Perpetual Trustee Company Limited v Baker
[2011] FMCA 264
•15 April 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| PERPETUAL TRUSTEE COMPANY LIMITED v BAKER | [2011] FMCA 264 |
| BANKRUPTCY – Creditor’s petition – whether for other sufficient cause a sequestration order ought not to be made – where cross-claims against the creditor alleged – whether surplus funds would have been available or required to be put towards the judgment debt on which the Bankruptcy Notice was based had conduct the basis of the asserted cross-claims not occurred – whether appropriate to adjourn the hearing to enable debtor to pursue cross-claims. |
| Bankruptcy Act 1966 (Cth), ss.40, 41 Corporations Act 2001 (Cth), s.420A Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), rr.4.04, 4.05, 4.06 Federal Magistrates Court Rules 2001 (Cth), r.15.07 |
| Cain v Whyte (1933) 48 CLR 639; [1932] HCA 6 Commonwealth Bank of Australia v Paola (2005) 3 ABC(NS) 703; [2005] FCA 855 Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346; [1960] HCA 50 Fortson Pty Ltd v Commonwealth Bank of Australia and Another (2008) 100 SASR 162; [2008] SASC 49 GE Capital Australia v Davis and Others (2002) 180 FLR 250; [2002] NSWSC 1146 In the matter of Douglas Dragan Jovanovic; Slavko Govedarica & Anor v Douglas Dragan Jovanovic [1998] FCA 463 Ling v Enrobook Pty Ltd (1997) 74 FCR 19; [1997] FCA 226 Perpetual Trustee Company Limited v Triprush Pty Limited [2010] NSWSC 861 Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers; Re Tresidder; Tresidder v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331; [2003] FCA 373 Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314; [1998] FCA 503 Rigg v Baker (2006) 155 FCR 531; [2006] FCAFC 179 Rotstein v Slaveski (2010) 8 ABC(NS) 200; [2010] FCA 493 St George Bank Ltd v Helfenbaum [1999] FCA 1337 Totev v Sfar and Another (2006) 230 ALR 236; [2006] FCA 470 Totev v Sfar and Another (2008) 167 FCR 193; [2008] FCAFC 35 Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646; [2004] NSWSC 114 Westpac Banking Corporation v Tsatsoulis [2003] FCA 406 Williamson v Scarano [2010] NSWSC 975 Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572; [1995] FCA 1359 | ||
| Applicant: | PERPETUAL TRUSTEE COMPANY LIMITED (ACN 000 001 007) | |
| Respondent: | GARY JAMES BAKER |
| File Number: | SYG 2443 of 2010 |
| Judgment of: | Barnes FM |
| Hearing dates: | 25 February 2011 and 2 March 2011 |
| Delivered at: | Sydney |
| Delivered on: | 15 April 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr V Bedrossian |
| Solicitors for the Applicant: | Norton Rose Australia |
| Counsel for the Respondent: | Mr D Neggo |
| Solicitors for the Respondent: | Spinks Eagle Lawyers |
ORDERS
A sequestration order be made against the estate of Gary James Baker.
The applicant creditor’s costs (including any reserved costs) be taxed in accordance with the Federal Court Rules and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
A copy of these orders be given to the Official Receiver in Sydney within two (2) days by the applicant creditor.
THE COURT NOTES THAT:
The date of the act of bankruptcy is 1 November 2010.
A consent to act as trustee has been signed by Mark Julian Robinson and has been lodged with the Official Receiver in Sydney.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2443 of 2010
| PERPETUAL TRUSTEE COMPANY LIMITED (ACN 000 001 007) |
Applicant
And
| GARY JAMES BAKER |
Respondent
REASONS FOR JUDGMENT
These proceedings
On 10 November 2010 the applicant creditor, Perpetual Trustee Company Limited (Perpetual), filed and presented a creditor’s petition seeking that a sequestration order be made against the estate of the respondent debtor, Gary James Baker (Mr Baker). The creditor’s petition recites that the debtor owes the creditor the amount of $788,351.37 in accordance with a judgment of the Supreme Court of New South Wales entered on 5 August 2010. It relies on an act of bankruptcy said to consist of a failure by the debtor to comply on or before 1 November 2010 with the requirements of a Bankruptcy Notice served on him on 8 October 2010 or to satisfy the court that he had a counter-claim, set-off or cross demand equal to or more than the sum claimed in the Bankruptcy Notice that he could not have set up in the action in which the judgment referred to in the Bankruptcy Notice was obtained.
The Bankruptcy Notice to which the creditor’s petition refers (NN4139 of 2010) has annexed to it a copy of a judgment/order of the Supreme Court of New South Wales in proceedings 2009/00297366 between Perpetual and Mr Baker (as fourth defendant) made and entered on 5 August 2010 which states relevantly that “Judgment is entered that the fourth defendant [Mr Baker] is to pay to the plaintiff [Perpetual] the sum of $788,351.37”.
Mr Baker relies on a notice stating grounds of opposition to the petition filed on 17 January 2011. It contains two grounds which are as follows:
1. The respondent has a Cross claim against the Applicant by reason of the conduct of the Applicant in selling property located at 1/6 Notts Avenue Bondi Beach NSW.
Particulars
The Applicant is Mortgagee in possession of a property owned by Montpensier Pty Ltd and located at 1/6 Notts Avenue Bondi Beach. On or around 2 May 2008 the property was valued by Landmark White (NSW) Pty Ltd as having a then market value of $5,750,000.00. The Applicant did represent to me that the property had a value of $4,500,000.00. The Applicant then did lend to the Montpensier Pty Ltd the sum of $4,000,000.00 to enable Montpensier Pty Ltd to purchase the said property. The Applicant is suing the Respondent on a guarantee in respect to the said loan to Montpensier. On 16 November 2010 the Applicant did, by its agent, cause that property to be sold in its capacity as mortgagee in possession. The sale was for an amount of $1,500,000.00. The Respondent says that the Applicant has breached its duty in the mortgagee sale process. The Respondent says that the property was marketed for a period of 16 days and that this was too short a time to market a property of this value. The Respondent says that the property has been sacrificed for a quick sale. The Respondent says that he has suffered loss and damage by reason of the sale process and by reason of him being induced into giving the guarantee. As a guarantor he has an action in equity against the mortgagee sacrificing the property when selling as a mortgagee in possession.
The Respondent owns all the paid up share capital in Montpensier Pty Ltd. In selling the property the Applicant has caused loss and damage to Montpensier and to him as a shareholder in Montpensier.
The Respondent also says that the Applicant is suing the Respondent in respect to a guarantee the Respondent gave the applicant in respect to the Loan. The Respondent is disputing this claim, however, The respondent says that as a guarantor if he is found liable under the guarantee he would be entitled to be subrogated to the rights of Montpensier in respect to the sale process of the subject property vis a vis the Applicant.
The Respondent also says that the Applicant made misleading statements to the Respondent which caused the respondent to cause Montpensier to proceed with the purchase of the subject property. The decision to cause Montpensier to proceed with the purchase of the subject property has caused loss and damage to the respondent in that the value of his shareholding in the company has been reduced to Nil and he may become liable under the guarantee.
Having regard the recent fact of the sale the Respondent is still obtaining further information regarding the sale process.
2. The Respondent has a cross claim against the Applicant. The Cross claim arises by reason of misleading conduct engaged in by Challenger and the Applicant in respect to a property located at 3/15 Bennelong Crescent Bellevue Hill. At present the Respondent is only seeking damages from Challenger Managed Investments Limited (and valuer) in respect to the Cross claim filed in proceedings 2009 / 00295132. The Respondents intends to Amend that Cross claim to include the Applicant on the grounds that Challenger was at all times acting as agent for and on behalf of the Applicant. The property at 3/15 Bennelong Crescent has now sold for $3,000,000.00 and the respondent claims damages of $1,250,000.00 plus interest and costs.
In relation to the formal requirements of s.52(1) of the Bankruptcy Act 1966 (Cth) (the Act) the applicant relied on an affidavit of Michael John Vella sworn on 9 November 2010 verifying the creditor’s petition; an affidavit of John Alan Holmes sworn on 10 November 2010 (in compliance with r.4.04(1)(a) of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth)); an affidavit of service sworn by Kristina Cook on 14 October 2010 (in compliance with r.4.04(1)(b)); an affidavit of service sworn by Andrew Ng Saad on 26 November 2010 (in compliance with r.4.05); an affidavit of search sworn by John Alan Holmes on 24 February 2011 (r.4.06(3)) and an affidavit of debt sworn by Michael Vella on 24 February 2011 (in compliance with r.4.06(4)). A consent to act as trustee declaration executed by Mark Julian Robinson on 9 November 2010 and stamped by the Insolvency and Trustee Service Australia (ITSA) on 11 November 2010 is annexed to the affidavit of service of the creditor’s petition sworn by Mr Ng Saad.
If the court is satisfied with proof of the matters specified in s.52(1) of the Bankruptcy Act it “may make a sequestration order”. Mr Baker seeks to establish “other sufficient cause” to dismiss the petition within s.52(2)(b) of the Act. In the alternative he submitted that the court should adjourn the hearing of the creditor’s petition in order to give him the opportunity to litigate the asserted cross-claims. This issue is discussed below.
The respondent relied on affidavits sworn by him on 17 January 2011 and 18 February 2011. In reply, the applicant initially relied on affidavits of Katherine Neta Andrews affirmed on 24 January 2011 and John Alan Holmes sworn on 24 February 2011.
