Lamaw Pty Ltd v Tahiri
[2018] FCCA 2955
•19 October 2018
FEDERAL CIRCUIT COURT OF AUSTRALIA
| LAMAW PTY LTD v TAHIRI & ANOR | [2018] FCCA 2955 |
| Catchwords: BANKRUPTCY – Application for sequestration order – substituted creditor – whether substitution was valid – whether debt due – whether judgment debt necessary for action – circumstances of entering into deed – cross and third party claims – discretion to refuse sequestration order – sequestration order granted. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.37, 43, 49, 52(1), 52(2)(b) Federal Circuit Court (Bankruptcy) Rules (Cth), r.2.04 |
| Cases cited: Buckley v Bienfelt; Ex parte James Hardie & Co Pty Ltd (1976) 13 ALR 291 Cain v Whyte (1933) 48 CLR 639 Owners of Strata Plan No 53267 v Prestia [2001] FCA 363 Papas v Westpac Banking Corporation [2014] FCA 290 |
| Applicant: | LAMAW PTY LTD (ACN 137 876 478) |
| First Respondent: | BETJULA TAHIRI |
| Second Respondent: | VEZIRE TAHIRI |
| File Number: | MLG 1839 of 2017 |
| Judgment of: | Judge McNab |
| Hearing date: | 24 July 2018 |
| Date of Last Submission: | 24 July 2018 |
| Delivered at: | Melbourne |
| Delivered on: | 19 October 2018 |
REPRESENTATION
| Counsel for the Applicant: | Mr P. Bornstein |
| Solicitors for the Applicant: | John Dunne & Associates |
| Counsel for the Respondents: | Mr P. Corbett QC |
| Solicitors for the Respondents: | Madgwicks Lawyers |
THE COURT ORDERS THAT:
A sequestration order be made under the Bankruptcy Act 1966 against the estate of the Respondent debtors, Betjula Tahiri and Vezire Tahiri.
The Applicant creditor’s costs, including the costs reserved, be taxed and paid from the estate of the Respondent debtors in accordance with the Bankruptcy Act 1966.
AND THE COURT NOTES THAT:
A.The date of the commission of the act of bankruptcy is 22 August 2017.
B.A private trustee, Daniel Peter Juratowitch, has consented to act as trustee in bankruptcy.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1839 of 2017
| LAMAW PTY LTD (ACN 137 876 478) |
Applicant
And
| BETJULA TAHIRI |
First Respondent
| VEZIRE TAHIRI |
Second Respondent
REASONS FOR JUDGMENT
Introduction
By an amended creditor’s petition filed 17 April 2018, Lamaw Pty Ltd (ACN 137 876 478) (‘Lamaw’) applied for a sequestration order under s 43 of the Bankruptcy Act 1966 (Cth) against the estate of Betjula Tahiri and Vezire Tahiri. The Applicant claims in this petition that:
1.The Respondent debtors Bejtula Tahiri and Vezire Tahiri jointly and severally owe the substituted Applicant creditor the amount of $1,176,953.56 being the balance owing to the creditor pursuant to the provisions of the deed of settlement 22 January 2016.
2.The Applicant creditor does not hold security over the property of the Respondent debtors Bejtula Tahiri and Vezire Tahiri.
3.At the time when the act of bankruptcy was committed, the Respondent debtors Bejtula Tahiri and Vezire Tahiri:
(a)were personally present in Australia
(b)were ordinarily present in Australia
(c)had a dwelling, house or place of business in Australia
(d)were carrying on business in Australia either personally or by an agent or manager.
4.The following act of bankruptcy was committed by the Respondent debtors within 6 months before presentation of this petition:
The Respondent debtor Bejtula Tahiri and the Respondent debtor Vezire Tahiri failed to comply on or before
22 August 2017 with the requirements of a bankruptcy notice deemed to have been served on them on 1 August 2017 or to satisfy the Court that they had a counterclaim, set-off or cross- demand equal to or more than the sum claimed in the bankruptcy notice, being a counterclaim, set-off or cross demand that he could not have set up in the action in which the judgment referred to in the bankruptcy notice was obtained.
