation by the Bank does not disclose any arguable breach of duty by the mortgagee.
There is nothing in the material to which I have been taken that satisfies this Court that there is any substance in the assertion of a want of reasonable care by the mortgagee in relation to the sale of the property or that the sale that occurred on 19 March 2015 was at an undervalue. Mr James filed a notice of motion in the District Court to set aside the judgment obtained by the petitioning creditor, and that application was dismissed. I note it was dismissed in circumstances where that Court found that there was an arguable case on the material before the District Court.
The decision in the District Court found that Mr James could not succeed in obtaining the benefit of s.111A of the Conveyancing Act 1919 (NSW) due to a suspension clause in the lending agreement between petitioning creditor and Mr James. I was informed that an application for leave to appeal has been fixed for hearing on 11 May before the Court of Appeal and that the issues sought to be agitated include the work done by s.111A and whether the suspension clause is one that is contrary to public policy or otherwise contrary to s.22 of the Civil Procedure Act 2005. It was argued that these matters were left open in O'Brien v Bank of Western Australia Ltd [2013] NSWCA 71 in which Ward JA discussed the principles surrounding suspension clauses. It is not necessary for this Court on either application to determine these issues.
On the material before this Court, I am not satisfied that Mr James is likely to succeed in any claim against the petitioning creditor. For the reasons I have given, I am satisfied that even if Mr James were to succeed it would be for an amount substantially less than the amount currently owing to the petitioning creditor. In these circumstances, even if this Court can dispense with Rule 3.02, I am satisfied this is not appropriate case to do so. I should note that to the extent it was suggested that s.111A of the Conveyancing Act gave Mr James as a guarantor a cause of action for damages in respect of the property owned by the company now in liquidation. I do not accept that proposition. That proposition is contrary to the terms of the Act and what was said the Bryson J in GE Capital Australia v Davis [2002] NSWSC 1146 at [45] and [56].
Whilst I accept that there may be some benefit under s.111A that could fall within the right of Mr James as a guarantor to obtain an equitable remedy of accounts in respect of the sale by the mortgagee of the property now in liquidation that right would subject to the rights of the liquidator, receiver and unsecured creditors. I am satisfied that any such right would not give rise to an counterclaim set-off or cross-demand equal to or in excess of the debt currently due and payable to the judgment creditor.
In any event for the reasons I have given, the suspension clause is not determinative of this application as, in my opinion, Mr James is not likely to succeed in his claim against the petitioning creditor alleging a breach of s.111A. Further Mr James is not likely to recover derivatively through the companies that are now in liquidation any surplus by equitable accounts, even if the suspension clause were found not to be enforceable, that would satisfy the amount due to the petitioning creditor. I note that there was reference by Mr Pritchard SC to a Contracts Review Act claim, but this was not identified in the application for leave to the Court of Appeal and there are no facts that give rise to an arguable case that the contract of guarantee by Mr James was unjust at the time it was made. I am satisfied that any recovery by Mr James would not be equal to or exceed the amount that is currently owing to the judgment creditor.
The supporting creditor ANZ obtained a consent judgment on 16 May 2014 to the sum of $13,928,818. I was informed by consent that the amount currently due and payable by Mr James in that regard is $11,751,606. My attention was drawn to the fact that there was a cross-claim on between Mr James and the ANZ Bank, the supporting creditor, which was, by consent, dismissed. I was informed by Mr Pritchard of Senior Counsel that there was a cross-claim or statement of claim that Mr James was seeking to pursue against the ANZ.
That statement of claim was before the Court and filed on 19 May 2014. It is one in respect of which Mr James advances his claim in circumstances where the relevant properties were all held by companies and his claim is being pursued in the position of a shareholder. That claim is one which also appears to be without merit.
