Petratos v Provident Capital Limited - [2009] FMCA 1168

FEDERAL MAGISTRATES COURT OF AUSTRALIA

PETRATOS v PROVIDENT CAPITAL LIMITED

[2009] FMCA 1168

BANKRUPTCY – Application to set aside bankruptcy notice – whether bankruptcy notice an abuse of process – consent judgment against guarantor – creditor serving bankruptcy notice before realising security – no implied stay arising from payments deed between parties – no evidence of improper motive of creditor – application dismissed – indemnity costs refused.

Bankruptcy Act 1966 (Cth), ss.41(6A)(b)

Bakamovic v Investec Bank (Australia) Limited [2008] FMCA 1513
Bank of Credit & Commerce International SA (No 8) [1997] 4 All ER 568
BP Refinery Pty Ltd v Hastings Shire Council (1977) 180 CLR 266
Brunninghausen v Glavanics [1998] FCA 230
Burns v AMP Finance Ltd [2004] FCA 1094
Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264
Cavoli v Etl [2007] FCA 1191
China and South Sea Bank Limited v Tan [1990] 1 AC 536
Codelfa Construction v State Rail Authority of NSW (1982) 149 CLR 337
Deputy Commissioner of Taxation v Catanese [1999] FCA 564
Maxwell-Smith v S & E Hall Pty Ltd [2006] FCA 825
Watts v Adelaide Bank Limited [2009] FCA 420
Williams v Spautz (1992) 174 CLR 509
Yang v Mead [2009] FCA 1202

Applicant:

HELEN PETRATOS

Respondent:

PROVIDENT CAPITAL LIMITED

File Number:

SYG 917 of 2009

Judgment of:

Smith FM

Hearing dates:

16 & 17 November 2009

Delivered at:

Sydney

Delivered on:

17 November 2009

REPRESENTATION

Counsel for the Applicant:

Mr B Skinner

Solicitors for the Applicant:

Mavrakis & Associates

Counsel for the Respondent:

Ms B Nolan

Solicitors for the Respondent:

Tiernan & Associates

ORDERS

The time for compliance with Bankruptcy Notice BN 968/09 is extended nunc pro tunc from 28 April 2009 until the date of this order.
The application to set aside the Bankruptcy Notice is dismissed.
The applicant must pay the costs of the respondent as agreed or taxed pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 917 of 2009

HELEN PETRATOS

Applicant

And

PROVIDENT CAPITAL LIMITED

Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

Ms Petratos applied on 20 April 2009 to set aside a bankruptcy notice issued on 13 March 2009 on the application of Provident Capital Limited (“Provident”). The bankruptcy notice required her to pay the amount of $4,379,479.45 under a judgment of the Supreme Court which was entered by consent in proceedings number 15988 of 2006 in the Supreme Court of New South Wales, together with some interest. The judgment was obtained on 21 November 2008. She now alleges that the issue of the bankruptcy notice was an abuse of process and should be set aside on that ground.
The bankruptcy notice was served personally on Ms Petratos on

