Maddestra v Penfolds Wines Pty Ltd

[1993] FCA 586

DOMINIC MADDESTRA; CHRISTOPHER JOHN BORELLA and CLYDE WILLIAM BADGER v.
PENFOLDS WINES PTY. LTD.
No. WAG26-28 of 1993
FED No. 586
Number of pages - 8
Contract - Bankruptcy
(1993) 44 FCR 303

COURT

IN THE FEDERAL COURT OF AUSTRALIA

BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
Ryan(1), O'Loughlin(1) and Drummond(1) JJ

CATCHWORDS

Contract - Construction of contracts - guarantee executed by directors of Retail Equity Pty. Ltd. in consideration for the supply of goods to the company on credit - Deed of Guarantee names "Retail Equity Limited" as principal debtor - reference to "Retail Equity Limited" construed as a reference to "Retail Equity Pty. Ltd.".

Bankruptcy - Court going behind judgment debt - Bankruptcy Court not concerned with the sufficiency of the pleading or of the evidence in the Court in which judgment was obtained - Bankruptcy Court must be satisfied only that there is in fact a debt that arises on the same basis as that on which the judgment was obtained - even if rectification of guarantee necessary to entitle petitioning creditor as plaintiff to judgment in action on guarantee against the bankrupts as defendants, failure to seek order for rectification does not prevent the Bankruptcy Court making a sequestration order based on non-compliance with a bankruptcy notice demanding payment of the amount of the judgment on the guarantee.

Bankruptcy - judgment debtors are plaintiffs in litigation unconnected with the petitioning creditor - most of judgment debtors' creditors indicated informally that they were opposed to the bankruptcy of the judgment debtors - Court will rarely allow a debtor to avoid bankruptcy on the basis of informal arrangements with creditors - submissions based on the absence of any assets of judgment debtors - judgment debtors' impecuniosity is only a basis for refusing a sequestration order if it is clear that the judgment debtor has no assets - evidence indicating that the administration of the estates in bankruptcy may yield divisible assets - sequestration orders allowed to stand.

Clyne v Deputy Commissioner of Taxation (1985) 5 FCR 1

Codelfa Constructions Pty. Ltd. v State Rail Authority of New South Wales (1982) 149 CLR 337

Corney v Brien (1951) 84 CLR 343

M.P. Darcy; Ex parte The Pre-Term Foundation (Full Court of Federal Court, unreported, 23 May, 1988)

F. Goldsmith (Sicklesmere) Ltd. v Baxter (1970) 1 Ch 85

In Re Field (1978) Ch 371

Re Gourlay (Burchett J, unreported, 16 August, 1989)

In Re Hester; Ex parte Hester (1889) 22 QBD 632

Re McCollum (1987) 71 ALR 626

Re Skaff; Ex parte Farrow Mortgage Services (1993) 113 ALR 715

Story v Boulton (Full Court of Federal Court, unreported, 18 September, 1992)

Totterdell v Nelson (1990) 97 ALR 341

Ex parte Whelan (1986) 1 QdR 500

HEARING

BRISBANE, 20 July 1993

#DATE 27:8:1993

Counsel for the appellants: P. Kyle

Solicitor for the appellants: Kyle and Company

Counsel for the respondent: C.L. Zelestis QC and P. Donovan

Solicitors for the respondent: Mazza McCallum and Robinson

ORDER

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. The respondent's costs be taxed and paid from the estate of the bankrupt in accordance with the Bankruptcy Act 1966.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

RYAN, O'LOUGHLIN AND DRUMMOND JJ After a contested hearing, Lee J, on 3 February, 1993, made sequestration orders against the estates of each of the appellants. The appeals, which challenge the making of these orders, were heard together, the issues in each being substantially identical.

1. The act of bankruptcy by each appellant that was relied on by the respondent, as petitioning creditor, was his failure to comply with a bankruptcy notice that demanded payment of the sum of $284,738.38. This was the amount of a judgment which the respondent had obtained in the Supreme Court against each appellant, on a claim by the respondent on a joint and several guarantee which each appellant had given to it in respect of debts incurred by a company, Retail Equity Pty. Ltd., for goods sold to that company by the respondent between 28 August, 1990 and 3 December, 1990, and for interest thereon.

2. Only two grounds of appeal against Lee J's decision were argued. However, the appellants sought leave to adduce further evidence in support of each ground pursuant to s. 27 of the Federal Court of Australia Act 1976. The respondent opposed this.

