Parker v Hammer

[2014] FCCA 2710

FEDERAL CIRCUIT COURT OF AUSTRALIA

PARKER v HAMMER & ANOR [2014] FCCA 2710

Catchwords:
BANKRUPTCY – Creditor’s petition – solvency – counterclaim.

Legislation:
Bankruptcy Act 1966, ss.52(2), 52(2)(b)

Cases cited:
Australia & New Zealand Banking Group Ltd v Foyster [2000] FCA 400
Sandell v Porter (1966) 115 CLR 666; (1966) 40 ALJR 71
Southern Cross Interiors Pty Ltd (in liq) and Another v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; (2001) 188 ALR 114; (2001) 164 FLR 430; (2001) 39 ACSR 305; (2001) 19 ACLC 1513; [2001] NSWSC 621

Applicant: HARVEY PARKER

First Respondent: DAVID HAMMER

Second Respondent: EVA KARPATI

File number: MLG 1738 of 2014

Judgment of: Judge Riley

Hearing date: 10 November 2014

Date of last submission: 10 November 2014

Delivered at: Melbourne

Delivered on: 24 November 2014

REPRESENTATION

Counsel for the Applicant: Jonathan Evans

Solicitors for the Applicant: Doherty & Colleagues Solicitors

Counsel for the Respondents: D F McAloon

Solicitors for the Respondents: Tisher Liner FC Law

ORDERS

1. A sequestration order be made against the estate of David Hammer.

2. A sequestration order be made against the estate of Eva Karpati.

3. The applicant creditor’s costs be taxed and paid from the estates of the respondent debtors in accordance with the Bankruptcy Act 1966.

4. Pursuant to s.52(3) of the Bankruptcy Act 1966, all proceedings under the sequestration order made on 24 November 2014 be stayed for 21 days.

The court notes that:

(a)the date of David Hammer’s act of bankruptcy is 30 July 2014; and

(b)the date of Eva Karpati’s act of bankruptcy is 21 April 2014.

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT MELBOURNE

MLG 1738 of 2014

HARVEY PARKER

Applicant

And

DAVID HAMMER

First Respondent

EVA KARPATI

Second Respondent

REASONS FOR JUDGMENT

Introduction

1. This is a creditor’s petition.  The basic chronology is as follows:

   a)in about February 2008, the debtors, Mr Hammer and Ms Karpati, who are domestic partners, bought apartment 119/219 in the Iririki Apartments in Vanuatu for $725,000;

   b)the seller was Iririki Island Holdings Ltd, which held the apartment on trust for the petitioning creditor, Mr Parker;

   c)the purchase was subject to the buyers obtaining a first mortgage loan of $420,000 from the Westpac Banking Corporation;

   d)upon the buyers securing that loan, Mr Parker agreed to advance the buyers a second mortgage loan of $255,000 until February 2011 at no interest;

   e)the first and second mortgage loans were arranged;

   f)the purchase settled in about February 2008;

   g)the buyers did not repay Mr Parker the $255,000 in February 2011 or at all;

   h)in June and July 2011, Mr Hammer promised to repay the loan from Mr Parker but did not do so;

   i)

   on 4 June 2013, Mr Parker commenced proceedings in the Supreme Court of Victoria (“the SCVic proceedings”) against

   
   

   Mr Hammer and Ms Karpati;

   j)

   in the SCVic proceedings, Mr Parker was the plaintiff and

   
   

   Mr Hammer and Ms Karpati were the first and second defendants respectively;

   k)Iririki Island Holdings Ltd was not a party to the SCVic proceedings;

   l)Mr Parker sued on the second mortgage;

   m)Mr Hammer and Ms Karpati filed a defence to the SCVic proceedings in August 2013;

   n)Mr Parker applied for summary judgment in the SCVic proceedings in October 2013;

   o)

   summary judgment was entered against Mr Hammer and

   
   

   Ms Karpati in the SCVic proceedings for $255,000 on

   
   

   12 February 2014;

   p)

   Mr Parker issued a bankruptcy notice against Mr Hammer and

   
   

   Ms Karpati on 6 March 2014, based on the judgment of $255,000;

   q)

   the bankruptcy notice was personally served on Ms Karpati on

   
   