28 March 2009, and the time for compliance was initially extended by a registrar upon the filing of the application for setting aside the bankruptcy notice. Unfortunately, and apparently through oversight, further extensions of time for compliance were not ordered at subsequent listings in this court. However, Provident does not today oppose the making of an order nunc pro tunc extending time over the period during which this was overlooked. I shall therefore order that time be extended under s.41(6A)(b) of the Bankruptcy Act 1966 (Cth) from 28 April 2009 until today.
The procedural history of the matter in this Court was explained in a judgment I gave yesterday morning, when refusing Mr Petratos’ application to adjourn the hearing of her application until December or later. I shall not repeat what I said in that judgment, which will be revised and published if the parties request it.
The short background to the matter is that Ms Petratos was at relevant times a director of Tembelli Pty Ltd (“Tembelli”). She is a licensed real estate agent, and Tembelli was the vehicle for her and Mr Kitas to develop a block of 11 home units in Boundary Street, Paddington. The project involved the improvement of the units, the preparation of a strata plan, and the sale of the units as separate lots or as parcels of lots. Their finance for the project was renewed in 2005, when Provident became involved as the provider of capital. Tembelli then gave a mortgage over the whole of the property to Provident, together with a company charge. Joint and separate guarantees were given by Mr Kitas and Ms Petratos. The terms of the loan are not in evidence, but the terms of Ms Petratos’ guarantee and indemnity given on 16 February 2005 show that it was very broadly worded in favour of the lender, giving the lender complete discretion as to calling on the guarantor for payments in relation to the liabilities of Tembelli. The guarantee was unlimited in its amount in relation to “all money payable by the debtor to the lender under the loan agreements”.
The subsequent history of the project and the Provident financing agreements is only sketchily shown in the evidence before me. Tembelli defaulted on its loan, and Provident moved to take possession of the property at some point prior to February 2007 and, it seems, also appointed receivers under the company charge. There were then many efforts made by both Ms Petratos and Mr Kitas and companies associated with them, and by Provident, to consider how best to raise funds to satisfy the Tembelli indebtedness to Provident, including the accruing interest and expenses. Both sides at times developed proposals for refinancing or for sale of the property, and but these did not come to a successful outcome, for various reasons which were not fully investigated in the proceeding before me.
Eventually, Provident sued Tembelli, Mr Kitas and Ms Petratos in the Supreme Court proceedings to which I have referred above. The statement of claim is not in evidence, but it is reasonable to infer on all the evidence before me that it sought recovery from Tembelli for its unpaid liabilities under the loan agreement and security agreements, and sued Mr Kitas and Ms Petratos under their guarantees in relation to the same Tembelli indebtedness. On 24 May 2007, Provident obtained a judgment in those proceedings against Tembelli and Mr Kitas, who were the first and second defendants, in the amount of $4,610,745.10, plus costs in the sum of $2,242. Liability to meet those judgment debts then commenced to run against those defendants, accruing interest under the Civil Procedure Act 2005 (NSW).
The proceedings continued against Ms Petratos, who filed a defence and cross-claim against Provident, making various allegations in relation to Provident’s dealings with Tembelli and herself, and with the secured property. She also counter-claimed for damages under the Trade Practices Act 1974 (Cth) for misleading and deceptive conduct. Efforts to resolve these disputes and to recover the Tembelli and Kitas debts were made during 2008, and agreements for this were replaced by a deed made in October 2008. There is a suggestion from the bar table that it was dated 23 October 2008. It was entitled the ‘payment deed’.
The payment deed is in evidence, and recites the matters I have referred to above and some other matters of history. Provident, Tembelli, Mr Kitas, Ms Petratos and a company related to Ms Petratos, HDL Holdings were parties. It appears from the terms of the deed, and this is supported by some extrinsic evidence, that it was hoped at that time that all the outstanding claims of Provident on Tembelli and both the guarantors could be fully met by the refinancing of the project by Ms Petratos and Mr Kitas using HDL Holdings, so that funds would become available to pay Provident an agreed amount during November 2008. The provision for this payment on or before 17 November 2008 was made in clause 2 of the deed:
2.Payments
2.1The Tembelli parties must pay Provident $4,2000,000 (“settlement amount”) by bank cheque on or before the Tuesday 17 November 2008 (“settlement date”). In exchange, Provident will give a discharge of its mortgage over the property and release of the company charge over Tembelli.
2.2Petratos must pay $50,000 (“Petratos amount”) to Provident by Friday 27 February 2009.
2.3Kitas must pay $100,000 (“Kitas amount”) to Provident by Friday, 27 February 2009.
2.4The amounts and obligations referred to in each of the each of the preceding subclauses are separate and additional.
2.5If Provident does not receive the settlement amount as required under subclause 2.1, then Petratos consents to judgment against her in the court proceedings for $4,250,000. In these circumstances, Provident will only seek payment from Petratos of the $4,250,000, and any interest from 17 October 2008 and costs to which it may become entitled under the judgement.
