Johnson, R.J. v AGC (Advances) Ltd

Re: ROBERT JOHN JOHNSON
And: AGC (ADVANCES) LIMITED
No. B N2913 of 1991
FED No. 320
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Lockhart J.(1)

CATCHWORDS

Bankruptcy - Meaning of "counter-claim or cross-demand that equals or exceeds the amount of the judgment debt" - how to assess whether such a counter-claim or cross-demand has a fair chance of success.

Bankruptcy Act 1966 (Cth): s. 40(1)(g).

HEARING

SYDNEY

#DATE 21:5:1992

Counsel for the Applicant : R.J. Colquhoun

Solicitors for the Applicant : Carroll and O'Dea

Counsel for the Respondent : M. Cashion

Solicitors for the Respondent: Clayton Utz

ORDER

The Court orders that:

1. It be declared that the Court is not satisfied that the applicant has a counter-claim or cross-demand equal to or exceeding the amount of the judgment debt of the respondent that the applicant could not have set up in the proceeding in which the judgment was obtained.

2. Otherwise the application be dismissed.

3. The applicant pay the costs of the respondent of this proceeding including any reserved costs.

4. Time for compliance with Bankruptcy Notice No. B2913 be extended up to and including 4 June 1992.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

On 11 July 1991 the respondent, AGC Advances Limited, obtained by consent judgment in the Supreme Court of New South Wales against the applicant, Robert John Johnson, in the sum of $13,262,658.36.

On 16 August 1991, a Deputy Registrar issued a bankruptcy notice directed to the applicant based upon the judgment. Time for compliance with the requirements of the notice was later extended by a Deputy Registrar. It is not in dispute that before the expiration of the time fixed for compliance with the requirements of the bankruptcy notice, the applicant filed with the Registrar an affidavit or affidavits intended by the applicant to answer the description of "an affidavit to the effect that he has such a counter-claim, set-off or cross-demand as is referred to in paragraph 40(1)(g)" within the meaning of s. 41(7) of the Bankruptcy Act 1966 ("the Act"). A counter-claim, set-off or cross-demand referred to in s. 40(1)(g) is one that equals to or exceeds the amount of the judgment debt and that the debtor could not have set up in the action or proceeding in which the judgment was obtained (see s. 40(1)(g)).
On 20 December 1991 the applicant filed an application in this Court seeking an order that the Court be satisfied that the applicant has a counter-claim or cross-demand of the kind referred to in s. 40(1)(g). An order was also sought in the application that the bankruptcy notice be set aside on the ground that the amount specified in the notice exceeds the amount of the applicant's indebtedness to the respondent; but this order was abandoned at the hearing. Affidavits have been filed by both parties in the application and yesterday I commenced to hear it and the hearing concluded earlier this afternoon.
Before turning to the evidence the principles to be applied in cases of this kind should be stated.
In Re Brink (1980) 30 ALR 433 I said (at 437-438) that there was some variance in the authorities as to what is sufficient to satisfy the Court that a debtor has the requisite counter-claim, set-off or cross demand. I referred to the relevant authorities (at 437-439) and in particular to the judgment of the High Court in Ebert v Union Trustee Co of Australia Limited (1960) 104 CLR 346 where Dixon C.J., McTiernan and Windeyer JJ. said at 350:

"Section 52(j) makes it necessary that a debtor served with a bankruptcy notice, if he does not comply with its requirements, should satisfy the Court of Bankruptcy that he has a counter-claim, set-off or cross-demand which equals or exceeds the amount of the judgment debt. The debtor clearly must satisfy the court that there exists in him a counter-claim, set-off or cross-demand. 'cross-demand' are the words relied upon here. The appellant cannot satisfy the Court that a cross-demand exists by showing no more than that she propounds one and states how she suggests that she can make it out. In Re Duncan; Ex parte Modlin (1917) 17 SR(NSW) 152; 34 WN(NSW) 49, Street J. said that the debtor need not satisfy the Court that there are reasonable grounds for believing that he will establish his cross-action, but only that he has a bona fide claim which he is fairly entitled to litigate. This perhaps is expressed too favourably to the debtor. In Re A Debtor (1958) 1 Ch 81, Roxburgh J. said: 'But not every demand will suffice. A demand made in bad faith would not be good enough. The debtor must satisfy the Court that he has a genuine demand ... But in my opinion a demand must be more than bona fide: the Court must be satisfied that it has a reasonable probability of success': (1958) 1 Ch, at p 99. Perhaps the standard may be expressed by saying that the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross-demand."

