Lo Pilato (Trustee) v Kamy Saeedi Lawyers Pty Ltd, in the matter of Adzic (Bankrupt)
[2017] FCA 34
•31 January 2017
FEDERAL COURT OF AUSTRALIA
Lo Pilato (Trustee) v Kamy Saeedi Lawyers Pty Ltd, in the matter of Adzic (Bankrupt) [2017] FCA 34
File number: ACD 68 of 2014 Judge: KATZMANN J Date of judgment: 31 January 2017 Catchwords: BANKRUPTCY AND INSOLVENCY — Transfer of real property by debtor within two years of bankruptcy — whether void as against trustee in bankruptcy under ss 120 and/or 121 and/or 122 of the Bankruptcy Act 1966 (Cth) or s 239 of the Civil Law (Property) Act 2006 (ACT) — whether consideration offered for sale of house below market value — whether vendor insolvent at time of transfer — meaning of “time of transfer” — whether transfer made with intent to defraud or defeat creditors or hinder or delay distribution of assets — extent of relief where house on-sold to purchaser for value
BANKRUPTCY AND INSOLVENCY — Transfer of property by debtor within two years of bankruptcy — whether grant by debtor of personal guarantee and charge over real property in each of four costs agreements made with a firm of solicitors void under s 121 of the Bankruptcy Act 1966 (Cth) as a transfer of property made with intent to defraud or defeat creditors or hinder or delay distribution of assets — whether transfer of part of proceeds of settlement to solicitors for the vendor’s company void as against trustee in bankruptcy under ss 120, 121 and/or 122 of Act — whether payment made on behalf of debtor’s company or in discharge of his obligations under the guarantees — whether transfer for no consideration or for consideration below market value — whether payment made with intent to defraud or defeat creditors or hinder or delay distribution of assets — whether effect of payment to give solicitors a preference, priority or advantage over other creditors
JURISDICTION — Cross-vesting of jurisdiction — where applicant seeks order under s 288 of the Legal Profession Act 2006 (ACT) — whether Court has jurisdiction to make such an order
COSTS — Lawyers — whether charging provision and guarantee clause in several costs agreements “not fair or reasonable” — failure to comply with disclosure obligations to client and third party payer — intimate relationship between solicitor and client
Words & phrases: “time of transfer”, “not fair or reasonable” Legislation: Bankruptcy Act 1924–1950 (Cth) s 94
Bankruptcy Act 1966 (Cth) ss 5, 58(1), 82(1), 120, 121, 122, 134(1)(j)
Civil Law (Property) Act (ACT) s 239
Corporations Act 2001 (Cth) ss 95A, 601AD(1)
Evidence Act 1995 (Cth) s 140
Jurisdiction of Courts (Cross-Vesting) Act 1987 (Cth) s 9(3)
Jurisdiction of Courts (Cross-Vesting) Act 1993 (ACT) s 4(1)
Land Titles Act 1925 (ACT) ss 73, 77
Legal Practice Act 1996 (Vic) s 103
Legal Practitioners Act 1970 (ACT) s 191
Legal Practitioners Act 1974 (NT) s 130
Legal Practitioners’ Act 1893 (WA) s 59
Legal Profession Act 2006 (ACT) ss 222, 223(1)(a), 261A, 262(d), 269, 271, 277(3), 278, 282(6), 281A, 288
Legal Profession Regulation 2007 (ACT) cl 83
The Mercantile Acts 1867–1896 (Qld) s 46
Attorneys’ and Solicitors’ Act, 1870 (UK) s 9
Cases cited: Alman v Macdonald Rudder [2001] WASC 65
Ambrose (Trustee) in the matter of Poumako (Bankrupt) v Poumako [2012] FCA 889
Anscor Pty Ltd v Clout (2004) 135 FCR 469
Athanasiou v Ward Keller (6) Pty Ltd (1998) 8 NTLR 23
Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) and (No 10) (2009) 39 WAR 1
Blatch v Archer (1774) 1 Cowp 63; 98 ER 969
Brady v Stapleton (1952) 88 CLR 322
Briginshaw v Briginshaw (1938) 60 CLR 336
Burgess v Messrs D’Alessandro [1993] ANZ ConvR 14
Camm v Linke Nominees Pty Ltd (2010) 190 FCR 193
Crosby v Kelly (2012) 203 FCR 451
D’Alessandro v Legal Practitioners Complaints Committee (1995) 15 WAR 198
Duckworth v Chopra [2001] WASC 146
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89
Fiorino v Woodgate [1994] FCA 181
Foskett v McKeown [2001] 1 AC 102
Frigger v Shepherd [2014] WASC 477
Harrison v Hocking [2000] WASC 188
Jovetic v Stoddart & Co (1992) 7 WAR 208
Joye v Beach Petroleum NL (1996) 67 FCR 275
Lewis v Doran [2004] NSWSC 608; 208 ALR 305
Lewis v Doran [2005] NSWCA 243; 219 ALR 555
Marchesi v Apostolou [2007] FCA 986; 5 ABC(NS) 131
McInnes v Twigg (1992) 109 FLR 96
McVeigh v Moses (Legal Practice) [2005] VCAT 2917
Moschi v Lep Air Services Ltd [1973] AC 331
Neat Holdings Pty Ltd v Karajan Holdings Pty Ltd [1992] HCA 66; 110 ALR 449
Official Trustee in Bankruptcy v Alvaro (1996) 66 FCR 372
Passey v Bandarage [2002] ACTSC 105
Peldan v Anderson (2006) 227 CLR 471
Permfox Pty Ltd, in the Matter of Chase v Official Receiver for the Bankruptcy District of New South Wales [2002] FCA 1564
Prentice v Cummins (No 5) (2002) 124 FCR 67
Re Jury; Ashton v Prentice (1999) 92 FCR 68
Re Stuart [1893] 2 QB 201
Sandell v Porter (1966) 115 CLR 666
Sheahan (Trustee) in the matter of Frost (Bankrupt) v Frost [2011] FCA 356
Spencer v Commonwealth (1907) 5 CLR 418
Stoddart & Co v Jovetic (1993) 8 WAR 420
Sunbird Plaza Pty Ltd v Maloney (1988) 166 CLR 245
Sutherland v Brien [1999] NSWSC 155; 149 FLR 321
Tanwar Enterprises Pty Ltd v Cauchi (2003) 217 CLR 315
The Trustees of the Property of Cummins v Cummins (2006) 227 CLR 278
Tooheys Ltd v Commissioner of Stamp Duties (NSW) (1961) 105 CLR 602
Trustee of the Property of O’Halloran, in the matter of O’Halloran v O’Halloran [2002] FCA 1305
Tyler v Thomas (2006) 150 FCR 357
Weiss v Barker Gosling (1993) 114 FLR 223
Westpac Banking Corporation v The Bell Group Ltd (In liq) (No 3) (2012) 44 WAR 1
Whitton as Trustee of the Estate of Rose v Regis Towers Real Estate Pty Ltd (in administration) (2007) 161 FCR 20
Williams v Lloyd (1934) 50 CLR 341
Smith LD, The Law of Tracing (Clarendon Press, Oxford, 2003)
O’Donovan and Phillips, The Modern Contract of Guarantee (Law Book Co Ltd, 1985)
Date of hearing: 6, 7, 8, 11 & 12 April 2016 Date of last submissions: 9 November 2016 Registry: Australian Capital Territory Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 396 Counsel for the Applicant: Mr G Blank Solicitor for the Applicant: DibbsBarker Counsel for the Respondents: Mr B F Katekar Solicitor for the Respondents: Kamy Saeedi Law ORDERS
ACD 68 of 2014 IN THE MATTER OF GORAN ADZIC (BANKRUPT) BETWEEN: FRANK LO PILATO, AS TRUSTEE OF THE PROPERTY OF GORAN ADZIC, A BANKRUPT
Applicant
AND: KAMY SAEEDI LAWYERS PTY LTD (ACN 130 129 878)
First Respondent
SAEEDI PTY LTD ACN 142 209 845 AS TRUSTEE FOR THE SAEEDI FAMILY TRUST
Third Respondent
JUDGE:
KATZMANN J
DATE OF ORDER:
31 JANUARY 2017
THE COURT DECLARES THAT:
1.The transfer of the property at 6 Kuhn Place, Nicholls by Goran Adzic to the third respondent is void as against the applicant.
THE COURT ORDERS THAT:
2.The third respondent pay the applicant’s costs.
3.The application against the first respondent be dismissed.
4.The applicant pay the first respondent’s costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
Table of contents
Background facts
[7]
The $100,000 payment
[32]
The transfer of the Nicholls Property
[34]
The bankruptcy
[45]
Pre-action communications about the Nicholls Property
[49]
The commencement of the proceeding
[58]
The case against the Trust
[59]
The relevant legislative provisions
[62]
The issues
[67]
Was there a loan to Mr Adzic for $100,000 on 4 October 2011 (for which Mr Adzic paid $30,000 on 6 October 2011)?
[68]
Was Mr Adzic’s obligation to repay the loan discharged upon settlement by being treated as the deposit?
[81]
Was the consideration for the purchase less than market value at the time of transfer?
[83]
Was the transfer made with the intention of defeating creditors?
[140]
To what relief is Mr Lo Pilato entitled?
[205]
The case against the Law Firm
[241]
The issues
[248]
The $229,879.14 payment and the costs agreements
[249]
Was the payment made by Mr Adzic to the Law Firm or to Redevelopments and held in the Firm’s trust account on Redevelopments’ behalf?
[262]
Was the $229,879.14 the payment of a secured debt?
[280]
Should the charging clauses and guarantees be set aside under s 288 of the Legal Profession Act 2006 (ACT)?
[287]
What is the Court’s jurisdiction to make orders under s 288 of the Legal Profession Act?
[288]
What is Mr Lo Pilato’s standing to make the application?
[293]
Should the charging clauses and guarantees be set aside?
[320]
Were the grants of the personal guarantees and charges in the costs agreements transactions to defeat creditors?
[367]
Was the payment of $229,879.14 a transfer to defeat creditors?
[380]
Was the payment of $229,879.14 a preferential payment for the purposes of s 122?
[381]
Was the payment of $229,879.14 an undervalue transaction under s 120?
[383]
Does the Law Firm have a defence?
[390]
To what relief is Mr Lo Pilato entitled?
[391]
Conclusion
[392]
REASONS FOR JUDGMENT
Goran Adzic was a property developer. In October 2012 he was made bankrupt. The unsecured creditors of his bankrupt estate claim to be owed more than $12 million. In this proceeding, his trustee in bankruptcy, Frank Lo Pilato, seeks to recover money on behalf of the estate from two entities to which Mr Adzic transferred real estate and money within months of his bankruptcy.
