OTVOSI v Gustavo Ferella - [2005] FMCA 1631

FEDERAL MAGISTRATES COURT OF AUSTRALIA

OTVOSI & ANOR v GUSTAVO FERELLA

[2005] FMCA 1631

BANKRUPTCY – Application for a stay of proceedings under a sequestration order – where application for review of decision of Registrar.

Bankruptcy Act 1966 (Cth), ss.52(2)(a), 52(3), 57
Federal Magistrates Court Act 2001 (Cth), ss.15, 104(3)
Federal Court of Australia Act 1976 (Cth), ss.23, 35A(6)
Corporations Act 2001

Trustees of the Franciscan Missionaries of Mary v Weir [2000] FCAFC 574 Australian Guarantee Corporation Limited v Collard [1997] FCA 1094
Freeman v National Australia Bank [2002] FCA 427
Beames v Rigby [2002] FCA 808
Rigg v Commonwealth Bank of Australia [2001] FCA 1340
Adelaide Bank Limited v Badcock [2002] FMCA 10
Martin v Commonwealth Bank of Australia [2001] FCA 87
Cottrell v Wilcox [2001] FCA 866
Bryant v Commonwealth Bank of Australia [1996] HCA 3
HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638
Day, in the matter of Gould v Gould [2000] FCA 1377

Applicant:

ERVIN OTVOSI & ANOR

Respondent:

GUSTAVO FERELLA

File Number:

SYG2757 of 2005

Judgment of:

Barnes FM

Hearing date:

1 November 2005

Delivered at:

Sydney

Delivered on:

11 November 2005

REPRESENTATION

Counsel for the Applicant:

Mr E White

Counsel for the Respondent:

Mr JT Johnson

Solicitors for the Respondent:

Landerer & Co.

ORDERS

That the respondent’s application for a stay of proceedings under the sequestration order made on 14 October 2005 is dismissed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG2757 of 2005

ERVIN OTVOSI & ANOR

Applicant

And

GUSTAVO FERELLA

Respondent

REASONS FOR JUDGMENT

The respondent (the debtor) seeks a stay of proceedings under a sequestration order made by a Registrar on 14 October 2005 in relation to his estate. On 17 October 2005 the debtor filed an application for review seeking that the sequestration order be set aside. The matter came before the Court on 18 October 2005. It was adjourned at the request of the debtor until 25 October 2005 at which time the debtor’s legal representative made an oral application for a stay of proceedings under the sequestration orders made on 14 October 2005 in relation to both Angelo Ferella and his father Gustavo Ferella (the debtors). Both matters were listed for hearing together on 1 November 2005. The applicants are the petitioning creditors (the creditors). They opposed the granting of a stay in either matter.
The only evidence before the Court from Mr Gustavo Ferella is an affidavit sworn by him on 14 October 2005 in which he stated that he gave authority for his son Angelo Ferella to act on his behalf in relation to proceedings before the Federal Magistrates Court in relation to a creditor’s petition as he was too ill to attend. Mr White confirmed that he had instructions from Mr Gustavo Ferella as well as Mr Angelo Ferella. Angelo Ferella swore an affidavit on 17 October 2005 indicating that he had ‘the care and contact’ in this matter and was authorised to swear the affidavit which he swore on 17 October 2005 on behalf of both himself and his father. He indicated that his father was quite ill (although no medical evidence was or has since been provided) and that he had given him written authority to act on his behalf. According to Mr Ferella the Registrar did not accept this authority.
Both of the Ferellas rely on affidavits of Angelo Ferella sworn on

17 October 2005, 25 October 2005 and 1 November 2005. Angelo Ferella was also cross-examined by Counsel for the creditors. The creditors relied on affidavits of Leslie Pozniak, the solicitor with carriage of the matter for them, sworn on 17 October 2005 and

28 October 2005.
There has been a considerable amount of litigation between the parties relating to development of land at Point Piper of which the debtors are registered proprietors. The creditors own neighbouring land. On