5.The Applicant creditor provides the following information , to the extent it is known to the Applicant creditor, for use by the Australian Financial Securities: nil
The Respondents oppose the petition and due the detailed particulars in the amended response filed 3 July 2018, these particulars replicated exactly below:
1. The debt claimed as due to the supporting creditor/substituted applicant is not due or payable.
Particulars
(a)The debt claimed by the applicant is not a judgment debt now due and payable by the respondents to the applicant:
(b)the debt claimed by the applicant is not calculated in accordance with the Deed of Settlement relied upon by the applicant but instead pursuant to a mortgage made 26 April 2013 ("the mortgage") which has been discharged;
(c)no loan or advance was made to the respondents by the applicant which is secured by the mortgage and the mortgage is unenforceable against them:
(d)the debt claimed by the applicant is not a debt payable by the respondents unless and until the applicant has complied with clause 3 of the Deed of Settlement (in particular clause 3.2) and the applicant has not complied with that condition precedent:
(e)the debt claimed by the applicant includes claims for legal costs and interest that the applicant has not established as due and payable by the respondents;
(f)the debt claimed by the applicant of $1,176,953.56 was not a debt due to the applicant at the date of the alleged act of bankruptcy and has not been proven to be a debt due and payable by the respondents to the applicant; and
(g)the respondents object to the evidence relied on by the applicant to support the debt claimed on the grounds stated in the Notice of Objection accompanying this Amended Notice of Opposition and in the absence of admissible evidence as to a debt due a sequestration order should not be made.
2.The respondents have a cross claim against the supporting creditor/substituted applicant which warrants the refusal of any application for a sequestration order, alternatively an adjournment of the creditors petition.
Particulars
(a)The sum paid to the applicant of $170,000 pursuant to the Deed of Settlement made 22 January 2017 was made pursuant to a mistake of fact and law as to the terms and effect of the Deed of Settlement;
(b)the Deed of Settlement made 22 January 2017 was executed by the respondents in the mistaken belief that they were indebted to the applicant and/or liable to the applicant for monies advanced to AAD Services Pty Ltd;
(c)the respondents were not indebted to or liable to the applicants pursuant to the mortgage and were acting under the mistaken belief that they were so liable and that the applicant was entitled to enforce the mortgage against them, when in fact it could not;
(d)the mortgage was procured by misrepresentation and/or breach of duty by the servant and/or agent of the applicant, the solicitor Mr McNab; and
(e)alternatively, if Mr McNab was not the servant or agent of the applicant then he should be held liable to indemnify the respondents against any sum that they may be found liable to the applicant together with legal costs incurred by the respondents arising from his negligence and breach of fiduciary duty.
3.The Court should be satisfied that there is “other sufficient cause” within the meaning of s 52(2) of the Bankruptcy Act such that a sequestration order ought not be made.
Particulars
(a)The respondents repeat the particulars sub-joined to paragraphs 1 and 2 above;
(b)the applicant has not established indebtedness by the respondents for the sum claimed as due;
(c)the act of bankruptcy relied upon was not an act of bankruptcy in respect of a judgment debt due and payable to the applicant;
(d)the original petitioning creditor has not sought to pursue the petition and does not seek a sequestration order in reliance on the bankruptcy notice;
(e)There are reasonable and arguable grounds to dispute the debt claimed by the applicant;
(f)further, the respondents have claims against the Fidelity Fund maintained by the Legal Services Board and against their former solicitors that can be used to meet any debt due to the applicant, if they are ultimately adjudged liable to pay any sum to the applicant;
(g)the order for substitution of the applicant as petitioning creditor should not have been made in the absence of proper proof of indebtedness and the order should be set aside under section 37 of the Act; and
(h)in the absence of a judgment debt that is due and payable to the applicant, the fact that sums well in excess of the amount originally advanced have been paid to the applicant, the fact that the applicant has extant rights against AAD Services Pty Ltd which it has not exercised against that company, a sequestration order is not in all of the circumstances an appropriate exercise of the Court’s discretion.
4.The interlocutory order made 12 April 2018 substituting Lamaw Pty Ltd as applicant in this proceeding be set aside.
Particulars
(a)The particulars under paragraph 1 above are repeated; and
(b)pursuant to section 37 of the Act and the inherent jurisdiction of the Court, this Court has power and jurisdiction to set aside the interlocutory order made 12 April 2018 on the grounds that an interlocutory order for substitution should not have been made on the evidence.