By legislative enactment, certain transfers of property (including money) made by a bankrupt before his or her bankruptcy are void against the trustee in bankruptcy, that is to say, at the instance of the trustee and to the extent necessary to satisfy the debts of the bankrupt and the costs of the bankruptcy. The provisions invoked in this case are ss 120, 121 and 122 of the Bankruptcy Act 1966 (Cth) and s 239 of the Civil Law (Property) Act 2006 (ACT). These provisions enable transfers of property to be made void against the trustee in bankruptcy if:
·the transfer occurred within five years before the bankruptcy, and the transferee gave no consideration for the transfer or consideration below market value: Bankruptcy Act, s 120(1);
·the property would probably have become part of the bankrupt estate or available to creditors if it had not been transferred, and the transferor’s main purpose in making the transfer was to prevent the property from becoming divisible among his or her creditors or to hinder or delay the process of making property available for division among them: Bankruptcy Act, s 121(1);
·the transferor was insolvent, and the transfer was to a creditor, had the effect of giving the creditor a preference, priority or advantage over other creditors, and was made in one of the periods before the bankruptcy described in the table set out in s 122(1) of the Bankruptcy Act; or
·the transfers (here called “dispositions”) were made with the intent to defraud creditors and the trustee is “a person prejudiced by the disposition” (unless the disposition was to an honest purchaser who, at the time of the disposition, did not have notice of the fraudulent intent): Civil Law (Property) Act, s 239.
There are several transfers of property that Mr Lo Pilato seeks to have declared void against him.
The first is the sale of Mr Adzic’s house to the family trust of one of the principals of the law firm, Kamy Saeedi Lawyers Pty Ltd (the Law Firm or the Firm), which acted on behalf of one of his companies (Redevelopments Pty Limited). Mr Lo Pilato says that the house was sold below market value, or alternatively that Mr Adzic’s main purpose in transferring the property was to defeat Mr Adzic’s creditors.
The second is the transfer of $229,879.14, derived from the proceeds of the sale of the house, into an account held by the Law Firm, purportedly on account of fees for legal work performed for Redevelopments. Mr Adzic had guaranteed the payment of these fees personally in the four costs agreements under which the fees were said to have been incurred. Mr Lo Pilato attacks the payment on three bases: first, as an undervalue transaction; second, as a transfer to defeat or defraud creditors; and third, as a preferential payment.
The trustee’s attack also extends to the giving of the guarantees in the four costs agreements and the charges over the house granted in those agreements to secure the debts. Mr Lo Pilato contends that the grants of the guarantees and charges were themselves transfers of property to defeat creditors. He also contends that the guarantees and charging clauses were not fair and reasonable provisions of the agreements, and seeks orders that they be set aside under s 288 of the Legal Profession Act 2006 (ACT).
BACKGROUND FACTS
At some point in or before December 2007, Mr Adzic became aware of the opportunity to purchase land at the site of the former Jamison Inn in Macquarie, a suburb in the Belconnen district of the ACT. The land was owned at the time by a company known as Enima Pty Ltd (Enima). Mr Adzic wished to develop the land by building apartments on it. But one Daniel McMillan — through Redevelopments, which was then his company — had acquired a call option in respect of it. So Mr Adzic, through a company — Smarthand Pty Ltd —purchased from Mr McMillan the entire share capital of Redevelopments. Smarthand, which changed its name to Space Property Group (ACT) Pty Ltd on 20 October 2009, was the trustee of the Adzic Family Trust. The purchase price was $2.4 million, to be paid by Smarthand in four equal installments. Under the terms of the Share Sale Agreement with Mr McMillan, Mr Adzic personally guaranteed and indemnified Smarthand’s obligations.
On 8 January 2008 the sale went ahead, Smarthand paying the first installment of $600,000, $300,000 of which came from Mr Adzic’s joint venture partner, Kees Veraar. Mr Adzic became Redevelopments’ sole director and Smarthand its sole shareholder.
Redevelopments then called on the option to purchase the Macquarie land from Enima and paid Enima some $8 million. According to Mr Adzic’s evidence, he contributed $300,000 and about $800,000 was put up by another joint venture partner, Emil Bulum. The balance was financed by a loan from Bankwest in the sum of $8,150,000, secured by a registered mortgage over the land and other security, including a fixed and floating charge over the assets of Redevelopment, and several guarantees and indemnities, including a guarantee and indemnity from Mr Adzic for the entire amount of the loan. The sale was completed in July 2008.
Mr Adzic’s troubles began on 31 July 2008 when Enima lodged a caveat over the land, claiming that it had been underpaid because the true purchase price under the agreement was $10 million. Soon after, Enima sued Redevelopments in the ACT Supreme Court for the $2 million difference. On 16 October 2008, the caveat was dissolved but an injunction granted, preventing Redevelopments from further encumbering the land.
In October 2008 Mr Adzic sacked his then lawyer and instructed Tracey Mylecharane, a partner in the Law Firm, to take over carriage of the matter. Doubtless Mr Adzic was happier with her, because they soon began an intimate personal relationship and late in 2008 or early in 2009 she moved in with him.
Despite the spark of a new romance, 2009 proved to be a difficult year for Mr Adzic and his business interests. The Enima litigation continued, and its impact on Redevelopments was severe. The company had all but exhausted its funds in procuring the Macquarie land, and Mr Adzic found it impossible to find fresh funds while the injunction prevented him offering the land as security. On 12 May Smarthand (and Mr Adzic, as its guarantor) failed to pay the second of the four instalments due to Mr McMillan under the Share Sale Agreement. At some stage in the middle of the year Mr Bulum decided that he wanted to leave the Macquarie project entirely and requested withdrawal of his equity. The Bankwest facility, which had been issued for a 12 month term, was due to expire on 28 July. And on 14 August the Enima litigation ended in defeat for Redevelopments when Refshauge J handed down judgment in Enima’s favour (Enima Pty Ltd v Redevelopments Pty Ltd [2009] ACTSC 95).
Faced with this compounding series of setbacks, Mr Adzic fought valiantly to save his company. He caused Redevelopments to appeal the decision of Refshauge J. He persuaded Bankwest to extend the loan to 31 December 2009. On 25 November he reached an accommodation with Mr Bulum, entering into a “Deed of Loan” whereby Mr Bulum’s “equity” in the joint venture was converted to a debt of $845,000, to be repaid to him by Mr Adzic, Redevelopments, Kees Veraar, and Keenan Veraar on 29 December 2009 or the expiry, cancellation or termination of the Bankwest facility, whichever occurred sooner. On 9 December 2009 Bankwest approved a second extension of the facility, this time to 28 February 2010.
When 28 February 2010 arrived, however, and the Bankwest facility again reached its notional expiry date, Redevelopments was yet to secure any major new funding.
Nevertheless, Mr Adzic reassured Bankwest that he was continuing to search for new equity, and on 29 April 2010 he informed the bank that he had found a joint venture partner in Radical Developments Pty Ltd. On 25 May Bankwest granted a further extension of the loan, this time until 26 August 2010. On 25 June Redevelopments was victorious in the Enima appeal (Redevelopments Pty Ltd v Enima Pty Ltd (2010) 174 ACTR 1) and the injunction was dissolved. Shortly afterwards, on 7 July 2010, Radical, Redevelopments, and Space entered into their joint venture agreement. Under the terms of the agreement Radical was to be “responsible for securing and/or providing funds” to the joint venture and for an immediate advance of $750,000. It appears that, at least for a time, funds from Radical were forthcoming.
As 2010 progressed, so did the Macquarie development. On 7 September Redevelopments signed a costs agreement with the Law Firm, engaging it to act in relation to off-the-plan sales of units in the development. Under this agreement (the Conveyancing costs agreement), Mr Adzic was named as guarantor and his and Redevelopments’ obligations were secured by a charge over Mr Adzic’s home at 6 Kuhn Place, Nicholls (the Nicholls Property or the Property). In December 2010 Redevelopments lodged an application with the ACT Planning and Land Authority for the development of the site.
Even as things progressed, however, Mr Adzic was fighting on four fronts.
On one front, Mr Adzic was engaged in an escalating dispute with Mr McMillan.
Space had missed the third instalment due under the Share Sale Agreement on 12 May 2010, and on 20 May it received a creditor’s statutory demand from Mr McMillan for $2,006,340. Six days later Mr Adzic was served with a demand for a slightly larger amount. On 9 June 2010 Space applied to set aside the statutory demand. Neither Space nor Mr Adzic paid Mr McMillan what he demanded. On 9 November 2010, after making further demands for payment, Mr McMillan filed an application in this Court seeking to recover the money he said he was owed.
In the meantime, on a second front, relations between Mr Adzic and Mr Bulum had also soured.
On 18 December 2009 Mr Bulum registered a caveat over the Macquarie land, allegedly pursuant to the Deed of Loan. Redevelopments responded by instituting an action for the removal of the caveat. The evidence in this proceeding does not make entirely clear what this dispute was about or when and how it was resolved. It is significant, however, because of the costs agreement, made on 22 March 2010, under which Redevelopments instructed the Law Firm to act for it in the caveat proceeding. Under this agreement (the Bulum costs agreement) Mr Adzic guaranteed Redevelopments’ obligations and both his and Redevelopments’ obligations were secured by a charge over the Nicholls Property.
The dispute between Mr Adzic and Mr Bulum escalated after 29 December 2009, when repayment was due according to the terms of the Deed of Loan. On 18 May 2010 Mr Bulum made a written demand on Redevelopments, Mr Adzic, and the Veraars for repayment of the loan plus interest. The Law Firm responded, on behalf of Redevelopments and Mr Adzic, asserting that they were not yet required to repay the loan because the time for repayment had been “extended by agreement”.
On 22 July 2010, after the exchange of further correspondence, Mr Bulum instituted proceedings in the Supreme Court of New South Wales against Mr Adzic, Redevelopments, and the Veraars to recover the $845,000 plus interest. The four defendants pleaded in their defence that the Deed of Loan had been varied orally so that the loan amount would only be repayable when an alternative lender was found. Mr Bulum denied that there had been any variation and the case proceeded.
On 30 September 2011 Mr Bulum filed an application for summary judgment.
Ultimately Mr Bulum was victorious in the proceeding, but he obtained orders only against Kees Veraar, as by that time Mr Adzic was bankrupt and Redevelopments had been deregistered.
The third front related to the development application.
The development application was approved, subject to conditions, on 24 June 2011. But on 22 July 2011 a third party lodged an application for review of the decision in the ACT Civil and Administrative Tribunal (ACAT). On 26 July 2011 Mr Adzic engaged the Law Firm to act for Redevelopments in relation to the appeal, and he signed a costs agreement (the ACAT costs agreement) on 12 December 2011. In this agreement, as in the others already mentioned, Mr Adzic was named as guarantor and, once again, his and Redevelopments’ obligations were secured by a charge over the Nicholls Property.
The fourth front concerned the loan to Bankwest.
On 26 August 2010 the bank determined that Redevelopments was in breach of the terms of its loan facility and issued Redevelopments with a default notice, requiring it to repay the loan in full on 26 September 2010. Negotiations between Mr Adzic and the bank ensued, with Mr Adzic seeking additional time to refinance. The negotiations were successful to a certain extent, because over the following months the effective deadline for repayment of the loan was extended several times. On 18 October 2010 the bank demanded that Redevelopments repay the loan in full by 10 December 2010; on 9 March 2011 it demanded repayment in full by 30 March 2011; and on 20 May 2011 it demanded repayment in full by 27 May 2011, this time through its solicitors, Gadens.