27 April 2005 the creditors obtained a judgment in the Supreme Court of New South Wales in which it was ordered that the debtors pay their costs in the sum of $74,656. This was the basis for the bankruptcy notices issued at the request of the creditors to each of Angelo and Gustavo Ferella and the subsequent creditors’ petitions on the basis of which sequestration orders were made in relation to the estates of each of Angelo and Gustavo Ferella.
Counsel for Angelo and Gustavo Ferella contended that a stay of proceedings under each sequestration order should be granted on the basis that Angelo Ferella had disclosed that they had a beneficial interest under a trust which included two properties with a value of over ten million dollars. Under s.52(2)(a) of the Bankruptcy Act 1996 (the Act), if the Court is satisfied by the debtor that he or she is able to pay his or her debts it may dismiss a creditor’s petition. It was contended that accounts of the trust of which the debtors were beneficiaries showed a healthy financial position and that it was sufficient for the debtor to demonstrate to the Court that he had the ability to pay his debts at the moment or in the near future. Further it was argued that the stay should be granted so that the Ferellas could refinance one of their properties in accordance with a financing proposal of which there was evidence before the Court, which would provide them with a sufficient amount not only to pay out the current mortgage on the property but also to pay out debts.
An initial issue arose as to the extent of the power of the Court to grant a stay pending determination of a review of a decision of the Registrar. Mr White, for the debtors, did not dispute that, as contended by Mr Johnson for the creditors, the Court was limited to granting a stay of only 21 days pursuant to s.52(3) of the Act, although he submitted that such period was to be calculated, not from the date of the sequestration order, but rather from the date the stay was granted. This admission was made despite the fact that I had raised in the course of the hearing the question of whether this Court had power to grant a stay pending the completion of its review and not limited to a period of 21 days, pursuant to s.104(3) of the Federal Magistrates Court Act 2001 (and also see s.15 of the Act) consistent with what the Full Court of the Federal Court had held in Trustees of the Franciscan Missionaries of Mary v Weir [2000] FCAFC 574 in relation to the comparably worded provisions of the Federal Court of Australia Act 1976 (see ss.35A(6) and 23 and also see Australian Guarantee Corporation Limited v Collard [1997] FCA 1094). As I have decided, for the reasons set out below, not to order a stay of proceedings under either of the sequestration orders it is not necessary for me to determine whether this Court does have power to stay proceedings under a sequestration order made by a Registrar for an indefinite period pending its review by the Court or whether, if it is limited to granting a stay of 21 days, the date from which such a stay would be calculated. It may be that those matters which persuaded the Full Court of the Federal Court as to the existence of power under the Federal Court of Australia Act 1976 to stay such proceedings for an indefinite period pending review by that Court are equally applicable to the powers of this Court under the Federal Magistrates Court Act 2001 (see in particular Weir's case at [19] to [23]). That remains to be determined in some other proceedings.
This is not a case in which a stay is sought pending an appeal. Hence consideration of whether there is an arguable point on the proposed appeal can have no direct relevance (see Freeman v National Australia Bank [2002] FCA 427 at [4] and Beames v Rigby [2002] FCA 808 and Rigg v Commonwealth Bank of Australia [2001] FCA 1340 at [25]).

