Phontos v Carlamax Properties Pty Ltd
[2011] FMCA 205
•30 March 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| PHONTOS v CARLAMAX PROPERTIES PTY LTD | [2011] FMCA 205 |
| BANKRUPTCY – Application to set aside Bankruptcy Notice – where applicant owed respondent money in his capacity as guarantor of a mortgage – whether cross demand equal to or exceeding judgment debt – where applicant had a claim against first mortgagee which, if successful, would promote the priority of the respondent (as second mortgagee) and entitle it to full proceeds of sale – where applicant demanded that respondent seek to alter the security priority of its mortgage – whether affidavit in support of application met requirements of rule 3.02(2) of the Rules and so extended time for compliance with Bankruptcy Notice – abuse of process – where applicant alleged purpose of bankruptcy proceedings was to prevent further litigation against respondent. |
| Bankruptcy Act 1966, ss.40(1)(g), 41(6A), 41(6C), 41(7) |
| Re A Bankruptcy Notice [1934] CH 431 Re Smith; Ex parte Chesson (1992) 106 ALR 359 Re Judd; Ex parte Pike (1924) 24 SR(NSW) 537 Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 30 ALR 433 James v Abrahams (1981) 34 ALR 657 Streimer v Tamas (1981) 37 ALR 211 Webb v Hunter [1995] FCA 1443 Minister v Jia Legeng (2001) 205 CLR 507 Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 Williams v Spautz (1992) 174 CLR 509 |
| Applicant: | MICHAEL PHONTOS |
| Respondent: | CARLAMAX PROPERTIES PTY LTD ACN 095 176 248 |
| File Number: | SYG 310 of 2011 |
| Judgment of: | Raphael FM |
| Hearing date: | 17 March 2011 |
| Date of Last Submission: | 17 March 2011 |
| Delivered at: | Sydney |
| Delivered on: | 30 March 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr R Freeman |
| Counsel for the Respondent: | Mr B Skinner |
| Solicitors for the Respondent: | Raj Lawyers |
ORDERS
Application dismissed.
Applicant to pay the Respondent’s costs to be taxed, if not agreed, in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 310 of 2011
| MICHAEL PHONTOS |
Applicant
And
| CARLAMAX PROPERTIES PTY LTD ACN 095 176 248 |
Respondent
REASONS FOR JUDGMENT
On 19 January 2011, after a hearing before Rolfe J in the District Court of NSW, Carlamax Properties Pty Ltd, the respondent, obtained judgment against the applicant and two companies associated with him in the sum of $648,872.52. The applicant was a director of those companies and a guarantor of their obligations. Rolfe J’s decision was given ex tempore and neither a copy of the transcript, nor of his Honour’s revisions thereto (if any) in the form of a final judgment have been provided to me. Mr Freeman, who appears for the applicant in these proceedings, also appeared in those and concedes that the hearing was a contested one. He also concedes that no application to stay the judgment has been made. Nor has any notice of appeal been filed. On 3 February 2011 the Official Receiver issued Bankruptcy Notice 0656/2011 which was personally served on the applicant on the same day. On 24 February 2011 the applicant, who is a solicitor, filed an application with this Court. The final orders sought by the applicant were:
“1.The Bankruptcy Notice No 0656 of 2011, which was served on me on 3 February 2011, be set aside. A copy of that Bankruptcy Notice accompanies this application to costs.
INTERIM ORDERS SOUGHT BY THE APPLICANT
The applicant seeks the following interim orders:
1.That the time for compliance with the Bankruptcy Notice be extended up to and including the date of final hearing to set aside the Bankruptcy Notice.”
It will be seen that the application makes no mention of the provision of the Bankruptcy Act 1966 (Cth) (the “Act”) under which it is brought. There was filed with the application an affidavit sworn by Mr Phontos. In paragraph 1 he states:
“I seek to set aside the Bankruptcy Notice 0656 of 2011 served on me on 3 February 2011 on the ground that I have a cross-demand equal to or exceeding the amount claimed in the Notice which I could not have set up in the action or proceeding in which the judgment in respect of the Notice has been issued was obtained.”
The words used by the applicant echo those contained in ss.40(1)(g) and 41(7) of the Act, the latter of which is in the following form:
“Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter‑claim, set‑off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter‑claim, set‑off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.”
It will be seen that, provided the applicant complies with the provisions of the Bankruptcy Act and Rules, there is no need for the interim application that was made.