Additional evidence issues
The hearing in this matter commenced on 25 February 2011. In the course of oral submissions counsel for Mr Baker submitted that on the basis of the matters raised in the notice of opposition the judgment debt that formed the basis for the Bankruptcy Notice ought to have been reduced or entirely satisfied. It was contended that if the Notts Avenue property referred to in ground one had been sold for a “reasonable market rate” there “would have been a surplus of funds” available after satisfying the debt owed to Perpetual and that this amount would have been “required” to be paid against the judgment debt (described below as the “Triprush judgment debt”) which formed the basis for the Bankruptcy Notice (based on what was said to be significant cross-collateralisation in relation to loans made to companies associated with Mr Baker by Perpetual which were guaranteed by Mr Baker). In addition, it was submitted that if the judgment debt was not entirely met on this basis, the remaining portion would have been capable of being repaid by Mr Baker because of the proceeds of sale he claimed he ought to have obtained had the 3/15 Bennelong Crescent unit been sold in early 2008 (as contended in ground two).
Perpetual sought and was granted leave to file further affidavit evidence in reply, on the basis that the factual contentions that any surplus of funds on the sale of the Notts Avenue property would have been “required” to be paid against the Triprush judgment that formed the basis for the Bankruptcy Notice had not been foreshadowed in the notice of grounds of opposition and did not arise in an obvious way from the documents relied on by Mr Baker in evidence.
The hearing was adjourned until 2 March 2011. Perpetual then sought to rely on an affidavit of John Alan Holmes sworn on 28 February 2011, an affidavit of Stuart Terry sworn on 28 February 2011 and an affidavit of Michael Vella sworn on 1 March 2011.
Mr Baker objected to the entirety of this material on the basis that it was irrelevant and fell outside the scope of the leave that had been granted. Parts of Mr Terry’s affidavit were not read.
The leave to file further affidavit evidence in reply was granted in general terms. Counsel for Perpetual had indicated that he wished to fill an evidentiary gap in relation to the new contention for Mr Baker and that it was anticipated that the foreshadowed evidence in reply would relate to other monies owed by Mr Baker under Perpetual and/or Challenger arrangements which, it was suggested, would show that if there had been any surplus from the Notts Avenue property (after obligations in relation to the loan secured over that property were met), it would not have been solely available, if at all, for the Triprush judgment debt that formed the basis for the Bankruptcy Notice and would also address the suggested interrelationship of loan facilities. Given the uncertainty as to exactly what evidence would be filed by Perpetual, Mr Baker was given the opportunity to file evidence in reply. He did not avail himself of that opportunity.
The affidavits filed in court on 2 March 2011 are (having regard to the fact that part of the affidavit of Stuart Terry was not read) within the terms of the leave and of relevance in these proceedings. Mr Terry’s affidavit relates to another loan by Challenger to Montpensier Pty Ltd (Receivers and Managers Appointed) (Montpensier), the owner of the Notts Avenue property at the relevant time, which Mr Baker guaranteed (as foreshadowed when leave was sought) and the loan by Challenger to Garbake Pty Limited (Garbake) in relation to the purchase of the Bennelong Crescent property referred to in ground two of the notice of opposition of which Garbake was a part owner and which Mr Baker guaranteed. Details are provided of the shortfalls after sale of these properties for which Mr Baker is liable as guarantor. Mr Holmes’ affidavit addresses the circumstances of and current position in relation to the loan to Montpensier, Mr Baker’s guarantee and the mortgage and proceedings by Perpetual in relation to the Notts Avenue property the subject of ground one. Mr Vella’s affidavit attests to the current amount owing by Mr Baker under the guarantee in relation to the loan to Montpensier in connection with the Notts Avenue property referred to in ground one (relevant to whether there would have been a surplus as claimed).
Such evidence is admissible. If accepted, it could rationally affect the assessment of the probability of the existence of facts in issue in these proceedings, having regard to the grounds of opposition relied on by Mr Baker and the scope of s.52(2)(b) of the Bankruptcy Act.
The test of relevance is a broad one. In the context of a debtor’s attempt to rely on s.52(2)(b) of the Bankruptcy Act, by a claim that funds would necessarily be available to meet the petitioning creditor’s judgment debt, evidence about his financial position is of direct relevance. Indeed, more generally, evidence as to other indebtedness of the debtor or as to his solvency generally (even if he were to be successful in the foreshadowed cross-claims) would be relevant to whether there was “other sufficient cause” for dismissal of the creditor’s petition (see Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 26 – 27 [1997] FCA 226).
Other sufficient cause
There is no suggestion by or on behalf of Mr Baker that he is able to pay his debts within s.52(2)(a) of the Bankruptcy Act. Rather, the notice of opposition appears to be intended to assert primarily that the court should be satisfied by Mr Baker that “for other sufficient cause a sequestration order ought not to be made” within s.52(2)(b) of the Act. In this context Mr Baker seeks that the creditor’s petition be dismissed or, if the asserted counter-claim can be quantified by the court but falls short of the amount of the debt relied on in the creditor’s petition, that an order be made that on payment of such shortfall the petition be dismissed.
Counsel for Mr Baker drew a distinction between a claim against the petitioning creditor which was likely to succeed and which would warrant refusal of a sequestration order and a “real claim” which had sufficient prospects to warrant an adjournment so that the debtor had the opportunity to have it litigated.
It is not in dispute that s.52(2)(b) of the Bankruptcy Act enlivens a broad discretion in the court to be assessed in the circumstances of each case (Cain v Whyte (1933) 48 CLR 639 [1932] HCA 6).
Mr Baker contended that Ling v Enrobook Pty Ltd was authority for the proposition that it is in the public interest “that a sequestration order ought only to be made on the basis of an indebtedness which [w]as not counterbalanced by a claim by the debtor against the petitioning creditor” that was likely to succeed (at 26).
In that case, the Full Court of the Federal Court considered the operation of s.52(2)(b) of the Act and discussed authorities on whether the fact that the debtor had a pending legitimate claim to funds sufficient to satisfy the petitioning creditor’s debt amounted to “other sufficient cause” (at 25). In response to a contention that the primary judge had erred in supposing that the public interest in allowing a debtor to prosecute an action should be confined to cases where the petitioning creditor was the defendant to such action by the debtor, their Honours stated (at 26), that the 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 a creditor, but against a third party.
Their Honours acknowledged that if the debtor was “well advanced with litigation” that was “likely to result in the debtor being in a position to pay his or her debts”, this “may well provide a basis for finding that there [was] sufficient cause for a sequestration order not to be made”, on the basis that it was “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” (at 26). It was also made clear however (at 26) that “the authorities [did] not suggest that it [was] in the public interest to allow insolvent debtors to prosecute litigation generally”.
The Full Court of the Federal Court concluded (at 24 – 25):
Both the wording of s52(2)(b) of the Act and the authorities make it clear that the debtor carries the onus of proof of establishing "that for other sufficient cause a sequestration order ought not to be made". In Cain v Whyte (1933) 48 CLR 639, a case concerning s56 of the Bankruptcy Act 1924 (Cth), the predecessor of s52 of the Act, the High Court approved the judgment of the primary judge in that case which included the following passage (at 645-646):
"... I do not agree with the argument put forward by Mr Graham that the words 'other sufficient cause' should be limited to the one case where the Court is satisfied that the petition is put forward solely for some collateral illegitimate end, and not for the purpose of securing the equal distribution of the available assets amongst the creditors. To my mind, the High Court of Australia did not intend to put a limit on the meaning of the words 'other sufficient cause' in Dowling v Colonial Mutual Life Assurance Society [(1915) 20 CLR 509]... I can well conceive that 'other sufficient cause' might arise in connection with any particular case. To my mind, it is the duty of the Bankruptcy judge to examine in each case, if the question is raised, whether there is other sufficient cause than the fact that the debtor is able to pay his debts in full, for refusing to make an order.
I rule then that I am fully entitled to examine the contention put forward to Mr Philp on behalf of the debtor that there is, in the present case, other sufficient cause sufficient to justify the dismissal of this petition. I approach that question with the full appreciation that, prima facie, on proof of the matters mentioned in s.56 (2), the Court will proceed to make an order for sequestration, and that it is for the debtor to show some cause overriding the interest of the public in the stopping of the unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order."
See also Rozenbes v Kronhill (1956) 95 CLR 407 at 414 and Re Burlock; Burlock v Commissioner of Taxation (1994) 49 FCR 522 at 530).
A review of the authorities discloses that in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor's debt will amount to "other sufficient cause" not to make a sequestration order (Re Yeatman; Ex Parte Yeatman (1880) 16 Ch D 283; Maddestra v Penfolds Wines Pty Ltd; (1993) 44 FCR 303; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14; Ling v Commonwealth. The circumstance that the legitimate claim of the debtor is one against the judgment creditor is likely to be a significant circumstance for the purposes of s52(2)(b).
However, while the fact that an asserted claim is against the petitioning creditor is significant, as Cowdroy J pointed out in Totev v Sfar and Another (2008) 167 FCR 193; [2008] FCAFC 35 at [85], the view that “an arguable claim [against the petitioning creditor] does not [necessarily] constitute “other sufficient cause” is supported by recent authority” (see Rigg v Baker (2006) 155 FCR 531; [2006] FCAFC 179). As his Honour stated at [86]:
The determination of such question will depend upon an assessment of the particular facts in each case, considered in conjunction with the interests of the petitioning creditor.
A creditor’s petition should not be dismissed on the ground of a possible claim against the petitioning creditor, unless the proposed action is one with sufficient prospects of success. As Allsop J indicated in Totev v Sfar and Another (2006) 230 ALR 236; [2006] FCA 470 at [44] the proposed cross-claim is not heard in the bankruptcy court, but “the material is examined for the purpose” of assessing the “likelihood of success”. His Honour outlined the law in relation to “other sufficient cause” in some detail and pointed out (at [37]) that:
On proof of the matters in s 52(1) of the Act, the court will generally proceed to make an order for sequestration. It is for the debtor to persuade the court that the public interest in the dealing with the insolvent debtor and the rights of individual creditors are outweighed by other considerations: Cain v Whyte (1933) 48 CLR 639 at 645–6 and 648.