Procedural History
By an application filed 23 August 2018, the Commonwealth Bank of Australia t/as Bankwest (ABN 123 123 124), applied to the Court for sequestration under s 43 of the Bankruptcy Act 1966 (Cth) against the estate of the Respondents.
On 6 March 2018, Lamaw filed a notice of appearance pursuant to the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) and became a supporting creditor.
On 22 March 2018 Lamaw made an application to be substituted as the petitioning creditor.
On 12 April 2018, Registrar Ryan ordered that Lamaw be substituted as Applicant in this matter and that the proceeding’s title be amended accordingly.
Documents relied on by the parties
The Applicant
The Applicant relied on the following documents:
(a)affidavit of Andrew Bruce Pascoe, sworn 21 March 2018;
(b)affidavit of David Charles Henderson, sworn 4 June 2018; and
(c)affidavit of David Charles Henderson, sworn 17 July 2018.
The Respondents
The Respondents relied on the following documents:
(a)affidavit of Andrew Bruce Pascoe, sworn 21 March 2018.
(b)affidavit of Adem Tahiri, sworn 23 July 2018;
(c)affidavit of Cassie Ann O’Bryan, sworn 20 July 2018;
(d)affidavit of Cassie Ann O’Bryan, sworn 10 May 2018; and
(e)affidavit of Betjula Tahiri, sworn 21 May 2018.
Chronology
The Respondents were directors of AAD Services Pty Ltd, a company that ran a paper recycling business. Mr. Bruce McNab, a solicitor known by the First Respondent, arranged for finance to be procured for the business from Mr. Andrew Pascoe, director of Lamaw.[1]
[1] Affidavit of Andrew Bruce Pascoe, sworn 21 March 2018.
In April 2013, Lamaw agreed to provide AAD Services Pty Ltd (‘AAD’) with a loan in the sum of $865,000. The security provided was in form of cross-collaterised mortgages. On 26 April 2013, caveats were lodged on the titles of the collateral properties and unregistered mortgages were granted in favour of Lamaw with covenants outlining the terms of the loan.[2] While these mortgages are dated 26 April 2013, they were only lodged by K&L Gates on behalf of Mr. Pascoe on 12 August 2014.[3]
[2] Ibid.
[3] Ibid.
The covenants of the mortgages were to the effect that:
(a)an advance of $865,000 was to be provided to AAD;
(b)the due date of the loan was 26 June 2013;
(c)the interest on the loan was 30% per annum, but in the case of default the rate of 36% per annum applied;
(d)interest was to be calculated monthly;
(e)the first instalment of interest was payable on 26 May 2013 and every 26th day of each month thereafter; and
(f)the mortgagor agrees to pay an establishment fee of $34,600 to the mortgagee.[4]
[4] Affidavit Cassie O’Bryan sworn 18 May 2018, 5 – 12.
The loan was not repaid by the due date.[5] Any interest accrued was also not paid.
[5] Ibid 3.
Payments were made to Lamaw from the Respondents as follows:
(a)$133,000 on 7 October 2013;
(b)$320,000 on 20 December 2013;
(c)$500,000 on 15 May 2015; and
(d)$170,000 on 22 January 2016.
On 22 January 2016 a Deed of Settlement (‘the Deed’) was entered into by the Applicant and Respondents to settle the debt owing under the original loan agreement. There is some disagreement on the surrounding circumstances of the Deed arrangements. With regard to the terms of the Deed, the following relevant clauses can be extracted:
2.in consideration of the settlement deed, the Respondents jointly and severally agree to pay the Applicant a total principal sum of $440,000 plus interest at a rate of 36% per annum by the following:
2.1payment of the sum of $170,000 by bank cheque or EFT by 5pm on 21 January 2016;
2.2payment of the sum of $50,000 together with interest accruing on a monthly basis on the outstanding balance calculated at the rate of thirty six percent (36%) per annum by payment of that sum (and accruing interest calculated with monthly rests from 22 January 2016 to 21 August 2016) by bank cheque or EFT by 4pm on 21 August 2016; and
2.3payment of the sum of $220,000 together with interest accruing on a monthly basis on the outstanding balance calculated at the rate of thirty six percent (36%) per annum by payment of that sum (and accruing interest calculated with monthly rests from 22 January 2016 to 21 January 2017) by bank cheque or EFT by 4pm on 21 January 2017.
