Macko (Trustee), in the matter of Psevdos (Bankrupt) v Psevdos
[2023] FedCFamC2G 13
Federal Circuit and Family Court of Australia
(DIVISION 2)
Macko (Trustee), in the matter of Psevdos (Bankrupt) v Psevdos [2023] FedCFamC2G 13
File number(s): ADG 319 of 2021 Judgment of: JUDGE BROWN Date of judgment: 27 January 2023 Catchwords: BANKRUPTCY – application for review of sequestration order made by Registrar – sequestration order sought on the basis of unsatisfied judgment debt and costs order – respondent asserts he has no personal liability as debt incurred in performance of a trust – nature of review of sequestration order Legislation: Bankruptcy Act 1966 (Cth) ss 40(1)g, 41, 43(1), 52
Federal Circuit & Family Court of Australia Act 2021 (Cth) s 254
Federal Circuit & Family Court of Australia (Division 2) (Bankruptcy) Rules 2021 Sch 1, r 2.02
Federal Circuit & Family Court of Australia (Division 2) (General Federal Law) Rules 2021 r 21.04
Cases cited: Aon Risk Management Limited v Australian National University (2009) 239 CLR 175
Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640
Gordon v Campbell (1842) 1 Bell App 428
Helvetic Investments v Knight (1984) 9 ACLR 773
Hoyts Pty Ltd v Spencer (1919) 27 CLR 133
Hutchings v Australian Securities & Investment Commission [2017] FCA 858
Muir v City of Glasgow Bank (1879) 4 App Case 337
Pacific Carriers Ltd v PNP Paribas (2004) 218 CLR 451
Psevdos v Commonwealth Bank of Australia (No 2) [2017] FCA 19
Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132 at
Re Interwest Hotels Pty Ltd (in liq) (1993) 12 ACSR 78
Totev v Sfar (2008) 167 FCR 193
Wren v Mahony (1972) 126 CLR 212
Jacobs’ Law of Trusts in Australia 8th ed, Butterworths, (2016)
Division: Division 2 General Federal Law Number of paragraphs: 91 Date of hearing: 10 October 2022 Place: Adelaide Counsel for the Applicant: Ms Flaherty Solicitor for the Applicant: WRP Legal & Advisory Respondent: Appeared in person ORDERS
ADG 319 of 2021 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: MACKO CORPORATION AS TRUSTEE FOR THE MACKO CORPORATION TRUST
Applicant
AND: SPIROS PSEVDOS
Respondent
order made by:
JUDGE BROWN
DATE OF ORDER:
27 January 2023
THE COURT ORDERS THAT:
1.The orders of Registrar Colbran dated 12 April 2022 are affirmed.
2.The Application for Review filed 2 May 2022 is dismissed.
3.The respondent is to pay the applicant’s costs as agreed or taxed, paid out of the estate of Mr Psevdos.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE BROWN:
Introduction
These reasons for judgment relate to an application for review of orders of Registrar Colbran, of this Court, made on 12 April 2022, which resulted in the sequestration of the estate of Spiros Psevdos, pursuant to the provisions of the Bankruptcy Act 1966 (Cth).[1]
[1] Hereinafter referred to as “the Act”.
Essentially, the relevant debtor asserts that there is no debt due personally from him, on which a sequestration order was based, as his personal liability is limited as a consequence of the fact that he contracted on behalf of a trust to borrow money on its behalf.
The relevant petitioning creditor asserts otherwise submitting that the fact that the borrower is described as a trustee is merely a description of him and it contracted with the natural personage of the trustee.
If it would have been otherwise, the relevant loan agreement would have expressed the limitation explicitly, which it did not. Hence its agreement is with the natural person who executed the loan agreement and it is entitled to proceed against him personally.
The petitioning creditor in the case was Macko Corporation Pty Ltd[2] as trustee of the Macko Corporation Trust. Stephen James Duncan was appointed as trustee of Mr Psevdos’ estate.
[2] Hereinafter referred to as “Macko Corporation”.
The relevant petition was filed in this Court on 28 October 2021. The petition alleged that Mr Psevdos had committed an act of bankruptcy as a consequence of his failure to comply with a bankruptcy notice issued against him on 3 May 2021, by the Official Receiver, pursuant to the provisions of section 41(1) of the Act.
The section authorises, in conjunction with section 40(1)(g), the Official Receiver to issue bankruptcy notices, in respect of an unsatisfied judgment debt, which is not subject to counter-claim or set-off; appeal; or stay; and which is for an amount of at least $5,000.00.
The bankruptcy notice was based on a judgment debt obtained by Macko Corporation as trustee for the Macko Corporation Trust against three respondents, in the District Court of South Australia, on 18 January 2021. The relevant order was made by Master Olsson. The three respondents to the order were identified as follows:
·Andrew Malecki as trustee for Bare Trust – Famechon Crescent Land;
·Andrew Malecki;
·Spiros Psevdos as trustee for the Orio Investment Trust.