Relevantly, Allsop J referred to the need for the court to keep in mind not only the interests of the petitioning creditor and the debtor but also the public interest which (as Burchett J said in Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314 at 317; [1998] FCA 503 “may be adversely affected by the propping up of insolvency”. In Totev v Sfar, after referring to Ling v Enrobook Allsop J continued at [43] – [44]:
In St George Bank Ltd v Helfenbaum [1999] FCA 1337 at [13] Sundberg J summarised the authorities:
The existence of a cross-claim may be a “sufficient cause” within s 52(2)(b) for declining to make a sequestration order: Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25. It is for the debtor to establish the existence of “sufficient cause”: Cain v Whyte; (1933) 48 CLR 639 at 645–646; Ling at 24. He must establish that he has a real claim against the creditor that is likely to succeed. If the Court is satisfied that there is such a claim, and that its quantum is likely to equal or exceed the creditor’s claim, it will not make a sequestration order. If the claim is likely to be less than the creditor’s claim, the Court will require the debtor, if he is to avoid a sequestration order, to pay the difference between the judgment debt and the amount he is likely to recover on his claim. See Re Player (1962) 19 ABC 277 at 282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115–116; Ling at 25–26; Commonwealth Bank v McDonald; [1999] FCA 984. A debtor does not establish a real claim that is likely to succeed merely by producing a statement of claim in an action against the creditor: Re Rivett; Ex parte Edward Fay Ltd (1932) 5 ABC 182; Player at 282, or by pointing to the existence of current litigation against the creditor: cf Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19 at 23. While the Court does not try the cross-claim in advance, the debtor must adduce sufficient evidence to show that it is a real claim which is likely to succeed: cf Vogwell v Vogwell (1939) 11 ABC 83 at 88; Player at 282.
It may be that the fourth sentence of the above passage in St George Bank Ltd v Helfenbaum is open to debate as to whether it states the matter slightly too unequivocally in the light of what was said in Ling v Enrobook. Nevertheless, what is clear is that the fact that there has been an act of bankruptcy does not make the claim by the debtor against the petitioning creditor irrelevant. It should be examined to assess whether it can be said that there is sufficient evidence to show that it is a real claim which is likely to succeed.
Notably, his Honour went on to state at [44]:
Also relevant is the stage of the litigation, the length of time for its vindication and any other relevant matters. It goes without saying that solvency is a relevant consideration. In some circumstances, it may be difficult to assess the likelihood of success of the debtor’s claim. All the authorities show that central to the showing of “other sufficient cause” for the purposes of s 52(2)(b) is the question of the prospects of success. The case is not tried in the bankruptcy court, but the material is examined for the purpose alluded to by Gibbs J in Re Schmidt. As Olney J identified in Re James, if a likelihood of success can be demonstrated, that may justify a refusal of a sequestration order. Alternatively, the circumstances may reveal a claim of a character and nature in which likelihood of success cannot be predicted with accuracy but in the circumstances the petition should be dismissed or an adjournment of the petition should granted: see the approach of Sundberg J in Ling v Commonwealth (1996) 68 FCR 180 at 195–6; 139 ALR 159 at 172, with which Wilcox J and Whitlam J agreed. If the claim is one in which credit of witnesses will be involved, and a debtor sets out the nature and detail of the case and all his or her evidence the debtor may only be able to persuade the bankruptcy court that, if relevant criteria are believed, he or she has good prospects of success. What should be proved, or what is sufficient to be proved, in any given case will depend upon the circumstances. The context in which the issue arises is also important. The discretion involved in s 52(2)(b) is a broad one, and, importantly, it is informed by public interest considerations concerned with the dealing with insolvents. It is to be distinguished from the task involved in deciding whether a claim exists that satisfied s 40(1)(g) of the Act. There, the task, prior to the commission of an act of bankruptcy, is the identification of a bona fide or genuine claim: Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346; [1960] ALR 691; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433; 44 FLR 135; Vogwell v Vogwell (1939) 11 ABC 83.
Insofar as counsel for Mr Baker suggests that the court should determine the likely quantum of such a claim and if it was likely to be less than the creditor’s claim, require Mr Baker to pay the difference between the judgment debt and that amount, the caution expressed by Allsop J in Totev v Sfar is in point.
Mr Baker submitted that there was a distinction between a claim against a petitioning creditor which was likely to succeed which would warrant refusal of a sequestration order and a “real claim” which had sufficient prospect to warrant the debtor being granted the opportunity to have it litigated. Reliance was placed on remarks of French J (as he then was) in Rigg v Baker at [66] (albeit his Honour was addressing the circumstances in which a sequestration order ought not to have been made and should be annulled). However such a proposition should not be overstated. What his Honour said in that case is follows:
A distinction has been drawn between a claim against the petitioner creditor which is likely to succeed and which would warrant refusal of a sequestration order and a "real claim" which has sufficient prospect to warrant the debtor being granted an opportunity to have it litigated. In the latter case an adjournment of the petition may be appropriate: R v Jovanovic (1997) 42 NSWLR 520 citing Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14 at 22 (Olney J). The existence of a cross-claim against the petitioning creditor which is likely to succeed may support the proposition that the sequestration order ought not to have been made and should be annulled. On the other hand the existence of a real claim which might have warranted adjournment would not necessarily support that conclusion. That is not to exclude the possibility that in appropriate circumstances the registrar or judge hearing the petition ought to grant an adjournment on the basis of a "real cross-claim".
The circumstances in R v Jovanovic (1997) 42 NSWLR 520 (cited in Rigg v Baker) are not comparable to those in this case. In Jovanovic there were District Court proceedings on foot between the debtor and the creditor which were said to form a basis for a cross-claim against the creditor. Mansfield J was of the view that sufficient cause existed for the sequestration order to be dismissed, subject to the fact that judgment was reserved on an interlocutory application to have the claim in the District Court dismissed. In those particular circumstances, his Honour considered that until that decision was made by the District Court it was appropriate to adjourn the hearing of the creditor’s petition on the basis that if the application for a summary dismissal of the District Court action was dismissed (so that it could proceed to trial) then the application for a sequestration order should be dismissed under s.52(2)(b) of the Bankruptcy Act.
While in appropriate circumstances an adjournment may be allowed to enable a debtor to litigate a “real claim” against the petitioning creditor, that possibility must be determined in light of the general principles applicable in relation to the exercise of the discretion to grant such an adjournment, bearing in mind the policy objectives of the Bankruptcy Act and matters such as the need to have regard to the public interest, the prima facie right of the petitioning creditor to obtain a sequestration order and the importance of avoiding or minimising delay once such proceedings have been instituted. These issues are discussed further below.
Counsel for Mr Baker also contended that conduct by a judgment creditor which prevented a judgment debtor from paying the debt “may operate to disentitle the judgment creditor from proceeding to immediate execution” (see Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572 at 585-586; [1995] FCA 1359 at [47] – [48]). However, the remarks in that respect in Wiltshire-Smith were made in the context of considering whether an order of the Family Court had the effect of restraining or preventing a debtor from paying or otherwise discharging liabilities incurred by him such that execution of a judgment had been stayed so that a bankruptcy notice based on that judgment could not properly be issued. In such circumstances a failure to make payment in response to the bankruptcy notice would not constitute an act of bankruptcy (ibid at [44]). However it is no part of the debtor’s notice of opposition or case in these proceedings that the Bankruptcy Notice on which the creditor’s petition is based could not properly have been issued (see s.41(3)(b)). There is no suggestion that at the time of the application for the issue of the Bankruptcy Notice execution of the judgment or order to which it related had been stayed or that Perpetual had prevented Mr Baker from paying the debt in question, so that it could not rely on the Bankruptcy Notice.
Relevant Supreme Court proceedings
In order to consider the notice of opposition and the orders sought by the debtor, it is necessary to have regard to several proceedings in the Supreme Court of New South Wales involving Mr Baker and Perpetual. The first of these is Supreme Court proceedings 2009/00297366 (which it is convenient to refer to as the Triprush proceedings). The Bankruptcy Notice is based on the judgment against Mr Baker in those proceedings.
Mr Baker was the sole director of Triprush Pty Limited (Triprush). Perpetual made a loan to Triprush in relation to a property at 33 Bennelong Crescent, Bellevue Hill which was guaranteed by Mr Baker. The borrowers (Triprush and another company) defaulted. Perpetual instituted proceedings in the Supreme Court against, relevantly, Triprush and Mr Baker (who was the fourth defendant) in relation to the loan.
On 5 August 2010 Perpetual obtained summary judgment against Mr Baker for $788,351.37 (see Perpetual Trustee Company Limited v Triprush Pty Limited [2010] NSWSC 861). Perpetual successfully claimed that this amount was due to it from Mr Baker under a deed of guarantee that had been executed by him on or about 27 October 2006. Harrison AsJ found that this amount was due and payable under the deed of guarantee and that Mr Baker’s claimed defence of equitable set-off, which was said to arise from moneys claimed by him in a cross-claim in the Montpensier proceedings in relation to the Notts Avenue property (which involved a separate claim by Perpetual Trustee against Montpensier as borrower and against Mr Baker as guarantor of that loan facility) was “doomed to failure” (at [26]). Her Honour pointed out (at [22]) that even if Mr Baker was “entirely successful” in such a cross-claim, as it was a claim for loss or damage equal to the amount of his liability pursuant to the Montpensier guarantee, it “could only possibly result in him being relieved of liability under his guarantee of the [Montpensier] loan”. On this basis there would not be any “surplus” funds available to Mr Baker to constitute the basis for an equitable set-off for the purpose of the Triprush proceedings (at [22]).