2.6If Provident receives the settlement amount but does not receive the Petratos amount as required under subclause 2.2, then Petratos consents to judgment against her in the court proceedings for $50,000. In these circumstances, Provident will only seek payment from Petratos of the $50,000, and any interest from 17 October 2008 and cost to which it may become entitled under the judgment.
2.7Petratos has given Provident the forms of consent to judgment referred to in subclauses 2.5 and 2.6. Provident must hold these consents in escrow pending the occurrence of the events referred to in the respective subclauses.
2.8Promptly after Provident receives:
2.8.1the settlement amount, it must return to Petratos the original consent to judgment for the $4,250,000;
2.8.2the Petratos amount, it must return to Petratos the original consent to judgment for the $50,000;
if not otherwise already filed with the court.
2.9Subclauses 2.5 and 2.6 do not limit Provident’s right of action against Petratos for any breaches of this deed other than this clause 2.
In clause 3 the “Tembelli parties” acknowledge that Provident was in possession of the property, and would remain in possession until its mortgage was discharged. It also contained a promise by Provident that it would not “market or otherwise promote the property for sale or lease until after the settlement date”. In the event that the settlement amounts were paid as agreed, releases were given by Provident to Petratos and Kitas.
Clause 5 is an important provision which confirmed the continuing effectiveness of the previous judgment obtained against Tembelli and Mr Kitas, and of Provident’s rights in relation to the security and guarantee, in the event that the settlement anticipated in clause 2 did not occur. It provided:
5.Essential Obligations
Each of the obligations set out in this deed and each reference to time is an essential obligation. If any of the Tembelli parties breaches or fails to comply strictly with any of those obligations, then Provident may take such action as it sees fit in respect of the property, the judgment against Tembelli and Kitas, or such other action as it may determine, whether under the Deed of Loan or the securities or otherwise.
There were other provisions of the deed concerning confidentiality, governing law, and other provisions. Clause 14 provided:
14.The Whole Document
14.1This deed supersedes the 29 September Deed, which no longer has any effect.
14.2This document records the whole agreement between the parties as to the matters set out in this document.
14.3If all the parties have not executed this document but have executed counterpart documents, then this document and the executed counterparts form the one document between the parties.
On the evidence before me, the Tembelli parties were unable to pay Provident $4,200,000 on or before 17 November 2008. Ms Petratos also did not pay her separate liability for $50,000 before 27 February 2009, and it seems Mr Kitas may also not have made his separate payment, although the situation of Mr Kitas is not clear to me.
In accordance with clause 2.5 and 2.7 the forms of consent to judgment attached to the deed were executed by solicitors on behalf of Provident and Ms Petratos, and were filed in the Supreme Court in proceedings number 15988 of 2006, giving rise to a judgment against Ms Petratos for $4,250,000 made on 21 November 2008 and entered on 13 February 2009. That judgment is the judgment relied on in the bankruptcy notice. I note that the certificate of judgment attached to the bankruptcy notice erroneously referred to 2008 in its case number, but no point is taken as to this obvious slip. The judgment provided that it would accrue interest at Supreme Court rates. There was also an order for the payment of costs, but no amount of costs was included in the bankruptcy notice.
There is evidence before me as to attempts by Provident to market the 11 home units after the failure of the payments deed. As I have indicated above, various unfruitful discussions and arrangements had been attempted prior to the payments deed, leaving Provident at the end of 2008 in full possession of the whole of the property, with none of the home units having yet been sold. The deed itself envisaged that the marketing inactivity by Provident would continue, at least until the settlement date, with the expectation that the Tembelli parties would themselves refinance the project and procure a discharge of the Provident security.
After this scheme failed, Provident employed real estate agents to bring the property into a state where the units could all be sold with vacant possession. When doing so, they faced at least one tenant in one of the units who was highly intransigent in relation to vacating the premises. There were extensive proceedings required in the CTTT, and the tenant was not evicted by the Sheriff until May 2009. Only at that point was that unit available for selling, and the whole process of evicting this tenant appears to have delayed the marketing of other units. Ms Petratos in the present proceeding has criticised delays in the marketing, and also some of the prices which were obtained and other aspects of the procedures followed by Provident to realise its security.
At the time of the issue of the bankruptcy notice in March 2009, these efforts had barely progressed at all, and none of the units had been sold. By July 2009, six of the 11 units had been sold, leaving five to be sold. On the most recent evidence, contracts for the sale of the remaining units have been entered into. Some of these have a sale price which has been reduced from the original asking price, and it is envisaged that all contracts will be completed on 7 December 2009. Details of these contracts and the prices for the units which have been attained are not shown in the evidence.