The specific order made by Master Olsson was as follows:
The Applicant is awarded and judgment is entered against the Respondents jointly and severally by consent in the amount of $182,419.02 being the loan amount ($160,000) plus interest payable in accordance with the loan agreement as detailed in paragraph 4.4 of the affidavit of Arthur Salamon sworn 7/1/21 (FDN 24), such sum being calculated as amounting to $22,419.02 up to and including 19/01/21.
The order also indicates that each of the respondents appeared, when the order was made. The third respondent, Mr Psevdos, being in person.
The resulting Bankruptcy Notice had attached to it the sealed order of the District Court and directed Mr Psevdos to make payment of an amount of $202,419.02 to the Macko Corporation Pty Ltd or otherwise reach a satisfactory compromise with it, within 21 days of service of the notice upon him.
Service of the Bankruptcy Notice on Mr Psevdos proved to be a tortuous affair. The relevant process server, William Eglinton providing three affidavits detailing his various attempts to serve Mr Psevdos.[3] In his first affidavit, Mr Eglinton deposed as to his numerous attendances at Mr Psevdos’ home, in mid-May to late June 2021 and his unsuccessful attempts to arrange a time to attend upon him via email and text message.
[3] See affidavits of William Phillip Eglington filed on 28 October 2021; 10 December 2021; & 13 December 2021; respectively.
In his second affidavit, Mr Eglinton deposes that that he had attended a property in central Adelaide on 13 August 2021 and had attempted to provide the bankruptcy notice to the person who had answered the door and whom he believed to be Mr Psevdos. However the person served declined to identify himself specifically and denied that he was, in fact, Mr Psevdos. He then closed the door upon Mr Eglinton, who slid the notice through the mail slot in the door.
Mr Eglinton was again engaged to serve the relevant creditor’s petition on Mr Psevdos, which he accomplished on 29 November 2021, at the same premises at which he had deposited the bankruptcy notice. Again, Mr Psevdos declined to identify himself but Mr Eglinton deposed the person served was the same person with whom he had interacted on 13 August 2021.[4]
[4] See affidavit of William Phillip Eglington filed on 13 December 2021.
On 10 December 2021, Christopher Macko, a director of the petitioning creditor deposed that the debt to it, which was the subject of the relevant bankruptcy notice, remained unpaid.[5] Solicitors for the petitioning creditor filed other affidavits confirming the willingness of Mr Duncan to act as trustee; service of the petition on the Australian Financial Security Authority; and an affidavit in respect of searches made of the National Personal Insolvency Index.[6]
[5] See affidavit of Christopher Edward Macko filed on 13 December 2021.
[6] See affidavit of Robert John Mills filed 13 December 2021.
The search conducted by Mr Mills indicated that Mr Psevdos remained an undischarged bankrupt, having made bankrupt on 6 June 2016 on the petition of the Commonwealth Bank. It is the submission of Mr Psevdos, amongst other matters of more significance, that the current petition of Macko Corporation is a matter of petty bastardry, which will achieve nothing given his current status as a bankrupt. By necessary implication, he suggests an improper purpose behind the petition.
It is the position of the petitioning creditor that the relevant debt is one which arose post Mr Psevdos’ bankruptcy and it is entitled to proceed in the manner in which it did. It is Mr Psevdos’ position that he did not conceal the fact of his bankruptcy from Macko Corporation and did not, either as a matter of fact or law, enter into any loan contract with it, as the contracting party was the Orio Investment Trust.
The relevant petition came into Court on 28 January 2022, on which occasion Mr Psevdos indicated his opposition to the sequestration order. In these circumstances, Registrar Colbran directed Mr Psevdos to file the grounds on which he opposed the petition and each party to file affidavits of relevant evidence. The petition was adjourned for hearing on 18 March 2022.
Legal principles relating to bankruptcy proceedings
The Court’s authority to make a sequestration order arises pursuant to the provisions of section 43(1) of the Act. It is a discretionary power and is exercisable only if the Court is satisfied that the relevant respondent has committed an act of bankruptcy and is a resident of Australia or carries out business in this country.
As previously indicated, section 40 provides an exclusive list of circumstances, which constitute acts of bankruptcy, which include the ground relied upon by Macko Corporation in the current matter, namely that contained in section 40(1)(g), which is the lack of satisfaction in respect of a bankruptcy notice issued as a consequence of a judgment debt.
Section 52 provides a list of the matters which a petitioning creditor is required to prove to the Court before a sequestration order may be made. They are as following:
·The matter set out in the applicable petition;
·Proof the petition had been served; and
·Proof that the debt or debts on which the petitioning creditor relies are still owing.
Pursuant to the provisions of section 52(2) of the Act, the Court may dismiss a petition if satisfied that the debtor is able to pay his or her debts or there is other sufficient cause to dismiss the petition.
The proof of debt provided by the applicant
The evidence required by section 52 was provided on behalf of Macko Corporation by its solicitor, James Forde.[7] He deposed as to the conduct of the District Court proceedings instituted by Macko Corporation against Mr Malecki, in both his capacity as a trustee of a trust and his personal capacity and against Mr Psevdos, as trustee of Orio Investment Trust.