According to Harrison AsJ, there were other difficulties facing the assertion of any available equitable set-off in the Triprush proceedings. The Triprush guarantee expressly excluded any right of set-off on the part of Mr Baker (at [23]); “a right to a set off could be excluded by agreement between the parties” (at [23]); and such a claim “must arise from a claim that is sufficiently closely connected to the initial claim”. Harrison AsJ found that as the damages claimed in the cross-claim would not give rise to a surplus, it was unnecessary to decide whether there was such a “close connection” between the Triprush proceedings and the Montpensier proceedings (at [25]). Mr Baker’s defence was struck out and judgment was entered in favour of Perpetual in the sum of $788,351.37. As indicated, it is this judgment that formed the basis for the Bankruptcy Notice and subsequently for the creditor’s petition.
The second relevant proceedings are Supreme Court of New South Wales proceedings 2009/00297367 (the Montpensier proceedings). These proceedings, which are yet to be determined, were commenced by Perpetual against Montpensier and Mr Baker on 15 December 2009 in relation to a loan by Perpetual to Montpensier to enable Montpensier to purchase the Notts Avenue property referred to in ground one of the notice of opposition. Perpetual sought possession of the property and judgment in the amount of $4,322,143.96.
According to the Statement of Claim in the Montpensier proceedings the loan in question was made by Perpetual “in its capacity as custodian for the Mirvac AQUA Senior Debt Pool and the Mirvac AQUA Mezzanine Debt Pool”. Mr Baker’s liability was said to arise under a written guarantee dated 7 July 2008. In an Amended Defence filed on 1 June 2010 Mr Baker appeared to admit the existence of the loan (but take issue with its terms). He admitted that he executed a guarantee, but denied that he was liable pursuant to the guarantee. Mr Baker filed a cross-claim in these proceedings on 1 June 2010 in which he alleged that Challenger made a misleading or deceptive representation about a potential loan to Montpensier; that Landmark White (NSW) Pty Ltd (Landmark White) (which prepared a valuation) made a misrepresentation that the market value of the property was $5,750,000.00 as at 2 May 2008 and/or had acted negligently and breached a duty of reasonable care; and that an agent for Perpetual had represented to him (on behalf of Montpensier) that the value of the Notts Avenue property was about $4.5 million and that the property was adequate security for the loan from Perpetual to Montpensier. The cross-claim asserts that this was not the market value of the property and that, but for the misrepresentations, Mr Baker would not have executed the guarantee of the loan from Perpetual and that to the extent that it was enforceable then by reason of such representations Mr Baker had “suffered loss or damage equal to the amount of his liability pursuant to the guarantee”. Such a claim against Perpetual, even if successful, would not result in surplus funds being available in relation to the Triprush judgment debt that formed the basis for the bankruptcy notice.
However, in ground one in the notice of opposition Mr Baker contended that Perpetual also “breached its duty in the mortgagee sale process” in that the Notts Avenue property was marketed for too short a time and was sacrificed for a quick sale” (having been sold for $1,500,000 on 17 November 2010). Mr Baker’s contention is that as guarantor he has an action in equity against the mortgagee and that Perpetual caused loss and damage to Montpensier and also to him as owner of all the paid up share capital in Montpensier. He claims in his affidavit that he intends to claim damages against Perpetual based on the difference between what the Notts Avenue property “could have been sold for if a proper marketing campaign was entered into and what [it] was sold for” in November 2010.
Mr Holmes’ evidence is that on 29 March 2009 Perpetual obtained judgment in its favour for possession of Unit 1 (the Notts Avenue Property). The proceedings against Mr Baker remain on foot. Mr Vella’s evidence is that the amount of $4,241,613.09 was owing by Mr Baker to Perpetual in relation to this loan as at 1 March 2011. This amount takes into account the proceeds of sale of Unit 1.
Insofar as it is said to be Mr Baker’s intention to expand the basis of his cross-claim against Perpetual in the Montpensier proceedings, this has not occurred. It is apparent from the affidavit of Mr Holmes sworn on 24 February 2011 that as at that date the pleadings in the Montpensier proceedings had not formally closed. In the face of an application for summary dismissal of the defence and cross-claim, Mr Baker had sought and been granted leave to further amend his cross-claim on several occasions. There is, however, no evidence before this court that any such further amended cross-claim has been drafted or filed in the Montpensier proceedings. I am told that on 2 March 2011 those proceedings were adjourned pending resolution of the present proceedings.
In his affidavit of 18 February 2011, after outlining concerns about the valuation and sale process in relation to the Notts Avenue property (the subject of the Montpensier proceedings), Mr Baker stated that Perpetual had obtained a judgment “against Montpensier in relation to the debt the subject of the Montpensier Loan agreement” in the sum of $3,223,426.67 and an order for possession. However the judgment to which he refers appears to be the judgment of 18 September 2009 in other Supreme Court proceedings 13279 of 2009 in which Perpetual (as mortgagee) and Challenger (as lender) obtained orders for possession of Unit 3 of 6 Notts Avenue and judgment against Montpensier in the sum of $3,223,426.67 (the Unit 3 proceedings). Mr Terry’s evidence is that after the sale of Unit 3 by Perpetual the amount for which Mr Baker was liable as guarantor of the loan to Montpensier in relation to that property was $2,305,311.76 as at 28 February 2011.
As explained in Mr Terry’s affidavit of 28 February 2011, while the Deed of Loan between Challenger and Montpensier in relation to Unit 3 also listed as security Units 1, 6 and 7 of 6 Notts Avenue, those properties were not in fact provided as security for the loan from Challenger.
The other relevant Supreme Court proceedings are proceedings 295132 of 2009 (the Garbake proceedings) which involve a claim against Garbake and Mr Baker by Perpetual as custodian for Challenger and also by Challenger in its own right. Mr Baker and Garbake were the joint owners (as tenants in common in equal shares) of Unit 3, 15 Bennelong Crescent, Bellevue Hill (the property to which ground two in the notice of opposition relates). In the Garbake proceedings Perpetual and Challenger sought possession of the Bennelong Crescent property and judgment in the amount of $3,984,035.43 plus interest. This was said to be the amount owing under a loan to Garbake of 21 December 2007 that was guaranteed by Mr Baker and a company known as Mine & Quarry Pty Limited. Perpetual held a mortgage over the Garbake property.
Mr Baker has filed a defence and cross-claim in the Garbake proceedings. In an affidavit sworn on 4 December 2009 filed in the Supreme Court he alleged that he had a cross-claim for damages arising in relation to the Bennelong Crescent property against Challenger/Perpetual for between $400,000 and $600,000 (the surplus that he claimed would have been realised had the property been sold for $4.25 million in early 2008).
The essence of Mr Baker’s asserted cross-claim filed in April 2010 is a contention that Challenger represented that the value of this property was $5,595,000 exclusive of GST (which among other things is said to be in breach of the Trade Practices Act 1974 (Cth)) and that acting in reliance upon such representation Mr Baker rejected an offer that was made to buy the property for $4.25 million in early 2008. The property was sold for $3,001,000 at public auction on 11 December 2010.
Mr Baker deposed that in December 2007 at about the time Challenger gave him a valuation by Landmark White of the Bennelong Crescent property at $5,595,000 “the outstanding debt secured on the property was around $3,700,000.00”. He calculated that had he sold the property for $4.25 million in around early 2008, he “would have been able to fully discharge the alleged debt to Challenger/Perpetual” and that there would have been a surplus of about $400,000 to $600,000. It was conceded in these proceedings that as 50 percent of the Bennelong Crescent property was owned by Garbake, Mr Baker’s interest in any successful litigation of the asserted cross-claim was therefore only 50 per cent, so that the maximum amount he could obtain, on his own calculations, would be in the vicinity of $200,000 to $300,000 plus interest.
Mr Baker’s affidavit evidence is that he intends to amend his cross-claim in the Garbake proceedings to make the same allegations against Perpetual as he makes against Challenger. There is no evidence that any such amendment or proposed amendment has been drafted, served or filed. These proceedings remain on foot.
However, according to Mr Terry’s affidavit of 28 February 2011, the expected shortfall under the loan after the anticipated completion of the sale of the Bennelong Crescent property would be approximately $2,135,000 as at 1 March 2011 for which Mr Baker would be liable as guarantor.
The asserted cross-claims
In light of this background it is necessary to consider the grounds relied on in the notice of opposition as elaborated on in the submissions for Mr Baker.
Both grounds assert the existence of cross-claims. While there are proceedings on foot between Mr Baker and Perpetual, Mr Baker has not in fact brought the claims against Perpetual that he now asserts constitute cross-claims (except the claim of set-off in the Montpensier proceedings). He proposes to amend the existing cross-claim in the Montpensier proceedings. He proposes to include Perpetual as a cross-defendant in his cross-claim against Challenger in the Garbake proceedings. There is, however, no explanation for why this has not yet occurred.
In relation to the Garbake proceedings, Mr Baker’s evidence includes his defence and cross-claim in relation to Challenger and a stated intention to allege that when Challenger engaged in what is said to be misleading and deceptive conduct it was acting as agent for Perpetual, that he never had any direct dealings with Perpetual, that all his dealings were through Challenger and that he was told by a Challenger employee that Challenger represented Perpetual. Mr Baker has filed an affidavit in support of his existing cross-claim in the Garbake proceedings sworn on 4 December 2009 and intends to rely on it (and Annexures thereto) as the basis for his claim against Perpetual.
No objection was taken by counsel for the applicant to this affidavit, or otherwise to the evidence relied on by Mr Baker in support of ground two in the notice of opposition.
