National Australia Bank Ltd v Kendrick-Smith

[2000] FCA 271

FEDERAL COURT OF AUSTRALIA

National Australia Bank Ltd v Kendrick-Smith
[2000] FCA 271

NATIONAL AUSTRALIA BANK LIMITED v MILES KENDRICK-SMITH
N 8014 OF 1999

GYLES J
SYDNEY
13 MARCH 2000

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 8014 OF 1999

BETWEEN:	NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) APPLICANT
AND:	MILES KENDRICK-SMITH RESPONDENT
JUDGE:	GYLES J
DATE OF ORDER:	13 MARCH 2000
WHERE MADE:	SYDNEY

THE COURT ORDERS THAT:

1.A Sequestration Order be made against the estate of Miles Kendrick-Smith.

2.The applicant creditor’s costs (including reserved costs, if any) be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.

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

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	N 8014 OF 1999

BETWEEN:	NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937) APPLICANT
AND:	MILES KENDRICK-SMITH RESPONDENT

JUDGE:	GYLES J
DATE:	13 MARCH 2000
PLACE:	SYDNEY

REASONS FOR JUDGMENT

1. This is the hearing of a contested petition by National Australia Bank Limited (ACN 004 044 937) (“National Australia Bank”) for a sequestration order against the estate of Miles Kendrick-Smith dated 30 August 1999, which first came before the Court on 14 October 1999.

2. The petition is founded upon a judgment in the amount of $853,206.17 obtained in the Supreme Court of New South Wales on 28 May 1999.  That judgment was entered by consent, Mr Kendrick-Smith then being represented by Mr Leonardus Smits, solicitor, of the firm Smits Leslie.  Those proceedings also involved other defendants, and have not yet been completed against them.

3. On or before 11 July 1999 Mr Kendrick-Smith failed to comply with the requirements of a bankruptcy notice duly served upon him on 20 June 1999, or to satisfy the Court that he had a counterclaim, set-off or cross-demand equal to or exceeding the sum specified in par 1 of that bankruptcy notice, being a counterclaim, set-off or demand that he could not have set up in the action in which the judgment referred to in the bankruptcy notice was obtained.

4. The judgment has not been set aside and remains unsatisfied.

5. Smits Leslie have filed evidence establishing that they have served bills of costs, in accordance with the relevant legislation, upon Mr Kendrick-Smith totalling $177,724.55, and appear to support the petition. 

6. The grounds of opposition to the application which remain relevant are:

   “(a)The Respondent has a cross claim against the Applicant which exceeds in quantum the amount alleged to be owing in the Creditor’s Petition.

   (b)The circumstances in which the cross claim arises are set out in the affidavit of Miles Kendrick Smith sworn 11 February 2000 and include:

   (i)the wrongful diversion by the Applicant of the sum of $201,037 due to be paid to Billbusters Pty Ltd (“Billbusters”) under a loan agreement between that company and the Applicant;

   (ii)the fact that the said diversion created a shortfall in the working capital of Billbusters resulting in the frustration of its business plan and consequential losses more fully particularised in the affidavit of Miles Kendrick Smith sworn 11 February 2000;

   (iii)the fact that the said diversion deprived Billbusters of opportunities in its business as set out in the affidavit of Miles Kendrick Smith sworn 11 February 2000;

   (iv)the fact that the Respondent was a guarantor to the loan between the Applicant and Billbusters and as such, is prima facie liable to the Applicant for the losses of Billbusters;  and

   (v)the issue of the Bankruptcy Notice on which the Creditor’s Petition is founded relied on a judgment of the Supreme Court of NSW which was based on the said guarantee.

   (c)The Respondent has a cross claim against Messrs Smits Leslie, supporting creditor, for professional negligence in advising the Respondent to consent to the orders made in the said Supreme Court proceedings which exceeds the amount claimed by that firm;”

7. The judgment debt was made up of amounts owing under several separate loans.  The first, called the Home Loan, was in the sum of $400,000 pursuant to an agreement dated 4 November 1997.  It is that transaction which gives rise to the claim of wrongful diversion, and I need to return to it.  There was then what was called a Business Investment Loan of some $200,000 pursuant to an agreement dated 12 February 1998.  Then there was what was called a Master Lease Agreement dated 17 June 1998 involving an obligation to pay rental for equipment.  Then there was a Guarantee and Indemnity dated 29 October 1998 guaranteeing the obligations of a company, Billbusters Pty Limited, to which the National Australia Bank had provided financial accommodation in the form of an overdraft facility.  All transactions also involved his then wife.  There is no issue taken with the calculation of the amounts outstanding.  In order to understand what the issue is, it is necessary to go into a little history.