[7] See affidavit of James Forde filed 14 January 2022.
Proceedings had been instituted in the District Court, which ultimately led to an application for summary judgment being made, which was supported by an affidavit of Christopher Edward Macko. In his affidavit, Mr Macko deposed that he was a director of the Macko Corporation on 30 January 2019, on which date, it had entered into a loan agreement with Mr Malecki as trustee of what was described as a bare trust – Famechon Crescent Land and in his own right and with Mr Psevdos, as trustee of the Orio Investment Trust.
Pursuant to this agreement, a sum of $160,000.00 was advanced by Macko Corporation. The loan attracted a rate of interest of 8.8% and was to be repaid in twelve months. It was secured by land at Modbury. Mr Macko further deposed that the respondents to the loan agreement did not re-pay the loan as required and failed to pay the full amount of interest due on it. In these circumstances, the District Court granted summary judgment in the terms set out above in favour of Macko Corporation.
A schedule to the loan agreement indicates that the relevant mortgagor is Mr Malecki. The purpose of the loan is to assist with development costs and the discharge of commercial debt. The security specified is land at Modbury North. Significantly Item 9 of the Schedule provides that the borrowers agree that Macko Corporation acts in its capacity and character as a trustee and as such its liability is limited to its trust fund.
There is no such limitation so far as Mr Psevdos or Mr Malecki are concerned. In the submission of counsel for the petitioning creditor that this is significant as this is the obvious place in which to insert such a limitation, which is not expressly provided for in the relevant loan agreement. Macko Corporation submits that any such limitation should not be implied by the mere description of Mr Psevdos as a trustee and from any antecedent document.
In his affidavit, Mr Macko provided a copy of a payment authority, dated 30 January 2019, which directed Macko Corporation to pay the sum of $160,000.00 into an account with the Westpac Bank held by Better Lending, a business apparently associated with Mr Malecki. The authority was signed by Mr Malecki and Mr Psevdos, the latter again being designated as Trustee of Orio Investment Trust.
Subsequently, Mr Forde deposed that the District Court had made a further cost order in the proceedings instituted by Macko Corporation in an amount of $20,000.00. On this basis it sought to amend the creditor’s petition to include this additional amount. This amount had been included in the bankruptcy notice issued on 3 May 2021.
The grounds of opposition to the petition
On 16 March 2022 Mr Psevdos filed his grounds of opposition to the petition, which are as follows:
·There is no debt owed by the respondent in his own right by operation of the loan agreement.
·The debt is a secured loan notwithstanding that the applicant elected not to exercise their power to realise their security at any material time.
·The bankruptcy notice is unfounded and as a result the creditor's petition is inert.
·The bankruptcy proceeding is an abuse of process.
Mr Psevdos deposed an affidavit[8] in support of his application to have the relevant petition dismissed, the contents of which can be summarised as follows:
[8] See affidavit of Spiros Psevdos filed 16 March 2022.
·Although he had appeared in the District Court proceedings, he did not do so in his personal capacity but only in his capacity as trustee of the Orio Investment Trust;
·His standing, in this regard, was not subject to challenge;
·The relevant loan agreement with Macko Corporation expressly stated that it was made in Mr Psevdos’ capacity as trustee and there is no reference in it to any agreement between Macko Corporation and him in his own right;
·This is in distinction to Mr Malecki, who entered the loan agreement as a bare trustee and in his own right;
·Mr Psevdos had prior to the loan contract, on 18 January 2019, informed Mr Macko of his bankruptcy and, the specific fact that he was not in a position to borrow lawfully in his own personal capacity, which is a term which should be incorporated into the loan agreement;
·The funds advanced by the loan were not disbursed to him in his personal capacity;
·Mr Malecki and Mr Macko had formally acknowledged, after the execution of the relevant loan agreement that he (Mr Psevdos) could not be personally liable for the loan and, as such, no claim for repayment could be made against him personally;
·The advance was secured against unimproved land at Modbury and, in these circumstances, he was at a loss to understand why this security was not pursued rather than him;
·He had previously been involved in a project directed to the development of the land at Modbury and he entered into the relevant agreement, at the behest of Mr Malecki and Mr Macko, to provide them with his knowledge in respect of it; and
·Mr Macko had made scurrilous accusations against him in the past and the current proceedings were vexatious in nature.
The relevant acknowledgment that Mr Psevdos was not borrowing in his personal capacity and therefore (by what is asserted to be an axiomatic implication on his part) could not be the subject of any personal suit to recover the sum advanced was in the following terms, which were ostensibly signed by both Mr Malecki and Mr Macko:
Dear Andrew
I don't have any objection to providing assistance with respect to the Solandra land given my familiarity and background with the project. However, it is important that you and the lender understand that I am an undischarged bankrupt. You are aware of the circumstances.
My bankruptcy will need to be acknowledged by the proposed lender and yourself. That said, there is nothing to prohibit me from borrowing money when a lender is aware of my bankruptcy. Please note it is unlawful for me to borrow money in the absence of me disclosing the bankruptcy.