Notwithstanding the proximity of the hearing date before the Court of Appeal in respect of a leave application, this Court has a broader interest than the parties which includes a public interest in relation to its bankruptcy jurisdiction in respect of an insolvent debtor and the interest of the supporting creditor opposing an adjournment is a relevant factor taken together with the lack of merit in relation to the claim being advanced by Mr James on the findings that I have made. An adjournment in this case would also give rise to the real prejudice of the incurring of further unrecoverable costs by the petitioning creditor in circumstances where the Court is satisfied that the counterclaim, set-off or cross demand will not give rise to an amount equal to or in excess of the judgment debt.
In those circumstances, notwithstanding that the Court of Appeal leave application is shortly to be heard, it is not, in this case, appropriate to adjourn either the application to set aside the bankruptcy notice or to adjourn the creditor’s petition. I have also taken into account that this creditor’s petition and the application to set aside the bankruptcy notice is one that otherwise would have been heard on an earlier date and was adjourned until today’s date on compassionate grounds in relation to Mr James.
The bankruptcy notice was validly issued and no ground has been made out to set aside the bankruptcy notice. I am not satisfied that there is sufficient cause to adjourn the application or to adjourn the petition. The insolvency in this case is not likely to be of short duration. I have taken into account, in this regard, the supporting creditor, ANZ which opposes any adjournment of either application. In these circumstances, I dismiss the application for review to set aside the orders of the registrar. I am satisfied that the judgment creditor has proved that Mr James, as the debtor, has committed an act of bankruptcy. That act of bankruptcy occurred on 19 December 2014. There was no substance in Mr James’s objection to the evidence of service of the bankruptcy notice, I am satisfied service was proved and I note Mr James admitted service of the bankruptcy notice.
I am satisfied that Mr James was personally present and a resident in Australia at the time of that act of bankruptcy. I am satisfied that the petitioning creditor has proved the matters stated in the petition and has proved the fact that the debt on which the petitioning creditor relies is still owing. I am satisfied the petition complies with the statutory requirements. I am not satisfied by Mr James that he is able to pay his debts. I am satisfied Mr James is unable to pay his debts as they fall due and is insolvent. I am not satisfied of any other sufficient cause whereby the sequestration order ought not to be made. I note that affidavits were also filed in accordance with rr.4.06(3) and 4.06(4) in support of the sequestration order. I am satisfied that the bank has proved the matters required under s.52(1) of the Bankruptcy Act and I am satisfied that the petitioning creditor is entitled to a sequestration order. I am satisfied that a sequestration order should be made against the estate of Mr James. For these reasons orders should be made in the respective application as identified in this judgment.
An oral application was then made by Senior Counsel for Mr James. This is a matter in which the Court has pronounced a sequestration order and an application is made before a stay under s.52(3) of proceedings under the sequestration order for a period not exceeding 21 days. Whilst I appreciate the force of Mr Pritchard’s argument that a stay of the proceedings will let Mr James seek to pursue further steps in relation to his Court of Appeal proceedings, those were matters I took into account in declining to grant an adjournment of either of the two applications. This was because I was clearly satisfied that there was no substance in the alleged challenge to the bankruptcy notice and I was clearly satisfied it was appropriate to make a sequestration order. I also took into account existence of the supporting creditor in respect of a further substantial amount owing by Mr James, the public interest and prejudice to the petitioning creditor in this case.
Whilst I understand Mr James’ concerns in relation to the case he seeks to assert in respect of a sale at an undervalue, for the reasons I have identified, that case has no substance. It is not a case in respect of which I see any merit. In my opinion Mr James has no arguable case which would justify a staying of the proceedings under the sequestration order. Mr Pritchard sought to identify that the balance of convenience was one which he asserted lay wholly in favour of Mr James. In the circumstances that I have identified including the existence of the supporting creditor, the prejudice identified to the petitioning creditor and the public interest, I am satisfied that the balance of convenience does not weigh in favour of Mr James. As this is a case which in my view counterclaim, set-off or cross demand is not arguable, this is not an appropriate case for a stay of the proceedings under the sequestration order. I decline the oral application.
I certify that the preceding thirty-two (32) paragraphs are a true copy of the reasons for judgment of Judge Street
Associate:
Date: 29 April 2015
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