3.AAD, B. Tahiri and V. Tahiri agree that if they default in paying the Settlement Sum or any parts thereof in accordance with clause 2, then provided Lamaw shall first give to AAD, B. Tahiri and V. Tahiri seven (7) Business Days written notice of such default, they each unequivocally, consent and agree that:
3.1The balance of the Lamaw Debt (together with any interest accruing from 21 January 2016 calculated with monthly rests but less any amounts paid to Lamaw in clear funds) shall immediately become due and payable without the need for Lamaw to give any further notice in writing to AAD, B. Tahiri and V. Tahiti
3.2LAMAW is entitled to commence proceedings and to make application to the Court and to apply for default judgment, jointly and severally against AAD, B. Tahiri and V. Tahiri, in default of this Deed for the following amounts:
(a) the LAMAW Debt;
(b) Less any amounts paid in accordance with clause 2 of this Deed;
(c) Plus interest calculated with monthly rests at the rate of thirty-six percent (36%) per annum on the balance of the LAMAW Debt (less any amounts paid) from the date of this Deed of Settlement until payment in full of the LAMA W Debt; and
(d) Plus all legal costs on an indemnity basis whatsoever incurred by LAMAW due to the default by AAD, B. Tahiri and V. Tahiri in the due observance and performance of this Deed of Settlement, including without limitation the cost of LAMAW commencing proceedings and making application for judgment in default of this Deed and of obtaining judgment.
[…]
4.To better secure the performance of the obligations and undertakings of AAD under this Deed and further in consideration of Lamaw entering into this Deed, AAD agrees:
4.1to irrevocably grant a general security charge in favour of Lamaw of all of its assets and property wherever situated as continuing security for:
(a) the Lamaw Debt; and
(b) interest, costs and charges owing or to become owing as set out in this Deed of Settlement;
4.2to give to Lamaw contemporaneously with the execution of this Deed of Settlement, two executed copies of the general security charge together with any other documents reasonably requested by the solicitors for Lamaw; and
4.3that the general security charge shall be registered at the PPSR, but not before 15 February 2016.
5. Subject to compliance:
5.1with sub-clause 2.1 of this Deed by AAD, B. Tahiri and V. Tahiri, Lamaw agrees to contemporaneously provide to AAD, B. Tahiri and V. Tahiri discharges of the security of the Second Mortgages to AAD, B. Tahiri and V. Tahiri, but expressly not any personal obligation, promise or covenant that will still remain owing by AAD, B. Tahiri and V. Tahiri to Lamaw under the Second Mortgages as varied by this Deed;
5.2with sub-clauses 2.2 and 2.3 of this Deed by AAD, B. Tahiri and V. Tahiri, Lamaw agrees to:
5.2.1.1release AAD, B. Tahiri and V. Tahiri from all Claims, Liabilities and demands (including legal costs) that it has or may have had whatsoever against AAD, B. Tahiri and V. Tahiri arising out of or in relation to the LAMA W Debt and the Second Mo1igages; and
5.2.1.2provide to AAD a signed discharge of the general security charge.
[…]
13.Upon execution of this Deed of Settlement and upon payment of the sum of$170,000 by bank cheque or EFT on or by 21 January 2016, LAMAW agrees that it will no longer appear in the Action as a Supporting Creditor or seek to be substituted as applicant creditor or plaintiff in the Action.
Upon receipt of the sum of $170,000 on 22 January 2016, the Applicant provided the Respondent with discharges of the mortgages as agreed to under the Deed.
There were no subsequent payments made to Lamaw by the Respondents after 22 January 2016.
There is disagreement between the Applicant and Respondent as to the construction of the Deed and the liability owed under it. These contentions will be explored in the summaries of the submissions of each party below.
Outline of Applicant’s submissions
Amount outstanding
The Applicant submits that the Respondents have defaulted under paragraphs 2.2 and 2.3 of the Deed and therefore remain liable for the covenants under the mortgages. This includes the outstanding amount plus interest accrued at a rate of 36% per annum since 2013.