After receiving the letter from Gadens, Redevelopments briefed the Law Firm and on 26 July 2011 Redevelopments and Mr Adzic entered into a further costs agreement (the Bankwest costs agreement). It contained the same guarantee and charging clause as the Conveyancing, ACAT, and Bulum costs agreements.
Negotiations between the Law Firm and Gadens led to an agreement on 31 May 2011, under which, it seems, Redevelopments was obliged to repay the loan in full by 28 July 2011. On 13 July Redevelopments requested an extension of time until 19 August 2011. It is not clear whether this request was granted. In any event on 19 August Redevelopments filed an originating application in the ACT Supreme Court, seeking an order that Bankwest be restrained from taking action on the mortgage over the Macquarie land or the charges given by Redevelopments and Space, on the basis that Bankwest,
by its employed Business Development Manager, Stephen Kartsonas, made oral representations to [Redevelopments], by its director Goran Adzic, that the defendant would extend the facility expiry date until [Redevelopments] was able to obtain development approval and secure alternative financing to pay out the loan from [Bankwest] and encouraged [Redevelopments] to continue to expend substantial sums of money and incur substantial liabilities in relation to the development, including pre-selling 198 units. [Redevelopments] did so in reliance on [Bankwest]’s representations and has altered its position to its substantial detriment as a result.
That day Penfold J granted the injunction sought by Redevelopments, presumably as an interim measure. On 29 September 2011 that order was amended so as to limit the injunction’s operation until 4.00pm on 4 November 2011. On 3 November 2011, however, the injunction was extended again until further order.
The $100,000 payment
In early October 2011 a series of acts occurred, the nature and significance of which are in issue in this proceeding.
What does not appear to be in dispute is that:
(1)on 4 October 2011,
(a)$100,000 was transferred by Ms Mylecharane, with Mr Saeedi’s consent, from a joint account held by Mr Saeedi and his wife to an account held only by Mr Saeedi;
(b)$50,000 was transferred from Mr Saeedi’s bank account to Ms Mylecharane’s bank account with the notation “loan to TM” appearing on Mr Saeedi’s account statement and with the notation “loan from KS” appearing on Ms Mylecharane’s account statement;
(c)Mr Adzic asked Ms Mylecharane to transfer $70,000 into a bank account called “JMA Legal Trust Account”;
(2)on 5 October 2011 Ms Mylecharane arranged the transfer of $70,000 to the JMA Legal Trust Account (in payments of $50,000 from Ms Mylecharane’s bank account and $20,000 from Mr Saeedi’s); and
(3)on 6 October 2011 Ms Mylecharane transferred $30,000 from Mr Saeedi’s bank account back into Mr and Mrs Saeedi’s joint bank account, with the notation “from TM” appearing on Mr Saeedi’s account statement.
The transfer of the Nicholls Property
Mr Adzic’s most valuable asset was the Nicholls Property.
Mr Adzic purchased land at the site in 1995. He and his father later built the house. In 1998, before the building work had been completed, Mr Adzic moved in. In 2009 Ms Mylecharane moved in with him. The evidence indicated, and it was not in contest, that she paid no rent and made no financial contributions to the mortgage or improvements to the Property.
On 26 October 2011, less than a week before the Bankwest injunction was due to expire, Mr Adzic lodged a transfer with the ACT Registrar-General in an attempt to transfer the whole of his interest in the Nicholls Property to both him and Ms Mylecharane as joint tenants in consideration of “love & affection”.
That transfer did not go ahead. On 5 December 2011 the Deputy Registrar-General issued a requisition on the transfer to Ms Mylecharane, and it was an agreed fact that, two days later, on 7 December 2011, contracts were exchanged for the sale of the Nicholls Property to Saeedi Pty Ltd as trustee for the Saeedi Family Trust (the Trust). The purchase price recorded on the contract of sale was $905,000. No deposit was then paid but the contract included a “special condition” in which the parties acknowledged that a deposit of $100,000 had been paid “by the buyer directly to the seller”.
I note parenthetically that for the following reasons, although the copy of the contract tendered in evidence carried the 7 December date, were it not for the agreement I would have had trouble accepting that exchange in fact occurred on that date.
On 11 April 2012 Ms Mylecharane emailed Amy Beattie, a private banker at the Commonwealth Bank (CBA), copying in Mr Saeedi. The email read (without alteration):
Hi Amy
As discussed, I confirm Kamy has asked me to liaise with you to get the ball rolling for an investment property he wishes to purchase through his trust.
He is in negotiations in relation to purchase price, with the price dependant upon the bank valuation to be obtained.
I confirm he will be contributing a cash deposit. Again, the amount will be dependant upon the valuation.
The property details are 6 Kuhn Place, Nicholls in the ACT. Details of the property should be kept confidential.
Can you kindly confirm the process from here, as Kamy would like to get the valuation process underway as soon as possible. He is keen to agree on a purchase price and exchange contracts without delay.
Please let Kamy or I know if you require anything further at this stage.
(Emphasis added.)
Ms Beattie replied, indicating, amongst other things, that she could order a valuation, and requesting financial records for “the Saeedi Group” in order that a loan could be approved. Ms Mylecharane confirmed Mr Saeedi’s instructions to proceed with the valuation and in the same email stated (again without alteration):
I cannot confirm the expected price. As previously mentioned that is dependant upon the valuation. I can however confirm the asking price, which is between $850,000 and $910,000.
The details for the contact person are Goran Adzic …
A contract has not yet issued to Kamy as a price has not been agreed upon …
(Emphasis added.)
Either Ms Mylecharane was lying, then, or the account given to the Court about the contract for sale is a fabrication. No reason was suggested by either party as to why Ms Mylecharane would set out to deceive the bank in this correspondence. Still, Mr Saeedi maintained that the contract was executed on 7 December 2011 and said that he was “baffled” by the assertion in Ms Mylecharane’s email. More importantly, no application was made for leave to withdraw the admission and I must proceed on the basis that exchange took place on the agreed date.
In another curious feature of the transaction, settlement occurred nearly six months later, on 31 May 2012, although the contract provided for settlement within 90 days. The transfer was registered a week later, on 7 June 2012. On the day of settlement and from its proceeds Mr Adzic paid the Law Firm by bank cheque the sum of $229,879.14.
Despite the sale, little changed. Mr Adzic and Ms Mylecharane continued to live in the Nicholls Property. There was evidence that Mr Adzic moved out at one stage, but the separation was apparently short-lived. Mr Saeedi testified that in about June 2012 Ms Mylecharane approached him apologising for their inability to pay the rent that month. He said that she told him that “the refinance should be through soon and we will pay then”. But rent was never paid. Nor was any demand for its payment ever made. Mr Saeedi said, however, that in about June 2013 he told Ms Mylecharane he was not prepared to carry the burden of the mortgage without any rent for much longer.
Between June 2013 and early 2014, Mr Saeedi arranged for work to be undertaken on the Property to prepare it for sale at a cost (according to him) of $38,000. On 3 May 2014 he signed a contract to sell it to a third party purchaser for $1.2 million. The sale was completed on 30 May 2014.
The bankruptcy
On 13 April 2012 judgment was entered by consent against Mr Adzic in the McMillan proceeding in the sum of $2,514,373.45.
Mr Adzic failed to pay the amount owing to Mr McMillan under the judgment and a bankruptcy notice was served on him. He failed to comply with the bankruptcy notice and on 15 August 2012 Mr McMillan filed a creditor’s petition in the Federal Magistrates Court (now the Federal Circuit Court). On 11 October 2012 the court made a sequestration order against Mr Adzic’s estate and Mr Lo Pilato, a chartered accountant and an experienced insolvency practitioner, was appointed his trustee in bankruptcy. The court order bears the notation that “the date of the act of bankruptcy is 14 August 2012”.
Mr Lo Pilato then began his investigation into Mr Adzic’s affairs.
In the period June to September 2013 public examinations were conducted of Mr Adzic, Ms Mylecharane, and Mr Saeedi.
Pre-action communications about the Nicholls Property
In an affidavit sworn on 16 March 2016, Mr Saeedi deposed to a number of conversations with Mr Lo Pilato about the Nicholls Property.
The first conversation took place on 12 July 2013, when Mr Saeedi attended the Federal Court for his public examination. He said that he spoke to Mr Lo Pilato either in a break or at the end of his examination, and they exchanged words to the following effect:
[Saeedi]:If you think the house at Kuhn Place was worth more than what I paid for it then why don’t you just reverse the transaction.
[Lo Pilato]:Oh, okay, I will think about that and see what happens.
When asked about the alleged conversation in cross-examination, Mr Lo Pilato confirmed that he was present in court on 12 July 2013, but said that he did not recall meeting with Mr Saeedi. When asked to deny that the meeting took place, he demurred. After some obfuscation, he ultimately conceded that it “could have happened” but he said that he could not “remember specifically”.
According to Mr Saeedi, the next conversation took place at the Loading Zone cafe on Northbourne Avenue, sometime in the second half of 2013. He said that he again said to Mr Lo Pilato:
[Saeedi]:If you think the house is worth more than I paid for it then why don’t you reverse the transaction?
Mr Lo Pilato recalled that meeting. When asked if he remembered Mr Saeedi offering to convey the Nicholls Property to him in return for the purchase price, he did not deny it. Rather, he at first obfuscated and talked around the question, before ultimately agreeing that he could not recall whether or not Mr Saeedi asked him to “reverse the transaction”. He said he did not recall whether Mr Saeedi said that he was planning to sell the Property, but he said that he understood that at that time that Mr Saeedi was undertaking work on it.
Then, on 12 November 2013, Mr Lo Pilato’s solicitors, DibbsBarker, wrote to Mr Saeedi stating that Mr Lo Pilato had “formed the view” that he was entitled to make certain demands, including demands relating to the Property.
Finally, Mr Saeedi said that sometime between November 2013 and January 2014, after his public examination, his meeting with Mr Lo Pilato at the Loading Zone Cafe, and his receipt of the letter, he had a conversation with Mr Hill of DibbsBarker. He said that the conversation took place on the phone, but he did not remember who made the call. He said that they first discussed some statements that Mr Lo Pilato had sought from his bank, in order to produce these in compliance with an undertaking he had apparently given at the public examination. The conversation then turned to the Nicholls Property. Mr Saeedi said that he told Mr Hill he was about to sell the Nicholls Property, and that Mr Hill thanked him for the information.
This evidence was not contradicted. No affidavit from Mr Hill was read and no application was made to call him to give oral evidence although he was present in court. In these circumstances I infer that nothing he could have said would have assisted Mr Lo Pilato’s case.
Consequently, I find that by January 2014 Mr Lo Pilato was aware (at least through his solicitors) that Mr Saeedi was proposing to sell the Nicholls Property. Yet, before this proceeding was commenced, no action was taken to “reverse” the transfer of the Property to the Trust or, indeed, to safeguard the trustee’s interest in the Property, such as by the lodgment of a caveat.