A review of a Registrar's decision under s.104(3) of the Federal Magistrates Court Act 2001 is a hearing de novo so that the petitioning creditor must re-prove to the satisfaction of the Court the matters required under s.52(1) (see Adelaide Bank Limited v Badcock [2002] FMCA 10 and Martin v Commonwealth Bank of Australia [2001] FCA 87 and also see Cottrell v Wilcox [2001] FCA 866 in relation to the comparable position in the Federal Court in relation to a review under s.35A(6) of the Federal Court of Australia Act1976). No issue was raised at this stage of the proceedings as to whether there was an act of bankruptcy (see Collard) or a defect in the bankruptcy notice (see Weir). No question was raised as to the construction of the law. As indicated, the debtors sought a stay on the basis that they were, or shortly would be, able to pay their debts and so the Court would dismiss the creditors’ petitions (or set aside the decision of the Registrar) and also for the purpose of refinancing to make available an amount to pay out debts.
In HVAC Construction (Qld) Pty Ltd v Energy Equipment Engineering Pty Ltd [2002] FCA 1638 French J applied the principles in Weir's case to the grant of a stay of winding up proceedings under s.35A(6) or section 23 of the Federal Court Act 1976 pending a review by the Federal Court of a winding up order made by a Registrar. Relevantly his Honour stated at [48]:
"The grant of a stay under s.35A(6) or s.23 is a matter for the discretion of the Court in the light of all the circumstances of the case. There is no rule confining the exercise of that discretion which requires special reasons to be shown for its exercise. In the statutory context of Part 5 of the Corporations Act 2001 however, the power is to be exercised with caution so as not to unduly delay the liquidator or hinder his or her capacity to carry out the duties imposed by the statute. There is therefore a clear onus on the applicant [for a stay] to make out a positive case.”
Part 5.4 of the Corporations Act 2001 deals with applications for orders to wind up a company in insolvency. In these proceedings, whether the power to grant a stay is to be found in s.52(3) or in the provisions of the Federal Magistrates Court Act 2001, the suggestion that the power be exercised with caution is also relevant in relation to the carrying out of the duties imposed on the trustee in bankruptcy.
French J suggested in HVAC at [49] that in addition to “the general considerations which enjoin caution” in the making of stay orders, there were specific considerations relevant to the class of case before him. Those included the merits of the proposed review, the current trading position and solvency of the company, the prejudice to the company if a stay was not granted, any detriment or risk of detriment to creditors following from a stay and the legislative policy against delay to the liquidation process. Similar considerations (taking into account that the debtors are natural persons and the context of the Bankruptcy Act 1966) are relevant and have been taken into account by me in this instance as part of all the circumstances of the case.
Further, as Kirby J stated in Bryant v Commonwealth Bank of Australia [1996] HCA 3 at [12] it is clear that the status of the bankrupt is affected by a sequestration order but:
"so are, potentially, the interests of third parties. So too is the interest of the community. It would therefore be a mistake to approach the present application as if the only interests affected by its outcome were those of the applicant and the respondent. Also to be kept in mind are the interests of other creditors, particularly unsecured creditors, and of the community which has its own concerns in the due administration of the Act in respect of the estate of persons found to be bankrupt.”
While Kirby J expressed these views in the context of an application for a stay in connection with an application for special leave to appeal to a High Court, such matters are also relevant in the present situation.
Much of what was said for the debtors addressed issues of their solvency. I take the view that it is not appropriate for me to predetermine, one way or the other, the substantive application for review insofar as that will require the Court to have regard to whether it is satisfied by the debtor of the matters in s.52(2)(a) on the hearing of the application for review. Nonetheless I have had regard to the debtors’ submissions about financial position as part of all the circumstances of the case in determining whether to exercise my discretion to grant a stay. Despite the fact that it is not possible to approach this issue by asking whether the applicant for review has an arguable case, the merits of the proposed review and the current position and solvency of the debtor are necessarily linked and relevant in determining whether a stay should be granted. Associated with a consideration of the debtor’s position is the nature and extent of disclosure of assets and liabilities and any prospects that there may be dealings with assets.
A primary basis on which the stay is sought is to enable the Ferellas to raise funds to pay the petitioning creditor the debt on which the petitions were based. Emmett J observed in Day, in the matter of Gould v Gould [2000] FCA 1377 at [7]:
“That does not appear to me to be a proper basis upon which to found a stay under section 52(3). It is certainly not a proper basis to found a stay under Order 52 rule 17 [Federal Court Rules in relation to a pending appeal].”
Similar concerns are raised in this context. In any event the evidence upon which the application is based is “confused and not convincing” (ibid).
Angelo and Gustavo Ferella are the registered proprietors as joint tenants of a property at Kings Park – which is said by Angelo Ferella to be worth $2.2 million and to earn $170,000 nett per annum. The Ferellas are also the registered proprietors as joint tenants of a block of land at Point Piper – purchased for $4,050,000 in 2000 and subject to a mortgage of $4,300,000. A June 2004 valuation values this property at $8,500,000. However, since that time there have been proceedings in relation to a restrictive covenant on the land which are discussed below.
In his affidavit of 1 November 2005 Angelo Ferella stated that he and his father and his mother were beneficiaries of a trust (a Deed of Trust for the Ferella Unit Trust was annexed) which was the owner of the two properties and that he intended to refinance the present loan on the Point Piper property to complete the development and pay debts to the creditor and Woollahra Council. Insofar as the application for a stay rests on the debtor’s solvency there are a number of relevant matters. The certificate of title for the Point Piper property shows a mortgage to Key Nominees Pty Ltd. Mr Ferella stated in his affidavit that it was encumbered by a mortgage to Eclipse Prudent Mortgages in the sum of 4.3 million dollars and it seems that these are associated bodies (see the letter from Bray, Jackson & Co. dated 27 June 2005 being annexure B to the affidavit of Angelo Ferella sworn on 25 October 2005). However Mr Ferella denied in cross-examination that, as stated in correspondence annexed to the affidavit of Mr Pozniak of 28 October 2005, from Bray, Jackson & Co., the solicitors for Key Nominees Pty Ltd to the Official Trustee in Bankruptcy, Mr Angelo Ferella and Mr Gustavo Ferella (described as ‘the bankrupts’) were in default pursuant to the terms of the mortgage having failed to repay the principal sum of $4,300,000 due under the mortgage, that they had been served with a s.57(2)(b) notice on 7 October 2005, and that Key Nominees was taking steps to secure possession of the property. This raises issues about both solvency and refinancing.
Angelo Ferella has, since July 2005, made a number of claims about his own ability (and that of his father) to obtain finance. None of these proposals eventuated prior to the sequestration order.
In proceedings between the parties in the Supreme Court in July 2005 Mr Ferella told that Court that he had received an offer of finance from Eclipse Mortgage (apparently a loan of $1,540,000 to be secured over the Kings Park property) part of which he intended to use to repay some of the debt owed to the Otvosis. He claimed that the balance was to be borrowed from his parents. He subsequently produced signed loan acceptance forms signed by himself and his father and told the Court that he had had a discussion with the principal of Eclipse Mortgages who had advised him that he could use the funds for any purpose at all. This was relevant because of his evidence to that Court that, while the money was being borrowed as construction funding, he had not previously told the financier anything to the effect that he proposed to use part of that money to pay off a debt. Despite submissions to the Supreme Court suggesting that the loan would proceed this did not occur. It is also relevant to consider other claims and evidence about the debtor’s financial position and later finance proposals.
According to the affidavit of Angelo Ferella sworn on 17 October 2005, on the date fixed for the hearing of the creditors’ petitions