   31 March 2014;

   r)the bankruptcy notice was deemed to have been served by way of substituted service on Mr Hammer on 9 July 2014;

   s)on 26 July 2014, Mr Hammer and Ms Karpati filed proceedings in the Supreme Court of the Republic of Vanuatu (“the SCVan proceedings”) against Iririki Island Holdings Ltd and Mr Parker;

   t)in the SCVan proceedings, it is alleged that, under clause 12.7 of the agreement to purchase apartment 119/219, the seller was required to:

   i)procure prior to settlement the consent of the body corporate for the subdivision of apartment 119/219 into two separate apartments (being apartment 119 and apartment 219) but failed to do so; and

   ii)provide all reasonable assistance after settlement to obtain all approvals and other documents to subdivide the apartment but failed to do so;

   u)in the SCVan proceedings, Mr Hammer and Ms Karpati sought specific performance of clause 12.7 and damages of $500,000;

   v)on 22 August 2014, judgment for interest in the sum of $133,089.04 was entered for Mr Parker against Mr Hammer and Ms Karpati in the SCVic proceedings;

   w)on 26 August 2014, Mr Parker filed his creditor’s petition against Mr Hammer and Ms Karpati, claiming an unsecured debt of $208,089.04;

   x)that sum was calculated as follows:

   i)$255,000 plus $133,089.04 equals $388,089.04;

   ii)$388,089.04 minus $180,000 (being the estimated value of the petitioning creditor’s security over apartment 119/219) equals $208,089.04.

2. The debtors opposed the creditors’ petition on two grounds, solvency and a counterclaim, being the SCVan proceedings.

Formal matters

1. Mr Parker filed an affidavit verifying the petition, and, on the day of the hearing, an affidavit of search and an affidavit of debt.  No issue was taken with those matters.

Solvency

1. Mr Hammer and Ms Karpati argued that they were solvent. 

2. Subsection 52(2) of the Bankruptcy Act 1966 (“the Act”) provides that the court may dismiss a creditor’s petition, where the matters required to be established by the petitioning creditor have been proved, if the court is satisfied that the debtor is able to pay his or her debts. 

   
   

   The parties noted that, in Sandell v Porter (1966) 115 CLR 666; (1966) 40 ALJR 71, Barwick CJ held that insolvency is “an inability to pay debts as they fall due out of the debtor’s own money”. The Act no longer requires that the debts be payable out of the debtor’s own money.

3. Nevertheless, the parties accepted that the law was as stated in Sandell v Porter at page 670 as follows:

   But the debtor's own moneys are not limited to his cash resources immediately available. They extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time - relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor. The conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilizing such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency.  

4. The parties also accepted as authoritative the following statement from Hely J in Australia & New Zealand Banking Group Ltd v Foyster [2000] FCA 400 at [17] and [19]:

   17.The onus of proving sufficiency of assets lies on the respondent. It is not sufficient for the respondent simply to establish that he has assets which exceed his liabilities in value. It must also be established that the assets are available to be realised and that they are capable of ready realisation. If a debtor is able to pay his or her debts, but is recalcitrant, the creditors may resort to other remedies, such as execution against property and garnishee proceedings, but not to sequestration. Bankruptcy is not a proceeding designed for the recovery of debts: see Re Sarina; Ex Parte Wollondilly Shire Council (1980) 32 ALR 596, 599.

   …

   19.Under s 52(2)(a) the respondent must satisfy the Court that he is "able to pay his ... debts", including liabilities: s 5(1). In my view, the subsection refers to a state of affairs which requires account to be taken of debts which will fall due in the reasonably immediate future pursuant to existing obligations: Bank of Australasia v Hall (1907) 4 CLR 1514, 1527-1528 as well as debts which are presently due and payable. However, whether that is so or not, for the reasons explained by Katz J in International Alpaca Management Pty Ltd account needs to be taken, if not in assessing solvency, then in the exercise of the discretion whether or not to dismiss the petition, of liabilities which will become payable in the reasonably immediate future.

5. The debtors submitted that the financial position of each of them needed to be considered in the light of the other’s, as they were domestic partners who had each said that they would apply their funds to the other’s debts.

6. Mr Hammer claimed that his assets consisted of:

   a)50% of the Iririki apartment;

   b)50% of a lot in the Breakers Beach Resort, Vanuatu;

   c)an interest in Karpati Advanced Technology Group Pty Ltd;

   d)an interest in Demtel International Pty Ltd; and

   e)an interest in Home Test Direct Pty Ltd.