The commencement of the proceeding
This proceeding was commenced by the filing of an originating application on 30 July 2014. The application originally sought orders against Ms Mylecharane in relation to her receipt of some of the proceeds of the sale of the Nicholls Property, but the action against her was discontinued after she was made bankrupt.
THE CASE AGAINST THE TRUST
Mr Lo Pilato contended that the Nicholls Property was sold to the Trust at less than its market value either because:
(1)the contract price was not the market value; or
(2)the true purchase price was lower than the contract price on the basis that the $100,000 was not a deposit but, either in whole or in part, a loan to Ms Mylecharane.
Either way, Mr Lo Pilato maintained that the transfer of the property to the Trust was void under s 120. Alternatively, Mr Lo Pilato contended, the house was sold with the intention of avoiding creditors and so the transfer was void under s 121. He also pleaded that the transfer of the property was a disposition with intent to defraud creditors and is void against him under s 239 of the Civil Law (Property) Act, but he did not advance any submissions on this point separate from those in support of his case under s 121.
The Trust, on the other hand, insisted that it bought the property for $905,000, which included “the $100,000 deposit”. It submitted that the Court would not be persuaded that $905,000 was less than market value or that Mr Adzic’s main purpose in selling the property was to keep it from creditors. In any case, it contended that relief is unavailable because the property was on-sold to a bona fide purchaser before this proceeding was commenced.
The relevant legislative provisions
Section 120 of the Bankruptcy Act relevantly provides as follows:
120 Undervalued transactions
Transfers that are void against trustee
(1)A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a)the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b)the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.
Note:For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.
…
Refund of consideration
(4)The trustee must pay to the transferee an amount equal to the value of any consideration that the transferee gave for a transfer that is void against the trustee.
What is not consideration
(5)For the purposes of subsections (1) and (4), the following have no value as consideration:
…
(d) the transferee’s love or affection for the transferor;
…
Protection of successors in title
(6) This section does not affect the rights of a person who acquired property from the transferee in good faith and by giving consideration that was at least as valuable as the market value of the property.
Section 121 relevantly states:
121 Transfers to defeat creditors
Transfers that are void
(1)A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor’s bankruptcy if:
(a)the property would probably have become part of the transferor’s estate or would probably have been available to creditors if the property had not been transferred; and
(b)the transferor’s main purpose in making the transfer was:
(i)to prevent the transferred property from becoming divisible among the transferor’s creditors; or
(ii)to hinder or delay the process of making property available for division among the transferor’s creditors.
Note:For the application of this section where consideration is given to a third party rather than the transferor, see section 121A.
Showing the transferor’s main purpose in making a transfer
(2)The transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent.
Other ways of showing the transferor’s main purpose in making a transfer
(3)Subsection (2) does not limit the ways of establishing the transferor’s main purpose in making a transfer.
Transfer not void if transferee acted in good faith
(4) Despite subsection (1), a transfer of property is not void against the trustee if:
(a)the consideration that the transferee gave for the transfer was at least as valuable as the market value of the property; and
(b)the transferee did not know, and could not reasonably have inferred, that the transferor’s main purpose in making the transfer was the purpose described in paragraph (1)(b); and
(c)the transferee could not reasonably have inferred that, at the time of the transfer, the transferor was, or was about to become, insolvent.
...
Subsections (5), (6) and (8) are identical in substance, if not in terms, to subsections (4), (5) and (6) of s 120. For the purposes of both ss 120 and 121 “transfer of property” is defined to include a payment of money and the “market value” of transferred property as the market value of the property at the time of transfer: see ss 120(7) and 121(9).
“Property” is defined in s 5 of the Act to mean:
real or personal property of every description, whether situate in Australia or elsewhere, and includes any estate, interest or profit, whether present or future, vested or contingent, arising out of or incident to any such real or personal property.
“Void” in these contexts means “voidable”: Anscor Pty Ltd v Clout (2004) 135 FCR 469 at [43] (Lindgren J). As Gummow J explained in Fiorino v Woodgate [1994] FCA 181:
The effect of s. 120, as of s. 94 of the Bankruptcy Act1924, is that a disposition of the description in the section is voidable at the instance of the trustee “as from the time as at which his title accrues” and that the section makes ineffectual every step taken by the bankrupt which would otherwise cause the beneficial title to pass: Williams v Lloyd (1934) 50 C.L.R. 341 at 374.
The issues
Insofar as the case against the Trust is concerned, the issues as defined by the parties are these:
(1)whether there was a loan to Mr Adzic for $100,000 on 4 October 2011 (for which Mr Adzic paid $30,000 on 6 October 2011);
(2)if so, whether Mr Adzic’s obligation to repay the loan was discharged upon settlement, by it being treated as the deposit;
(3)whether the price paid for the Property (that is, the consideration for the transfer) was less than its market value at the time of transfer;
(4)whether the contract for sale and the transfer of the Property to the Trust was a transfer made with the main purpose of defeating Mr Adzic’s creditors; and
(5)in the event that (3) or (4) is made out, to what relief, if any, Mr Lo Pilato is entitled.
Was there a loan to Mr Adzic for $100,000 on 4 October 2011 (for which Mr Adzic paid $30,000 on 6 October 2011)?
Mr Lo Pilato claims that, despite the “special condition” in the contract for sale (see [37] above), no deposit was paid on the purchase of the Nicholls Property. If he is right, then the Property was sold for $805,000.
The Trust relies on the transfer of $100,000 from the joint account of Mr and Mrs Saeedi on 4 October 2011 and the evidence of Ms Mylecharane, Mr Adzic, and Mr Saeedi. Neither Ms Mylecharane nor Mr Adzic was called in this case but Mr Lo Pilato tendered without objection the transcript of their evidence in the public examination. The transcript of evidence taken at a public examination may be used in evidence in any proceeding under the Bankruptcy Act regardless of whether the persons examined are parties to the proceeding (ss 81(17), 255(1)) and, unless an order is made to the contrary, is admissible as evidence of the matters described by those persons (s 255(2)). Neither party requested such an order.
Mr Saeedi’s evidence was as follows.
In early October 2011 he was looking to buy a unit in the eastern suburbs of Sydney, primarily as a weekender, but also as an investment, adding to his property portfolio. To this end he travelled to Sydney to look at a property in Tamarama. While he was there, he received a call from Ms Mylecharane. They had a conversation to the following effect:
[Mylecharane]: “Goran is looking to borrow one hundred thousand dollars to fund Redevelopments. It is a short term cash thing as he does not want to sell some of his assets or the land belonging to Redevelopments. There are more than two hundred units in the complex that have already exchanged contracts. It should not be a problem in the bigger picture as there are other potential joint venture participants and more than enough equity, but he needs that cash in the short term. He is looking to pay personal funds into Redevelopments and has been talking about selling his house in Nicholls. He has been talking to short term money lenders.”
[Saeedi]: “What is happening with Goran’s matters? I thought that he had plenty of assets that he could use?”
[Mylecharane]: “Redevelopments is fighting a number of claims to get the development to a stage where it can be sold. Redevelopments is paying all other debts apart from these contested ones and needs to get through these matters to realise the development of the Macquarie Units. There are more than enough assets to pay the debts, including the land in Macquarie that should be worth more than $15 million, but he would prefer a short-term loan so that he can keep hold of those assets and make the profit on the development.”
[Saeedi]: “Okay, I am in Sydney looking to buy an investment property.”
[Mylecharane]: “What if you buy Goran’s Nicholls house instead?”
[Saeedi]:“I would prefer not to get locked into a house in Gungahlin. I am pretty set on this house in Tamarama near the beach. As a compromise though, maybe we could set up a short term loan with the security of the Nicholls House if the other funding does not come through?”
“If Redevelopments is looking for short-term funding then what terms has Goran been able to find with lenders at the moment?”
[Mylecharane]: “The short term loan[s] usually have a fixed rate of interest of 30% that is payable immediately”.
[Saeedi]:“If you take $100,000 from my home loan account, then that will be on terms that there will be a fixed interest rate of 30% that is repayable immediately, then the $100,000 debt is to be paid within a month or so or else I will require the sale of the Nicholls property to repay the debt. If I am required to buy the Nicholls house, then the $100,000 will be taken to be the deposit for the purchase. We will discuss the market price for the house if that is needed to determine the remaining amount that would need to be paid. I am doing this as a favour for you though and I would prefer not to have to buy the house.”
Later that day, or the following day, Ms Mylecharane telephoned Mr Saeedi, saying that Mr Adzic had agreed to Mr Saeedi’s loan proposal. Mr Saeedi replied:
Okay. You have access to my bank accounts. Please make that loan happen.
Mr Saeedi explained that Ms Mylecharane knew the passwords to his electronic banking accounts and said, without objection, that she “directly facilitated each of the payments”, on the terms discussed with her.
Most of this evidence went unchallenged. Still, there are some difficulties with the Trust’s position.
As Mr Saeedi acknowledged, the contemporaneous records do not suggest that a loan of $100,000 was advanced to Mr Adzic. The bank statements show that:
(1)on 4 October $100,000 was transferred from the Saeedis’ home loan account to Mr Saeedi’s private bank account with the CBA and $50,000 credited to Ms Mylecharane’s NetBank account;
(2)the next day a further $20,000 was transferred from the private account to another solicitor’s trust account (JMA Legal Trust Account); and
(3)on 6 October $30,000 was transferred from the private account into the home loan account.
The first two transactions are recorded in the bank statements as “TM loan” and “loan to TM” respectively. None of the bank documents refers to a loan to Mr Adzic. No explanation was given for the notations but plainly “TM” denotes Tracey Mylecharane.
The bank statement does not indicate that the transfer on 6 October relates to any loan.
A bank statement relating to an account held in Ms Mylecharane’s name shows a transfer from Mr Saeedi’s private account on 4 October for $50,000, described as a loan from “KS” (presumably Mr Saeedi), and a transfer out of the same amount the following day with the notation “RTGS”. No evidence was given to explain this notation. No suggestion was made that it had any relationship to Mr Adzic.
Exhibited to Mr Lo Pilato’s affidavit of 9 June 2015, however, together with the bank records, was an email from Mr Adzic to Ms Mylecharane dated 4 October 2011 asking her to transfer “the $70k” into the JMA Legal Trust Account and emails between the bank and Ms Mylecharane supporting the conclusion that there were two transfers of $50,000 and $20,000 respectively, the first from Ms Mylecharane’s account, the second from Mr Saeedi’s. So, while the bank statements refer to “TM Loan”, and I was not taken to any evidence to show that Mr Adzic actually received any part of the money, $70,000 of the $100,000 withdrawn from the home loan account appears to have been deposited into an account with a firm of solicitors at Mr Adzic’s request. At the public examination, Mr Adzic testified that the money “went straight to Redevelopments” and he never saw any of it himself. He said that he asked Ms Mylecharane to “attend to a couple of payments for Redevelopments as a matter of urgency” and that he assumed it went into “the trust account”. Not only was this evidence not challenged, it was evidence in Mr Lo Pilato’s case. It is reasonable, then, to infer (and I do) that the purpose of the transfer was to procure funds for Redevelopments and that “the $70,000” represented the net amount of the loan after the 30% interest had been paid as agreed.