I will not agree to borrow in my own right (personal capacity). I am prepared to borrow as trustee for the Orio Investment Trust on that basis and if a claim is brought it is agreed that any claim is limited to the trust fund (the Orio Investment Trust) and not brought against me personally.
I agree to co-borrow in my capacity as trustee and not in my personal capacity as detailed above. I request your acknowledgment and understanding before taking any further steps. This is a mandatory requirement.[9]
[9] See Annexure SP-3 to Mr Psevdos’ affidavit filed 16 March 2022. The letter is dated 18 January 2019.
Andrew is apparently Mr Malecki, whom Mr Psevdos has described as being a mortgage broker and financier. As indicated above, the relevant loan agreement is dated 30th January 2019. 13.1 indicates that the parties agree that the entirety of their agreement is to be contained in formal agreement. Accordingly, the exclusionary letter pre-dates the contract.
Essentially, Mr Psevdos contended before Registrar Colbran, as he continues to do in the current proceedings, that he is not personally responsible for the debt claimed because he was acting in the capacity as a trustee for Orio Investment Trust.
Notwithstanding this contention, Registrar Colbran was satisfied that Mr Psevdos had committed an act of bankruptcy and made the relevant sequestration order on 12 April 2022. As a consequence, on 2 May 2022, Mr Psevdos instituted proceedings seeking a review of the learned Registrar’s decision.
The nature of the review proceedings
The jurisdiction for these review proceedings is found in the provisions of the Federal Circuit & Family Court of Australia Act 2021 (Cth).[10] Pursuant to section 254 of the FCFCOA Act the Court, through its Rules, is authorised to delegate designated powers to a Registrar of the Court. One such power is the power to make a sequestration order pursuant to the Act.[11]
[10] Hereinafter referred to as “the FCFCOA Act”
[11] See Federal Circuit & Family Court of Australia (Division 2) (Bankruptcy) Rules 2021 Rule 2.02 and Schedule 1 thereof.
The Federal Circuit & Family Court of Australia (Division 2) (General Federal Law) Rules 2021 set out the procedure to be followed on an application for review of a registrar’s decision. In particular, pursuant to rule 21.04, the hearing required is a hearing de novo. The Court is entitled to receive as evidence any affidavit or exhibits tendered before the Registrar; and with leave may receive further evidence.
On an application for review of a registrar’s decision, the Court:
·is engaged in a fresh proceedings;
·does not scrutinise the original reasons to ascertain error;
·makes its own decision on the merits of the case; and
·in an application for review of a sequestration order, where a sequestration order is still sought, the petitioning creditor is required to prove all necessary matters, including those specified in section 52(1) of the Act.
What a hearing de novo entails is a complete rehearing of the facts and the law as they exist when the judge reviews the order made by the registrar.[12]
[12] See Totev v Sfar (2008) 167 FCR 193.
Mr Psevdos’ submissions in opposition to the petition
Mr Psevdos has filed lengthy written submissions, which refer to many authorities. I found his arguments not without their challenges given the basic concept that a trust is not a legal person, unlike an individual or a corporation. It is an entity which can only contract through its trustee.
On a basic level, I query why Macko Corporation would have entered into a loan agreement, with two trusts, if it considered that it would not ultimately be repaid. In this context, clause 12.1 of the loan agreement is central, in which the borrower warrants that it has the power enter into and perform its obligations under the agreement.
However, as I understand Mr Psevdos’ case, his major point is that the relevant loan agreement is clear in its terms, which stipulate that he agreed to enter the contract concerned only on the basis that his personal liability was limited to assets controlled by Orio Investment Trust and did not include any personal liability relating to him.
As such, he is not personally liable to Macko Corporation and as a consequence cannot be rendered bankrupt on its petition. In his written submission, he indicates as follows:
I contend that the nature of trust and a trustee’s role in administering a trust is such that a trustee is not personally liable for the debts when he or she contracts effectively to limit liability.
The distinction is therefore not between separate legal entities but the capacity and character in which a person represents themselves when dealing and contracting.[13]
[13] See respondent’s written submissions filed 5 October 2022 at [5] – [6]. Hereinafter referred to as “the RWS”.
The seminal case, in this regard, is said to Gordon v Campbell[14] and subsequent English and Scottish authorities culminating in Muir v City of Glasgow Bank (“Muir”).[15]Mr Psevdos submits that these cases reflect the state of the law in Australia and have been supported by the learned authors of Jacobs’ Law of Trusts in Australia in which the following was stated:
[A] trustee’s prima facie personal liability for all contracts entered into can be varied such that it is limited to the trust assets.[16]
[14] Gordon v Campbell (1842) 1 Bell App 428.
[15] Muir v City of Glasgow Bank (1879) 4 App Case 337.
[16] See Jacobs’ Law of Trusts in Australia 8th ed, Butterworths, (2016) at [21-03].