7. Mr Hammer offered his own estimates of the value of his assets.  However, those estimates were struck out on the basis that Mr Hammer was not qualified to offer such opinions.  The debtors also sought to attribute a value to the Iririki apartment based on the fact that they bought it in 2008 for $750,000.  However, there was no evidence before the court that the debtors paid a fair price for the Iririki apartment or that it had retained its value.

8. Mr Hammer conceded that he had liabilities of $376,800.52 consisting of the following:

   a)50% of the secured debt on the Iririki apartment: $150,000;

   b)50% of the secured debt on the Breakers property: $6,000;

   c)50% of the judgment debt to the applicant: $194,044.52;

   d)unpaid accounting fees: $7,756;

   e)a negative bank balance: $12,000; and

   f)unpaid fees of former solicitors: $7,000.

9. Mr Hammer did not explain why his accounting and legal fees were unpaid, when they had fallen due or when he expected to pay them, if at all.  Mr Hammer did not explain the arrangements he had with his bank regarding the repayment of the $12,000.

10. In the absence of any valuation evidence concerning Mr Hammer’s interests in the proprietary companies, there is no reason to suppose that they have any value at all.  He claims, without any proper foundation, that his notional half of the Breakers property is worth $12,500.  That may be true.  It may also be supposed that the Iririki apartment is worth something.  However, in the absence of admissible evidence, it is not possible to conclude that it has any positive equity.

11. Mr Hammer claimed, without challenge, that he received income of $25,000 in the six months prior to 30 October 2014 from Karpati Advanced Technology Pty Ltd.  He did not claim to have received any income from the other two proprietary companies.

12. Consequently, subject to any money that Mr Hammer might be able to obtain from Ms Karpati, it would appear on the evidence before the court that he is not able to pay his debts as they fall due.

13. Ms Karpati claimed that her assets consist of:

    a)a retail and commercial property in Double Bay;

    b)a residential unit in Pyrmont;

    c)50% of the Iririki apartment;

    d)50% of a lot in the Breakers Beach Resort, Vanuatu; and

    e)a 2005 Mercedes Benz.

14. Ms Karpati exhibited to her affidavit a valuation of the Double Bay property that was seven months out of date, and had stamped twice on every page:

    This report is for the Bank’s lending mortgage purposes only and cannot be relied upon for any other purpose.

15. The valuation evidence was struck out on the basis that it was hearsay, the valuer not having sworn an affidavit himself, and on the basis that the evidence was out of date.

16. Ms Karpati also exhibited to her affidavit two market appraisals, apparently by real estate agents, of her unit in Pyrmont.  The appraisals were struck out on the basis that they were hearsay, the real estate agents not having sworn affidavits themselves, and on the basis that there was no evidence that they are qualified valuers.

17. The evidence of the value of the Vanuatu properties was as discussed above.

18. Ms Karpati exhibited an appraisal of her car.  However, it was struck out on the basis that there was no evidence that the appraiser was qualified to give valuation evidence and on the ground of hearsay, the appraiser not having sworn an affidavit himself.

19. Ms Karpati conceded that her liabilities of $3,316,029 consisted of the following:

    a)a mortgage on the Double Bay property of $1,900,000;

    b)a mortgage on the Pyrmont unit of $850,000;

    c)50% of the secured debt on the Iririki apartment: $150,000;

    d)50% of the secured debt on the Breakers property: $6,000;

    e)50% of the judgment debt to the applicant: $194,044.52;

    f)unpaid accounting fees: $10,985;

    g)negative bank balance: $5,000; and

    h)tax: $200,000.

20. Ms Karpati did not explain why her accounting fees were unpaid, when they had fallen due or when she expected to pay them, if at all.

    
    

    Ms Karpati did not explain the arrangements she had with her bank regarding the repayment of the $5,000.

21. In relation to her tax debt, Ms Karpati said that she now operated through a trust a business by the name of Medispa.  However, she said that, until June 2014, she had operated the business as a sole trader.  She said exhibited to her affidavit a notice of assessment for the year ended 30 June 2013.  It indicated that she had a taxable income of $513,625, she had paid pay as you go instalments of $11,639, and she had a tax liability of $201,955.60.  The $201,955.60 was said to be due on 22 April 2014.