Consequently, I find that in early October 2011 there was a loan of $100,000. I am satisfied that the money was paid to a firm of solicitors at Mr Adzic’s direction on behalf of Redevelopments. But the evidence does not indicate that it was the Trust that advanced the money. Rather, the money came from Mr and Mrs Saeedi.
Was Mr Adzic’s obligation to repay the loan discharged upon settlement by being treated as the deposit?
Assuming the obligation to repay the loan was Mr Adzic’s, rather than Redevelopments’, it is difficult to see how the obligation was discharged by the Trust treating it as the deposit on the purchase of the Nicholls Property when it was Mr and Mrs Saeedi, not the Trust, who provided the funds. It is also difficult to understand the reference to $100,000 when it is common ground that the debt was only $70,000 by the time the contract for sale was drawn up.
Be that as it may, the contract contained an acknowledgment that the deposit in that amount had been paid by the Trust directly to the seller (Mr Adzic). Mr Saeedi’s evidence was to the effect that, if the debt could not be repaid otherwise than by the sale to him of the Nicholls Property, then the $100,000 would be taken as the deposit. According to him, this was the agreement struck with Ms Mylecharane acting in this respect as Mr Adzic’s agent. Further, the settlement sheet refers to the payment of a $100,000 deposit. Mr Lo Pilato did not submit that the contract was a sham. In these circumstances I find that the loan was discharged upon settlement by being treated as the deposit on the purchase.
Was the consideration for the purchase less than market value at the time of transfer?
Mr Lo Pilato submitted that, if no money was paid by the Trust, then the $100,000 could not form part of the deposit for the Property. That is not necessarily so. A deposit paid by a third party is still a deposit. The real difficulty for the Trust is that s 120(1)(b) is not concerned with the consideration received by the transferor. As is apparent from its terms, s 120(1)(b) is concerned with the consideration, if any, given by the transferee (see Tyler v Thomas (2006) 150 FCR 357 at [112]–[113] (Bennett J), [230] (Graham J)).
The transferee here was the Trust. Mr Saeedi did not testify that he directed Ms Mylecharane to pay the money out of an account held in the name of the Trust. Nor did he say that he was paying the money on behalf of the Trust. The Trust’s involvement in the purchase only emerges when its name appears on the contract. There was no mention of the Trust before then. Whatever consideration Mr and Mrs Saeedi may have given, the Trust gave Mr Adzic only $805,000. This was the consideration for the purchase.
There is an issue about the time of transfer for the purpose of ss 120 and 121. The Trust claims that it is on 7 December 2011 being the date appearing on the contract for sale and the agreed date upon which contacts were exchanged. Mr Lo Pilato’s position is not entirely clear but I took him to be contending throughout that it is 12 May 2012 when settlement took place. I will return to this issue in due course. At this stage it is unnecessary to resolve it, because the evidence upon which Mr Lo Pilato relied was to the effect that the market value was no different at these two points in time.
As the Trust submitted, the term “market value”, as used in s 120, is intended to refer to the value of the property if it were sold to an unrelated purchaser bidding in a market on an ordinary commercial basis for the same kind of property, without any sort of discount or incentive for purchase: Tyler v Thomas at [45] (Branson J), [108] (Bennett J), [200]–[204] (Graham J). In Spencer v Commonwealth (1907) 5 CLR 418 at 432, to which Branson J referred, Griffith CJ said that:
[T]he test of value of land is to be determined, not by inquiring what price a man desiring to sell could actually have obtained for it on a given day, i.e., whether there was in fact on that day a willing buyer, but by inquiring “What would a man desiring to buy the land have had to pay for it on that day to a vendor willing to sell it for a fair price but not desirous to sell?” It is, no doubt, very difficult to answer such a question, and any answer must be to some extent conjectural.
Strange as it may seem, Mr Saeedi’s evidence was that it was he who determined a suitable price. He stated that in about late November or early December 2011 he searched the website which he said contains research on sales of Canberra properties. He said that he did not recall precisely the properties he used as a guide on prices although one property at 4 Dive Place Nicholls, valued at $1 million, mentioned by a certified practising valuer, James Brennan, qualified on Mr Lo Pilato’s behalf, seemed familiar. Properties such as this, Mr Saeedi said, which back onto the golf course and are complete, with backyards and swimming pools, created a benchmark for the Nicholls Property. Mr Saeedi said that his view at the time was that the Nicholls Property was inferior to such properties. He said that he used the data from the allhomes website to settle upon a figure of $900,000 as “a fair value” taking into account the following matters:
(a)the state of the Nicholls Property, considering its run‑down state and the work that was never completed since it was built approximately 20 years ago;
(b)the fact that I would not be able to sell it quickly if I wanted to as I would need trades to attend for the work to complete the construction and take care of the maintenance and repairs;
(c)the Nicholls Property did not present well, not just because it was incomplete and rundown, but also because that (sic) the main view from the street was a triple car garage;
(d)generally the location of the Nicholls Property away from the golf course or any significant reserve. I saw the houses in Nicholls that were selling for more than $1,000,000 and they all had special aspects that set them apart from this house;
(e)the fact that it did not have any real backyard other than small paved areas and it did not have a swimming pool; and
(f)I was not overly concerned at bargaining a lower price considering my working relationship with Tracey and that the purchase price would be a benchmark for them to repurchase the house.
Then, according to Mr Saeedi, he had a conversation with Ms Mylecharane in which he told her that he had had a look at property values in Nicholls, that he thought “the [P]roperty [was] worth about $900,000 in its current state”, and that she replied: “I have been discussing this with Goran recently and he agrees that is about the right price”. He said that she undertook to “take care of all the contracts that are needed”.
This evidence is at odds with evidence Mr Adzic gave during the public examination in which he agreed that in asset and liability statements he had signed he had estimated the value of the Nicholls Property at $1 million in July 2008 and $1.5 million in August 2011. Mr Adzic also said that in 2011 he went to the allhomes website, “made some comparisons”, and “made a call” as to where the Nicholls Property sat. He added that he believed that Mr Saeedi “got a valuation”, but he did not say when.
Mr Saeedi’s evidence concerning the background to the purchase was as follows. In about late November or early December 2011 Ms Mylecharane told him that Mr Adzic thought that it would be better if he were able to buy the Nicholls Property “and pay the rest of the purchase price, rather than leaving that as a loan to be repaid”. Mr Saeedi agreed on the basis of Ms Mylecharane’s assurance that she and Mr Adzic would continue to live in the premises and pay him a commercial rate of rent each month with the ultimate object of buying the Property back. According to Mr Saeedi, it was he who suggested the amount of the rental payment at $800 per week. He said that he then told Ms Mylecharane:
Well, if you have the contracts drawn up, then that gives the further security for the loan. Draw out the settlement date. I will not pay the stamp duty unless I have to so let me know as soon as the repurchase can take place.
Mr Saeedi recalled having attended the Nicholls Property on three or four occasions in the past when he had been invited to dinner. He said that he knew that the house was incomplete and the Property was looking “quite rundown” and “a lot of work was needed”. He referred to the following particular matters:
(a) the render was cracking all around the outside and the paint was aged;
(b) none of the external landscaping was finished to a good quality;
(c)the backyard was full of builders’ rubbish. It was a small courtyard and the retaining wall was not complete. The landscaping out the back looked particularly poor;
(d)going from the back living area to the back courtyard, the sliding doors on the house were not finished as there was exposed brick around these doors;
(e)throughout the inside of the house, it was dated with all finishings, and the paint looked old and in need of repainting throughout;
(f)… all of the inside of the house looked like it was 20 years old with worn carpet and all internal finishings; and
(g)the garage ceiling was missing and there were only exposed trusses down there. I observed water damage where it seemed as though water was entering from outside which had damaged one wall of gyprock.
He said that he was also aware of the fact that Kuhn Place was not “as prestigious” as some of the streets in Nicholls that backed onto the golf course.
Mr Saeedi also testified that the Property was in the same condition in July 2013. This testimony was doubtless intended to tie in with evidence from an estate agent, Maria Selleck, who inspected the Property at that time.
In her affidavit, Ms Selleck said that when she inspected the Property she found a number of problems. She said that the upstairs verandah was “in a state of disrepair”, with a large section of the decking being cracked and rotten, posing a safety risk. She said that builders’ debris was scattered around the rear courtyard; the gyprock ceiling in the garage was incomplete; the basement had wet walls, pools of water on the floor and high humidity, and building material was lying around. She said that the house looked like it was 20 years old both inside and out. She referred in particular to the preponderance of marble in the bathrooms and the layout and finishes of the kitchen which, she considered, made them look dated, although she conceded that neither the bathrooms nor the kitchen were refurbished before the 2014 sale. She asserted that the landscaping at the front and rear of the house would be unattractive to buyers and needed a lot of work, and the landscaping at the rear looked unfinished and appeared to have subsided. She felt it was unsafe for her to walk at the back due to the apparent subsidence. She described the paintwork as dated and in poor condition, both inside and out, such that it needed to be redone. She said that the render was cracking and peeling away throughout and on the whole of one side in particular, making the house appear dilapidated. She said that the interior plaster was also cracking. Finally, she said that the motorised blinds needed replacing.
Overall, her assessment was that the Nicholls Property “was not totally dilapidated … but a number of things were not completed and a number of items needed to be updated”. She said that she told Mr Saeedi that the Property was unsaleable in its current state but with “extensive work to … bring it up to the expected standard for [the] suburb”, he “may be able to get within the vicinity of” $1.1 million to $1.25 million, “provided that all works were undertaken and completed in a professional manner”.
Ms Selleck said that she inspected the Property again on about 21 February 2014. At this time she observed that “considerable” work had been performed, in accordance with her advice. Her opinion was that this had increased the Property’s sales potential. She agreed to act as agent, and sold the Property just before auction for $1.2 million, with contracts being exchanged on about 3 May 2014.
Ms Selleck deposed that the 2012 price of $905,000 and the 2014 price of $1.2 million were each “a fair market price”, considering the state of the Property when she inspected it 2013; her “review of recent sales that was undertaken at the time of marketing”; and her estimate, based on her experience in sales, that the improvements would have increased the value by $200,000–$300,000 or more.
She adhered to her opinions in cross-examination.
In re-examination Ms Selleck was asked whether she considered it likely that the Property could have sold for $1.1 million in July 2013 in what was then its present condition. She said she considered it impossible, because even in 2014 when the repairs had been undertaken and the “market had … improved by a great deal”, she was “getting offers between 1.05 and 1.1”, with the highest offer being the $1.2 million for which the Property was ultimately sold.
I have some difficulty with Mr Saeedi’s evidence.
First, it does not explain or, at least, satisfactorily explain, how the precise figure of $905,000 came to appear on the contract.