3. The first ground of appeal relied on asserts that, notwithstanding the Supreme Court judgments against them, there was in truth no debt due by any of the appellants to the respondent. The argument is that there can never have been any debt due by them since they guaranteed payment to the respondent of moneys due by "Retail Equity Ltd.", not by "Retail Equity Pty. Ltd.". This argument is only open if the appellants are allowed to adduce further evidence.

4. The appellants could readily have put this evidence before Lee J had they wished. They rely upon Totterdell v Nelson (1990) 97 ALR 341 at 347-8 to justify its reception now. In Totterdell, this Court considered, but did not rule on the proposition that the principle governing the reception of further evidence on appeal, which is stated in cases such as Wollongong Corporation v Cowan (1955) 93 CLR 435, does not necessarily govern the reception of additional evidence in bankruptcy appeals because their outcome will directly affect the rights of creditors who are not parties to the proceedings and will also concern the public interest in the administration of the bankruptcy law. Even if the principle referred to in Totterdell v Nelson is applicable in appeals in bankruptcy cases, it cannot in our opinion free the party putting the further evidence forward from the obligation to show that it is of such cogency that, if it had been adduced at the initial hearing, it would in all likelihood have led to a different result. The evidence in question does not meet this requirement.

5. While the further evidence includes the Deed of Guarantee which, in terms, describes the principal debtor as "Retail Equity Ltd.", it also includes the affidavit of a Mr. Cole, which was filed in support of the respondent's successful application for summary judgment in the Supreme Court action against the appellants. Mr. Cole swears that "By way of a document dated the 23rd day of May, 1989, the (respondent) received from Retail Equity Pty. Ltd. an application for credit in relation to the supply of goods and services from time to time by the (respondent) to Retail Equity Pty. Ltd. In consideration of the (respondent) agreeing to supply to Retail Equity Pty. Ltd. these goods and services, (the appellants) agreed to guarantee the due payment by Retail Equity Pty. Ltd. for all such goods and services." He also exhibits the credit application and the guarantee to his affidavit.

6. By the Deed of Guarantee, the applicants jointly and severally promised the respondent that "In consideration of (the respondent) having at my/our request agreed to supply Retail Equity Limited ... (hereinafter called the Debtor) with Goods and Services from time to time through its/their Licensee/Nominee ... or to such other person for the time being holding the licence in respect of ... (four named liquor stores)" they would be answerable for due payment by the Debtor for all such goods and services supplied by the respondent at the Debtor's request. By the credit application which is under its seal, Retail Equity Pty. Ltd. sought credit accommodation from the respondent in respect of goods supplied to the same four stores referred to in the Deed of Guarantee. The application identifies the three appellants as the company's directors and contains the information that they were prepared "to execute a guarantee of accounts".

7. The appellants do not dispute any of what Mr. Cole says or anything that is set out in the credit application. Not only was the existence of the debts upon which the sequestration orders were based not put in issue before Lee J - he records in his judgment that there was no issue that each appellant had committed the act of bankruptcy relied upon - but the additional evidence upon which the appellants seek to rely to raise that issue on appeal itself shows that the appellant, Mr. Borella, apparently acting on behalf of the other two appellants, acknowledged their personal indebtedness in respect of the debts of Retail Equity Pty. Ltd.: see his letter of 6 March, 1991 to the respondent. The appellants make no attempt to explain or qualify this evidence in applying to adduce the further evidence on appeal. Moreover, if that evidence were to be received, the respondent would be entitled to tender certain additional evidence of its own. That evidence is full of acknowledgments by each of the appellants on oath and by their counsel, in his written submissions to Lee J, that they were liable to the respondent on the guarantee.

8. The appellants' argument is based on the fact that the Deed of Guarantee refers to the principal Debtor as "Retail Equity Limited". It was said that it is not open to the Court, by a process of construction of the Deed, to read the reference therein to "Retail Equity Limited" as a reference to "Retail Equity Pty. Ltd.", since that would involve construing the Deed by reference to the obligations that the parties intended the appellants would assume under the guarantee. It was then submitted that only if the Deed were rectified could effect be given to an intention that they would guarantee payment by "Retail Equity Pty. Ltd.". Finally, it was said that the judgment debts, as judgments upon the Deed of Guarantee, were not in truth owing, since they could only be supported by an action for rectification of the guarantee and for judgment on the guarantee as rectified.