In this context, Mr Psevdos relies on Helvetic Investments v Knight (“Helvetic”).[17] He has not specified the actual portion of the case on which he relies. In this context, it is noteworthy that the majority of the Full Court of the Supreme Court of New South Wales, in the case, did not accept that the defendant’s liability should be limited to the assets of the trust notwithstanding the fact that the relevant guarantee had been described in its execution as a family trust which was signed by the defendant as a trustee.
[17] Helvetic Investments v Knight (1984) 9 ACLR 773.
In the case, Glass JA accepted the following propositions as being supported by Muir and being applicable in Australia:
·A trustee who enters into a contract will normally incur unlimited personal liability unless by appropriate language or express stipulation such liability is restricted;
·A mere description of the capacity in which he contracts as that of trustee is insufficient to exclude full personal liability;
·Upon the proper construction of the guarantee no language could be found in it to limit the normal unlimited liability of the contracting trustee.
As I understand Mr Psevdos’ submission, he asserts that the loan contract in the current matter has used language of sufficient precision to restrict his personal liability and is axiomatically more than a mere description of him. This language being utilised being that he has executed the relevant loan document, as the trustee of Orio Investment Trust. Accordingly, on this basis it is a matter for the Court’s construction as to whether there is such an exclusion given the explicit stipulations of the loan agreement in the current matter.
Of relevance to this issue is the contents of the exclusionary letter, dated 18 January 2019, executed by Mr Macko, Mr Malecki and, of course, Mr Psevdos, which pre-dates the loan agreement. In this context, Mr Psevdos submits that the letter represents a collateral contract to the main agreement and authorises the Court to go behind the judgment debt on which the bankruptcy is based.
Essentially, Mr Psevdos argues that he would not have entered the main contract if it had not been intended to result in the limitation of his personal exposure to the repayment of the sum in question, in accordance with the contents of the letter of 18 January 2019. As such there is a sufficiently express stipulation that his personal liability is to be restricted.
As indicated above, section 52 of the Act, authorises the Court, in certain circumstances, to go behind the judgment debt on which a sequestration order has been based. As best I can understand Mr Psevdos’ contention, he submits that there is sufficient uncertainty surrounding the entry of the judgment debt in this case, on which the relevant petition is based, to warrant the Court going behind the relevant judgment and to reach the conclusion that he does not owe the debt in question.
The circumstances can be summarised as follows:
·The proceedings in the District Court were commenced against him in his capacity as a trustee only;
·The same situation is apparent so far as Mr Malecki is concerned;
·Mr Psevdos consented to the judgment being entered as a trustee not in his own capacity and made this apparent to the District Court;
·The main agreement explicitly states he entered it as a trustee only;
·He agreed to the limitation clause contained in the collateral contract of 18 January 2019, as did Mr Malecki and Mr Macko; and
·The main agreement is largely silent on issues in respect of circumstances in which a borrower acts as trustee only.[18]
[18] See RWS at [19].
In these circumstances, Mr Psevdos submits as follows:
The collateral contract and the main contract together confirm I engaged as trustee only and proceeded to limit my personal financial exposure to the trust fund effectively.[19]
[19] See RWS at [53].
Although he does not necessarily accept that there is a level of ambiguity between the main and collateral contract, surrounding the making of the relevant agreement, Mr Psevdos asserts that this Court is entitled to look at the circumstances surrounding the making of both documents in assessing whether he is personally liable for the debt in question. Necessarily, he asserts, I assume, that the clear import of both documents is that he is not personally liable.
In this context, Mr Psevdos professes to rely on what was said by the High Court in Pacific Carriers Ltd v PNP Paribas (“Pacific Carries”)[20] as follows:
The case provides a good example of the reason why the meaning of commercial documents is determined objectively: it was only the documents that spoke to Pacific. The construction of the letters of indemnity is to be determined by what a reasonable person in the position of Pacific would have understood them to mean. That requires consideration, not only of the text of the documents, but also the surrounding circumstances known to Pacific and BNP, and the purpose and object of the transaction. (Citations removed)
[20] Pacific Carriers Ltd v PNP Paribas (2004) 218 CLR 451 at [22].
He also cites the following passage from Electricity Generation Corporation v Woodside Energy Ltd (“Electricity Generation Corporation”):[21]
The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. (Citations removed).
[21] Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35].
I fear that I may not have done justice to the subtlety of Mr Psevdos’ various arguments. However, as best I can, in summary, Mr Psevdos contends that he is not personally indebted to Macko Corporation and therefore the proof required by section 52 of the Act has not been provided by the petitioning creditor.
Rather, the overall evidence indicates that the debt is owed not by him but is limited to the resources of the trust on behalf of which he clearly executed the loan agreement in question, after he had unequivocally conveyed that this was sole basis on which he was prepared the execute the document in question.
The clear commercial meaning of the relevant loan agreement was that his intention was to limit his personal liability to the extent of the property of the trust concerned. Further the validity of this entitlement of trustees has been recognised by authorities since the early nineteenth century, if the language of the relevant document concerned – in this case the loan agreement – is clear on its face that liability is intended to be limited. In this context, he contends that the original agreement clearly has such an intent. However, if there is any inconsistency or ambiguity arising, it should be resolved by reference to the collateral agreement.