Secondly, there is no evidence that Mr Saeedi ever attended the Nicholls Property for the purpose of inspecting, let alone, valuing it. It stretches credulity that a person who had attended a house as a dinner guest on three occasions would take such particular notice of the defects in the Property, including its surrounds, unless he was minded to purchase it at some stage in the future or he had some relevant expertise, such as a valuer, estate agent, architect, or designer. Mr Saeedi had no such intention at those times and professed no such expertise.
Thirdly, Mr Saeedi conceded in cross-examination that, contrary to the representation in his affidavit, he did not go “all around the property” so he could not say whether the render was cracking “all around the outside”; he said he was speaking of what he saw on entering the house.
Fourthly, his recollection of his visits to the Property was vague and unreliable. In the public examination in 2013 he could not recall “specifically” when he had attended the Property, but it “would” have been in the six months before October 2011. In his affidavit in this proceeding he deposed to having visited the Property in November 2011. It is unlikely that his recollection of such a matter would be better in 2016 than it was three years earlier. When pressed in cross-examination he was insistent that he had visited the Property in 2011 at least because his son was born in January 2011 and he recalled visiting with his son. Later, however, he frankly acknowledged that the event he had in mind had taken place in November 2012, well after the purchase of the Property.
Fifthly, Mr Saeedi’s evidence is inconsistent with the evidence of a valuation undertaken on behalf of the CBA shortly after the email from Ms Mylecharane referred to in [40] above.
The valuation obtained on behalf of the CBA came from Herron Todd White. The valuer was Angus Howell. Mr Howell inspected the Nicholls Property on 17 April 2012. He described both the internal and external state of the premises as “very good” and he assessed the market value at $1.1 million. The valuation was unchanged in a later report on 30 July 2013.
Sixthly, while Mr Saeedi’s description of the Property was more consistent with Ms Selleck’s than Mr Howell’s, Ms Selleck did not inspect the Property in 2011 or 2012, and, apart from Mr Saeedi’s statement, no evidence was called to support a finding that the Property was in a similar state in 2013 when Ms Selleck’s inspection took place. In the public examination Mr Adzic referred to some unfinished works at the time the price was agreed. But his evidence was vague. He identified an issue with “air conditioning components”, which Ms Selleck did not mention. Neither he nor Ms Mylecharane referred to any of the matters raised by Ms Selleck. Nor was any expert evidence adduced to show that, if Ms Selleck’s description of the Property in July 2013 was accurate, then the Property was likely to have been in the same or similar condition two years earlier.
Seventhly, the CBA valuation was carried out after the Trust applied for a loan of $814,000, being 90% of the contract price, on 21 May 2012. On 24 May 2012 Scott Wallace of the CBA noted in the bank’s records:
Application is to assist purchase an additional investment property. The PP of $905K was set in 12/2011 (apparently a distressed sale) and as such I will accept the valuation amount for our purposes due to the time span.
(Emphasis added.)
When he was cross-examined on this note, Mr Saeedi denied using the term “distressed sale” but conceded that he would probably have said that Mr Adzic was under pressure to sell and that it was possible that he had intimated to Mr Wallace that Mr Adzic was willing to accept a lower price in order to achieve the sale. He said that he likely impressed upon him that it was a good deal for the bank. In these circumstances, it seems likely that Mr Saeedi believed that the contract price was low.
Having regard to all these matters, I consider that Mr Saeedi’s evidence concerning the state of the Property in November 2011 and, indeed, at any time before the sale, is unreliable. It is likely to have been affected by hindsight and influenced by the evidence his firm had obtained for the purpose of the case and his stake in the proceeding. Whether the influence was conscious or unconscious I am unable to say. For these reasons I do not accept his statement that the condition of the house in 2011 was the same as it was in 2013.
Mr Brennan, the valuer retained for the case on behalf of Mr Lo Pilato, produced five reports. The first, dated 11 December 2014, followed an inspection of the Property on 8 December 2014. The methodology he employed was to compare the Nicholls Property with other residential properties in the area which had been sold at roughly similar times. As Mr Brennan explained:
The most appropriate method of valuation for a property of this nature is direct market comparison whereby the subject property is compared with sales of comparable properties and adjustments made for points of difference.
The methodology appears to be orthodox. Certainly, it was never suggested that it was inappropriate. The same methodology was employed by Mr Howell.
The second report, dated 28 May 2015, was produced after Mr Brennan had considered a number of documents provided by Mr Lo Pilato’s solicitors (approved plans, a certificate of occupancy, a survey, and a title search). In the first report, based on a comparison of the Property with other homes sold in Nicholls during 2011 and 2012, Mr Brennan expressed the opinion that the market value as at 7 December 2011 was $940,000 and that at 31 May 2012 it was $1,200,000. In the second report, the valuations were unchanged. In reaching these opinions Mr Brennan assumed that the house was “constructed in around 2012” (sic), that in December 2011 it was only 95% complete, in “average condition for generally incomplete inclusions” and without “ground improvements”, but that by 31 May 2012 a certificate of occupancy had been issued.
In August 2015 Mr Lo Pilato’s solicitors asked Mr Brennan to consider evidence filed on behalf of the Trust, including the opinions expressed by Ms Selleck, and to give his opinion about the extent, if any, of fluctuations in the market between November 2012 and 2014.
In his third report, dated 27 August 2015, Mr Brennan noted that he had not been asked to value the Property as at 2014 and “therefore [could not] comment on the sale price of $1,200,000”. He also noted Ms Selleck’s description of the Property “regarding what potentially was the condition at 2012” and observed that their “assumptions of value” were made on “two differing levels of condition”. He said that he had not been instructed to value the Property in the condition Ms Selleck described. On the question of fluctuations in the market, Mr Brennan said:
[T]he market we are dealing in is the upper end of the prestige market in Nicholls. There are limited sales that transact in this market so it is difficult to get a reliable trend through the years. It is believed that this market peaked in 2010. It fell over the course of 2011 and I believe plateaued from about 2012 to 2014.
Mr Brennan said that his views as to the market value of the Nicholls Property were unchanged. He emphasised, however, that this was based on his assumption as to the condition of the Property in December 2011 and May 2012, in contrast to the description of the Property in 2013 given by Mr Saeedi and Ms Selleck in their evidence.
On 4 September 2015 Mr Lo Pilato’s lawyers wrote again to Mr Brennan asking for his opinions based on some new assumptions. The questions posed were:
1. Assuming that:
(a)the fair market value of the Property as at 2014 was $1.2 million; and
(b)the condition of the Property was not materially altered following the issue of the certificate of occupancy in May 2012 and the subsequent sale of the property in 2014,
what (if any) deductions or inferences can be drawn as to the value of the Property as at December 2011 and May 2012.
2. Assuming that:
(a)the condition of the Property as at November 2011 and May 2012 was such that the works referred to in paragraph 92 of Mr Saeedi’s affidavit needed to be carried out; and
(b)the value of those works was approximately $38,000,
what is your opinion as to the market value of the Property as at December 2011 and May 2012, and if it is different to your earlier valuations of the Property as at those dates, please explain why.
3. Assuming that:
(a) the fair market value of the Property as at 2014 was $1.2 million; and
(b)the ‘improvements’ referred to in Ms Selleck’s affidavit were carried out between 2013 and 2014,
please provide your opinion as to whether those improvements would have “at least increased the value [of the Property] by anywhere between two and three hundred thousand dollars, perhaps even more depending on the level of interest for this style of home” (Selleck, paragraph 22(c)).
4. If you:
(a)do not agree with the opinion expressed by Ms Selleck outlined at 3 above; and
(b)assume that there had otherwise been no changes in the value of the Property attributable to capital growth or market movements,
please provide your opinion as to how those improvements would have increased or decreased the value of the Property.
5. Please detail how (if at all):
(a) maintenance, repairs and other aesthetics works that would usually be undertaken (such as staging and styling) to prepare properties for sale would as a general rule, impact the value of those properties; and
(b) specifically in relation to the Property, how (if at all) your market valuations of the Property have taken into account or assumed maintenance, repairs and other aesthetics works undertaken (such as staging and styling) to prepare that Property for sale.
6. Please give your opinion, with reference to empirical evidence where and if available, as to market movements and/or changes in property values in the market for residential properties in the Australian Capital Territory generally, and the suburb of Nicholls specifically, over the periods:
(a) December 2011 to May 2012; and
(b) December 2011 to May 2014.
7. Please provide a statement as to whether the opinions expressed in your Report otherwise remain true and unaltered as at that date of your reply report. To the extent any corrections or alternations are required, please identify same.
Mr Brennan provided his answers to these questions in a further report, dated 9 September 2015:
1.As at 2011 we were advised the property was 95% complete with no Certificate of occupancy. Being incomplete and without a Certificate of Occupancy would have a detrimental effect on the marketability and therefore value of the home. Any potential owner would factor in a cost to complete with risk and hassle factor to get the home to a complete state.
As of May 2012 the dwelling was complete with a certificate of occupancy issued.
2.We were advised that the dwelling was incomplete as of December 2011 so to attribute this cost of $38,000 as being all that was required to complete the dwelling would not alter our valuation.
The valuation as at May 2012 would change as in my initial evaluation I assumed that the dwelling was complete to a good standard. If the costs were known at the time to repair to be $38,000 then this would be a detriment to the value of the property in the order of $50,000. This would give any potential buyer compensation for the hassle factor of having to get the work completed. This assumes that the $38,000 amount required would bring the home up to a good standard as assumed in my initial report.
3.The state of the market in 2013 I believe was only slightly weaker than that of 2014. It is noted that Maria Selleck refers to comparable sales in her affidavit however I have not seen any of this evidence around my valuation dates of December 2011 and May 2012.
4.Increased market conditions could not have driven the increases as mentioned by Maria Selleck. It is therefore the condition as stated by Maria which has led to the increases which she states. Without knowing exactly what was undertaken it is difficult to believe that:
a)If it was only the $38,000 spent on the home in total then it could not have increased the value by so much
b)If it was all the items mentioned by Maria in her statement that were rectified th[e]n it is still difficult to substantiate the increase as mentioned by Maria.
c)With relatively new homes potential purchasers are generally aware that unless there are structural issues then the cost of refreshing a home is not overly expensive in comparison to an older dwelling.
5.Furnishing and styling homes can sometimes get a small premium in the market. This is because the home is presented in the best possible way and potential purchasers see the dwelling at near its best. It can also lead to having a home on the market for a shorter period of time.
My valuation assumes that the dwelling is in a good state of repair and no styling was undertaken.
6.It is reported by reputable real estate analytical companies that there is a slight decrease in values over the whole Canberra market in 2011 of approximately 1.6%, the market then increased by 1.8% in 2012, increased by 2.2% in 2013 and increased by 1.6% in 2014.
With Nicholls being an outer Canberra Suburb and the home priced at the higher end of transactions in that particular market it is anticipated that the level of growth over the period of December 2011 to May 2014 would be overall less than that above.
7.The opinions expressed in my Report remain true and unaltered as at 8th September 2015. No corrections and alterations are required. I do reiterate that the condition that is described by Maria Selleck and Kamyar Saeedi differ from the condition assumed in my Valuation report.