9. In our view, it is permissible, in order to construe the Deed of Guarantee, to have regard to the credit application and to the evidence of Mr. Cole, which the appellants do not dispute in any relevant respect. That evidence, although it might be said to go to the nature of the negotiations that preceded the agreement recorded in the Deed, establishes "objective background facts which were known to both parties and the subject matter of the contract"; Codelfa Constructions Pty. Ltd. v State Rail Authority of NSW (1982) 149 CLR 337 at 352. This evidence shows that it was Retail Equity Pty. Ltd. that sought credit from the respondent with respect to goods supplied to four of its liquor stores and that the appellants, as directors of that company, were prepared to guarantee payment by it in return for the provision by the respondent of credit to it. When the Deed of Guarantee is read against this background, we think the reference in it to "Retail Equity Limited" must be understood as a reference to "Retail Equity Pty. Ltd.". The appellants argued that cases like F. Goldsmith (Sicklesmere) Ltd. v Baxter (1970) 1 Ch 85 in which an inaccurate description of a company was corrected by the process of interpreting the contract are different from cases like the present where the question concerns the identification of the content of the obligations imposed by a contract rather than the identification of a party to a contract. However, reference to the surrounding circumstances in which a contract was entered into is as readily available for construing the contract and identifying the content of those obligations and persons other than the parties to the contract as it is for the purpose of identifying the parties: in neither exercise does any question of rectification arise. Ex parte Whelan (1986) 1 QdR 500 at 502-503.

10. Even if, contrary to our view, rectification of the guarantee had been necessary properly to found the judgments which the respondent obtained against the appellants, they are in truth indebted to the respondent on the guarantee. They do not dispute what Mr. Cole has to say about their being liable on it. The judgment upon which the sequestration orders were founded was supported by consideration sufficient for the purposes of Corney v Brien (1951) 84 CLR 343 at 352-3. When a question arises whether there is a debt sufficient to support a judgment upon which a bankruptcy petition or a sequestration order is founded, the Bankruptcy Court is not concerned with questions as to the sufficiency of the pleading or of the proofs of the debt offered in the Court in which the judgment has been obtained. Its only concern is to be satisfied by proper proof before it that there in truth exists a debt and that that debt arose on the same basis upon which the judgment was obtained. Neither of the decisions relied on by the appellants, Re McCollum (1987) 71 ALR 626 or Re Gourlay (Burchett J, unreported, 16 August, 1989) provides any support for the proposition that, in a case in which there is, in truth, a debt owing on a particular basis, a judgment debt will not be regarded as sufficient to found a sequestration order because the material upon which the judgment was obtained failed to make reference to an essential element in the cause of action necessary to establish the existence of the debt on that particular basis. See Re Skaff; Ex parte Farrow Mortgage Services Pty. Ltd. (1993) 113 ALR 715 at 717-721.

11. If regard be had to the additional evidence on which the appellants rely to support the first ground of appeal, the conclusion must be that this attack upon the orders made by Lee J fails.

12. The second ground of appeal argued attacks Lee J's refusal to find in the litigation that is on foot in the Supreme Court between Retail Equity Pty. Ltd. and others and Custom Credit Corporation Ltd. sufficient cause within s. 52(2)(b) of the Bankruptcy Act 1966 to decline to make sequestration orders. His Honour's reasons for this conclusion are as follows:
    

"The litigation commenced by Retail Equity and the debtors was said to have such prospect of success that in due course the petitioning creditor could expect the principal debtor, Retail Equity, to discharge its indebtedness to it. When the orders were first made to adjourn the hearing of this petition it was said that the litigation was being treated with expedition and that the opportunity for discussion of settlement may bear fruit in short time making a sequestration order unnecessary or inappropriate. Nine months have passed since the hearing of the petition was adjourned without the Supreme Court litigation being any closer to resolution and, indeed, if it were to go to trial it could not expect to be heard within fifteen months. Furthermore, I am satisfied, as counsel for the petitioners submits, that the litigation does not have on its face a real appearance that it is capable of satisfying the demands of the petitioner and other creditors in the short term, a matter to be borne in mind when assessing the willingness of other creditors to await the outcome of this litigation and the public interest in these petitions.

If collateral litigation is well advanced and likely to bring a beneficial result to a debtor, there may be good cause for the Court not to make a sequestration order and it may be satisfied that such an order ought not to be made. The Court may mould its order according to the circumstances, deferring further hearing of the petition subject to review or it may be entirely satisfied that a sequestration order ought not to be made on the petition at any time and that the petition should be dismissed.

In the present case the extended petition is nearing the end of its life and the point has now come where a determination must be made whether the petition should be dismissed or sequestration orders made. I am not satisfied that the debtors have shown that there is other sufficient cause in which the Court may conclude that a sequestration order ought not to be made. The making of those orders will have no bearing on the conduct of the litigation in the Supreme Court."

1. The notice of appeal asserts that Lee J's decision to make the orders was erroneous not only because of the existence of this litigation, but also because of what was said to be the expressed opposition of the majority of the appellants' creditors to the appellants being made bankrupt.

