OWNERS CORPORATION 425446N v Lomax

[2017] FCCA 1186

FEDERAL CIRCUIT COURT OF AUSTRALIA

OWNERS CORPORATION 425446N v LOMAX [2019] FCCA 1186

Catchwords:
BANKRUPTCY – Sequestration order – review of registrar’s decision – hearing de novo – the bankrupt having outstanding proceedings against a person other than the petitioning creditor – proceedings unlikely to be successful – proceedings unlikely to permit the bankrupt to discharge the petitioning creditor’s debt within a reasonable time frame.

Legislation:
Bankruptcy Act 1966 (Cth), s.52
Civil Procedure Act 2010 (Vic), ss.28, 29(1)

Cases cited:
Ling v Enrobook Pty Ltd(1997) 74 FCR 19; (1997) 143 ALR 396

Petitioning Creditor: OWNERS CORPORATION 425446N

Bankrupt: GIULIAN ASHTON LOMAX

File number: MLG 2466 of 2016

Judgment of: Judge Riley

Hearing date: 23 May 2017

Date of last submission: 23 May 2017

Delivered at: Melbourne

Delivered on: 23 May 2017

REPRESENTATION

Counsel for the petitioning creditor: Bridget Slocum

Solicitors for the petitioning creditor: M & K Lawyers Group Pty Ltd

Advocate for the bankrupt: In person

Solicitors for the bankrupt: None

ORDERS

1. The orders made by a registrar on 18 April 2017 be affirmed.

2. The petitioning creditor’s costs of today be paid from the estate of the bankrupt.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT MELBOURNE

MLG 2466 of 2016

OWNERS CORPORATION 425446N

Petitioning Creditor

And

GIULIAN ASHTON LOMAX

Bankrupt

REASONS FOR JUDGMENT

(revised from the transcript)

Introduction

1. There is before the court an application to review a decision of a registrar.  The registrar made an order on 18 April 2017 providing for the sequestration of the estate of the bankrupt.  The bankrupt initially sought a stay of the sequestration order.  However, that application was dismissed at a hearing on 28 April 2017 for reasons given at the time.

2. The petitioning creditor has filed affidavits proving the matters stated in the creditor’s petition and proving service of the creditor’s petition, and has also filed an affidavit of search and an affidavit of debt.

3. The creditor’s petition in this case was presented on 11 November 2016.  It alleges failure to comply with a bankruptcy notice.

4. There is before the court an affidavit of service of the bankruptcy notice.  No issue is taken with it.  There is also no issue taken with the claim that the bankrupt did not comply with the bankruptcy notice.  The bankruptcy notice itself is based on a judgment which was registered in the Magistrates’ Court of Victoria but was originally an order of the Victorian Civil and Administrative Tribunal.  It required the bankrupt to pay $11,500 to the petitioning creditor, which is an owners’ corporation.

5. The bankrupt does not challenge the debt.  He accepts that the debt to the petitioning creditor has not been paid.  Indeed, he accepts that the debt to the petitioning creditor has increased to about $70,000 since the order was made.

6. The applicant initially asked for an adjournment.  However, he then orally sought to change the orders that he was seeking to ask that:

   a)the sequestration order be set aside; and

   b)he be required to pay the debt to the petitioning creditor within 21 days of the resolution of a proceeding in the County Court of Victoria where he is the defendant to a claim made by the National Australia Bank (“NAB”).

7. The bankrupt’s basic financial position is that he is the registered proprietor of Unit 3 at 508 Rae Street, Fitzroy North, which he estimates as being worth $1.475 million.  The petitioning creditor accepts that valuation. 

8. That property is subject to a mortgage to the NAB of $1.012 million.  That leaves an equity in the property of about $460,000.  As I have mentioned, the debt to the petitioning creditor now stands at about $70,000.  The bankrupt also says that he has other unsecured creditors to whom he owes about $40,000.  That leaves him with an excess of assets over liabilities of about $350,000.

9. In terms of income, the bankrupt says that he is presently unemployed, though he has worked as an architect in the past.  He says he is in receipt of the aged pension which, depending on his partner’s income, works out to about $250 to $500 per fortnight.

10. When asked how soon he could pay off the debt of $70,000 to the petitioning creditor, the bankrupt said that he could pay it when his County Court proceedings with the NAB are resolved.

11. The bankrupt conceded that he had not made loan repayments on the NAB mortgage for four and a half years.  He says that the NAB has brought proceedings against him in the County Court for recovery of the property to enable it to discharge the mortgage.  He has filed a defence and counterclaim in which he says that the NAB has breached implied terms of the mortgage facility by not lending him 80 per cent of the loan-to-value ratio and only lending him 70 per cent of the loan-to-value ratio.

12. The bankrupt says that, because the NAB breached its implied terms to lend him 80 per cent of the loan-to-value ratio, his architectural practice became unviable, the business had to close and therefore he defaulted on the NAB mortgage.

13. In the counterclaim, the bankrupt seeks orders that the interest charged by the NAB be reversed, with the result that his debt will be reduced from over $1 million to $770,000.  He also seeks damages for loss of earnings amounting to between $3 million and $5 million over four years.  He says that loss of earnings was what he could have earned as an architect if the NAB had not breached its implied terms and forced his business into closure.