(14 October 2005) he had sought adjournments on the basis that he had filed an application in the Supreme Court to pay the creditors’ costs of $74,656 by instalments. Annexure A to the affidavit of Mr Pozniak sworn on 17 October 2005 is a copy of Mr Ferella’s notice of motion filed 30 September 2005 in the Supreme Court seeking that the costs be paid by instalments of $3,110 per month commencing 5 November 2005. In the financial statement forming part of the affidavit of Angelo Ferella filed in connection with this notice of motion he reveals no income or assets. All questions about income and assets are marked “N/A”. He stated that he was supported by his parent and listed no expenses or liabilities other than a credit card debt of $1,000. There is no evidence before this Court as to Gustavo Ferella’s income, assets, expenses or liabilities (except in relation to the real property as discussed below).
Mr Angelo Ferella is the sole shareholder in Riva Industries Pty Ltd. In his affidavit of 14 October 2005 filed in the Supreme Court proceedings (annexed to his affidavit of 17 October 2005), he claimed that the instalments he had offered to pay towards the debt due to the creditors were to come from income generated by this entity. However it appears from a company extract search of Riva Industries Pty Ltd annexed to the affidavit of Mr Pozniak of 28 October 2005, that there is a current petitioner court action against the company by United Concrete Pty Ltd. Reference is made to an application to wind up the company under ss.459P, 462 or 464 that was effective on 9 August 2005.
Further, as disclosed in the affidavit of Mr Pozniak and as confirmed in cross-examination of Mr Ferella, the company Ferell Industries Pty Ltd was placed into liquidation as a result of action by the Deputy Commissioner of Taxation on 17 December 2004.
In his affidavit of 25 October 2005, Mr Ferella stated that he had received finance approval from Eclipse on 24 June 2005. He stated that he and his father had agreed to the terms of the offer from Eclipse (an advance of $1,540,000 secured on the Kings Park property for ‘investment purposes’ and subject to valuation) and that he had accepted the offer of finance (although he had not provided copies of the documents from Eclipse to this Court at the hearing of the creditors’ petitions as he believed he would be granted an adjournment.)
Mr Ferella repeated in his affidavit of 25 October 2005 that he and his father could use the funds to be provided by Eclipse for any purpose. Mr Ferella also stated that on 23 September 2005 he received finance approval in respect of another loan, of $5,000,000 to be secured by a mortgage on the Point Piper property, from CKM (Mortgages) Limited subject to a valuation of the property.