As previously indicated, Mr Psevdos remains an undischarged bankrupt on an earlier petition of the Commonwealth Bank. The sequestration order in question was subject to appeal in the Full Court of the Federal Court.[22] In this case, the Full Court (Charlesworth J) considered the application of Gordon v Campbell and Muir v City of Glasgow Bank to circumstances broadly analogous to the current matter namely that Mr Psevdos had contracted with the CBA solely in his capacity as trustee for Orio Investments.
[22] See Psevdos v Commonwealth Bank of Australia (No 2) [2017] FCA 19.
In the case, Charlesworth J said as follows:
Insofar as the decision in Gordon stands for the proposition that trustees may avoid personal liability for debts incurred in the performance of the trust (including debts arising under contract) by expressly making it known that they covenant in the capacity as trustees (or qua trustees, as that phrase was used in Gordon), that proposition is not good law.[23]
[23] See Psevdos v Commonwealth Bank of Australia (No 2) [2017] FCA 19 at [59].
In his submission, Mr Psevdos asserts that the Full Court has mistaken the seminal principle established in Gordon. As will be detailed in due course, it the position of Macko Corporation that Charlesworth J correctly and exhaustively detailed the general principles governing the liability of a trustee to pay the debts of a trust and I am bound by the decision in Psevdos v CBA (No 2).
The ratio of the decision being the uncontroversial concept that a trust does not have a distinct legal personality from its trustee. There is no recognition of a trustee having assumed an additional or qualified legal personality. Mr Psevdos contends that Gordon does, contrary to what was said by Charlesworth J, authorise a trustee to avoid personal liability, if they contract in the capacity or qua a trustee.
As such, it is his submission, again as I understand it, that the decision of the Full Court in Psevdos is manifestly wrong and therefore this Court is not required to follow an ostensibly binding authority.
Macko Corporation’s submissions in support of the petition
It is the submission of Macko Corporation that Gordon has no application to the present matter and this Court is bound by the decision of the Full Federal Court in Psevdos. In this context it is submitted as follows:
·A reading of the loan agreement makes no reference to the personal liability of Mr Psevdos or expressly differentiate between Mr Psevdos personally and in his capacity as trustee of the Orio Investment Trust.
·The only reference in the agreement to any trust limitation is that referrable to Macko Corporation in Item 9 of the Schedule. This is the obvious place in which to make reference to a similar limitation referable to Mr Psevdos. It does not appear.
·Clause 13.1 – the whole agreement clause – explicitly excludes any antecedent agreement such as the earlier letter of 18 January 2019.
·Even in the event that there was some prior agreement, the clear reading of the loan agreement indicates that it has been superseded by the later comprehensive document.
·The agreement in question is a commercial document, which has a plain and comprehensible meaning – a sum of money has been advance to the named individuals, which is intended to be repaid in twelve months at a specified rate of interest. As such it is not permissible for the Court to examine any other evidence to contradict the clear meaning of the relevant contract.
·A mere description of a person as a trustee is insufficient to exclude personal liability of a trustee. Appropriate language or an expressed stipulation of limited liability is required in the relevant agreement. There is no such language in the agreement which is the subject of the current proceedings.
·In these circumstances, the normal law relating to the liability of trustee to pay the debts of trusts as delineated by Charlesworth J in Psevdos v CBA (No 2) apply and the authorities commencing with Gordon v Campbell as cited by Mr Psevdos have no application given the clear terms of the relevant loan agreement.
·This Court is bound by the authority of the Full Federal Court and it cannot be said that Psevdos is manifestly incorrect.
In addition, Macko Corporation contends that there can be no basis for the Court to go behind the judgment in question. In this context, it submits that:
·Mr Psevdos has not sought to challenge the judgment by appeal or any form of cross action.
·The court record indicates that Mr Psevdos consented to the judgment.
·As indicated above, a trustee who contracts normally incurs unlimited personal liability unless such liability is expressly restricted by appropriate language. A designation or description of trustee alone does not suffice.
Macko resists the submission that the letter of 18 January 2019 represents some form of collateral contract the execution of which represented consideration for Mr Psevdos to enter into the loan agreement. More significantly, it is submitted by Macko that a collateral contract cannot be inconsistent, in its terms, with the main contract.[24]
[24] See Hoyts Pty Ltd v Spencer (1919) 27 CLR 133 at 146.
In this case, the main loan agreement indicates, at clause 13.1, that it is to be the source of the entire agreement between the parties. On its face, the loan agreement does not limit the liability of Mr Psevdos personally. As such, Macko Corporation asserts that there is no collateral agreement to the main loan agreement, which is not subject to any ambiguity. Rather, as with all commercial documents, its contents are to be interpreted objectively.