2. The additional evidence the appellants sought to tender here went to expand upon and to update the evidence adduced before Lee J to support the proposition that most of the appellants' creditors were opposed to their bankruptcy. In argument, however, the appellants focused their attention largely on what was said to be the significance of the Supreme Court litigation. It was submitted that if Retail Equity Pty. Ltd. were to succeed in the action, it would be able to pay out its own indebtedness to the respondent and to the appellants' other creditors, most of whom, like the respondent, claimed against them on guarantees they had given in respect of the debts of Retail Equity Pty. Ltd.. On the other hand, it was argued, if Retail Equity Pty. Ltd. were unsuccessful in the action, the respondent and the appellants' other creditors would get nothing from the appellants. It was therefore said to be obvious that it would be detrimental to the creditors for the sequestration orders to stand.

3. Although it was not expressly so put by counsel for the appellants, the assumption underlying these submissions appears to be that all this follows because the appellants themselves have no assets. Reference was made to the notices sent to each of those creditors by the Official Trustee, which the appellants described as "a notice of the likely effect of the bankruptcy upon (the creditors') chances of recovery of their debts". It is enough to refer to the Official Trustee's "Notice of Bankruptcy" sent to the creditors of the appellant, Mr. Badger. The other notices are to the same effect. In this document, dated 6 April, 1993, i.e., two months after the sequestration order against Mr. Badger, the Official Trustee told his creditors that "(f)rom the information available to the Trustee, it appears that no dividend would be paid in this estate". However, it is clear from the notice itself that, in expressing this opinion, the Official Trustee was relying on the information provided by Mr. Badger in his statement of affairs which the Trustee noted "may differ from the actual position of the bankrupt's estate". The Trustee further advised creditors that he did not, at that stage, propose to convene a meeting of creditors under s. 64 of the Bankruptcy Act (although they could, of course, themselves requisition such a meeting) or to apply under s. 81 for the examination of Mr. Badger or any other person.

4. There is authority that a debtor's lack of assets may justify a refusal to make a sequestration order. But the consistent trend of the modern cases shows that courts have been increasingly reluctant to allow debtors to avoid bankruptcy on this ground. In Re Field (1978) Ch 371, Megarry V.-C. said at p 375: "A man may indeed be too poor to be made bankrupt: but the burden of proof is heavy." See also In Re M.P Darcy; Ex parte The Pre-Term Foundation (Full Court of the Federal Court, unreported, 23 May, 1988). This Court, in Clyne v Deputy Commissioner of Taxation (1985) 5 FCR 1 at 6, said: "This course has been regarded as appropriate only in cases where the lack of assets is clear beyond question so that the presentation of the petition amounts to oppression". The reason for this approach is obvious: both when a petition is presented, and when a sequestration order is made, it will not normally be possible for the Court to know whether an administration in bankruptcy of the debtor's estate will turn up assets, either in the hands of the debtor or of others, that will be available for realisation and distribution to creditors. See Clyne at pp 6-7.

1. Far from this being a case in which it can be said that the appellants' lack of assets is clear beyond question, there are grounds for thinking that an administration in bankruptcy of each appellant's estate might well yield something in the way of divisible assets. There is evidence that Messrs. Borella and Maddestra have shares in a number of companies, including Christian John Properties Pty. Ltd. and Chellaston Pty. Ltd. respectively, which together have paid legal fees since December 1990 of over $360,000.00. There is no ground for assuming their shareholdings in these companies to be valueless. There is also evidence suggesting that all three appellants own a variety of other assets, including interests in superannuation funds, debts owed to them by others, interests in a partnership business and interests in real estate, either directly or through shareholdings in the owner-corporations.

2. It was also submitted that while Retail Equity Pty. Ltd. is entitled to maintain its action against Custom Credit Corporation Ltd. irrespective of the bankruptcy of the appellants, their creditors "clearly take the realistic view that the chances of success in that action would be seriously impaired by the bankruptcy of the appellants". It was not, however, explained why the appellants' bankruptcy is likely to impede the prosecution of that action. The contrary appears likely. The plaintiffs in the action against Custom Credit Corporation Ltd. and the receivers comprise Retail Equity Pty. Ltd., the three appellants, a number of other companies, persons who may be the wives of the appellants Borella and Maddestra, and one other person. The current particulars of damages filed by the plaintiffs in this action show that none of the appellants is now pursuing a damages claim against Custom Credit Corporation or the receivers. According to the appellants' submissions and the material before this Court, the Supreme Court action still appears to be proceeding towards a trial, albeit somewhat slowly. It appears from the answers of each of the appellants to interrogatories delivered in each petition that, since December 1990, legal fees totalling in excess of $360,000.00 have been paid by two of the plaintiffs in the action against Custom Credit, Christian John Properties Pty. Ltd. and Chellaston Pty. Ltd., in respect of a number of proceedings, including both "bankruptcy proceedings" and this action against Custom Credit Corporation Ltd.. The Court was not referred to anything that suggested that further funding for this action would not be forthcoming.