However, objection was taken by the applicant to much of the material put before the court by Mr Baker in support of ground one. As indicated, Mr Baker claims he intends to amend the cross-claim against Perpetual in the Montpensier proceedings to include a claim that Perpetual breached its duty to take all reasonable care to sell the Notts Avenue property for not less than its market value.
Thus there is no evidence of pleadings in which the cross-claim relied on in these proceedings is asserted or of affidavits filed in such other proceeding in support of Mr Baker’s claim about the existence and prospects of success of this asserted cross-claim against Perpetual. Rather, Mr Baker seeks to rely on his affidavits filed in these proceedings and documents contained in the exhibit to his affidavit sworn on 18 February 2011.
In his affidavit evidence Mr Baker expresses his opinion in relation to particular matters, including appropriate conduct in marketing properties and as to whether Perpetual and the receivers had taken reasonable care to obtain the best price reasonably obtainable in relation to the sale of the Notts Avenue property. In addition, he refers to valuations in relation to the Notts Avenue and other properties, copies of which are annexed to his affidavit.
The applicant objected to much of the evidence in this respect as unqualified opinion and unsubstantiated conclusions not admissible as evidence of value. Issue was also taken with Mr Baker’s evidence about the attributes of proper marketing campaigns as unqualified opinion. In particular it was contended that the affidavit evidence of Mr Baker about the annexed property valuations was not admissible in these proceedings as evidence as to the value of those properties (as distinct from the fact of the valuations). Reference was made to the failure to comply with any procedural requirements regarding expert evidence (such as r.15.07 of the Federal Magistrates Court Rules), the fact that Mr Baker was not a qualified independent expert and to the absence of notice of or evidence from any witness who could support such valuations. It was also submitted that in any event the utility of this evidence was in doubt, because as Mr Baker had acknowledged in cross-examination, in the Garbake litigation he was in fact submitting that valuations by Landmark White were grossly wrong and yet in these proceedings he sought to rely on valuations by them to show what the value of property should be for the purpose of determining the likely value of any cross-claim against the creditor.
Included in the material in issue are copies of valuation reports prepared by Landmark White in relation to Unit 1, 6 Notts Avenue as at 2 May 2008 and in relation to four other units in the same block undertaken around May 2007, and valuations by other valuers for other units dated 6 August 2008 and 15 July 2009. On the basis of these valuations Mr Baker asserted that the average valuation that had been placed on units in the block at 6 Notts Avenue was $3,925,000.
Mr Baker also attested to the “value” per square metre of Unit 1, 6 Notts Avenue and other nearby properties, based on their sale prices and what he claimed was the area of each such property.
The objections about the valuations were addressed in submissions by counsel for Mr Baker, who acknowledged that the valuations would be inadmissible on a final hearing as evidence of value, but submitted that in these proceedings the court could have regard to the material in the exhibit bundle, including the valuations, as evidence that Mr Baker said gave rise to and would underlie his asserted cross-claim against Perpetual. It was said that this material was properly before the court to enable the court to engage in an assessment of the merits and likelihood of success of the asserted cross-claim in determining whether there was “other sufficient cause” on the basis of a cross-claim against Perpetual with sufficient validity to justify a dismissal or adjournment of the creditor’s petition. It was contended that Mr Baker did not need to come before the court with the pleadings and evidence in admissible form as would be required if this were the court in which such a cross-claim would be determined. It was acknowledged that if the cross-claim was allowed to proceed it would have to be articulated in an admissible form and that this was not the state of the evidence at the moment or of the pleadings, but submitted that the court properly had before it information to assess the underlying merits of the claims notwithstanding any deficiencies in the way this material was brought before the court.
The submission was made on the basis that it is not necessary in proceedings of this nature to determine on a final basis the value of the properties, but rather it is for the court to assess whether or not on the material before it there is sufficient material to support a cross-claim which has the weight to enliven the court’s discretion under s.52(2)(b) of the Bankruptcy Act or to adjourn the proceedings. Hence the respondent submitted that when it came to a consideration of evidentiary requirements, the court need not and should not apply the same “strict rigour” that might be applied on the actual hearing of the cross-claim. Rather it should “just take the information for what it is and assess whether or not it could be incorporated into what [could be] called a real claim”.
Initially, no authority was cited in support of such proposition. After the hearing resumed on 2 March 2011, Mr Neggo drew the court’s attention to authorities in relation to the admissibility of evidence in the context of an application to set aside a bankruptcy notice based on the existence of a counter-claim, set-off or cross demand within s.40(1)(g) of the Bankruptcy Act. In that context there is authority (see for example Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346 at 350; [1960] HCA 50 at [5]) that the debtor must show that he has a prima facie case, “even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his asserted counter-claim, set-off or cross demand”.
The respondent contended that the same approach should be taken in these proceedings. Reference was also made to the remarks of Lindgren J in Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers; Re Tresidder; Tresidder v Harrowell of Hunt & Hunt Lawyers (2003) 198 ALR 331; [2003] FCA 373, referring with approval to the approach taken in Ebert and pointing out (at [11]) that “the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor” and that:
“evidence tendered on an application to set aside [a bankruptcy notice] is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the court should be satisfied that the debtor has a claim deserving to be finally determined”.
It was suggested that in Williamson v Scarano [2010] NSWSC 975 a similar approach was taken in relation to a case involving an extension of a caveat, on the basis that the applicant was required to persuade the court of the existence of some sort of arguable or potential case which would fall to be determined at a later stage.
In Totev v Sfar Allsop J expressed the view that material in opposition to a creditor’s petition put before the Federal Magistrates Court by a self-represented debtor in relation to a claim against the creditor that was on foot in the District Court was a consideration to be taken into account under s.52(2)(b) of the Bankruptcy Act. That material included not only pleadings, a request for further and better particulars, and a response but also other documents (including a summary of the debtor’s claims) which was not in proper form.
Allsop J did pointed out in Totev v Sfar at [44] that there was a distinction between what is in issue in an application to set aside a bankruptcy notice (the identification of a bona fide or genuine claim within s.40(1)(g) of the Act) and the exercise of the discretion in s.52(2)(b) which is “informed by public interest considerations concerned with the dealing with insolvents”.
However Allsop J found that the Federal Magistrate had erred in concluding that “there was no material of a persuasive nature” that the District Court proceedings had “any” prospects of success. His Honour stated at [65]:
Mr Totev can be seen to be putting all this material forward as the basis for his case, impliedly the truthful basis for his case. Perhaps he should have sworn to the exhibits as he would do in support of a pleading that was verified. Perhaps he should have tendered the witness statements in the proceedings and deposed to the primary facts which he wanted to prove. That certainly would have meant that the court could judge the primary evidence and not the asserted effect of it. He was a litigant in person who had posited the wrong, but at least a relevantly cognate, question.
In this context his Honour rejected (at [65]) the apparent acceptance by the Federal Magistrate that the debtor’s endeavours to show the worth of his claim were “irrelevant”.
While the debtor in Totev v Sfar had not expressly sworn to the truth of the matters set out in exhibits or sought to prove expressly the underlying facts in the asserted District Court claim, Allsop J accepted that he was seeking to say that those documents “not only reflected his District Court case” but were “a true basis for it” (at [62]) and found that these exhibits disclosed a “tolerably coherent case” that misleading representations had been made to him by the creditors in specific respects (at [63]), notwithstanding that the documents were “incomplete” and involved contested allegations and that one could “anticipate significant factual and credit issues” (at [64]).
Unaided by any other authorities directly in point I am of the view that the valuations are not admissible as evidence of the value of the properties for the purposes of determining a likely value in these proceedings (relevant to the suggestion that the court quantify the value of the asserted cross-claim), but that regard may be had to them as evidence of material that would be sought to be put in proper form supported by evidence from appropriate witnesses to be relied on in any hearing of the asserted cross-claim in the Supreme Court proceedings. The asserted effect of such material is relevant to the question of whether the court should be satisfied that there is “other sufficient cause” within s.52(2)(b) to dismiss the creditor’s petition or that there is sufficient material before the court for it to be satisfied that the debtor has a “real claim which has sufficient prospect to warrant [him] being granted an adjournment to give him an opportunity to have it litigated” (Rigg v Baker per French J at [66]).
However, the nature of and manner in which this material is put before the court is relevant to the weight to be given to it in assessing the debtor’s prospects of success. The applicant is not able to cross-examine any expert witness in relation to the valuations, for example to investigate whether any other matters bore upon the circumstances of the preparation of the valuations. Limited weight can be given to such documents.
Moreover, the valuation of the Notts Avenue property is dated 2 May 2008. The property was sold on 17 November 2010. Some of the valuations of other properties were from 2007, while one appears to be from 2008 although it bears varying dates. There is also a July 2009 valuation which related to units 2, 4, 5 and 8 in the same block as Unit 1, but not to Unit 1.
As the valuation of the Notts Avenue property was not contemporaneous with the time of the sale of the property in question, no account can have been taken of events that occurred between the time of the valuation and the time of the sale which might affect the market value of such a property. By way of example, the potential for a significant change of circumstances regarding the valuation of the Notts Avenue property is demonstrated by material before the court identifying that essential repairs were required for the Notts Avenue building which may cost some millions of dollars and by a survey which showed the existence of asbestos in the building.
Moreover, the valuation carried out on the Notts Avenue property as at 2 May 2008 was done on the basis that that unit was being valued as part of a joint holding in the building and specifically stated that the fact that Mr Baker had “ownership of the adjoining unit on the ground floor as well as the two units on level one” was such that the amalgamation of those four units would “significantly increase the value of this holding” (should the units be amalgamated and refurbished into one apartment) and that “[a]s such it is considered that a premium would be paid for the subject apartment in isolation”. However Unit 1 was sold as a single property.