Formal requirements for a sequestration order
The Applicant submits that the formal requirements for a sequestration order have been met, namely that:
(a)the Bankruptcy Notice seeks an order of a sum in excess of $5,000;[6]
(b)the debtors and their estate reside in Australia;[7]
(c)the debtor owes the petitioning creditor an amount in excess of $5,000;[8] and
(d)the matters required to be proven under s 52(1) of the Act have been made out as:
ii)the matters the subject of the petition have been proven by way of the Affidavit of Andrew Pascoe sworn 17 April 2018;
iii)the petition has been served; and
iv)the debts are still owing to the Applicant.
[6] Bankruptcy Act 1966 s.41.
[7] Ibid s.43.
[8] Ibid s.44(1)(a).
Response to grounds of opposition
The Applicant rejects the assertion that the debt is not due and payable. In response to the first ground of opposition, the Applicant submits that:
(a)there is no requirement that the debt owing to a substituted applicant be a judgment debt;
(b)the debt claimed by the Applicant is calculated in accordance ‘with the Deed of Settlement, the personal obligations and covenants of the Respondents under the mortgage being expressly preserved until payment of the sums of $50,000 and $220,000 plus interest in accordance with the terms of that Deed’;
(c)the disbursement authority signed by each Respondent directed payment of $805,000 to the MacPherson & Kelley Lawyers trust account. How it was disbursed following this is a matter for the Respondents and it is not disputed that the payment was made to MacPherson & Kelley;
(d)the Respondents, via the Deed, acknowledge their joint and several liability with AAD for the outstanding debt;
(e)paragraph 3 of the Deed is not a precondition to liability, merely a provision to facilitate the entry of a default judgment against the Respondents;
(f)any legal costs are due and payable as a consequence of the covenant on the mortgages to pay all costs of the Applicant;
(g)there is no basis for asserting that the debt of $1,173,693.56 was not due and payable at the date of the alleged bankruptcy; and
(h)the Respondents have admitted in their evidence that the amounts due on 21 August 2016 and 21 January 2017 have not been paid.
In reply to the second ground of opposition, the Applicant submits that:
(a)there is no mistake of fact or law as to the terms of effect of the Deed. The First Respondent is bound by the terms of the Deed, regardless of whether they read the Deed or not and cannot rely on any claim that his solicitor, an agent of AAD, engaged in misleading conduct such that the Deed is not enforceable;
(b)the Applicant relies on the Report as to Affairs of AAD Services Pty Ltd (in liquidation), referred to as exhibit COA 2 within the affidavit of Cassie O’Bryan dated 18 May 2018, to show that the Second Respondent did not believe that AAD and the Respondents were only obliged to pay $170,000 under the Deed. The Report as to the affairs of AAD listed Lamaw as a creditor for $210,000;
(c)the Deed was executed by the Respondents with the benefit of independent legal advice and where they were principal borrowers under the mortgage executed by them with AAD under the mortgage that was executed by AAD. They were aware that they were indebted to the Applicant jointly and severally as individuals;
(d)Mr. Bruce McNab acted as solicitor for AAD and the Respondents, not the Applicant. The affidavits filed by the Respondents do not disclose any misrepresentation by Mr. McNab; and
(e)the Respondents have not produced any evidence that they have commenced proceedings against Mr. McNab and even if they have a cause of action against Mr. McNab, this is not a proper basis for adjourning the creditors petition given the other circumstances of the case.
In reply to the third ground of opposition, the Applicant submits that:
(a)the Respondents are indebted to the Applicant in an amount that greatly exceeds the statutory minimum of $5,000 and have not provided any evidence of their financial situation, solvency or capacity or willingness to pay the debt due. Give these circumstances, there is no sufficient cause such that a sequestration order should not be made;
(b)in response to the assertion that the Applicant has not established indebtedness for the sum claimed, the Applicant refers to their above assertions regarding proof and quantum of debt;
(c)there is no requirement that the debt due to the substituted applicant be a judgment debt and the act of bankruptcy relied upon is set out in the original creditors petition filed by the Commonwealth Bank on 23 August 2017. This is that the Respondents failed to comply by 22 August 2017 with the requirements of a bankruptcy notice served to them on 1 August 2017 without explanation;
(d)the failure of the original petitioner to pursue the petition is why the Applicant was substituted as petitioner;
(e)the Respondents have not set out reasonable or arguable grounds to dispute the debt or any plausible contention requiring investigation: see Papas v Westpac Banking Corporation [2014] FCA 290, Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ASCR 785 and Menzies v Paccar Financial Pty Ltd [2011] FCA 460;
(f)
any claim made by the Respondents to the Fidelity Fund were not made in connection with the loan the subject of this proceeding and the claim against the fund is for an amount that would be insufficient to pay the debt due to the Applicant. Further, the fact that a debt may have a claim against a third party is not itself sufficient cause for a sequestration order not to be made: see
Ling v Enrobook Pty Ltd[1997] FCA 226; and Prestia, in the matter of Australia and New Zealand Banking Group Limited v Prestia [2001] FCA 792;
(g)paragraphs 2,4 – 6 of the affidavit of Andrew Bruce Pascoe, sworn 21 March 2018 and exhibit ABP-1 attached to the affidavit are sufficient proof to establish the minimum debt required to allow substitution of a creditor under s 49 of the Act; and
(h)given all the circumstances outlined above, the Respondents have not shown that a sequestration order ought not to be made.