I find that the evidence before me is clearly insufficient to persuade me that there has been any dereliction on the part of Provident in its responsibilities as a mortgagor exercising its powers of sale. To the extent that Ms Petratos’ criticisms in relation to selling the units remain part of her case in this Court, I do not accept those criticisms as being founded on evidence upon which I can give any real weight. Essentially, they remain only her general assertions, without detailed analysis and without any independent support from a qualified witness.
Ms Petratos’ application to set aside the bankruptcy, as amended, makes the following contentions:
Final orders sought by applicant
On the grounds stated in the supporting affidavit or statement of claim, the applicant seeks the following orders:
1.Bankruptcy Notice No. NN968 of 2009 be set aside on the grounds:
a)The issue of the Bankruptcy Notice is an abuse of process in the circumstances that:
i.      That the security held by the Respondent Creditor exceeds the judgment debt.
ii.     (deleted)
iii.     The purpose of the issue of the Bankruptcy Notice was to put pressure on the Applicant to pay the debt and individual court judgment.
iv.     The Respondent Creditor has failed to proceed expeditiously with the realisation of the principal security held by it for the debt, namely the property situated at 146 Boundary Street, Paddington, NSW.
The ground of “abuse of process” for setting aside a bankruptcy notice has support in authority, including the judgment of Emmett J in Brunninghausen v Glavanics [1998] FCA 230 and the judgment of Jacobson J in Maxwell-Smith v S & E Hall Pty Ltd [2006] FCA 825. In the latter, Jacobson J said:
[41] The court's power to set aside a bankruptcy notice arises from s 30 of the Act. But the Act confers no general discretion to set aside a bankruptcy notice that is valid in form and not an abuse of process: Re Briggs; Ex Parte Briggs v DCT (1986) 12 FCR 310 at 311-12; 75 ALR 554 at 556; Re Athans; Ex Parte Athans (1991) 29 FCR 302 at 310; Australian Securities and Investments Commission v Forge (2003) 133 FCR 487 ; 48 ACSR 474 ; [2003] FCAFC 274 at [27].
[42] It follows from this that the court does have power to set aside a bankruptcy notice which can be characterised as an abuse of process: Amos v Brisbane TV Ltd (2000) 100 FCR 82 ; 174 ALR 769 ; [2000] FCA 825 at [21].
[43] If it is apparent to the court that the purpose of a bankruptcy notice is to put pressure on a debtor to pay a debt, rather than to invoke the court's insolvency jurisdiction, the issuing of the bankruptcy notice will be an abuse of process: Brunninghausen v Glavanics [1998] FCA 230; see also Re Sarina; Ex parte Wollondilly Shire Council (1980) 30 ALR 266 at 269-70 ; 43 FLR 163 at 166.
[44] However, it is not an abuse of process if a creditor genuinely intends to pursue the matter if there is default in complying with the notice and there is no evidence of collateral purpose or undue pressure: Slack v Bottoms English Solicitors [2002] FCA 1445 at [15]-[21].
In a sense, every creditor who serves a bankruptcy notice on a debtor hopes to “put pressure on a debtor to pay a debt”, with the implicit threat that if this doesn’t occur a creditor’s petition based on an act of bankruptcy may ensue. There is nothing normally illegitimate in a creditor making use of the bankruptcy procedure of a bankruptcy notice for that purpose. Prima facie, it is a legitimate avenue for recovery of a debt which the law opens up to most creditors.
The concept of putting “pressure on a debtor to pay a debt” which can give rise to setting aside a bankruptcy notice is informed by the object of this ground, which is directed at preventing an ‘abuse of process’. The principles of abuse of court processes address the bringing of a prima facie legitimate process for a predominant purpose for which it was not designed, and which can be characterised as ‘improper’ (cf. Williams v Spautz (1992) 174 CLR 509 at 526). Jacobson J identified at [45] of his judgment the need for an applicant invoking abuse of process principles to set aside a bankruptcy notice to establish that there is not a “genuine” invocation of the court’s bankruptcy jurisdiction. In a sense, the onus falls on the applicant to show the court that the creditor has no legitimate or proper motive for serving a bankruptcy notice, referrable to the objects of the Bankruptcy Act. Cases such as Maxwell-Smith and Brunninghausen illustrate the type of situation which is required to establish that absence of genuine justification for “invoking the court’s bankruptcy jurisdiction”.
None of the recent cases which have addressed the abuse of process ground for setting aside a bankruptcy notice have adverted to the fact that bankruptcy notices are no longer issued as a process of the court, since the amendments which transferred the issuing of a bankruptcy notice from the judicial branch of government to the administrative or executive branch of government. Recent judgments seem to assume that the issuing of a bankruptcy notice can be sufficiently regarded as connected to the judicial process because the notice is subject to setting aside by the court, or because non-compliance will give rise to a ground for bringing a bankruptcy petition, notwithstanding that the issuing of a bankruptcy notice is an administrative and non-judicial activity. It is unnecessary for me in the present case to consider whether this assumption should be questioned, or should be related to concepts of abuse of process in administrative law.