Beyond this, insofar Mr Baker’s evidence involved an expression of opinion, the respondent contended that as the court was not required to reach a conclusion on the matters relied on, such material should be taken into account for the purposes of determining whether Mr Baker had established that he had a real claim against the creditor that was likely to succeed, or at least a real claim which had sufficient prospects of success to warrant him being granted an opportunity to have it litigated on the basis of evidence in proper form. In other words it appears to be contended that Mr Baker’s opinion demonstrated the nature of evidence that would be sought to be relied upon were Mr Baker given the opportunity to pursue such a claim. In effect this means that such material should be treated as submissions in relation to the asserted claim, for example about the marketing campaign.
Consistent with the approach taken in relation to the valuation evidence, I am prepared for present purposes to proceed on the somewhat unsatisfactory basis that the evidence can be before the court in that form.
However, the fact that the material before the court is not to be tested for admissibility in the same manner as it would be in proceedings in which a cross-claim was to be determined is relevant in determining the weight to be given to what, for present purposes, can only be regarded as assertions by Mr Baker as to the basis for his intended claim and its quantification.
While the legal basis for the asserted cross-claim was addressed in these proceedings, Mr Baker has not identified precisely how he would formulate his claim against Perpetual. No such cross-claim has been filed and there is no evidence as to when it would be likely to be litigated. This is relevant to whether other sufficient cause within s.52(2)(b) of the Bankruptcy Act is established.
On 1 July 2008 Perpetual offered a loan facility to Montpensier to fund the acquisition of the Notts Avenue property on condition that the security include a “joint and several unlimited guarantee” by Mr Baker. Montpensier accepted the offer and Mr Baker signed an acceptance on 4 July 2008. On 7 July 2008 Montpensier gave a mortgage to Perpetual and Mr Baker gave a guarantee. Montpensier subsequently defaulted on its loan. Perpetual appointed a receiver to the property and caused it to be sold for $1.5 million on 17 November 2010.
Mr Baker asserted that a number of issues could be taken with that sale which would be pursued in a cross claim against Perpetual based on a claim that the price obtained was at an undervalue (being said to be well below the valuation for that and other properties in the block and less than that achieved in other sales in the same street), and where it would be contended that the “property was sold in a period of diminished buyer demand” after a “limited marketing campaign” involving a low marketing budget with “limited newspaper advertisement”. It would be claimed that as the controller of the Notts Avenue property, “Perpetual had a duty to take all reasonable care to sell the property for not less than its market value” and that it had breached that duty. It was submitted that as the average of all valuations presently available for units in the Notts Avenue building was $3,925,000, “there should have been sufficient value in the property to discharge the amount owing to Perpetual in (respect of the loan sued upon), with a significant surplus”.
The respondent contended that a cross claim existed on the basis that having regard to s.420A of the Corporations Act 2001 (Cth), which provides that “[i]n exercising a power of sale in respect of property of a corporation, a controller must take all reasonable care to sell the property for” not less than its market value (if it has a market value or, otherwise, “the best price that is reasonably obtainable having regard to the circumstances existing when the property is sold”), there could be an action against a principal who appointed a receiver in relation to an undersale of a property by the receiver. The theoretical possibility of such an action was conceded by the applicant.
Mr Baker was the sole director of Montpensier which on 23 March 2010 was placed into liquidation. On 7 April 2010, a Mr Whittington of PKF Chartered Accountants and Business Advisers was appointed as receiver and manager of Montpensier, pursuant to a charge held by Perpetual. For present purposes it was not disputed that in these circumstances the receiver could not have been acting as the agent of Montpensier, but rather was acting as agent for Perpetual.
It was said to be relevant that for the purposes of s.420A “market value” was the “estimated amount for which an asset should be exchanged on the date of valuation between a willing buyer and a willing seller in an arms-length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without compulsion” (see Fortson Pty Ltd v Commonwealth Bank of Australia and Another (2008) 100 SASR 162; [2008] SASC 49 at [27] and [29]). It was in this context that it was said that the asserted cross-claim related to whether there had been “a proper marketing campaign” (including advertising) of the Notts Avenue property.
Counsel for the respondent acknowledged that s.420A “did not confer a right to damages or any other remedy”, but informed equitable principles relating to the duty to sell for proper value by strengthening the protection given by the general law obligation to exercise a power of sale in good faith (see GE Capital Australia v Davis and Others (2002) 180 FLR 250; [2002] NSWSC 1146 and Ultimate Property Group Pty Ltd v Lord (2004) 60 NSWLR 646; [2004] NSWSC 114). It was pointed out that, as Young CJ (in Equity) stated in Ultimate Property Group Pty Ltd & Lord at [34]:
“where a binding contract for sale is entered into by the mortgagee if there is an allegation that the mortgagee has recklessly sacrificed the mortgagor’s interest, either accounts must be taken [as] between the mortgagor as beneficiary and the mortgagee as trustee as to what amount should be deemed to be the surplus, or alternatively, an inquiry is made before the damages are awarded”.
Such an approach was said to apposite in relation to the asserted cross-claim. It was not disputed for present purposes that such an obligation applied equally to third party guarantors.
In support of the asserted cross-claim Mr Baker relied on the fact that he had caused Montpensier to purchase the Notts Avenue property in around July 2008 for $3.5 million at a time when there was in existence a valuation by Landmark White dated 2 May 2008 (which was said to have been prepared for Challenger as responsible entity and Perpetual as custodian on behalf of the Challenger Howard Mortgage Fund) which valued the property at $5.75 million. He also relied on the sale of the property for $1.5 million on 17 November 2010 in circumstances where there were valuation reports in relation to other units in the same block which valued those units per square metre at an amount that exceeded the price per square metre achieved in relation to the Notts Avenue property.
As it emerged in oral submissions, Mr Baker’s further claim was that, based on the wording of the loan offer, mortgage and guarantee documents in relation to the Notts Avenue property, the transactions in relation to that property also secured the Triprush debt, so that to the extent that Montpensier or Mr Baker owed other money to Perpetual, the surplus achievable on a proper sale of the Notts Avenue property (that should have been available but for the suggested breach of duty by Perpetual), would not have been paid to Montpensier or to its receiver or liquidator but rather would have been required to be paid to Perpetual against the Triprush judgment debt of $788,351.37 that formed the basis for the creditor’s petition. This contention was based on what was said to be the significant “cross-collateralisation” in relation to the loans made available to Montpensier by Perpetual. It was submitted that Mr Baker was entitled to claim in respect of the suggested surplus and to set-off against the judgment which formed the basis for the bankruptcy notice the amount that the Notts Avenue property would have realised (but for the asserted failure to take reasonable care) which would have discharged his liability under that judgment.
The argument for Mr Baker relies on the fact that the form of acceptance by both the borrower and the guarantor in relation to the loan offer of 1 July 2008 to fund the Notts Avenue property provided that “I/We also acknowledge that all the securities and guarantees I/we have given or may give to the Lender, including but not limited to those described in this Facility Agreement, stand as security for all money due to the lender on any account including under the Facility described in this Facility Agreement”. (It was submitted that this meant all guarantees given by Mr Baker to Perpetual stood as security for all money due to Perpetual on any account, having regard to the fact that this acknowledgement was in addition to the acceptance of the offer and the agreement to be bound by its terms. It was suggested that “all the securities and guarantees I/we have given or may give …” must include securities and guarantees outside those contemplated in the offer letter and that, in context, “all money due … on any account” must include due on accounts outside the contemplated facility, and extend to any amount due to Perpetual, not only by Montpensier and Mr Baker (respectively), but also by any entity associated with them, on the basis that it could not be read as applying only to money owed by Mr Baker (or Montpensier) to Perpetual “personally” because any such “personal” obligation would not also be guaranteed by the same party.
Such an interpretation was said to be consistent with the fact that a document attached to the loan offer headed “Statement of Property Assets Liabilities” included a number of companies apparently associated with Mr Baker and asserted a total equity in the order of $25,395,000.
Reliance was also placed on the fact that the loan offer incorporated a broadly expressed document entitled: “Mirvac AQUA Loan Terms and Conditions, Version 6, February 2008” which contained loan terms and conditions which were said to “apply to any Facility Agreement or offer letter which incorporate[d those] terms and conditions by reference”. Clause 4.2 of this document was expressed in general terms to provide that “at any time after an Event of Default” the lender could (among other things) “require immediate payment of the Debt, and recover the Debt” whether under the offer letter as security or under any other collateral agreement and “[e]nforce a security held by the Lender from the Transaction Parties”. “Event of Default” was broadly defined to include default in any performance of a term of that document or “Transaction Document” and any indebtedness or obligation of the borrower (or guarantor) to any person (including the lender) not being paid, met or satisfied when due.
It was pointed out that under cl.8.1 “Debt” meant “all money actually or contingently due by the Borrower to the Lender under or in relation to the Offer Letter and in any capacity, irrespective of whether the debts or liabilities are present, future, actual or prospective, contingent or otherwise”, that “Security” meant “the security specified in the Offer Letter”. It was submitted that the notion of “collateral agreement” should be given its ordinary meaning, and would extend to “any other agreement existing between Perpetual on the one hand and either Montpensier or Mr Baker on the other”.
The respondent contended that on the basis of this suggested construction of these documents what was being implemented was a significant “cross-collateralisation” of each of Montpensier’s and Mr Baker’s various dealings with Perpetual (including through entities associated with them) and that this cross-collateralisation was carried through in the subsequent documents, being Montpensier’s mortgage to Perpetual and Mr Baker’s guarantee.