Conclusions
A trust itself is not a separate legal person to its trustee. It can only contract through its trustee. They are one and the same. As the learned authors of Jacobs’ Law of Trust in Australia state:
The common law does not recognise a trustee as having assumed an additional or qualified legal personality. As Sir George Jessel MR bluntly put it in 1880, the creditor has a personal right to sue [the trustee] and to make him a bankrupt.[25]
[25] Jacobs’ Law of Trusts in Australia 8th ed, Butterworths, (2016) at [21-02].
Charlesworth J in Psevdos v CBA (No 2) described the general principles governing the liability of a trustee to pay the debts of a trust as being well settled. These principles can be summarised as follows:
·A trust is not a separate legal entity.
·As the legal owner of trust property, a trustee is personally liable for debts he or she incurs in performing the trust. As a consequence, a trustee’s liability is not limited by the extent of the trust assets.
·Accordingly, an individual trustee may be bankrupted in respect of a debt incurred in the performance of a trust.
·A trustee may have recourse to trust property to satisfy debts properly incurred on the trust’s behalf and may also seek indemnity against the beneficiaries of the trust.
·Depending on the terms of the trust, a trustee may discharge liabilities out of the trust property, rather than expending his or her own funds and then seek reimbursement.[26]
[26] See Psevdos v Commonwealth Bank of Australia (No 2) [2017] FCA 19 at [53].
I accept that the common law of Australia recognises that a trustee may limit his or her personal liability in any given contract. However, this can only be done through the use of explicit language in the contract itself. Essentially, the relevant contract must expressly stipulate that liability is limited in some way, such as only to the assets of the trust itself rather than the assets of the trustee concerned. In my view, this is the import of Helvetic, which was applied in Psevdos, as was the following statement of Eames J in Re Interwest Hotels Pty Ltd (in liq).[27]
Where a trustee acting on behalf of a trust entered a contract then as a matter of law the trustee would be taken to be personally liable as well as having made the trust liable under the contract. Clear and unambiguous words would be required before the court would accept that the personal liability of the trustee had been excluded …
[27] Re Interwest Hotels Pty Ltd (in liq) (1993) 12 ACSR 78 at [83].
In my view, a fair and objective reading of the loan agreement of 30 January 2019 cannot disclose any clear and unambiguous words which indicate that the parties agreed that the personal liability of Mr Psevdos would be excluded. To the contrary, Item 9 of the Schedule to the agreement provides such an exclusion for Macko Corporation but not for Mr Psevdos.
Again, as is clear from Helvetic, the mere use of some form of descriptor or indication of the existence of a trust does not absolve a trustee of legal liability in the absence of an express provision to this effect. In my view, this is the ratio decidendi of Charlesworth J in Psevdos and according to the doctrine of stare decisis I am bound by it. I reject the submission that Her Honour’s determination is manifestly incorrect.
I further reject the submission that the letter of 18 January 2019 represents a collateral contract to the main agreement of 30 January 2019. It terms are inconsistent with the main agreement, particularly the whole agreement provision contained in clause 13.1.
In this context, clause 5.1 requires the borrower to repay the principal sum on the repayment date. This is an ordinary commercial loan agreement. Indeed clause 4 provides that the monies advanced are not to be used for personal or domestic use but for the purpose delineated in the Schedule, namely the discharge of commercial debts.
In this context, what was said by the High Court in Pacific Carriers and Electricity Generation Corporation is apposite. This was a commercial agreement. Its meaning is to be determined by what reasonable business people would understand it to mean.
In my view, any objective reading of the agreement indicates that what Macko Corporation understood was that it was dealing with Mr Psevdos and Mr Malecki, each of whom designated himself a trustee, on the basis that it would advance a sum of money to them jointly which would be repaid in full in 12 months’ time. It is not objectively reasonable to reach any other conclusion, particularly that Macko Corporation had any expectation that it would receive a lesser sum because the trust associated with Mr Psevdos did not have any asset.
In any event, no evidence has been provided as to either party’s understanding of the asset backing of the Orio Investment Trust. It seems improbable that any prudent lender would have willingly advanced money in circumstances in which there was some doubt arising in respect of reimbursement.
In my view, it would be a nonsense if the relevant loan agreement could be construed so as not to create any legal liability by anyone, given the trust has no existence as a legal person. In this context, I adopt the pithy analysis of Glass JA in Helvetic as follows:
I am not prepared to construe the guarantee by imputing an intention common to the parties that it should be binding only upon a non-existent legal person. The inference ascribes to creditor and trustee a condition of legal innocence for which no warrant is shown. Assuming, contrary to my opinion, that such an inference is open I would act upon the canon that, when a choice exists, the court should incline to a construction favouring validity rather than nullity.[28]
[28] Helvetic Investments v Knight 9 ACLR 773 at 774.
I agree with the submissions of Macko Corporation. This is not a loan agreement laden with ambiguity. As such, this Court can have no warrant to examine extraneous circumstances as an aid to it interpretation nor, in my view, can it be said that the letter of 18 January 2019 represents a collateral agreement to it. The loan agreement of 30 January 2019 comprehensively deals the terms of the agreement between the borrowers and lenders concerned.