22. However, Ms Karpati claimed that she had entered into a payment arrangement with the Australian Taxation Office (“ATO”) pursuant to which she was required to repay $8,000 per month.  Ms Karpati claimed that she was meeting this commitment.  However, she did not provide a copy of a letter from the ATO confirming the arrangement, or indicating when it commenced.  Nor did Ms Karpati provide to the court the information on which the ATO based its decision to allow her to pay her debt over a period of just over two years. Ms Karpati did not provide any bank statements showing that she has made payments pursuant to the arrangement.  See Southern Cross Interiors Pty Ltd (in liq) and Another v Deputy Commissioner of Taxation (2001) 53 NSWLR 213; (2001) 188 ALR 114; (2001) 164 FLR 430; (2001) 39 ACSR 305; (2001) 19 ACLC 1513; [2001] NSWSC 621.

23. As Ms Karpati continued to operate as a sole trader until 30 June 2014, she may soon have a similar tax liability for that financial year.  However, as there was no evidence relating to that question, I disregard the possibility.

24. In any event, as Ms Karpati’s claimed arrangements with the ATO were not challenged, I am prepared to proceed on the basis that her tax liability is confined to $8,000 per month for about two years, or perhaps a longer period if there is substantial interest to be repaid.

25. Ms Karpati claims that she does not receive a regular salary but receives advances from the trust in anticipation of the future profits of the Medispa business.  She said that, since 30 June 2014, she had received enough to meet the mortgage repayments on the Pyrmont property, which are $4,422 per month, plus an additional $25,000. 

    
    

    Ms Karpati also said that the mortgage repayments on the Double Bay property, which are $9,424 per month, are met entirely out of the rental receipts from part of the Double Bay property.

26. It is difficult to see how Ms Karpati could be repaying $8,000 per month to the ATO when she has only received income of $25,000 in the four and a half months since 30 June 2014.  I can only assume that the payment arrangement started very recently.

27. Presumably, Ms Karpati’s Double Bay and Pyrmont properties are worth something.   Ms Karpati claimed that she had sufficient equity in them to be able to borrow an additional $380,000 to $400,000.  Indeed, Ms Karpati exhibited to her affidavit two letters from mortgage brokers purporting to verify that claim.  However, they were struck out as the mortgage brokers themselves did not provide affidavits, the opinions they purported to express were conditional on various things and because the letters did not constitute firm offers.

28. The debtors maintain that they are able to pay the debt the subject of the creditor’s petition.  However, they go on to say that they would “prefer” not to until after their counterclaim is determined.

29. However, in the circumstances, including that the value of the debtors’ assets are unknown and that the incomes of both of them are patently too small to repay their existing debts in the foreseeable future, I am not persuaded that the debtors are able to repay their debts within a reasonable time.

Counterclaim

1. The debtors claim that they have a counterclaim against Mr Parker and that this constitutes an “other sufficient cause” under 52(2)(b) of the Act to refuse the creditor’s petition.

2. The counterclaim is said to be based on the contract that the debtors entered into in about January 2008 to purchase the Iririki apartment from Iririki Island Holdings Ltd.  Particular reliance is placed on clause 12.7 of that contract, which provides that:

   At or before Settlement Date the Seller will procure and provide (in the proper form, if any) the written consent or approval of the Body Corporate giving consent or approval to the Buyer to further subdivide the Lot and after the Settlement Date the Seller further agrees to provide all reasonable assistance to the Buyer to obtain all consents, approvals and/or other documents reasonably required by the Buyer to further subdivide the Lot.

3. The debtors maintain that the seller was Mr Parker and he did not procure the approval for subdivision prior to settlement or assist them after settlement to obtain approvals for the subdivision.

4. The buyer was defined in the contract to be David Hammer and

   
   

   Eva Karparty, who may be assumed to be Eva Karpati.  The seller was defined to be Iririki Island Holdings Ltd.  However, on the copy of the contract provided to the court, there is written in handwriting, but not initialled, after the company’s name, “(Harvey Parker)”.  The contract appears to have been signed on behalf of the seller “by its authorised signatory”, who is identified as “Astrolabe Limited, Director”. 

5. Harvey Parker is not identified as having signed the contract in any capacity whatsoever.   However, he is mentioned in clauses 12.2 and 12.5 in the following terms:

   12.2Upon approval of the First Mortgage loan, Harvey Parker agrees to advance by way of Second Mortgage, the sum of AU$255,000, for a period of three years, at no interest to the Buyer from the Settlement Date.

   …

   12.5Harvey Parker will be responsible for the payment of all fees and duties payable for the registration of the Second Mortgage referred to in clause 12.2.

6. As Mr Parker did not sign the contract, it is difficult to see how any obligations in the contract could be enforceable against him.