In reply to the final ground of opposition, the Applicant repeats the submission that there is sufficient evidence of debt to justify the substitution of the Applicant as creditor in this case.
Outline of Respondents’ submissions
Factual context
The Respondents make submissions on a number of factual matters. They say that:
The relationship between Mr Pascoe and McNab is unclear. Mr Pascoe claims that McNab never acted as his solicitor but McNab knew that he was a source of funds for a short term loan facility and McNab appears to have lodged a caveat on behalf of Lamaw to protect its interests as mortgagee. Mr Pascoe also looked to McNab and pursued McNab to recover the money lent.
The Respondents submit that there is no evidence that the principal sum was advanced directly to the Respondents. They also say that the sum of $5,400 directed to be paid to Allgate Lawyers was paid to Proloquitor Pty Ltd, a company of which Mr. McNab is the director and sole shareholder. It is submitted that a caveat was lodged on the Respondent’s land by Mr. McNab on behalf of Mr. Pascoe.
The Respondents submit that the mortgage relied on by Lamaw refers to that mortgage as being collateral to another mortgage made between Lamaw and AAD on or about the same day. There is no indication that the Respondents intended to act as Covenantors or Guarantors of the money advanced to AAD on the mortgage. The Respondents say that ‘[t]here is no evidence of any advance to them for which they are indebted within the definition of “the moneys hereby secured” contained in the Memorandum of Common Provisions. Hence the Mortgage secured nothing’.
The Respondents submit that the Applicant cannot demonstrate that the Respondents are liable for the debt claimed. They state:
In January 2016 Lamaw says that Mr and Mrs Tahiri entered into a Deed of Settlement. The debt now claimed arises not from the Deed of Settlement but from a liability purportedly arising under the Mortgage, which by its own admission has been released and discharged by the mortgagee. No explanation has been given as to how this could be so as a matter of law.
The Respondents submit that there is some dispute over the factual circumstances which led to the signing of the Deed. This is particularly so in regards to Mr. Tahiri’s understanding of the effect and terms as opposed to what Mr. Henderson, the solicitor convening the settlement, says occurred. The Respondents say that this gives rise to a cause of action against Lamaw based on mistake or misrepresentation. Additionally, if no monies were advanced to the Respondents as Covenantors or Guarantors, then the premise of the Deed was misconceived and entered into under a mistake of fact and law. The Respondents cite the fact that Lamaw did not seek to recover further sums after the initial $170,000 payment in support of this proposition, saying that this action was consistent with Mr. Tahiri’s understanding of the terms of the Deed.
The Respondents submit that clause 15 of the Deed contains an ‘entire agreement clause’, making the Deed subject only to the obligations outlined in the mortgage. These obligations would be unenforceable as the mortgage is void, or have already been discharged by the discharge of the mortgages exchanged on the settlement date.
In the case that the Deed is binding, then the Respondents submit that the terms mandate that Lamaw must obtain a judgment in the Supreme Court of Victoria before enforcing the debt. Lamaw has not obtained this and this is ‘fundamental to its claim to now be owed a debt’.
The Respondent submits that any sum which Lamaw could claim to be indebted is limited to the balance of the unpaid settlement sum outlined in the Deed and not the advance plus interest outlined by the mortgage terms. The mortgage has been discharged by agreement and Lamaw has elected to adopt the Deed as the basis for liability.