In these circumstances, in my assessment, the final issue requiring examination is whether there are any circumstances which warrant the Court looking behind the relevant judgment debt on which the bankruptcy notice and subsequent sequestration are founded to determine whether section 52(2) of the Act has any application on the basis that Mr Psevdos has demonstrated sufficient cause that a sequestration order should not be made.
As indicated above, Mr Psevdos has characterised the actions of Macko Corporation, knowing him to be an undischarged bankrupt, yet seeking to bankrupt him again, as an act of petty vindictiveness. He also asserts that it was open to Macko Corporation to exercise its rights to security over the Modbury North land to secure repayment of its loan. Essentially, he asserts that the sequestration proceedings are an abuse of process.
The High Court has described abuse of process as being a concept which is inherently incapable of rigid characterisation. As such, the doctrine is insusceptible of a formulation which compromises closed categories. But, as French CJ noted in Aon Risk Management Limited v Australian National University, courts have the inherent authority to control their processes and prevent their application in a way which would be unfair to a party or would otherwise bring the administration of justice into disrepute among right-thinking people.[29]
[29] Aon Risk Management Limited v Australian National University (2009) 239 CLR 175 at [33].
Axiomatically, it appears to be imprudent for any lender to contract with a person who is an undischarged bankrupt. In my view, litigation following financial imprudence or even litigation motivated by a desire to inflict retribution on a person cannot be characterised as an abuse of process in the sense that level headed members of the public would consider it be inimical to the proper administration of justice. Litigation is frequently mean spirited and ill considered. It seems to me to be incontrovertible that Macko Corporation was entitled to bring the proceedings which it did, when the loan monies advanced by it were unpaid and all right-thinking people would reach the same conclusion.
In any event, there is no evidence available to me regarding the circumstances in which the parties concerned in this matter engaged into what, on its face, is a conventional loan agreement requiring repayment of a sum of money after the expiration of a fixed term. I reject any suggestion that the sequestration proceedings represent some species of abuse process.
That is not to say that the Court should be oblivious to the human tragedy which personal bankruptcy frequently occasions. However, the basic function of the Bankruptcy Court is one which relates to issues of personal insolvency.[30]
[30] Hutchings v Australian Securities & Investment Commission [2017] FCA 858 at [4] – [8].
The discretion arising under section 52(2) of the Act was described by Barwick CJ in Wren v Mahony in the following terms:
The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of [the petitioning creditor's] debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner.[31]
[31] Wren v Mahony (1972) 126 CLR 212 at 224.
As previously indicated, Mr Psevdos has contended that he does not owe the relevant debt personally. A submission, which I have rejected. He also challenges the validity of the judgment debt on which the relevant bankruptcy notice was posited. On the basis of the evidence provided by Mr Forde, there is no doubt that Macko Corporation advanced the sum of $160,000.00 to a bank account as directed by Mr Psevdos and Mr Malecki. The evidence of Mr Macko that the sum has not been repaid is not challenged.
In addition, it is clear that both Mr Psevdos and Mr Malecki were aware of the resulting District Court proceedings, which were not opposed with the resulting order not subject to challenge. In particular, Mr Psevdos does not assert that the District Court proceedings are vitiated by fraud or represent some form of miscarriage of justice.
In Ramsay Health Care Australia Pty Ltd v Compton the High Court indicated how a court exercising bankruptcy jurisdiction was to approach a judgment debt in the context of section 52. It said as follows:
In point of principle, scrutiny by a Bankruptcy Court of the debt propounded by a judgment creditor seeking a sequestration order in no sense involves an attempt to impeach the judgment. A Bankruptcy Court is not concerned with whether the judgment should be set aside as upon an appeal, or even as a default judgment or a judgment obtained by fraud may be set aside; nor is a Bankruptcy Court concerned to deny the effect of the judgment as "res judicata" between the parties to it. A Bankruptcy Court is not concerned to prevent the judgment creditor from invoking the ordinary processes of execution available under the general law. Rather, a Bankruptcy Court is concerned with whether the debt on which it is based is truly a basis for the making of a sequestration order.. A Bankruptcy Court has a statutory duty to be "satisfied" as to the existence of the petitioning creditor's debt; a creditor should not be able to make a person bankrupt on a debt which is not provable.[32]
[32] Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132 at [54].
In this context the High Court held that, in general terms, a judgment debt is usually to be taken as sufficient evidence of a debt for the purposes of section 52.[33] Given the commercial nature of the relevant loan agreement and its explicit terms regarding repayment, I accept that the debt on which the relevant petition is founded remains outstanding and owing. In addition, in my view, Mr Psevdos has not demonstrated sufficient cause as to why a sequestration order should not be made.
[33] Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132 at [68].
Accordingly, for these reasons, I affirm the order of the Registrar made on 12 April 2022. As a consequence the review application filed on 2 May 2022 is dismissed. Marko Corporation is entitled to its costs, to be agreed or taxed and paid out of the estate of Mr Psevdos.
The orders of the Court will be as set out at the commencement of these reasons for judgment.
I certify that the preceding ninety-one (91) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Brown. Associate:
Dated: 27 January 2023
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