The harmonised Bankruptcy Rules applying in the Federal Magistrates Court are the Federal Magistrates Court (Bankruptcy) Rules 2006 where at Pt 3, Rule 3.02(2) the following provisions are set out:
(2)If the application is based on the ground that the debtor has a counter claim, set-off or cross demand mentioned in paragraph 40(1)(g) of the Bankruptcy Act, the affidavit must also state:
(a)the full details of the counter-claim, set-off or cross demand; and
(b)the amount of the counter-claim, set-off or cross demand and the amount by which it exceeds the amount claimed in the bankruptcy notice; and
(c)why the counter-claim, set-off or cross demand was not raised in the proceeding that resulted in the judgment or order in relation to which the bankruptcy notice was issued.”
Whilst there are a number of complex issues raised in this application, it is well to consider first the threshold point as to whether the applicant’s affidavit of 24 February 2011 complies, the effect of any subsequent affidavits filed by the applicant and, if necessary, the effect of non-compliance.
The affidavit
Mr Phontos’ affidavit, of which paragraph 1 has already been extracted, continues by deposing to the fact that the judgment debt arose out of obligations as a guarantor. He explains that the loan, secured by a mortgage, is on some strata title law land situated at 110 Twin Rd, North Ryde and he then annexes the mortgage. At paragraph 4 of the affidavit, Mr Phontos annexes a copy of a letter from Property Builders Pty Ltd, the primary obligor under the loan, to a firm of solicitors known as Raj Lawyers. The substance of the letter is set out below:
“Dear Sir
Property Builders Pty Ltd & Ors ats Carlamax Properties Pty Limited
District Court Proceedings No.2010/11005
We attach copy letter from Gadens Lawyers dated 2 November 2010. The auction date referred to in that letter is now 27 November 2010.
Also attached is copy Notice of Appeal in proceedings number 286721 / 2008. The Appellants contend that the mortgage in favour of Adelaide Bank is empty and ought to be discharged (paragraph 6). If that contention is correct, your client is the first mortgagee and would have been paid in full from the settlement of lot 3 in September 2008.
As requested in the letter from Gadens, please let us know if your client will provide a discharge of mortgage on lot 1 for zero consideration as a matter of urgency.
We advise that orders were sought by Adelaide Bank that no moneys be paid to your client even in the event the total debt be discharged from any proceeds of sale. We were successful in opposing such orders wherein any net proceeds following discharge are to be immediately paid to your client.
We further advise that Property Builders (Constructions) P/L (PBC) is proceeding to finalise its claims as against Tresedar, Tetbury and Mr Evanian and will be seeking a final hearing date in the first half of 2011. PBC is willing to assign to your client so much of its projected claim to discharge the uncontested part of your client’s claim. As you know our clients’ claims are based on payments to be made under a Deed of Settlement as well as consequential loss claims and opposition to such claims is without substance or base.”
The letter from Gadens referred to in the extracted letter is dated 2 November 2010 states relevantly:
“Dear Sirs
Adelaide Bank Limited and Ors v Property Builders Pty Limited and Anor
It is a condition of our client’s mortgage that our client’s consent is required for any sale of the Property.
We note that Unit 1, 110-112 Twin Road Ryde, has been listed for sale with McGrath real estate, and is scheduled for auction on 20 November 2010.
To enable our client to consider the proposed sale, kindly provide us with:
1. a copy of the front page of the contract and any special conditions.
2. a copy of any agency agreement.
3. confirmation from Carlamax Properties Pty Ltd, the second registered mortgagee, that they will provide a discharge of mortgage for zero consideration; and
4. confirmation that the full net proceeds of sale will be available to our client on settlement.
Our client reserves its rights generally including under the mortgage, loan agreement, guarantee and judgment.”
Adelaide Bank is the first mortgagee of the property of which the respondent is the second mortgagee. The proceedings, 286721 of 2008, which resulted in a judgment of Simpson J in the Supreme Court of NSW revolved around the validity of the mortgage to the Adelaide Bank. Property Builders Pty Ltd and Mr Phontos argued that, for various reasons, the Adelaide Bank mortgage was not valid. If they had been successful it would have meant that the second mortgagee would have been promoted and thus would have received the full amount of the proceeds of sale of the units constructed on the property and would have had its loan repaid in full. However, Property Builders was not successful so no money was payable to Carlamax, nor would any money be due to it from the forthcoming sale. At paragraph five and six of the affidavit, Mr Phontos says:
“In the event that PB and I are successful in the Court of Appeal the Respondent ought to have been the first mortgagee of the land in its mortgage and I will demand that the Respondent seek the full amount of its debt and any further reasonable interest in the future from Adelaide Bank Limited. Adelaide Bank has received payment of approximately $2,500,000 from the sale of lots 1 to 4, 110 Twin Road, North Ryde.