Then, on 21 March 2016, Mr Lo Pilato’s lawyers sent another letter to Mr Brennan. This time they said that they realised he had been briefed with an incomplete copy of the contract for sale and they supplied him with a complete copy. They drew his attention in particular to cl 13, which required the seller to give the buyer a compliance certificate at completion. They asked him to assume that none of the three conditions which would exempt the seller from that obligation applied. Finally, they posed for his consideration the following two questions (as written):
1.Does this contractual obligation on the seller affect your stated opinion as to the market value of the Property as at 7 December 2011? Can you please set out your reasons for why this does, or does not, affect your opinion.
2.If it does change your opinion of the market value at 7 December 2011, please identify what that different market value is and your reasoning in coming to that opinion.
Mr Brennan replied on 30 March 2016. On this occasion, he elected to produce a fresh report which was presumably designed to replace all those that preceded it. This time he arrived at a new valuation of $1.2 million as at 7 December 2011 (an increase of $260,000 on the previous valuation of $940,000). Some of the sales evidence referred to in the first report was discussed in this last report, but not all of it, and additional properties were considered.
In answer to the lawyers’ questions he stated (without alteration):
1.The contractual obligation does affect my value of the property as at 7 December 2011. This is due to the fact that the property is not understood to be 95% complete however is assumed complete.
The market value would therefore change substantially as a potential buyer would know that upon settlement they would be purchasing a complete dwelling as opposed to an incomplete dwelling.
2.If a buyer was purchasing the home assuming the improvements were complete to a tradesman like manner and with a certificate of occupancy at settlement the property would have a market value of $1,200,000 (one million two hundred thousand dollars). This is based on evidence of comparable sales around the date of exchange (please refer to this valuation report as supporting evidence of value).
…
Certain sales have not been included in this report that was relied upon in the past report. This is due to the fact of them not being comparable evidence in this report considering the assumed completed nature of the subject dwelling.
There are sufficient sales within Nicholls in a comparable range for the valuer to be confident around the ascribed evaluation amount. There are 8 comparable sales in the report ranging in value from one million and $1,015,000 to $1,300,000 with two in a similar bracket around $1,200,000. The sales are compared based on location within the suburb, age, condition, quality, size, ancillary improvements etc.
…
Mr Brennan, perhaps misled by the letter from the lawyers, conflated “a certificate of occupancy” with “a compliance certificate”. According to the Registrar-General’s requisition of the attempted transfer from Mr Adzic to Ms Mylecharane, it was the certificate of compliance that was missing.
Mr Brennan’s evidence unravelled fairly quickly in cross-examination.
First, Mr Brennan laboured throughout under a false assumption that in December 2011 the Property was still under construction and that construction was completed by May 2012 so that his opinion as to its market value at the relevant times was based on the premise that it was “brand new” or “almost brand new”. He did not ever value the Property on the basis that it was constructed in around 1998 or 1999, although at least the majority of the building work had been carried out at that time.
The other matters which Mr Lo Pilato complains were not disclosed were certainly not included in the costs agreements. In the absence of any evidence from the Firm to suggest that disclosure was made at some other time, I conclude that there was no disclosure as alleged and so the requirements for disclosure were not met in several respects. There is no good reason for the Firm’s failure to disclose.
It was put to Ms Mylecharane at the public examination that she was aware of the obligation to provide an estimate of “the likely fees”. She answered:
To the extent we’re able to do so. Under the Act we can indicate that, due to the nature of the matter we’re not in a position to provide an estimate. I believe that would have formed most of these costs agreements …
When it was put to her that she was required to give some indication to the client of the kind of factors that would influence the costs that would be incurred she replied:
When requested, yes.
This answer was false, possibly disingenuous. It at least reflects a misunderstanding of the statutory requirement. Perhaps Ms Mylecharane had confused this obligation with the obligation in s 269(1)(h) to disclose to the client his right to progress reports in accordance with s 278, which right is only triggered by a “reasonable request”. The obligation in s 269(1)(d), however, arises regardless of whether a client requests the information.
Clause 2 of all the agreements in question contains, amongst other things, the Law Firm’s various hourly rates. In all but the Conveyancing costs agreement, cl 2 also includes a paragraph in the following terms:
Your matter
Due to the nature of your matter we are unable to provide you with an estimate of likely fees of completing this matter. However, we will provide you with estimates of each stage of the litigation process as the matter progresses.
Ms Mylecharane was asked whether estimates were provided as promised and she answered:
Not in writing. I don’t recall ever writing anything in relation to that.
She was not asked, however, whether she provided such estimates orally. Mr Adzic was asked only about the Bulum matter, and he said he could not recall whether he was given a costs estimate. Regardless, the statutory obligation is to provide the necessary disclosures in writing and before, or as soon as practicable after, the law practice is retained in the matter.
I accept Mr Lo Pilato’s argument that the failure to make the required disclosures is no mere technical breach. I also accept that the failure to make the statutory disclosures was not reasonable. But the fact that it is not reasonable not to make the disclosures does not necessarily mean that the agreement or the provisions in question are not reasonable.
Mr Lo Pilato made no submissions as to why the Firm’s failure to do so renders the clauses unfair or unreasonable. But ignorance of the extent of the prospective debts Redevelopments would incur means that Mr Adzic agreed to those clauses without a full appreciation of the extent to which his home was in jeopardy if he failed to honour the guarantee. It is not ameliorated by the undertaking to provide periodic estimates. It seems to me that this could render the charging clauses unfair and unreasonable.
The difficulty in the present case is that the idea for the charging clause came from Mr Adzic, not the Law Firm. In the public examination both Mr Adzic and Ms Mylecharane testified that it was Mr Adzic who raised the idea of charging the Nicholls Property as security for the payment of the legal fees. Mr Adzic referred to “cash flow delays”. He said that he could not guarantee that he would have the funds in the bank each month. He said that if that were an issue for the lawyers, then the charging clause was “the mechanism” to make them happy. MrAdzic said that Ms Mylecharane had told him that senior counsel might have to be retained and that counsel would need an assurance that “his” fees would be paid. While there is nothing to indicate that alternative options were canvassed, there is no evidence to suggest that any pressure was placed on, or undue influence was exerted over, Mr Adzic to bring about the agreement. Nothing revealed in evidence about the personal relationship between him and Ms Mylecharane would lead to such a conclusion. In all the circumstances, I am not persuaded that the failure to make the statutory disclosures rendered the charging clauses unfair. There is no reason to conclude that, had the requisite disclosures been made, Mr Adzic would not have agreed to them.
Nor am I persuaded that the failure to make the statutory disclosures means that the charging clauses were unreasonable.
It is certainly true, as Mr Lo Pilato submitted, that there were other ways the Firm could have acquired security. The Bankwest, ACAT and Conveyancing costs agreements were all entered into after the dissolution of the Enima injunction in June 2010. Accordingly, Redevelopments could have granted the Law Firm an equitable second mortgage, notice of which could be given to the world by lodging a caveat on the title (which would be in addition to the Bulum caveat). But I am not persuaded that the existence of an alternative means of acquiring security, from Redevelopments, made the acquisition of security from Mr Adzic unfair or unreasonable, particularly where the alternative security on offer was an equitable second mortgage, subordinated to the registered mortgage of Bankwest and carrying with it the possibility of a contest over priorities with Mr Bulum.
Mr Lo Pilato also submitted that the at times large balances of the Redevelopments trust account rendered the granting of the charge unreasonable. The difficulty with this submission is that there was no certainty that sufficient moneys would be in the trust account at the times when fees and disbursements became payable.
I now turn to the second limb: the failure to make the required disclosures in the peculiar circumstances in which the parties were placed at the time the costs agreements were entered into.
In the pleading no attempt was made to indicate why the particularised matters render the agreements not fair or reasonable and notwithstanding the way in which this matter was pleaded, Mr Lo Pilato contended in his written submissions in chief that the guarantees and charging clauses were not fair or reasonable primarily because Mr Adzic was insolvent at the time he agreed to them. The argument appears to be that these terms were unfair or unreasonable because in these circumstances the Nicholls Property would be unavailable to Mr Adzic’s unsecured creditors. Mr Lo Pilato cited no authority, however, to support the proposition that the interests of unsecured creditors have any bearing on the question and, having regard to the subject-matter, scope and purpose of the Legal Profession Act, I cannot see how they would.
An additional argument was advanced at the hearing concerning the absence of independent legal advice.
Each of the agreements contained the clauses relating to independent legal advice set out above at [257]–[258].
Ms Mylecharane gave evidence at the public examination that she had advised Mr Adzic to obtain independent legal advice and Mr Adzic’s evidence was to similar effect. Mr Adzic testified, however, that he did not obtain such advice.
No complaint is made in the pleading that the clauses in question were unfair or unreasonable because Mr Adzic did not in fact have such an opportunity or that they were agreed to without Mr Adzic obtaining independent legal advice. Nor was such a proposition advanced in the written submissions in chief. No application was made to amend the pleading to make such an allegation. Yet in oral argument Mr Lo Pilato also complained that, given the personal relationship between Ms Mylecharane and Mr Adzic, it was incumbent on the Firm to ensure that Mr Adzic obtained independent legal advice before entering into the agreements. He did not indicate, however, what more the Firm could or should have done.
Similarly, in written submissions in reply, Mr Lo Pilato contended that the Firm was under an obligation to ensure that Mr Adzic properly understood the nature and effect of the guarantees and charging clauses contained in the costs agreements. Once again, this was not a matter raised by the pleading, at least not expressly. Mr Lo Pilato claimed that the evidence that Mr Adzic gave during his public examination showed that the Firm had failed to discharge that obligation and Mr Adzic did not properly understand the effect of the charging clauses. He submitted that Mr Adzic did not demonstrate that he knew that:
·the charging clauses, protected by a caveat, could prevent any further security being given over the Nicholls Property;
·an application could be made to the Court to enforce the charging clauses by judicial sale of the Nicholls Property; or
·if the charging clauses were enforced, an application could be made for the appointment of trustees for sale of the Nicholls Property.
That much is true. But the fact that Mr Adzic did not demonstrate a knowledge of these things does not prove that he was never told about them. At the public examination Ms Mylecharane was not asked what advice she gave Mr Adzic about the implications or consequences of the charging clauses, or of the personal guarantees for that matter. Nor was she asked whether she canvassed with Mr Adzic other means of securing its fees. As the allegations concerning the deficiencies in the legal advice were not made until after the close of evidence, it would be most unfair to the Law Firm to enable Mr Lo Pilato to rely upon them and I do not therefore propose to entertain the arguments.