Whatever the foundations for the ground, it appears to me that recent authorities, including the two I have cited above and other cases including Watts v Adelaide Bank Limited [2009] FCA 420, and Cavoli v Etl [2007] FCA 1191, and Yang v Mead [2009] FCA 1202, show that the debtor needs to be able to establish an improper motive of the creditor from evidence which demonstrates that there is no legitimate justification for the serving of a bankruptcy notice in the particular circumstances. Compelling circumstantial evidence of motive is usually required. For example, where a creditor has knowledge that a debtor is clearly solvent, is able to pay the judgment debt from his liquid resources, has made reasonable offers for payment or security, and there is no apparent commercial explanation for the serving of a bankruptcy notice, the court might in the particular context infer an improper purpose for serving a bankruptcy notice. In such a case, threats of insolvency procedures might appear to have no purpose, and to be made with no intention to carry those procedures into effect. An improper collateral purpose might be inferred, even in the absence of any disclosure of the creditor’s true purpose.
Ms Petratos’s case for persuading the Court to draw such inferences, has changed over time. Her case presented today abandoned, expressly or implicitly, some allegations of impropriety by Provident which were originally made. Even in the submissions of Ms Petratos’s counsel her case remained, it appeared to me, fluid. Essentially, it appeared to me that Ms Petratos wished now to persuade the Court that there was an inconsistency in Provident serving a bankruptcy notice in April 2009, in circumstances where it had available to it a sufficient security in the block of home units, and where this was proved with hindsight.
Her counsel acknowledged that generally a secured creditor such as Provident, in the circumstances attending the financing of the present development, has several options in relation to seeking payment of the principal indebtedness from the borrower or a guarantor. These include suing either or both of the principal borrower and the guarantor and pursuing judgments against either of them, and also exercising powers to realise secured properties. Long established authorities have pointed out that the creditor’s remedies in relation to executing on judgments against the debtor, or the surety, include pursuing those persons into bankruptcy, even before securities have been realised to reduce their indebtedness. I referred to these authorities in Bakamovic v Investec Bank (Australia) Limited [2008] FMCA 1513 at [11], including reference to China and South Sea Bank Limited v Tan [1990] 1 AC 536 at 545 in a well-known passage which was also cited in Bank of Credit & Commerce International SA (No 8) [1997] 4 All ER 568 at page 572.
Acknowledging the normal right of Provident to choose to enforce a judgment against a guarantor such as Ms Petratos without first exhausting its rights in relation to the security, Ms Petratos endeavoured to persuade me that Provident had lost this right in the circumstances of the payment deed of October 2008. Although her case for setting aside the bankruptcy notice did not clearly contend that there was an agreement binding Provident not to enforce its judgment debt against Ms Petratos before realising its security, this might appear to have been the effect of the submissions which were made to me (cf. Bakamovic at paragraph [7] and the authorities cited there). She might therefore appear to be contending that the bankruptcy notice was invalidly issued or could not be relied upon because she was entitled to a stay on execution, or because she had arrived at an ‘arrangement’ with the creditor involving a stay on enforcement (cf. Deputy Commissioner of Taxation v Catanese [1999] FCA 564).
The particular focus of the submissions of Ms Petratos’ counsel in this respect was the terms of the payment deed. As I understood him, I was invited to imply from the terms of the deed, particularly clauses 2.1 and 2.5, an agreement which altered the underlying capacity in which Ms Petratos became obligated to pay the judgment debt to Provident from that of guarantor to principal debtor, so that Provident was bound to apply the proceeds of the security in reduction of the judgment debt against her, rather than against the larger judgment debt of Tembelli. Such agreement would, in effect, mean that Provident could not, as against Ms Petratos, account for the proceeds of the security by applying them against the Tembelli debt and holding her liable for any deficit on the principal borrower’s account. It was also contended, as I understood it, that a further implication of the deed was that Provident would not execute against her under the judgment entered pursuant to the deed, until and unless there was a deficit in the application of the security proceeds against that judgment debt.
However, I can find no expressed nor implied support in the payment deed, when construed in the light of the surrounding circumstances, for any of these implied agreements or arrangements, nor foundation for any other expectations held by Ms Petratos which would provide a basis for setting aside the bankruptcy notice. In my opinion, the deed shows no intention to alter the underlying liability of Ms Petratos as guarantor of Tembelli’s liabilities, in particular its liabilities deriving from Provident’s 2007 judgment against Tembelli for $4,612,987.10 plus interest. Rather, the recited background and cl.5 confirmed that a default judgment entered against Ms Petratos under cl.2.5 would represent the agreed quantum of her liabilities as guarantor of the borrower’s indebtedness, now crystallised in the 2007 judgment against Tembelli. The effect of the deed was therefore only to cap the amount which Provident could recover from Ms Petratos under the guarantee at the sum of $4,250,000. From her perspective, it may also have had a benefit of substituting a non-compounding Civil Procedure Act liability for interest for a more onerous contractual rate.
In my opinion, nothing in the deed suggests that the parties intended to alter the rights of Provident in the event that there was default in payment of ‘the settlement amount’, to decide how or when it would exercise its rights of recovery in relation to Tembelli’s indebtedness, whether under the judgment against Tembelli, the judgment against Petratos, or by the sale and realisation of the security. Apart from the express terms of the deed which tied Provident’s hands in relation to exercising powers of realisation during the period up until 17 November 2008, I can find no express nor implied term controlling the timing of Provident’s exercise of its powers of sale as a mortgagee in possession, in particular by obliging it to realise the security before enforcing the judgment against Petratos.
I accept that the deed must be construed in the context of the Supreme Court proceedings which are referred to and recited in the deed, and as an agreement intended to resolve the issues then outstanding in those proceedings. It was hoped to do this by payments made before 17 November 2008, leading to discharge of the security and releases of the guarantors. However, the default provisions did not alter the cause of action upon which Ms Petratos consented to judgment against her, nor Provident’s options in relation to enforcement of its judgments against Tembelli and her.
It follows from this construction of the payment deed, that I do not accept that it would not be open to Provident to apply the proceeds of realising the security against the judgment debt against Tembelli as principal borrower, and to hold Ms Petratos liable for any deficit up to the maximum amount under the judgment debt against her.
The uncontested position is that at the time of the issuing of the bankruptcy notice in March 2009, the full amount of the judgment debt against Tembelli was owing. Provident had a judgment against Ms Petratos allowing it to recover that debt against her as guarantor up to the amount of her capped liability under clause 2.5 of the October 2008 deed. I can find no implication in the payment deed binding Provident at that time to stay execution on its judgment against