Amount outstanding
The Respondents submit that the amount claimed, $1,173,693.56, is based on a spreadsheet calculation attached to the affidavit of
Mr. Bruce Pascoe and this amount has not been correctly calculated according to the terms of the Deed. They submit that this amount is based off the original advance under the mortgages, which have now been discharged, as well as other charges such as for legal fees which they say should not apply.
Cross claims and third party claims
The Respondents submit that they have claims against Mr. McNab and Mr. Chimonis over their involvement with arranging the loan and settlement. The Respondents have made claims against the Fidelity Fund for compensation, which they submit could be used to set off any debt they have with Lamaw. Nonetheless, they contest that there is any debt owing against Lamaw.
The Respondent submits that if there is a debt owing, any grant of a sequestration order would prejudice the claims against Mr. McNab and Mr. Chimonis. The Respondent submits that there is sufficient doubt over the circumstances surrounding the construction of the Deed and the quantum of debt owing, if any, to warrant a stay on sequestration while this is investigated.
Discretion
The Respondent submits that s 52(2)(b) of the Act, by the inclusion of ‘other sufficient cause’, bestows a very wide discretion on the Court to refuse a petition for a sequestration order, relying on Cain v Whyte (1933) 48 CLR 639, 645; Vlad v Lopez (No 2) [2017] FCCA 2032 [110]; and Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314, 317. The Respondent submits that:
This is not a case where the respondents seek to go behind a judgment of another Court which establishes a debt. Here there is no judgment requiring review. The very debt which the applicant seeks to rely upon is in question on a number of genuine grounds. As a matter of discretion the Court ought not in the circumstances of this case make an order where, not only has the original petitioning creditor been satisfied but a substantial sum has been paid to the current Applicant in satisfaction of the amounts apparently advanced to a third party pursuant to the original transaction.
The Respondent submits that the Court should exercise its discretion considering:
(a)Lamaw has received a total of $1,123,000 and the establishment fee of $34,500 in respect of the original $865,000 advanced to AAD;
(b)the petitioning creditor does not have a judgment debt;
(c)the original petitioner is satisfied and is not pursuing the petition;
(d)under the terms of the Deed, according to the Respondents, the mortgages were discharged upon the $170,000 payment advanced to Lamaw and therefore the Applicant cannot revive the mortgage;
(e)the Court has the power to set aside an order for substitution of a creditor under s 37 of the Act as established in Buckley v Bienfelt; Ex parte James Hardie & Co Pty Ltd (1976) 13 ALR 291, 296 and Owners of Strata Plan No 53267 v Prestia [2001] FCA 363 [14]. Given the circumstances of this case, Lamaw should not have been substituted as creditor and the Court should set aside the order for substitution.
Consideration
In my view, the Applicant has established that the Respondents are indebted to the Applicant in an amount exceeding $5,000 and it is appropriate to make a sequestration order.
The Applicant advanced the sum of $865,000 to AAD and the Respondents on the security of cross collateralised mortgages dated
26 April 2013.[9] There are two mortgages, the first naming AAD as the first mortgagor and the second naming the Respondents as mortgagors and each mortgage acting as collateral to the other. AAD and the Respondents are jointly and severally liable for repayment of the loan and payments of interest.
[9] See Affidavit of Cassie Ann O’Brien, sworn 18 May 2013 exhibit CAO – 1.
The Respondents and AAD defaulted in their obligations under the mortgages in that they did not pay interest due on 26 May 2013 and did not repay the loan with interest on 26 June 2013.
Recital C of the Deed entered into between AAD, the Respondents and the Applicant records that the Respondents paid the sum of $133,000 on 7 October 2013, $320,000 on 20 December 2013 and $500,000 on
15 May 2015 and the remaining debt owing under the mortgages was acknowledged under the Deed to be $700,828.02.
Under the terms of the Deed, AAD and the Respondents jointly and severally agreed pay to the Applicant sum of $440,000 by payment of $170,000 on 21 January 2016, $50,000 together with interest accruing monthly on the balance at 36% per annum on 21 August 2016 and $220,000 with interest accruing monthly on the balance at 36% per annum on 21 January 2017.