8. The National Australia Bank provided financial accommodation to a company, Sharelink Communications Pty Limited (ACN 058 888 743) (“Sharelink”) by way of overdraft facility, the approval of which was dated 19 July 1994.  To secure its accommodation, the National Australia Bank took a debenture, created on 21 July 1994, over the assets of Sharelink, and obtained a guarantee and indemnity, dated 22 July 1994, from Mr Kendrick-Smith and his then wife. 

9. By an affidavit of 17 July 1997, Mr Kendrick-Smith described himself as the director and a shareholder of Sharelink.  That affidavit was sworn in support of an application for the appointment of a provisional liquidator, and showed an estimated deficiency before the cost of winding up of $4,366,320, including National Australia Bank as a secured creditor.  Paragraph 14 of the affidavit was in the following terms:

   “National Australia Bank Limited has a first ranking Charge over the assets and undertaking of the company and is presently owed by the company $197,063.  I have arranged for National Australia Bank Limited to be paid the amount required to discharge such Charge and all other securities provided to National Australia Bank Limited, (including my personal guarantee) such payment being expected to be made by me to National Australia Bank Limited on or about 30 July, 1997.”

10. Mr Kendrick-Smith says that the collapse of the Sharelink business was due to the actions of the day-to-day manager of the business.  He wished to set up another similar business.  He says that, amongst other sources of finance, he approached the National Australia Bank Business Banking Section at Pitt Street, Sydney, and put forward his proposal for finance for the new business, including a business plan which showed that $400,000 was necessary to properly capitalise the proposed business.  He says that the loan was approved and it was only after he left the Bank on his visit on 4 November 1997, immediately prior to the advance being made, that he became concerned that there was to be a diversion of funds to pay out the outstanding Sharelink overdraft. 

11. The Bank officers say that it was always understood that the advance would be utilised to pay out the Sharelink overdraft, that it was appreciated that the balance would be utilised by Mr Kendrick-Smith in setting up a new business, but it was denied that any business plan was produced.   It is said that the assessment of the loan was based upon the security of the matrimonial home and upon the ability to repay from sources other than the new business.  No business plan of the nature alleged was produced in evidence.

12. It is clear from his own contemporaneous letters that Mr Kendrick-Smith did appreciate that he had authorised the payment to clear the Sharelink overdraft when the instruction document was presented to him by the Bank officers on 4 November, although he says that it was, in effect, sprung upon him.  There was then a hold, but on 11 November 1997 Mr Kendrick-Smith wrote in the following terms:

    “I refer to the National Tailored Home Loan of $400,000.

    Carmela and I would like to draw on the additional funds in excess of the $197,000 already drawn.  We have sought independant advice and are happy to proceed.

    Please arrange for were funds to be available via the cheque account you created, for this process.

    Additionally please provide Mr Stephen Cordell with any assistance he requires in securing the assignment of the charge.”

13. By deed of assignment dated 26 November 1997, Mr Kendrick-Smith and his then wife took an assignment of the debenture over the assets of Sharelink from National Australia Bank.

14. Billbusters Pty Limited was registered on 12 January 1998, with Mr Kendrick-Smith as its director.  It conducted the new business.  It was wound up on 15 December 1998, a provisional liquidator having been appointed on 24 November 1998.  All of the advances by National Australia Bank which led to the judgment were connected with the business of  Billbusters Pty Limited.

15. Mr Kendrick-Smith claims that the consent which was granted by him to the judgment was as a result of negligent advice by Mr Smits.  Mr Smits denies this, and gives a comprehensive account of what took place at the time.  During the course of argument, it was made clear that the reference to a cross-claim against Smits Leslie is defensive to their claim for costs, and is not put forward as a separate answer to the petition.  Indeed, it could not be, because there has been no attempt by Mr Kendrick-Smith to prove solvency.

16. Plainly, the cross-claim against the National Australia Bank which is foreshadowed in these proceedings could have been brought in the Supreme Court proceedings.  Notwithstanding that the petition has been before this Court on numerous occasions since October 1999, all that has happened is that there has been an application to the New South Wales Court of Appeal for leave to appeal.  The rules of that Court in relation to the preparation of documents had not been complied with when the hearing before me concluded.

17. Mr Kendrick-Smith claims that the diversion of the funds from funding of the proposed business of Billbusters Pty Limited to clearance of the overdraft due to the National Australia Bank starved the new venture of necessary capital and led to its failure.  He claims that if it had been properly funded the business would have been very successful.