I adhere to the view expressed by me in Re Brink (at 439) that the consequence of the review of the authorities is that this Court should follow the decision of the High Court in Ebert and that a debtor must therefore show that he has a prima facie case. I also said (at 439):

"However, I do not understand Ebert's case as deciding that this court must undertake a preliminary trial of the counter-claim, set-off or cross-demand; rather this court must be satisfied that the debtor has a fair chance of success, a statement of principle to which I adhere."

See also Clark v UDC Finance Limited (1985) 2 NZLR 636 at 637-8.

The issue before the Court raised under s. 40(1)(g) is whether the applicant has established that he has a prima facie case in the sense of a reasonable probability or fair chance of success. The counter-claim or cross-demand must be such as equals or exceeds the amount of the judgment debt. In my opinion the counter-claim or cross-demand asserted by the applicant (it is not of course a set-off) could not have been set up by him in the Supreme Court proceeding in which the judgment was obtained.
Affidavits were filed by the applicant and read on the hearing. The deponents were the applicant, his brother (Francis Edward Johnson), Robert Duncan Lidster and Robert Gordon Cruickshank. The respondent read affidavits of Vivien Jane Sonego, Richard Oliver Cunningham, Paul Ancil Hughes Jnr and Glen Alan Madsen.
Some of the deponents were cross-examined; but I made it clear to counsel that this was not a trial, even of a preliminary nature, of the substantive issues raised by the counter-claim or cross-demand, whereupon counsel adopted the sensible attitude of limiting cross-examination to matters presently relevant and permissible.
The matters which the applicant seeks to propound in his counter-claim or cross-demand are substantially the same as the matters which he seeks to propound in the Supreme Court of New South Wales in the proceeding in the Common Law Division (No. 1613 of 1991) which he commenced on 20 December 1991.
I have not formed a view that any of the witnesses lacked credibility or reliability. It was not appropriate in a proceeding of this kind that I form such a view, and it was not a view which I did in fact form. It seems to me that to the extent to which issues turn on questions of credit they should be determined in the appropriate proceeding which is not the present one. The full ventilation of the issues between the parties would obviously be a hearing which would take a week or more to determine and would involve far more extensive evidence than has been placed before me, and evidence in better form than certain of the affidavits filed by the applicant in this proceeding.
None of my findings of fact are intended to be of a final nature. I have simply determined them for the purpose of dealing with the present application, applying the principles to which I referred earlier.
The applicant was a director of Horticultural World Limited ("HWL") from the middle of 1987 to 3 July 1991. HWL was formed for the purpose of acquiring what is described in the evidence as the "Big Banana" or "The Big Banana Theme Park", a tourist attraction in the Coffs Harbour district. The "Big Banana" is the name given to an area of what is presently some 44 acres in the Coffs Harbour district. It is situated on the Pacific Highway about half way between Sydney and Brisbane. The "Big Banana" has various facilities and attractions to cater for tourists and facilities to accommodate the administration and operations staff. The evidence suggests that it has parking for large numbers of cars and coaches, a restaurant, a retail area within the restaurant complex, other retail areas on the site, an office and administration building, public amenities, workshops, a hydroponic glasshouse, a banana packing shed, 4 kilometres of shuttle train tracks, diesel-operated shuttle trains, historical exhibits, an ocean lookout, fruit orchid and display gardens and an animated fictional monster housed in a billabong known as the Bunyip.
The applicant is one of three persons who invested in the project and one of the shareholders in HWL. The applicant and his wife held or hold between them 45% of the shares in the issued capital of HWL.
In June 1987, HWL purchased the "Big Banana" for $1,650,000. From October 1988 until about the end of July 1989 HWL invested approximately $22m on improvements including renovation of existing shops, the creation of new buildings, the erection of exhibits and storage sheds, earthworks, carparking and landscaping and the construction of a monorail and monorail carriages. The monorail and its carriages were designed specifically for the site and cost more than $3m to purchase and install.