The mortgage involved a charge by Montpensier of all its secured assets to Perpetual for payment of the secured money and to secure performance of its obligations. The secured assets were said to include the Notts Avenue property and any right of Montpensier to receive any money in respect of the Notts Avenue property (which, it was said, would include the proceeds of the sale) (cl. 13.1 of the Mortgage) Secured money meant all money owing to Montpensier (“whether alone or not”) and included “any money due” on a “Collateral Documents” or on “any guarantee”. In turn, “Collateral Document” included any “present or future loan agreement, mortgage, bond, charge, guarantee or other document under which [Montpensier] either alone or together with any other person, agree[d] with [Perpetual] in any way” and “any other security given to [Perpetual] to secure the Secured Money”. This was said to include Mr Baker’s joint and several unlimited guarantee.
It was also submitted that Mr Baker’s guarantee extended to the Triprush debt because of the cross-collateralisation of his obligations and the fact that he had given a “collateral” guarantee for that debt which ultimately formed the basis for the judgment debt that grounded the Bankruptcy Notice and hence the Creditor’s Petition.
On this basis it was contended that the Montpensier mortgage secured not only Mr Baker’s guarantee of the Montpensier debt but also his guarantee of the Triprush debt. This was said to charge the Notts Avenue property and the proceeds of any sale of that property with payment of the Triprush debt. On this basis it was submitted that “any surplus of any sale proceeds (after paying out the Notts Avenue Property loan) would be paid in satisfaction of the (secured) Triprush debt” and “not to the liquidator of Montpensier”.
Moreover, it was submitted that “because Mr Baker’s Guarantee extended to the Triprush Debt, he would be entitled to an accounting by the controller of that property, and to set-off any loss against the Triprush Debt, if there was a breach of the controller’s duty not to sacrifice the Notts Avenue Property.”
In these circumstances, on the basis that the figures in the valuations available for units in the Notts Avenue building averaged $3,925,0000, it was submitted that it would be claimed that there should have been sufficient value in the Notts Avenue property to discharge the amount owing to Perpetual in respect of the loan sued upon with a significant surplus, that the Notts Avenue property also secured the Triprush debt and that as a result, to the extent that Montpensier or Mr Baker owed other money to Perpetual, the surplus would not have been paid to Montpensier or its receiver or liquidator, but would have been paid to Perpetual in satisfaction of the Triprush debt.
In other words the claim is that there should have been a surplus in relation to the sale of the Notts Avenue property which would have been paid in discharge of the debt that is the basis for the creditor’s petition but for the breach by Perpetual and that Mr Baker was entitled to claim (in his intended cross-claim) in respect of that surplus and was entitled to set-off against the Triprush judgment the amount that the Notts Avenue property would have realised and which would have been paid in discharge or reduction of his liability under the Triprush judgment.
It was also submitted that even if a lesser amount would have been achievable on a sale of the Notts Avenue property for a proper price, there would also have been surplus funds available to Mr Baker had Perpetual not engaged in the conduct described in ground two in the notice of opposition in relation to Unit 3, 15 Bennelong Crescent, and that taken together these amounts would be likely to exceed the debt owed to Perpetual. Even if these amounts did not exceed the amount owed, it was submitted that the cross-claims were quantifiable and the petition should be dismissed on the basis that Mr Baker pay the difference between the judgment debt and such quantified amount.
It is convenient to outline the basis for ground two in the notice of opposition before considering these contentions or whether an adjournment is warranted.
The background to ground two is that Mr Baker was the joint owner as tenant in common in equal shares with Garbake of the property located at Unit 3, 15 Bennelong Crescent, Bellevue Hill. On or about 21 December 2007 Challenger loaned monies to Garbake (as explained in the affidavit of Mr Stuart Terry of 28 February 2011). The loan was secured by a mortgage over the property to Perpetual (as custodian) dated 21 December 2007. Mr Baker (and another associated company) guaranteed Garbake’s repayment of the loan to Challenger. Garbake defaulted on the loan.
Perpetual and Challenger commenced the Garbake proceedings against Garbake and Mr Baker for possession of the property and judgment in the sum of $3,984,035 in 2009.
Mr Baker filed a cross-claim in those proceedings in which he alleged that the purpose of the loan was to enable Garbake to pay out an existing obligation to a third party, that Challenger approved a redraw facility to Garbake the limit of which would be $3.6 million provided that sum did not exceed 65 per cent of Challenger’s assessment of the market value of the Bellevue Hill property. Challenger commissioned a valuation from Landmark White. Reliance was primarily placed on the fact that Challenger sent a copy of the Landmark White valuation of $5,595,000 exclusive of GST dated 18 December 2007 to Mr Baker and Garbake. This was said to constitute a representation as to the value of the Bellevue Hill property and that the “outlook for the Sydney prestige residential market was stable” that “the top end of the residential (housing) market would outperform the general residential market” and that the “value levels of properties such as the [Bellevue Hill] property should be maintained”.
It was contended in the cross-claim that acting in reliance upon such false and misleading representations Mr Baker rejected an offer to purchase the Bellevue Hill property for $4.25 million which was said to have been made in early 2008. Perpetual (as custodian) sold the property by public auction on 11 December 2010 for $3,001,000.
While Perpetual is named in the cross-claim, the allegations relate only to Challenger. The notice of opposition asserts that Mr Baker “intends” to amend the cross-claim to include Perpetual, on the basis that “Challenger was at all times acting as agent for and on behalf of” Perpetual. There is no evidence of any such amended cross-claim having been drafted, served or filed in the Garbake proceedings. Mr Baker’s affidavit evidence in this respect is that he never had any dealings with Perpetual in relation to the Bellevue Hill property, that all his dealings were with Challenger and that an employee of Challenger told him that they did the deal, the money came from Perpetual and that they represented Perpetual. He estimated that had the Bellevue Hill property been sold for $4.25 million he would have realised a surplus of between $400,000 and $600,000, although it is now conceded that half of this would have been money to which Garbake was entitled, so that Mr Baker’s asserted claim against Perpetual is in the vicinity of $200,000 to $300,000.
As set out above, Mr Baker’s contention is that such an amount would be recoverable in a cross-claim and would, together with the cross-claim about the suggested surplus funds available on a proper sale of the Notts Avenue property, have exceeded the amount of the judgment debt that formed the basis for the Bankruptcy Notice and creditor’s petition.
Resolution
For a number of reasons I am not satisfied that the grounds in the notice of opposition, either alone or in combination on the basis contended for in oral submissions are such that the creditor’s petition should be dismissed or adjourned.
First, I note as a general principle that, having regard to the policy objectives of the Bankruptcy Act (see Rotstein v Slaveski (2010) 8 ABC(NS) 200; [2010] FCA 493 at [17]), an applicant seeking an adjournment should put the court in possession of all possible information as to his or her financial position. That has not occurred in this case, notwithstanding that Mr Baker had sought and was given time to file affidavit evidence in relation to solvency prior to the hearing.
The absence of evidence about Mr Baker’s overall financial position overall is also relevant to the contention that there is “other sufficient cause” for dismissal of the petition under s.52(2)(b). If a debtor’s financial position is such that he will be insolvent even if successful in the asserted cross-claim (having regard to other debts) the existence of such a cross-claim may not constitute “other sufficient cause” in s.52(2)(b) (see Commonwealth Bank of Australia v Paola (2005) 3 ABC(NS) 703; [2005] FCA 855 at [25 –[26] and [28] per Hill J (and see generally Totev v Sfar at [44]).
Mr Baker has chosen not to put such evidence before the court. He does not seek to establish solvency within s.52(2)(a) of the Bankruptcy Act. There is, however, evidence of various loans to companies associated with Mr Baker by Perpetual and Challenger which have been guaranteed by Mr Baker in relation to which there are significant outstanding liabilities. In addition to the Perpetual loan to Triprush (in relation to which Mr Baker’s liability forms the basis for the judgment debt underlying the Bankruptcy Notice), the evidence is that the outstanding liability under the Perpetual loan to Montpensier in relation to Unit 1, 6 Notts Avenue (for which Mr Baker is liable as guarantor) was $4,241,613.09 as at 1 March 2011. In addition, Mr Baker’s liability as guarantor of the Challenger loan to Montpensier in relation to Unit 3, 6 Notts Avenue was in the order of $2,305,311.76 as at 28 February 2011. The shortfall on the Challenger loan to Garbake in relation to Unit 3, 15 Bennelong Crescent (for which Mr Baker is liable as guarantor) was expected to be approximately $2,135,000 after allowance for the expected proceeds of sale on 1 March 2011.
In addition, during cross-examination Mr Baker acknowledged that Suncorp was potentially owed $1.9 million by him. While he seemed to suggest that he had reached an agreement in relation to that transaction, he provided no evidence as to the basis for or prospects of successfully settling or resisting such claim.
There is no evidence before the court as to any other liabilities or as to Mr Baker’s realisable or other assets. Mr Baker led no evidence in reply to this evidence (despite having the opportunity to file affidavits in reply as described above).
Hence there is evidence that Mr Baker has significant actual or contingent liabilities arising from a number of loan arrangements for which he has acted as guarantor, including for loans to companies now in liquidation, in circumstances where he has not purported to depose any evidence as to his current financial circumstances and has not deposed that he was solvent. This is relevant as part of all the circumstances in determining whether there is other sufficient cause within s.52(2)(b) of the Bankruptcy Act.
Moreover, it is well established that the mere existence of an “arguable” claim does not by itself necessarily constitute “other sufficient cause” (Rigg vBaker and Totev v Sfar [2008] FCAFC 35 at [85] – [87]). The court must assess the prospects of success to the extent that this can be done on the material before the court. There are no pleadings or affidavits filed in other proceedings raising the asserted claims. The limited evidence before this court is not such as to establish that Mr Baker’s asserted claim in relation to Unit 1, 6 Notts Avenue is “likely to succeed”.