18. Having read the affidavits and the documents tendered, and having heard preliminary argument on more than one occasion, I permitted the solicitor for Mr Kendrick-Smith to cross-examine the senior of the Bank officers involved in the home loan advance.  I did so for the purpose of exploring and understanding the basis for the foreshadowed set-off and cross-claim rather than determining the issue on the merits.  At the end of that cross-examination, I indicated to the parties that, in my view, there was a triable issue as to whether there had been proper consent given to the appropriation of the funds towards satisfaction of the Sharelink overdraft.  In so doing, I did not intend to suggest that I did not believe the Bank officer, or that I was expressing any view as to the strength or weakness of the case.  There is a direct conflict of evidence and the matter is not rendered certain by the contents of the contemporaneous documents.

19. However, I have come to the conclusion that the raising of this triable issue is not sufficient to establish the grounds of opposition to the making of the sequestration order.  Mr Reeves, counsel for the National Australia Bank, submitted a number of factors in favour of this conclusion.  Those of weight included the following:

    1.Notwithstanding any doubt which might have existed as to the issue of consent, Mr Kendrick-Smith adopted and took the benefit of the Home Loan transaction by telling the National Australia Bank that he was happy to proceed with it having had the benefit of advice, and then taking the assignment of the debenture charge over Sharelink.

    2.The inherent difficulty of proving that under-capitalisation led to failure of a business of this character.

    3.In any event, shortly after the incorporation of Billbusters Pty Limited, a further $200,000 was provided by National Australia Bank for the purposes of the business, which made up any alleged shortfall.  Although Mr Kendrick-Smith says that the business had started before then, and had incurred business losses of this magnitude, the only two documents which were produced which were anything like a business plan were to the contrary of this, and it appears inconsistent with the date of registration.

    4.The evidence of Mr Kendrick-Smith contended, in substance, the actions of Telstra and the Australian Competition & Consumer Commission led to the failure of the business.

    5.The inherent difficulty of assessing the quantum of the effects of any under-capitalisation, and, more importantly, the lack of evidence on the issue.

    6.The losses, if sustained, were the losses of Billbusters Pty Limited, not Mr Kendrick-Smith.

    7.The continued existence of the Supreme Court judgment which was obtained nearly ten months ago, with about five months having elapsed since the petition first came before this Court.

    8.The formidable difficulties of fact and law which Mr Kendrick-Smith will face in having the consent judgment set aside, where the consent was given after the obtaining of legal advice.

    9.The failure to assert the claim at the time of the service of the bankruptcy notice.

20. Whilst no one of the factors put forward on behalf of the applicant may be decisive, and some are in issue, they are telling when taken in combination.  In short, I am confronted with a situation where there is an act of bankruptcy, committed many months ago, the debt is still due, and the debtor has not sought to prove solvency.  Against this there is the assertion of a cross-claim or set-off, attendant with severe problems of fact and law, which has not been pursued in a timely or appropriate fashion.  There is also the circumstance that a s 86 Agreement might affect the assets of the debtor.

21. In my opinion, having regard to the guidance to be obtained from cases such as Re Schmidt;  ex parte Anglewood Pty Ltd (1967) 13 FLR 11, Re James;  ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No. 2) (1994) 51 FCR 14 and the authorities referred to in them, the debtor has not satisfied me that there is sufficient cause why a sequestration order ought not to be made within the meaning of s 52(2)(b) of the Bankruptcy Act 1966 (Cth).

22. At the close of argument, the solicitor for the debtor drew my attention to a newspaper report concerning the case of Arnoya Holdings Pty Ltd v Metway Leasing Ltd [1999] NSW CA 120 which indicated that there might be a constitutional point current before the High Court which might have some impact on this matter.  Upon further examination, it seems clear that if there is any constitutional point which might arise, it will only arise in the event that the trustee elects not to pursue the application for leave to appeal to the Court of Appeal and, in that event, the challenge would be to s 60 of the Act rather than to the making of the sequestration order.  In any event, it is not for this Court to speculate upon the position which the trustee will adopt, or to assume that the trustee will not approach the question arising under s 60 otherwise than in a proper and bona fide manner.

23. As I am satisfied that all of the statutory requirements are met by the evidence which has been tendered on behalf of the petitioner, I propose to make the orders sought in the application.

I certify that the preceding twenty-three (23) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles.

Associate:

Dated:             13 March 2000

Counsel for the Applicant:	Mr SMP Reeves
Solicitor for the Applicant:	Mallesons Stephen Jaques
Solicitor for the Respondent:	Mr J Hassett, Hassett Dixon
Solicitor for the Supporting Creditor:	Mr J Leslie of Smits Leslie
Date of Hearing:	10, 11, 28, 29 February, 1 March 2000
Date of Judgment:	13 March 2000