Ms Petratos, in particular, while it attempted to realise the security and apply it in reduction of the Tembelli debt. Such an implication would be contrary to the normal legal position of a creditor in Provident’s position, and for that reason does not appear “reasonable and equitable”, “necessary to give business efficacy to the contract”, “so obvious that it goes without saying”, and in conformity with the express terms of the deed (cf. BP Refinery Pty Ltd v Hastings Shire Council (1977) 180 CLR 266 at 283, and Codelfa Construction v State Rail Authority of NSW (1982) 149 CLR 337 at 347).
I therefore am unable to identify any breach of contract or arrangement, or other conduct on the part of Provident, which was inconsistent with the expressed or implied terms of the 2008 payment deed in any manner which would allow the issue of the bankruptcy notice to be characterised as an abuse of process, or otherwise give rise to a ground for setting aside the bankruptcy notice. On my construction of the payment deed, and in the context of Provident’s general rights as a creditor to enforce a judgment against a guarantor before realising and accounting for the proceeds of its security, there was no impropriety in terms of the legal, or for that matter, moral or ethical conduct of Provident Capital in pursuing Ms Petratos by way of a bankruptcy notice in March 2009, even if at that time it was also contemplating an attempt to realise its security.
When considering Provident’s decision to serve a bankruptcy notice on Ms Petratos at that time, it is notable that there is no evidence before me that there was no basis upon which Provident might have been concerned at that time as to her solvency and ability to meet her judgment debt, even if eventually she was shown to be liable only for a part of the amount of the judgment debt in the course of Provident’s accounting to the principal borrower and the guarantor for the proceeds of realising the security. It remains possible, even likely, that Provident may have been uncertain at that time whether there would be a deficit against Tembelli’s liability, and may have lacked confidence in