7. I do not accept that Mr Parker was the seller under the contract.

   
   

   His name appearing in handwriting next to the typed name of a company is not sufficient to make him the seller.   There was material suggesting that Iririki Island Holdings Ltd had held the property on trust for Mr Parker.  However, again, that is not enough to make him the seller under the contract.  Consequently, I do not accept that the debtors have a counterclaim against the petitioning creditor.

8. The debtors did not include the value of the counterclaim in their assets.  However, I will consider that claim further in case it might be thought that the counterclaim is of significant value.

1. In the SCVan proceedings, the debtors claim specific performance and $500,000 in damages.  There is nothing in the claim itself or in the material before the court that substantiates in any way that the debtors might be entitled to $500,000, or any lesser sum, from Iririki Island Holdings Ltd.  It appears to be a figure plucked out of the air.  Nor is there any material to suggest that Iririki Island Holdings Ltd has the ability to pay $500,000 or any lesser sum.  Even if the claim were good, it might in reality be worthless.

2. Mr Parker also argued that the claim was probably statute barred, as the claim arose more than six years ago.  There are two problems with that argument.  One is that there was no evidence before the court about the limitation of actions statute in Vanuatu.  The other is that clause 12.7 imposed an ongoing obligation to assist.  Arguably, the six years, if that is the applicable limit, has not started running.

3. Mr Parker also argued that the obligations under clause 12.7 had been waived by the buyers proceeding with settlement in about February 2008.  The flaw in that argument is that clause 12.7 also imposed ongoing, post-settlement obligations.

4. Mr Parker also claimed that the debtors would be estopped from pursuing him in the SCVan proceedings because clause 12.7 was expressly raised in the SCVic proceedings.  However, Mr Parker more or less conceded that the specific performance claim could not have been brought in the SCVic proceedings as it would require actions to be taken in Vanuatu.  Even so, the specific performance claim, if successful, could not be expected to yield any money for a very long time, after the subdivision of the apartment and its eventual sale.

5. The more fundamental problem is that the debtors were required to mitigate their loss.  They should have taken whatever steps were necessary themselves to obtain the approval and other documents necessary for the subdivision.   There was no evidence that Iririki Island Holdings Ltd could have done something to secure the approval and other documents necessary for the subdivision that the buyers could not have done themselves.

6. In all the circumstances, I am not persuaded that the debtors have any counterclaim at all against Mr Parker.  Nor am I persuaded that they have more than a very small claim against Iririki Island Holdings Ltd.

   
   

   I do not accept that any such claim would be sufficient to make them solvent, even if the proceeds of the action could be recovered in the near future.

7. I should also add that the chronology of this matter raises considerable doubt about the genuineness of the claim.  If it were genuine, one would have expected it to have been raised years ago, and not when bankruptcy proceedings were underway.

Adjournment

1. The debtors said that, at the very least, the creditor’s petition should be adjourned until after the SCVan proceedings were determined. 

   
   

   Mr Hammer said in his first affidavit, sworn on 29 September 2014, that that he was informed by his solicitors that the trial in the SCVan proceedings was likely to be in two or three months, that is, at the end of November or December 2014.  That statement is clearly hearsay. 

   
   

   It was not verified by a copy of a document from the court showing the hearing date. 

2. Mr Hammer swore a second affidavit on 30 October 2014, which appears to have overtaken the information in his first.  He said in his second affidavit that he was informed by his lawyers and verily believed that:

   a)

   a first conference in the Vanuatu proceedings was held on

   
   

   9 October 2014;

   b)a second conference was scheduled in December 2014;

   c)he and Ms Karpati were required to pay security for costs of $17,500 by 20 November 2014; and

   d)they intended to do so.

3. In view of the second conference being scheduled in December 2014, it seems unlikely that there will be a trial in December 2014. 

   
   

   Mr Hammer gave no clue as to the source of the funds from which he and Ms Karpati would pay the $17,500.

4. In any event, in my view, for the reasons expressed above, the debtors do not have a counterclaim against the petitioning creditor.  They might have an insubstantial claim against Iririki Island Holdings Ltd.  However, even if successful, it is unlikely that they will recover sufficient money in the near future to affect their solvency.  In these circumstances, I do not consider that it is appropriate to adjourn the creditor’s petition pending the outcome of the SCVan proceedings.

Conclusion

1. As none of the debtors’ arguments has been made out, there will be sequestration orders against both of them.

I certify that the preceding fifty-two (52) paragraphs are a true copy of the reasons for judgment of Judge Riley

Associate: 

Date:  24 November 2014