14. The bankrupt conceded that previously he had earned between $100,000 and $150,000 per annum as an architect.  However, he said that he could have earned $1 million per annum as an architect if the NAB had given him the 80 per cent loan-to-value ratio and he had been able to proceed with his business plan, even though he had never earned a million dollars a year in the past.

15. The matter in the County Court is listed for trial on 9 October 2017.  However, the bankrupt has filed an application for summary judgment.  He says that he filed it on 1 May 2017.  At that time the bankrupt was bankrupt.  It is unclear how he could have filed that document.  In any event, it seems that he has and it seems that it may be listed for hearing on 19 June 2017.  At the same time, the NAB has a summary application for possession.  That is also expected to be heard on 19 June 2017.

16. The question for this court is whether the sequestration order can properly be set aside in these circumstances.  There is authority that, in circumstances such as this, it is not appropriate to delay a bankruptcy.  In Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 26; (1997) 143 ALR 396, the Full Court of the Federal Court reviewed the authorities and then said:

    The above authorities do not, in our view, support the appellant’s contention that the courts recognise a public interest in allowing a debtor to prosecute litigation commenced by the debtor. The public interest recognised by such authorities is that which, in broad terms, is reflected also in s 40(1)(g) of the Act; that is, that a sequestration order ought only to be made on the basis of an indebtedness which is not counterbalanced by a claim by the debtor against the petitioning creditor. Such authorities provide no comfort to a debtor who asserts a claim, not against his or her creditor, but against a third party.

    The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts may well provide a basis for a finding that there is a “sufficient cause” for a sequestration order not to be made (see, for example, Maddestra v Penfolds Wines Pty Ltd). But the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally. They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of only short duration.

17. Ling v Enrobook is apposite to the present case because what the bankrupt wishes to do is delay the sequestration of his estate due to his claim not against the petitioning creditor but against a third party.  What the Full Court of the Federal Court has made clear is that the question in such cases is the usual question of whether the bankrupt is able to pay his debts in a reasonable time frame. 

18. The court can also look at the prospects of success of the County Court proceedings that are being used as a reason for not sequestrating the estate.  Although the hearing on 19 June 2017 is less than a month away, it seems to me that there is very little prospect of the bankrupt succeeding in his summary judgment claim on that day.  It seems to me that his prospects of being able to establish that the NAB breached an implied term to lend him 80 per cent of the loan-to-value ratio when it was only willing to lend him 70 per cent of the loan-to-value ratio is remote.

19. It also seems to me to be very unlikely that the bankrupt will be able to achieve the reversal of interest that he seeks.  Even if he did, he would still have a large debt outstanding to the NAB.  He does not appear to be in any position to repay the NAB.  There is a strong likelihood, in my view, that the NAB will be able to recover possession of the Rae Street property.

20. The prospect of the bankrupt being able to obtain an order for damages for loss of earnings of about $1 million per annum strikes me as being extremely unlikely.  The bankrupt was not able to say to this court that, at any point in the past, he has had earnings of that level.  It seems to me to be fanciful that the court would make an order for damages of that nature at the summary judgment hearing listed on 19 June 2017 or at the final hearing scheduled for 9 October 2017.

21. One might regard the prospect of payment after four or five months to be sufficient to delay a sequestration order.  However, there is no certainty that, if the matter did proceed to trial on 9 October 2017, that judgment would be given at the same time.  It is possible that judgment would be delivered some months later.  In any event, it does not seem to me that there are sufficient prospects of success, either in the bankrupt’s summary judgment application or in his substantive application, to delay the sequestration order.

22. In addition, the bankrupt has raised an issue about ss.28 and 29 of the Civil Procedure Act2010 (Vic). He claimed that the NAB has breached its overarching obligations in the conduct of the County Court proceeding. Section 28 provides that:

    (1)In exercising any power in relation to a civil proceeding, a court may take into account any contravention of the overarching obligations.

    (2)Without limiting subsection (1), in exercising its discretion as to costs, a court may take into account any contravention of the overarching obligations.

23. I do not see how that could assist the applicant. He is not represented. It is unlikely that he would get any significant costs order at all under s.28, no matter what the NAB has done.

24. Section 29 of the Civil Procedure Act 2010 provides that:

    (1)If a court is satisfied that, on the balance of probabilities, a person has contravened any overarching obligation, the court may make any order it considers appropriate in the interests of justice including, but not limited to—

    …

    (c)an order that the person compensate any person for any financial loss or other loss which was materially contributed to by the contravention of the overarching obligation, including—

    (i)      an order for penalty interest in accordance with the penalty interest rate in respect of any delay in the payment of an amount claimed in the civil proceeding; or

    (ii)    an order for no interest or reduced interest;

    …

25. That provision relates to the conduct of the litigation. It does not relate to an entirely separate obligation to pay interest on a mortgage. It seems to me that, even if the NAB has, in some way, contravened its overarching obligations, s.29 is not going to assist the bankrupt in any significant way.

26. All in all, I am not satisfied that the bankrupt has a reasonable prospect of discharging his debt to the petitioning creditor or to his other unsecured creditors within a reasonable timeframe.

27. Consequently, I consider that the bankrupt is, in fact, insolvent. In terms of s.52 of the Bankruptcy Act 1966, I do not consider that there is any sufficient cause to not affirm the decision of the registrar to make a sequestration order.

I certify that the preceding twenty-seven (27) paragraphs are a true copy of the reasons for judgment of Judge Riley.

Date:         1 June 2017