In any case, as Mr Lo Pilato acknowledged, the Court has a discretion whether to make an order to set aside a costs agreement or a term of the agreement: cf. Harrison at [79], Alman v Macdonald Rudder [2001] WASC 65 (Wheeler J) at [18]; Frigger v Shepherd [2014] WASC 477 (Jenkins J) at [29]. In this case, Mr Adzic, himself, never complained about the charging clauses. While this circumstance would not necessarily affect the question of unfairness or unreasonableness, it is not irrelevant to the question of whether the clauses should be set aside. Moreover, the inclusion in the agreement of the charging clauses had no adverse consequences for Mr Adzic. The charge was never called upon. On Mr Lo Pilato’s own case the payment was made voluntarily. In these circumstances, even if I were satisfied that the charging clauses were not fair and or not reasonable, I would not exercise my discretion to set them aside.
Were the grants of the personal guarantees and charges in the costs agreements transactions to defeat creditors?
It will be recalled that a transfer of property by a person who later becomes bankrupt is void against the trustee in bankruptcy under s 121(1) of the Bankruptcy Act if the property would probably have become part of the bankrupt’s estate or available to creditors if it had not been transferred and the transferor’s main purpose in making the transfer was to prevent the property from becoming divisible among his or her creditors or to hinder or delay the process of making the Property available for division among them.
Thus, in order to succeed in this respect Mr Lo Pilato must show that:
(1)the grant of the personal guarantees and the charging clause in each costs agreement was a transfer of property;
(2)but for the grant, that property would probably have become part of Mr Adzic’s bankrupt estate or available to his creditors; and
(3)Mr Adzic’s main purpose was to prevent the Property from becoming divisible among his creditors or to hinder or delay the process of making the Property available for division among them.
By granting charges over the Nicholls Property and providing personal guarantees to secure Redevelopments’ indebtedness to the Firm, Mr Adzic was doing something that resulted in the Law Firm becoming the owner of property that did not previously exist and so is taken to have transferred the Property to the Law Firm: see s 121(9)(b) and Sutherland v Brien [1999] NSWSC 155; 149 FLR 321 at [15] (Austin J). That disposes of the first element. The second is not in dispute. I now turn to consider the third.
Mr Lo Pilato seeks to prove Mr Adzic’s purpose in either of two ways.
First, he relies on s 121(2), which, it will be recalled, provides that “the transferor’s main purpose in making the transfer is taken to be the purpose described in paragraph (1)(b) if it can reasonably be inferred from all the circumstances that, at the time of the transfer, the transferor was, or was about to become, insolvent”.
The charging clauses were granted at the date of each of the four costs agreements which, as I have said, were:
·22 March 2010 (the Bulum costs agreement);
·7 September 2010 (the Conveyancing costs agreement);
·26 July 2011 (the Bankwest costs agreement); and
·12 December 2011 (the ACAT costs agreement).
I have already determined that it can reasonably be inferred that Mr Adzic was insolvent, or about to become insolvent, on 7 December 2011. There is no evidence to suggest that he was in any better position on 12 December 2011. For this reason the main purpose in granting the charge in the ACAT costs agreement is taken to be the purpose described in para 121(1)(b) of the Bankruptcy Act with the result that that charge is void against Mr Lo Pilato under s 121 of the Bankruptcy Act.
As at 7 September 2010 and 26 July 2011, Mr Adzic’s position was relevantly indistinguishable. The McMillan debt was due and payable, and there is no evidence that as a matter of “commercial reality” Redevelopments either could or would have advanced Mr Adzic the money required to pay that debt. For that reason I find that it can reasonably be inferred that Mr Adzic was insolvent, or about to become insolvent, at those dates and the grants of the charge in the Bankwest and Conveyancing costs agreements are void against Mr Lo Pilato under s 121 of the Bankruptcy Act.
The position in relation to the Bulum costs agreement is different, however. This is how Mr Lo Pilato described Mr Adzic’s asset position as at 22 March 2010:
Current Assets Current Liabilities AXA and Lend Lease shares $13,199.72 Credit Card Westpac $15,000.00 Credit Card ANZ $5,000.00 Emil Bulum $866,803.74 Daniel McMillan $600,000.00 Total $13,199.72 Total $1,486,803.74 Non-Current Assets Non-Current Liabilities 6 Kuhn Place, Nicholls $1,100,000.00 Westpac $500,000 Honda/BMW/Toyota Truck $100.00 Townsend and Associates Architects $300,000.00 Total $1,100,100.00 Total $800,000
Mr Lo Pilato conceded in cross-examination that he did not know Redevelopments’ financial situation at the time the Bulum agreement was entered into. Indeed, there is little evidence about what that situation was. The McMillan debt at that time was only $600,000. Apart from the credit card debts totaling $20,000, the only other debt then current mentioned by Mr Lo Pilato is the Bulum debt, but that was a debt for which Mr Adzic was jointly liable with the Veraars and Redevelopments.
Mr Adzic had not yet been served with a demand by Mr McMillan. Nonetheless, according to Mr McMillan’s uncontradicted evidence, the second instalment of $600,000 under the Share Sale Agreement had been due and payable since 12 May 2009.
Mr Lo Pilato submitted that, according to his unchallenged evidence, Mr Adzic was insolvent as at July 2009 and that his asset position only worsened after this time. This submission accurately reflects the evidence in Mr Lo Pilato’s second affidavit. What it does not do, however, is take into account Mr Lo Pilato’s concessions in cross-examination to the effect that it was necessary in determining solvency to look at the commercial realities, that they included the fact that Mr Adzic was the beneficial owner of Redevelopments, and that he (Mr Lo Pilato) did not know Redevelopments’ true financial position at that time. Still, I am satisfied that it can reasonably be inferred that at this time Mr Adzic was insolvent or about to become so. That inference arises from Mr Adzic’s evidence at the public examination. The effect of that evidence is that he was not able to pay the second instalment of the McMillan debt when it fell due and he was not able to raise the funds from other sources.
I therefore find that each of the four guarantees and charges was void against the trustee under s 121(1).
Was the payment of $229,879.14 a transfer to defeat creditors?
On the assumption that the payment was not made on Redevelopments’ behalf, the answer to this issue must be resolved in Mr Lo Pilato’s favour. The Law Firm contended that the payment was a payment of a secured debt and for this reason was not caught by s 121. But I have found to the contrary. It is an agreed fact that Mr Adzic was insolvent at the time the payment was made. In these circumstances, his main purpose is taken to be the purpose described in s 121(1)(b) (see [157] and following above).
Was the payment of $229,879.14 a preferential payment for the purposes of s 122?
Section 122(1) of the Bankruptcy Act provides that a transfer of property by a person who is insolvent in favour of a creditor is void against the trustee in the person’s bankruptcy if the transfer:
(a)had the effect of giving the creditor a preference, priority or advantage over other creditors; and
(b)was made, relevantly, in the period beginning six months before the presentation of the creditor’s petition and ending immediately before the date of the bankruptcy of the debtor.
In his pleading, however, Mr Lo Pilato only alleged that the payment of the $229,879.14 was a “transfer of property by [Mr]Adzic to his creditor” in the event that the payment was paid pursuant to a guarantee. As I have found that the payment was not made pursuant to a guarantee, the question does not arise.
Was the payment of $229,879.14 an undervalue transaction under s 120?
The payment of the $229,879.14 was a transfer of property by a person who later became bankrupt, within five years before the commencement of his bankruptcy.
Mr Lo Pilato contended that the payment was liable to be set aside under s 120 because the Law Firm gave no valuable consideration or consideration of less than market value, because Redevelopments was not yet in default under the guarantee and no demand had been made upon it.
The Law Firm’s response was threefold.
First, it submitted that the obligation to pay under the guarantee arose even without any default by Redevelopments or any demand. I have dealt with this submission above.
Secondly, it submitted that, even if the liability under the guarantees had not been triggered at the time of settlement, Mr Adzic was at least contingently liable to the Firm, and his payment of Redevelopments’ liability was a reduction of that contingent debt, which would be provable in his bankruptcy (citing Bankruptcy Act, s 82(1)). Even if it be accepted that the discharge of a contingent debt is good consideration, the Law Firm made no attempt to explain why the “market value” of that discharge is the same as the full amount owed by Redevelopments.
Thirdly, the Law Firm submitted that the consideration for the payment of $229,879.14 was the release of the charge over the Property. This argument suffers from the same defect as the second.
I therefore find that if, contrary to what I have found above, the payment was not made for the benefit of Redevelopments, it would have been made for no consideration or for consideration of less than its market value and so would have been void against the trustee.
Does the Law Firm have a defence?
The Law Firm did not raise any defence so the question is moot.
To what relief is Mr Lo Pilato entitled?
Having regard to my conclusion on the first issue, Mr Lo Pilato is not entitled to any relief.
CONCLUSION
In summary, in relation to the claim against the Trust, I am satisfied that there was a loan to Mr Adzic in October 2011 of $100,000. I am not satisfied, however, that the loan was made by the Trust. Rather, the loan was made by Mr and Mrs Saeedi. Since Mr and Mrs Saeedi were not the transferees of the Nicholls Property, the loan was not part of the consideration for the transfer for the purposes of s 120 of the Bankruptcy Act. It follows that the Property was transferred for $805,000. I am not satisfied that the contract price of $905,000 was less than the market value of the Property at the time of transfer but I am satisfied that the actual consideration of $805,000 was. I am therefore satisfied that the transfer is void against Mr Lo Pilato under s 120(1) of the Act.
I am also satisfied that the transfer is void against Mr Lo Pilato under s 121(1) of the Act as it was a transfer of property which would otherwise have become part of Mr Adzic’s estate or available to his creditors and Mr Adzic’s main purpose in making the transfer was to prevent the Property from becoming divisible amongst his creditors or, at least, to hinder or delay the process of making property available for division amongst his creditors. I am satisfied that this is so on the basis that it can reasonably be inferred from all the circumstances that, at the time of the transfer, Mr Adzic was, or was about to become insolvent.
I would therefore make the first declaration Mr Lo Pilato sought. But Mr Lo Pilato did not file his application until after the Trust had transferred the Property to a third party who acquired it in good faith and for consideration that was at least as valuable as the market value of the Property. Nor did he call for the delivery up or re-vesting of the Property to him. As such he has no personal claim against the Trust and I am bound by the decision of the Full Court in Alvaro to find that Mr Lo Pilato is not entitled to consequential relief on this basis. Although he may make a claim to the traceable proceeds of the sale to the third party, it has already been established that the bulk of the proceeds have been dissipated. In these circumstances, having regard to Mr Lo Pilato’s statutory obligation under s 121(5) to pay the Trust the value of the consideration it gave for the purchase of the Property, there is no utility in ordering a taking of an account. For the same reason it would also be futile to make the second declaration.
The claim against the Law Firm turns on whether the payment of the amount of $229,879.14 on settlement of the Nicholls Property was made by Mr Adzic on his own behalf and not on behalf of his company, Redevelopments. The claim fails because I am not satisfied that the money Mr Adzic paid to the Law Firm was not paid on behalf of Redevelopments.
It follows that Mr Lo Pilato has succeeded against the Trust on all issues save that he has not been able to make out a case for consequential relief, but he has failed against the Law Firm. In each case costs should follow the event. He should have his costs against the Trust but he should pay the Law Firm’s costs.
I certify that the preceding three hundred and ninety-six (396) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Katzmann. Associate:
Dated: 31 January 2017
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