3. We see no error in the approach which his Honour took in rejecting the argument that considerations associated with the litigation constituted sufficient cause not to order sequestration.

4. Moreover, there is real doubt about whether this litigation is likely to bring any benefit at all to the creditors.

5. Firstly, it is not at all clear on the material before the Court that the action is likely to succeed. The main claim for damages in the action will only succeed if it can be shown that Custom Credit Corporation Ltd. was not entitled to appoint the receivers to Retail Equity Pty. Ltd. After a contested hearing over three days, Anderson J, on 8 February, 1991, refused an application by Retail Equity Pty. Ltd. and the other plaintiffs in this action for an interlocutory injunction requiring the receivers to deliver up to Retail Equity Pty. Ltd. the businesses and premises of which they took possession. While Anderson J found that there was a real question as to whether Custom Credit Corporation Ltd. could justify appointment of the receivers on the grounds put forward at that time, he held that the appointment was nevertheless justified on the ground of Retail Equity Pty. Ltd.'s insolvency, saying: "I am left in no doubt that immediately prior to the appointment of receivers (Retail Equity Pty. Ltd.) was unable to pay its debts as they fell due. Further I have no doubt that this was more than just a transitory problem". The material to which the Court was referred all supports the correctness of his Honour's conclusion.

6. Secondly, appellants' counsel conceded that there was nothing before this Court to show how the appellants would be legally bound to ensure that, if the action succeeded, their creditors would be paid by Retail Equity Pty. Ltd..

7. Moreover, insofar as the appellants sought to rely on the fact that a majority of their creditors supported them and were opposed to their being bankrupted, this case provides yet another example of insolvents seeking to avoid bankruptcy and then to escape from bankruptcy by making informal arrangements with their creditors individually rather than by following the procedures contained in provisions such as Part X and s. 73 of the Bankruptcy Act. There is no dispute that the appellants are all insolvent. It is apparent from the additional material on which the appellants sought to rely that arrangements have been proposed by the appellants with their creditors that differ as between creditors; and, although there is evidence that these various proposals appear to be acceptable to the creditors to whom they have been put, the information that the appellants laid before each of their creditors in procuring these acceptances is not disclosed. It will rarely be in the public interest in the proper administration of the bankruptcy laws to allow a debtor to avoid bankruptcy or a bankrupt to escape from bankruptcy in reliance upon such an exercise.

8. Manoeuvring by insolvents, either to avoid or to escape from bankruptcy, by making informal arrangements with their creditors will generally amount to no more than an attempt to avoid complying with the procedures contained in the Bankruptcy Act. Those procedures allow insolvents to avoid bankruptcy, but only if they follow the courses prescribed by the Act which are designed to protect their creditors and the public interest. In Re Hester; Ex parte Hester (1889) 22 QBD 632 was an unsuccessful appeal against the refusal by the Registrar to rescind a receiving order made under the Bankruptcy Act 1889, where every one of the debtor's creditors had consented to rescission. It is frequently cited as authority for the proposition that the public interest in the proper administration of the bankruptcy laws and the wishes of the creditors are not co-extensive. See, e.g., Totterdell v Nelson, supra, at 344; Gregory Laird Story v William McLean Boulton, (Full Court of the Federal Court, unreported, 18 September, 1992). In In Re Hester, Fry LJ said at p 641:
   

"This appeal is based on the idle notion that the court is bound by the consents of the creditors obtained, not at a meeting of the creditors, not after a full and open discussion of the rights and interests of the parties and the general position of things, but obtained by the debtor going round to his various creditors, and procuring from them ... consents to the rescission of the receiving order, upon what representation and in what manner we do not know. ...

I conceive that one of the objects of this statute was, if not to put an end to, yet at least to discourage, private arrangements between a debtor and his creditors. Any one who knows the history of the law of debtor and creditor of this country, knows that private arrangements between debtors and their creditors have often been scandalous, and that they have given opportunities for misrepresentation, for private bargains, and for undue preferences. I for one should pause long before I allowed the evils of private arrangements between a debtor and his creditors to creep into the administration of this Act."

1. The appeal is therefore dismissed.