Ms Petratos’ solvency at the future time when the security was fully realised. In such a situation it might appear prudent, and certainly not an abuse of process, for the creditor to safeguard itself in relation to a future possible insolvency of the guarantor, to serve a bankruptcy notice so as to obtain priority for the earliest possible act of bankruptcy.
The actual motives of the managers of Provident in the present case for serving the bankruptcy notice were poorly explored in evidence, and I am not persuaded that they were shown not to be legitimate motives, involving a proper concern about Ms Petratos’ financial position.

Ms Petratos has not presented evidence that she was clearly solvent and able to satisfy the whole or part of the judgment debt in March 2009, nor that Provident had no reason to be concerned about this. Her evidence to the court does not ascend beyond a personal belief on her part that Provident has pursued a disagreeable path, when exercising its right to enforce the judgment to which she consented, by way of issuing a bankruptcy notice before selling the secured properties. I am therefore far from satisfied that she has established an abuse of process answering the terms of the authorities cited above, or having a parallel with the facts in the cases where abuse of process has been found in relation to a bankruptcy notice.
My above reasons have addressed the case principally presented at the hearing of Ms Petratos’ application. However, the particulars of alleged abuse of process listed in the amended application, extracted above, were not abandoned and must also be addressed.
In relation to the first particular, in my opinion it suffers both from a misconception as to Provident’s legal position in relation to the security, and also fails in its factual foundations. The misconception which emerged during submissions, concerned the identification of the judgment debt against which the prospective proceeds from the security should be compared. Ms Petratos submitted that this was the judgment against her, since Provident would be exercising powers of sale upon a primary obligation to account for the proceeds against the liability and amount of Ms Petratos’ judgment and not by reference to the larger indebtedness of the Tembelli judgment. However, as I have explained above, the judgment against Ms Petratos did not alter the basis of Provident’s rights and obligations when accounting for the proceeds of sale against the liabilities of principal borrower and guarantor, notwithstanding that these became quantified in the respective judgments against each of them. In my opinion, at all relevant times Provident has been entitled to enforce its judgment against Ms Petratos to such extent as is covered by the outstanding liability of Tembelli. Although the maximum amount recoverable from her is capped at an amount less than Tembelli’s judgment debt, she remains ultimately liable for the deficit after accounting for the proceeds received by Provident from its security until Tembelli’s liability is fully discharged.
It is undoubted that at the time of issue and service of the bankruptcy notice, Tembelli’s outstanding liability exceeded the amount demanded in the bankruptcy notice. The contention that an abuse of process was shown because ‘the security held by the respondent creditor exceeds the judgment debt’ therefore invited the use of hindsight in relation to proceeds subsequent realised by Provident and anticipated to be realised in the future.
The most recent evidence projected a substantial deficit when accounted against the Tembelli judgment debt, and an uncertain deficit when accounted only against Ms Petratos’ judgment debt. The most recent affidavit from the manager of the respondent, Mr O’Sullivan, attached an accounting schedule of the proceeds received between June 2009 and November 2009, together with anticipated settlements in December. It shows a projected deficit of $1,361,536.62, against the Tembelli judgment and its accruing interest. For the reasons explained above, I accept that this reflects a legal position which Provident is entitled to take. In my opinion, it clearly refutes Ms Petratos’ argument that hindsight has demonstrated that in March 2009 there was no proper basis for Provident to believe that it might need to recover a substantial amount from Ms Petratos under the consent judgment against her.
Moreover, even if Provident was bound by implied terms in the 2008 payment deed to account for the security proceeds against the lesser amount of the judgment against Ms Petratos rather than the Tembelli judgment, the evidence does not satisfy me that no deficit would have been in prospect in March 2009 requiring possible recourse to the liability of Ms Petratos. I was presented with no contrary analysis, except by way of submissions which glossed over amounts of interest and other liabilities which would properly be brought into account by Provident. Moreover, as was submitted by Provident, a projection which had been made by Mr O’Sullivan in July 2009 by reference to the judgment against Ms Petratos, when adjusted in the light of later actual and anticipated receipts, still points towards a deficit after full realisation of the security. I am therefore not satisfied as to the factual basis of the contention made in the first particular of the amended application, as well as its legal basis.
In relation to particular 3 of the amended application [particular 2 was abandoned], as I have found above, I am not satisfied that there is any evidence suggesting that the “purpose” of the issue of the bankruptcy notice was to put improper pressure on Ms Petratos to pay the judgment debt or arrive at an acceptable arrangement with Provident in relation to her liability. I am not satisfied that there was any collateral purpose, nor that Provident had any purpose other than to safeguard its position in relation to Ms Petratos’ liability in the event that she was or became insolvent. That is, that an improper purpose existed in March 2009, in the minds of any person relevant to assessing the purposes of Provident Capital.
Mr O’Sullivan was cross-examined, and might appear to have revealed some understandable confusion as to the history of the matter, as to the legal basis for the Provident Capital’s claims against Ms Petratos and Tembelli, and as to the submissions on these matters which were made on behalf of his company by its counsel. Nowhere in cross-examination was any ulterior or collateral purpose for serving the bankruptcy notice clearly identified and put to Mr O’Sullivan. I am not persuaded that any of his responses provided evidence that Provident Capital issued the bankruptcy notice in March 2009 as an abuse of process.
In relation to particular 4 in the amended application, the contention that Provident unreasonably delayed realising its security never achieved substance beyond a general assertion on the part of