I accept that the terms of the Deed provide that, subject to the payment of $170,000, the Applicant agreed to contemporaneously provide discharges of the mortgages that expressly preserved the personal obligations and covenants of AAD and the Respondents under those mortgages, pending compliance with the obligations to pay the further sum of $50,000 with interest and $220,000 with interest. It was only upon payment of all amounts payable under paragraphs 2.1, 2.2 and 2.3 of the Deed that the Applicant agreed to release AAD and the Respondents from their liabilities under the mortgages.
The Respondents defaulted in their obligations under paragraphs 2.2 and 2.3 of the Deed and therefore remained liable for their personal obligations and covenants under the mortgages.
Even if the Respondents did not remain liable for their obligations and covenants under the mortgages, I accept that as at the date of the act of bankruptcy (22 August 2017) the Respondents remain indebted to the Applicant for at least $473,570.16. This amount comprises of $270,000, which is the balance of the outstanding settlement sum, together with interest at the rate of 36% per annum calculated monthly from 22 August 2016 in accordance with paragraph 2.2 and 2.3 of the Deed.[10]
[10] Affidavit of David Charles Henderson, sworn 17 July 2016.
Whilst the debt claimed by the Applicant is not a judgment debt, in my view, it is a debt that is now due and payable by the Respondents to the Applicant. The obligations under the mortgages have not been discharged, as was made plain by the terms of the Deed entered into by AAD, the Respondents and the Applicant.
Clause 3.2 of the Deed was effectively an enabling provision for the benefit of the Applicant, should it wish to obtain judgment, but is not a precondition on the Applicant bringing a claim. The Applicant is entitled to raise in these proceedings that a debt is due and payable by the Respondents to the Applicant.
In relation to the second ground of opposition, I accept the Applicant’s response that potential cross claims raised by the Respondents do not provide a sufficient basis for refusing to make a sequestration order. The Respondents have not raised the proper basis for a claim against the Applicant in their material.
I accept that the Respondents have not established that there is any mistake of fact or law as to the effect of the Deed. In relation to claims that the First Respondent may not have understood the Deed because of language difficulties, I note that the Respondents executed the Deed with the benefit of legal advice and where they were borrowers under a mortgage executed by them. The Deed was executed in the presence of their solicitor at the time, Mr Chiminos of AML Law & Associates. The Respondents paid the instalment of $170,000 pursuant to the terms of the Deed on 22 January 2016.
In any case, there is no evidence that the Applicant was aware of any language difficulties that the First Respondent had when it entered into the Deed.
Further, the claim that the Respondents made to the Fidelity Fund against Mr Chiminos relates to the conduct of Mr Chiminos in relation proceedings in the Supreme Court.[11] The Court notes the contents of the affidavit[12] were sworn to be true, without those contents being interpreted or translated to the First Respondent. The claim that is the subject of the claim on the Fidelity Fund is not sufficient to cover the debt which is the subject of this proceeding.
[11] See Affidavit of Betjula Tahiri, sworn 21 May 2018, exhibit BT-13.
[12] Ibid.
In relation to the submissions made by the Respondents regarding the discretion of the Court to refuse a petition for a sequestration order and the Court’s power to set aside an order for the substitution of the creditor under s 37 of the Act, in my view no sufficient grounds have been raised by the Respondents to satisfy the Court that it is appropriate to make orders of the kind sought by the Respondents. In in my view, the order for the substituted creditor was properly made, particularly in circumstances where the Applicant has established that the Respondents are indebted to it for a sum exceeding $5,000.[13] Otherwise, the Respondents have not established that the Applicants did not receive independent legal advice in relation to the entry into the Deed, or further, that they did not understand the transaction that they are entering into. The entry into the Deed provided a benefit to them at that time (being an agreement that the Applicant would not substitute as a petitioning creditor in proceedings against AAD). Further, the Respondents have not issued action against Mr Bruce McNab or Mr Chiminos and have not clearly articulated what the claims against them are or the loss arising. No cross claim has been raised against the Applicant.
[13] See Affidavit of Andrew Bruce Pascoe, sworn 21 March 2018 [1],[4] – [6], exhibit ABP-1.
Otherwise, I do not find that there are grounds under s 52(2)(b) of the Act to refuse to make a sequestration order.
For these reasons, in my view it is appropriate that the orders sought by the Applicant be made.
I certify that the preceding fifty-three (53) paragraphs are a true copy of the reasons for judgment of Judge McNab
Date: 19 October 2018
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