The respondent financed the acquisition of the "Big Banana" by HWL and it took various securities including a finance facility deed of 7 April 1989, varied on 16 October 1989, and guarantees of the repayment of the debt of HWL from the applicant and others.
The "Big Banana" has been trading continuously since 26 June 1989. The applicant managed the business from 22 December 1989 to 10 May 1990 and his tasks included attracting tourists from within Australia and overseas.
On about 7 January 1990 HWL defaulted under the finance facility deed. On 26 June 1990 a provisional liquidator was appointed to HWL and he became liquidator on 14 March 1991 when HWL was wound up. On 7 March 1991 a receiver was appointed to the assets of HWL charged to the respondent and constituting the "Big Banana" business.
On 17 October 1991 an auction sale of the "Big Banana" was held, but it was passed in as the reserve of $3m had not been reached.
By agreement for sale dated 12 November 1991, the respondent agreed with Teamkite Pty Limited ("Teamkite") that the respondent would sell and Teamkite would buy the "Big Banana". On 11 May 1992 the respondent gave notice in writing to Teamkite asserting that the latter was in default under the agreement for sale in that it failed to perform its obligations under clause 39 of the agreement by the time stipulated in a letter of 14 April 1992 from the respondent or its solicitors in which it made time of the essence for the performance of the obligations under clause 39. Those obligations apparently relate to the obtaining of liquor licences with respect to certain portions of the premises comprising the "Big Banana".
The notice asserts that Teamkite was in breach of an essential obligation under the agreement and therefore stated that the respondent terminated the agreement and forfeited the deposit of $300,000. It also stated that the respondent would proceed to resell the property and hold Teamkite liable for any deficiency and costs, charges and expenses occasioned by resale.
The solicitor for Teamkite appeared yesterday in response to a summons to produce documents served upon the firm of which he is a member; and he informed the Court that Teamkite disputed the validity of the purported notice of termination of the contract.
The evidence is sparse as to the profitability of the "Big Banana" venture and its value. It must be remembered, however, that this is a proceeding with respect to s. 40(1)(g) of the Act and is not a final hearing on the merits. There is some evidence that, during the period from January 1990 to 10 May 1990, before payment of interest to the respondent, the net profits from trading activities of the "Big Banana" was approximately $12,000 per week, and that the annual profits were in the region of $1m and may have reached $1.5m.
There is no doubt that after about May 1990 there was a decline in the profitability of the "Big Banana". There is also evidence in support of the applicant's case that there was a general decline in the appearance, presentation and operation of the venture. There is evidence, though this is disputed, that after about late 1990 the "Big Banana" became merely a shell of the former "Theme Park" that it had been and that it fell into disrepair. Specific allegations include the facts that farming activity at the park decreased, one of its attractions, the Bunyip, broke away from its mooring and was left floating in the water in about late 1990, two of the four shuttle trains were removed which meant that there were long queues at peak periods, and brochures which were still issued promoting the park, but were not truly represented by the appearance of the park.
There is also evidence that in order to prepare for the sale of a property such as the "Big Banana" the following steps need to be taken:

. the property must be made to look attractive and kept in a "well groomed condition" for potential purchasers to inspect; . contracts need to be drawn up before the property is advertised for auction, that is to say a completed form of contract inclusive of all leases, council certificates and zoning requirements; . it is advisable to have feasibility studies for redevelopment or rezoning of the property, so that all such information is readily available well before the auction for prospective purchasers to assess the value to them of the business premises; . the agent must himself have an excellent working knowledge of the property;

. the marketing must be well directed; . brochures should be sent to strategic areas overseas as well as in Australia; and as the "Big Banana" is such a specialised property it would need to be advertised in the "right areas" in order to attract sufficient attention to the auction; . the auction should be prepared and conducted in such an "open manner" as ensures that contracts as well as financial information are readily available well before the auction date and that the property is well promoted.