However in his affidavit of 1 November 2005, Angelo Ferella stated that he now intended to refinance the Eclipse loan (on Point Piper) with a mortgage advance of 6.3 million dollars from Champion Financial Limited. He acknowledged that he owed 4.3 million dollars to Eclipse and claimed that out of the excess he would pay the judgment debt and an outstanding costs order in relation to a judgment in favour of Woollahra Council. He stated that he had not taken up the second advance from Eclipse Prudent Mortgages Limited because the terms and conditions on review were unsatisfactory and the amount offered was insufficient. It is relevant to note that the debt to the present creditors is said to arise from an order for costs following court proceedings in relation to a the Point Piper land. On 23 September 2005 Hamilton J gave judgment in further proceedings between the debtors and creditors in relation to a restrictive covenant to which the land is subject. His Honour found that the Otvosis were entitled to an injunction restraining the construction of the development proposed by the Ferellas on the Point Piper land. It appears that the effect of the restrictive covenant will be to limit any development on the land to two storeys and that a fresh development approval from the local council will be required. However in cross-examination Mr Ferella told the Court that he had not disclosed to Champion Financial the terms of the Supreme Court judgment in September 2005. These circumstances cast some doubt on the debtors’ claimed willingness and ability to refinance and hence the extent of any detriment to them if the stay is not granted.
In addition to the above history there are confusions and unexplained inconsistencies in relation to the involvement of a Trust in these affairs.
The mortgagors under the existing mortgage to Key Nominees Pty Ltd are Angelo and Gustavo Ferella. The parties named as borrowers and mortgagors in the blank form of mortgage relating to the proposed mortgage of the Kings Park property were Gustavo and Angelo Ferella. The letter from the solicitors for CKM (Mortgages) Ltd referred to a mortgage over the security of the property of Messrs A & G Ferella. However in his affidavit of 1 November 2005 Angelo Ferella stated that he, his father and his mother were beneficiaries under a Trust which was the owner of the two properties. A Deed of Trust for Ferella Unit Trust was annexed. However the conditional loan offer from Champion Financial Ltd stated that the borrower was “Cavallino [sic] Unit Trust” and the guarantors Angelo and Gustavo Ferella. The loan was described as for purposes which are wholly or predominantly business or investment related.
There is no explanation as to the relationship, if any, between the Cavallino Unit Trust and the Ferella Unit Trust. Annexed to Mr Ferella's affidavit of 1 November 2005 is a copy of a recently prepared financial report for the year ended 30 June 2005 for Cavallino Unit Trust which includes an item for land and building in progress in the sum of $5,430,569. However the deed of trust annexed to his affidavit is in the name of Ferella Unit Trust. The two Mr Ferellas are the trustees under that deed of trust. The beneficial interest in A class units in the trust (which give an entitlement to income) are said to belong to the two Mr Ferellas and also to Nida Ferella. The holder of B class units, and as such entitled to the capital of the trust fund, is the Ferell Staff Superannuation Fund. Mr Ferella was unable to tell the Court the name of the trustee of this superannuation fund. There are no details of this Fund before the Court.
There are thus a number of unanswered issues raised by the material before the Court in relation to the financial position of Angelo and Gustavo Ferella and their associated entities, such as issues of the beneficial ownership of the Kings Park and Point Piper property and the identification of the unit trust and of those entitled as beneficiaries under that trust and their rights. Counsel for the Otvosis raised the issue of whether, in light of the nature of the income and capital units under the unit trust, it was in fact an appropriate power of the trustees to, in effect, lend to themselves for purposes other than the trust (assuming that the trust does in fact own the real estate). There have been a number of proposals for refinancing which have not proceeded. There has been a failure to explain the situation in relation to the default under the present mortgage of the Point Piper property. While there is a conditional loan approval it is clear that there has not at this time been a full disclosure to the proposed lender of the restrictions which now apply to building on the land which would provide the security for any mortgage.