Accepting for present purposes that the evidence of valuation (in particular in relation to Unit 1of 6 Notts Avenue and other properties relevant to Mr Baker’s asserted claim of a sale at undervalue) can be taken into account in the manner discussed above, it is nonetheless not persuasive support for Mr Baker’s claims about his likely prospects of success or the quantum of any cross-claim against Perpetual. In particular, there is no evidence of the market value of Unit 1, 6 Notts Avenue at or about the time of the sale of that property and the valuations do not take into account potential changes in circumstances or the distinction between sale of the property as part of a joint holding or as a single unit.
In particular this material is not such as to enable the court to determine the likely quantum of the asserted claim and whether it exceeds the debt owed to the creditor or, if it is less than the debt owed to Perpetual, such as to warrant dismissing the petition on the basis that Mr Baker pay the “difference” between the likely value of the claim and the debt (St George Bank Ltd v Helfenbaum [1999] FCA 1337 at [13]).
There are a number of other reasons why other sufficient cause in s.52(2)(b) of the Bankruptcy Act has not been established, even taking Mr Baker’s claims about the value of the property at its highest.
Insofar as the claim in ground one is a claim of equitable set-off it is relevant to note that, as Young CJ stated in Ultimate Property Group Pty Ltd v Lord at [75]- [80]:
Although no rights are conferred on guarantors by 420A, Bryson J [in GE Capital] held that they are able to take a benefit from the accounting in one of two ways.
The first way is by way of equitable set-off…There can be an equitable set-off in situations where it would be unjust to allow a plaintiff to recover without taking into account the defendant’s counter claim.
Thus, where a creditor sues the guarantor, it would be unjust to allow the creditor to claim more against the guarantor than it could have claimed when accounts were taken between mortgagor and mortgagee.
The second way is to…recognise rights of guarantors where the principal creditor has acted so as to diminish the value of the security.
In addition, it must be noted that under the general law the mortgagee does owe a fiduciary duty of some kind at least to the guarantor, of the mortgage debt.
That proposition is broadly stated. In Australia, it is clear that if the mortgagee sues the guarantor, then the guarantor is able to say that the quantum of the claim must be reduced by the amount at which the creditor sold the security at an under-value as the guarantor was entitled to have the security sold for its proper value.
The difficulties that would face any claim that monies would have been available to Mr Baker in relation to the Triprush debt on the basis of an equitable set-off in the Montpensier proceedings were canvassed by Harrison AsJ in the judgment discussed at [33] –[34] above. In particular, even if he succeeded in such a claim it could only result in him being relieved of liability under his guarantee and not in surplus funds being available generally for him in relation to other liabilities.
Furthermore and critically, even if the “cross-collateralisation” claim asserted in oral submissions had any prospects of success on the basis contended for by Mr Baker, the evidence before the court in the annexure to the affidavit of Mr Vella sworn on 1 March 2011 indicates that at the time of completion of the sale of the Notts Avenue property in early January 2011 Montpensier’s indebtedness to Perpetual for which Mr Baker was liable as guarantor was in the order of over $4.5 million on the two loan accounts in relation to the Notts Avenue property. Hence even if the Notts Avenue property had been sold at or about that time for an amount in the vicinity of what Mr Baker asserted was a proper amount (that is, somewhere in the order of $3,925,000), it cannot be said that there is an arguable case that there would have been any surplus achievable on such sale after meeting the outstanding indebtedness.
It is also generally relevant to have regard to the extent of Mr Baker’s present indebtedness as guarantor of the Perpetual loan to Montpensier secured over Unit 1 of 6 Notts Avenue as also identified in the affidavit of Michael Vella sworn on 1 March 2011. The indebtedness under that loan, after the sale of Unit 1, 6 Notts Avenue was taken into account, was $4,241,613.09 as at 1 March 2011.
There is no evidence before the court to support Mr Baker’s contention that there would have been any surplus, even if the Notts Avenue property had been sold for an amount of about $3,925,000 being the average valuation of units at Notts Avenue on Mr Baker’s calculations.
In the absence of any such evidence it is not necessary to determine whether Mr Baker’s “cross-collateralisation” argument about the utilisation of any surplus proceeds on a “proper sale” of Unit 1, 6 Notts Avenue would be likely to succeed as matter of law although I note that such a contention would face a number of obstacles.
The argument in relation to the construction of the loan documents is based, to a large extent, on an apparent lack of specificity and clarity in parts of the documents. As the applicant submitted, it may well be that such lack of specificity and clarity would be read against the interests of Perpetual pursuant to the “contra proferentem” rule. If that were so, then any surplus from the sale of Unit 1, 6 Notts Avenue at a higher price (had there been a breach as alleged by Mr Baker and a surplus) would not have been secured for the payment of the Triprush judgment debt, but rather would have become an asset of Montpensier. There is no evidence to suggest that such funds would have been surplus funds in the hands of Montpensier.
Another possible obstacle to the success of such a claim is the fact that Perpetual did not act in the same capacity in the Triprush proceedings and in the Garbake proceedings. The applicant submitted that Mr Baker’s asserted claim against Perpetual in relation to the dealings in relation to Unit 3, 15 Bennelong Crescent should not be regarded, strictly speaking, as a claim against the petitioning creditor but rather as a claim against a third party. It is not necessary to assess the likelihood of success of such contentions given the factual difficulties facing the asserted cross claim.
Even if there is a legal basis on which these claims may be raised, the claims in relation to the Notts Avenue property are not such as to satisfy me that there is a likely prospect of successfully establishing that there would have been a surplus, had there been a “proper sale”, after meeting Mr Baker’s liability under the guarantee in relation to that property.
Further, the claim as formulated in ground one of the notice of opposition is not presently on foot. There is no explanation for the fact that Mr Baker has not amended the cross-claim in the Montpensier proceedings in which he claims he intends to raise this claim against Perpetual (notwithstanding the opportunity he has had to do so). The evidence does not establish that any such cross claim would be likely to be determined in the near future.
Mr Baker’s calculations of the maximum amount of any claim in respect to the Bennelong Crescent property is on the basis that at or about the time of the offer of $4.25 million the indebtedness under the Garbake loan facility was about $3.7 million. For present purposes the applicant did not take issue with these figures and agreed that the maximum amount Mr Baker himself (as distinct from Garbake) could obtain from a cross-claim on the basis asserted in ground two in the notice of opposition would be in the vicinity of $200,000 to $300,000 plus interest. Of itself, this amount is significantly short of the judgment debt already in place against Mr Baker as a result of the Triprush proceedings.
Taking Mr Baker’s claims at their highest, I am not satisfied by him that he has established that he has a real claim against Perpetual that is likely to succeed in a quantum that is likely to equal or exceed the creditor’s claim such as to constitute “other sufficient cause” within s.52(2)(b) of the Bankruptcy Act that would warrant dismissal of the creditor’s petition.
Nor, on the evidence before the court, am I satisfied that it would be appropriate to quantify the amount likely to be recovered and to order that Mr Baker pay the difference between the judgment debt and the amount he claims he is likely to receive on such claim. Even if Mr Baker were to have a claim in the order of $200,000 to $300,000 as contended in ground two, such an amount would fall significantly short of the Triprush judgment debt. Insofar as it was contended that Mr Baker should have the opportunity to pay the shortfall, there is no evidence before the court as to why this asserted claim has not been brought in the Garbake proceedings or, importantly, as to any possible source of funds or as to Mr Baker’s ability to pay Perpetual any such shortfall. I am not persuaded that it would be in the interests of the administration of justice or of the parties to make such an order.
As to the adjournment application, I have borne in mind that an adjournment of a creditor’s petition may be appropriate in circumstances where the debtor establishes a case which has sufficient integrity to warrant him being given an opportunity to have it litigated. However, having regard to all the circumstances in this case, in particular the fact that the evidence is not such as to establish sufficient prospects of success of the claim or to demonstrate that any such success would result in money being available or required to be paid towards the Triprush judgment that forms the basis for the Bankruptcy Notice, the lack of evidence as to why such claims have not yet been brought in the current Supreme Court proceedings, the uncertainly as to when any such future cross claims would be determined and the absence of any evidence of solvency, I am not satisfied that there is any utility in adjourning the creditor’s petition to allow Mr Baker to formulate and subsequently pursue such claims.
The grounds in the notice of opposition, including the oral elaboration and extension of those claims, are not made out either as a basis to dismiss the petition, adjourn the proceedings or to make any other order sought by Mr Baker.
I am satisfied that Mr Baker committed the act of bankruptcy alleged in the creditor’s petition by failing to comply with the requirements of Bankruptcy Notice NN4139 of 24 September 2010 on 1 November 2010, which was within six months of presentation of the creditor’s petition.
On the evidence before the court I am satisfied with proof of the matters required by s.52(1) of the Bankruptcy Act, including the matters stated in the petition, that the petition was presented in correct form for a debt of more than the minimum amount, that it was served on the debtor and that the debt on which the petitioning creditor relies is still owing. There is no suggestion that the circumstances have changed in that respect from those in existence at the time of the hearing of this matter.
As noted above, there is no evidence to suggest and it was not contended that Mr Baker was able to pay his debts in the sense required by s.52(2)(a) of the Act. On the evidence before the court I am not satisfied that for any of the reasons raised by Mr Baker or otherwise that for “other sufficient cause” a sequestration order ought not to be made.
Accordingly a sequestration order should be made against the estate of Gary James Baker with the usual order as to costs.
I certify that the preceding one hundred and thirty-three (133) paragraphs are a true copy of the reasons for judgment of Barnes FM
Date: 15 April 2011
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