There is also evidence that the preparation for the auction sale of the "Big Banana" did not observe these principles and that the sale was advertised and promoted inefficiently. There is also evidence to the contrary. Some of the evidence to the contrary is, for example, that two of the four shuttle trains were not removed, but that the provisional liquidator reorganized the timetable by having two trains operating during off-peak periods and four trains operating during peak periods only, such as school holidays and times when there were large coach bookings. The breaking away of the Bunyip from its mooring is also denied, as is the fact that farming activity at the park decreased.
In these circumstances I approach the issues, not on the basis that the matter is a final hearing or even akin to a final hearing of a proceeding, but to determine whether there is a fair chance of success at such a hearing. I have relied primarily upon the evidence adduced in the applicant's own case and not sought to weigh it against the evidence adduced by the respondent because that inevitably would place the Court in the position of assessing the credibility of witnesses or their reliability and preferring the evidence of one witness to that of another, the very task which in a complex case like this should not be engaged in by the Court.
The assertions of the applicant are twofold. The first submission is essentially that the respondent either wilfully allowed the "Big Banana" to rapidly and markedly deteriorate or that it acted recklessly and negligently in its conduct of the business which led to a dramatic reduction in value. This assertion is founded on the proposition that the respondent was a mortgagee in possession of the assets and business that constituted the "Big Banana". As mentioned earlier, on 26 June 1990 a provisional liquidator was appointed of HWL; and I have been informed by counsel for the respondent (and it is not disputed) that the appointment of the provisional liquidator was at the instance of a creditor of HWL who is not the respondent. The provisional liquidator appears to have acted as such during the period of his appointment, and, following his appointment as liquidator on 14 March 1991, he has continued to act in that capacity. It was not until 7 March 1991 that the respondent appointed a receiver to the "Big Banana" business. Until the winding up of HWL on 14 March 1991 the receiver acted as agent for HWL and not for the respondent. There is no evidence in any reliable form at all that the respondent intervened in the conduct of the provisional liquidation or the receivership, at least prior to the winding up of HWL.
Thus there can be no case made out against the respondent itself prior to 14 March 1991. After that date the receiver became the agent of the respondent, and I am content to assume for present purposes that the acts of the receiver thereafter were on behalf of his principal, the respondent, so that the principal is liable for his actions and conduct. Although the case is far from being a clear one in favour of the applicant I shall also accept for the purposes of this proceeding that there is a reasonably arguable case that after 14 March 1991 there was to some degree deterioration in the business of the "Big Banana" and its assets brought about by the conduct of the respondent through its receiver. I emphasise again that I am making no such finding on any final basis as there is strong evidence of the respondent to the contrary.
The second limb on which the applicant puts his case against the respondent is that the respondent (so it is said) failed to use reasonable care to obtain the best possible price for the sale of the "Big Banana" in October 1991. Again, notwithstanding cogent evidence from the respondent, I am satisfied for the purposes of the present proceeding that the applicant may establish at a trial as a matter of fact (I shall mention the law in a moment) that the respondent through its receiver did fail to exercise reasonable care to obtain the best possible price in the circumstances. This second limb, however, rests on the proposition of law that a mortgagee in possession owes a duty to the mortgagor or a guarantor to use reasonable care to obtain the best possible price in the circumstances. The question of a mortgagee's duty in exercising his power of sale has been considered by courts in Australia, England and New Zealand on many occasions. There are two streams of authority: one is to the effect that the duty of a mortgagee in the exercise of his power of sale is solely to act bona fide; the other, that he has an additional and higher duty to take reasonable precautions to obtain a proper price at the sale. The latter strand of authority finds strong support in England and New Zealand: see Clark v UDC Finance Limited per Casey J. at 638 where the cases are conveniently collected by his Honour; and Parker-Tweedale v Dunbar Bank Plc (1991) Ch 12. In Australia the position is not so clear. There is a useful collection of some of the relevant authorities in the judgment of Cole J. in Westpac Banking Corporation Limited v Kingsland, unreported, 22 August 1991 at 10-12 where his Honour concluded on his review of the authorities that the duty of a mortgagee and a receiver in relation to the exercise of the power of sale is merely to act in good faith. His Honour derived this proposition principally from the judgment of the High Court in Pendlebury v Colonial Mutual Life Insurance Limited (1912) 13 CLR 676. For myself I do not think the matter is so clear. It is plain from my reading of the authorities that the question of the nature and extent of a duty of a mortgagee exercising his power of sale has been left unresolved by the High Court. In Pendlebury, Barton J. approached the question on the basis that the duty to act bona fide includes the duty to take reasonable precautions to obtain a proper price at the date of the sale (at 694-5). In Forsyth v Blundell (1973) 129 CLR 477 Menzies J. adopted a similar approach to that of Barton J. in stating (at 481) that:

"To take reasonable precautions to obtain a proper price is but a part of the duty to act in good faith."

Walsh and Mason JJ. referred to the conflicting authorities on this question as to whether the mortgagee's duty is merely to act bona fide or whether he is bound to take reasonable precautions to obtain a proper price, but left the question open; see also The Australia and New Zealand Banking Group Limited v Bangadilly Pastoral Co Pty Limited (1978) 139 CLR 195.

Given the state of authority in Australia, I am not prepared to hold in an application of the kind before me that it is not reasonably open in law for the applicant to assert a case that the respondent owed a duty of care to him to obtain the best possible price upon the sale of the mortgaged property. The applicant is, of course, not the mortgagor, but a guarantor, and there is a further question as to whether any such duty owed by a mortgagee extends to a guarantor; but it is plain from the authorities to which I was referred that this too is an open question, although on balance the preponderance of authority appears to favour the conclusion that the requisite duty is owed to guarantors as well as mortgagors.
The question arises as to whether any counter-claim or cross-demand of the applicant is one that equals or exceeds the amount of the judgment debt. I have already referred to the evidence adduced in support of the applicant's case that some $22m was put into the development of the "Big Banana" business after it was acquired by HWL together with the initial purchase price of $1.6m. Also, whilst he was managing the business, it showed substantial profits and prospects of further and greater profits. There is some evidence that on the basis of capitalisation of earnings the business was worth, when the applicant left it, something in the order of $10m to $15m or possibly as high as $20m. But the fact is that shortly after he ceased to manage the business in May 1990 the company, HWL, was placed in the hands of a provisional liquidator who later became its liquidator. Also the receiver was appointed by the respondent and there is no suggestion that any of these appointments was invalid.
Once provisional liquidators and receivers are appointed to businesses, problems generally arise. Even if the respondent owed the duties asserted by the applicant and breached them, it is impossible to say on the evidence before me that they are quantifiable to any figure, even a broad and inexact one. It is also impossible to say that any counter-claim or cross-demand he may have equals or exceeds the sum of $13,262,658.36. If there was a fair case adduced by the applicant in this proceeding that could enable a finding to be made of a quantified loss of the kind which he must establish, I would so hold and then the Supreme Court could sort the matter out in the current common law proceeding before it. But I cannot make this finding. There are so many variables that may come in to the question of quantification of loss once liquidators and receivers are appointed to a company, no permissible finding of the kind contended for by the applicant could be made by the Court.
It is impossible to quantify any counter-claim or cross-demand, let alone reach the conclusion that it is equal to or exceeds the $13,262,658.36.
There is a further reason for no reliable assessment of loss being possible, namely, the consequence of the notice of termination of the agreement for sale by the respondent.
The Court orders that it be declared that the Court is not satisfied that the applicant has a counter-claim or cross-demand equal to or exceeding the amount of the judgment debt of the respondent and that he could not have set up in the proceeding in which the judgment was obtained. Otherwise the application is dismissed.
The applicant shall pay the costs of the respondent of this proceeding including any reserved costs.
The Court also orders that the time for compliance with Bankruptcy Notice No. B2913 be extended up to and including 4 June 1992.

[1992] FCA 320

21 MAY 1992