It is also relevant that at this stage there is no satisfactory evidence as to the totality of the financial circumstances of either of the debtors. The information in the notice of motion seeking to pay the debt by instalments does not advance the case for a stay. It is also relevant that neither of the debtors has filed a statement of affairs as should have been done. While there was some discussion of the possibility of an appeal from the judgment of Hamilton J of 23 September 2005 no such an appeal was instituted prior to the making of the sequestration orders.
Further, Angelo Ferella did not disclose all of his creditors (and those of his father) in his affidavit of 1 November 2005. Mr Ferella stated that apart from the Eclipse loan the beneficiaries under the trust had liabilities of the debt of $74,656 to the creditors in these proceedings, and a debt of $9,764.79 in favour of Woollahra Council. There is, however, evidence before the Court of a bankruptcy notice issued by Gadens Lawyers Sydney against both Mr Ferellas which is the subject of proceedings in the Federal Magistrates Court based on a judgment for the sum of $38,124.24 obtained on 9 June 2005. Mr Ferella conceded in cross-examination that he was aware of the claim, which he described as an ‘alleged claim’ that was related to the company called Ferell Industries which is in liquidation. Counsel for the Ferellas suggestion that he bore some responsibility for the omission of reference to this debt in the most recent affidavit of Mr Ferella because the served copy of the affidavit of Mr Pozniak sworn on 28 October 2005 omitted this bankruptcy notice from the annexures. However this does not overcome the fact that Angelo Ferella was aware of this liability but made no reference to it in his affidavit.
Despite the fact that there are a number of difficulties with the evidence presently before the Court in relation to the Ferellas’ financial position, that is not to say that when the matter comes before the Court for hearing of the creditors’ petitions it is not possible that they may each satisfy the Court that they are able to pay their debts within s.52(2)(a). However, on the evidence before the Court, there are a number of concerns relevant to the exercise of the Court's discretion to grant a stay related to the solvency of each Mr Ferella given the limited disclosure there has been at this time.
In these circumstances the evidence about the merits of the proposed review and the current and future position and solvency of both Angelo and Gustavo Ferella are not factors which support the grant of a stay.
In addition to these issues in relation to the situation of each of the bankrupts, Mr Johnson for the petitioning creditors raised the possibility of a detriment or risk of detriment to creditors. He suggested that there was a concern that steps may be taken to deal with property. This concern was said to be reinforced by the conditional nature of the refinancing proposal, the absence of evidence from the lender that conditions have been satisfied or as to the exact basis upon which the facility was approved and because the fact that the Point Piper property cannot be developed in accordance with its current development approval has not been disclosed to the lender.
Whether or not this assertion is justified, it is clear that there are creditors other than the petitioning creditor, although the full extent of such creditors cannot be determined in the absence of a statement of assets. At least two other creditors (Woollahra Council and Gadens) have been indicated. The interests of all creditors and the public interest in the administration of the Bankruptcy Act 1966 in respect of the estates of persons found to be bankrupt are matters which are relevant to be taken into account. The power to grant a stay in such circumstances should be exercised with appropriate caution so as not to unduly delay the Trustee in Bankruptcy or hinder such person’s capacity to carry out the duties imposed by the Bankruptcy Act 1966.
Putting the evidence for Mr Gustavo Ferella at its highest, all of the considerations which apply to the application for a stay of the sequestration order made in relation to Angelo Ferella on 14 October 2005 (with the exception of those matters which relate to disclosure by Angelo Ferella of particular aspects of his personal financial position) are also relevant in this instance. There is no disclosure of Mr Gustavo Ferella's financial position other than what Angelo Ferella had to say about their joint financial position and the difficulties with that evidence have been discussed. Having regard to all of those matters and in the absence of any evidence from Gustavo Ferella himself, apart from the brief affidavit giving authority for his son to act on his behalf, Mr Ferella has not made a positive case for the stay which he seeks. The application for a stay is refused.

I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate:

Date: 11 November 2005