Ms Petratos. It was met by detailed affidavits by Provident’s agents and solicitor, explaining in particular the difficulties in obtaining vacant possession and pursuing the sale of the units on an individual basis, which I accept. The October 2008 deed itself provided for a delay on the part of Provident, and the marketing of the units then proceeded in a difficult economic climate. I am not at all persuaded that there was a failure to proceed expeditiously with the realisation of the principal security. Even if marketing could have proceeded faster, there is no evidence which persuades me that Provident’s failure to have made any sales before serving the bankruptcy notice in March 2009 reflects adversely upon Provident’s motives and purposes when doing that.
In this respect, I note that Ms Petratos has at no point approached the Supreme Court of New South Wales to obtain a stay on execution of the judgment debt against her, nor commenced any other proceedings in relation to the conduct of Provident as mortgagor in possession and exercising powers of sale. I pointed to the absence of any stay on enforcement, when refusing the adjournment application made at the start of the hearing (citing Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264 and Burns v AMP Finance Ltd [2004] FCA 1094).
There is now evidence before the Court as to Provident’s marketing effort since the service of the bankruptcy notice and commencement of this application. Ms Petratos was given the opportunity to explore this during adjournments. However, no evidence before the Court as to events after March 2009 persuades me that they provide hindsight to inform the purposes for which the bankruptcy notice was issued in March 2009, so as to provide any evidence of the alleged abuse of process.
Weighing up all the evidence before me, and the submissions that have been made, I am not persuaded that a ground for setting aside the bankruptcy notice has been made out and I therefore refuse the application.
[After receiving further submissions on costs]
Provident applies for costs beyond those taxed under the scales applied under the bankruptcy rules. It seeks indemnity costs by reason of the service of a “without prejudice save as to costs” letter one week ago, on 11 November 2009. In this letter, Provident’s recent projections as to the realisation of the security were put to Ms Petratos, being the projections which were put into evidence by Mr O’Sullivan and which I have addressed above. As I have indicated, he projected a substantial deficit based upon the outstanding principal and interest owing by Tembelli under the 2007 judgment debt of $4,612,987.10. Provident offered to accept a lesser amount in discharge of Ms Petratos’ liability. There was also an offer to consent to the extension of time for compliance with the bankruptcy notice beyond the dismissal of the application, although it appears to me that this Court would not have jurisdiction to order this. The letter states: “We advise that this offer will expire at 10.00am on 17 November 2009”, which is today.

There are several reasons why I do not consider that Ms Petratos’ failure to accept this offer before 10 am today should give rise to an award of costs greater than scale costs. The offer was very late, and I am not persuaded that the short time allowed for its consideration while the matter was actually under argument provided sufficient time.
Also, I am not satisfied that it would have been unreasonable for Ms Petratos to have preferred to have proceeded with the hearing. As I have indicated above, she made submissions disputing the assumptions under which Mr O’Sullivan’s most recent projections were arrived at, and I would not characterise her submissions as manifestly hopeless.
Furthermore, the outcome of the proceedings shows nothing as to the reasonableness of the compromise offer made to Ms Petratos. The amount which she eventually will be held liable for under a final accounting for the proceeds of the security is a matter which I am unable to form any judgment about, even if it was appropriate for me to do so. The appropriate amount in a commercial sense that Provident should or should not settle with Ms Petratos in relation to her liability at this point of time is not a matter which was being litigated in this Court. I consider that it would be inappropriate for me now to embark upon an assessment of the evidence to decide whether it shows that the refusal of Provident’s offer was unreasonable.
For all these reasons I decline the application for some costs to be awarded on an indemnity basis.

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

Associate: Michael Abood

Date: 30 November 2009