I could not make that demand in the proceeding that resulted in the judgment to which the Notice was issued pending the outcome of the proceedings in the Court of Appeal.”
Paragraphs seven and eight of the affidavit deal with the forthcoming sale of unit 5. In paragraph eight Mr Phontos estimates that the sale price may yield about $50,000.00 in reduction of the second mortgage to Carlamax. This estimate is made on the basis of the status quo between Property Builders and the Adelaide Bank. The balance of the affidavit deals with the further claim by Mr Phontos that the notice is an abuse of process. An application of that type is one to which s.41(6A) of the Act applies:
“(6A)Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a)proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b) an application has been made to the Court to set aside the bankruptcy notice;
the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.”
To that extent, the prayer for interim relief is relevant.
Mr Phontos describes his rights against the respondent as a cross demand. Such a demand was seminally described in Re A Bankruptcy Notice [1934] CH 431 at 440 and cited in Re Smith; Ex parte Chesson (1992) 106 ALR 359 at 363-4. Hill J commences at 363 by illuminating the policy behind the exclusion from the category of acts of bankruptcy of those cases where the debtor has a counter-claim and cites the explanation provided by Maughan AJ in Re Judd; Ex parte Pike (1924) 24 SR(NSW) 537 at 540 in a passage cited with approval by Lockhart J in Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 30 ALR 433 at 437:
“The object of the legislature in providing machinery for the setting aside of a bankruptcy notice where the judgment debtor has a cross-demand is obviously to prevent a judgment creditor from pursuing bankruptcy proceedings when, as between himself and the judgment debtor, the balance of the account is in favour of the judgment debtor…”
His Honour then proceeds to consider the meaning of the phrase “cross demand” and states:
21. The concept of "cross-demand" appears, however, to be the widest of the three expressions used. Of it Lord Hanworth MR said (at 438):
"If a cross-demand is only to be interpreted as meaning something which could have been introduced into the action by way of counter-claim, it adds nothing to the word `counter-claim'. `Cross-demand' seems to me to be a word introduced in order to give a wider ambit to the meaning of these claims, something that would not be described, certainly, as a set-off, something that could not have been brought in the action, something that still lies
outside a counter-claim, but is of a nature which can be specified and which is of such a nature that it equals or exceeds the amount of the judgment debt. I do not desire to say what `cross-demand' may include, but it is not difficult to say that it does not include a claim of such uncertain nature as appears in these Chancery proceedings.”22. A similar view was expressed by Maughan A.J. in Re Judd (supra at 539-40), where his Honour said that the word "cross-demand" encompassed a claim for unliquidated damages in tort and that a cross-demand under the section need have no connection with the cause of action out of which the judgment debt arose. As his Honour observed, after discussing the case law:
“These cases are all in favour of an unrestricted meaning being given to the word”.
23. I think, in the present case, that the claim which the Debtor has against the Judgment Creditor can aptly enough be termed a cross-demand. It is a claim, sounding in money…”
The cross demand identified in the affidavit of 23 February 2011 is not a cross demand against the current creditor. It is, in effect, little more than a ground of solvency. It is as if the applicant is saying to his creditor “I am not insolvent because I have a claim against X which, if successful, will enable me to repay you.” Given the evidence in the affidavit that the property is about to be sold and there being no further evidence which would associate the claim against the Bank of Adelaide with the respondent, there is no obligation existing for the creditor to pay any money to the debtor. The creditor has not taken an assignment of Mr Phontos’ rights against the Adelaide Bank, such as they are. The creditor’s right to receive the money allegedly wrongfully obtained by the Bank of Adelaide without further litigation between it and the bank can only exist if the creditor was made a party to the Adelaide Bank proceedings and itself sought an order for payment of the security monies to it. At the time of the swearing of Mr Phontos’ affidavit Carlamax was not a party to those proceedings.
In James v Abrahams (1981) 34 ALR 657 a Full Bench of the Federal Court, Deane, Fisher and Lockhart JJ, considered an alleged counter-claim, set-off or cross demand where the debtor was claiming that the creditor held certain property in trust for her. Whilst the majority, Deane and Lockhart JJ, held that there was a prima facie case that the creditor held certain land in trust for the debtor and herself, they opined:
“The debtor's claim to a declaration that the Cromer land is held upon trust for the creditor and himself related to property which, on the evidence, is valued at $90,000. If the debtor's claim prevails, the value of his beneficial interest in that property will exceed the amount of the judgment debt against him. His claim is not, however, a claim that the creditor pay him an amount of money. It is not a claim in respect of a money demand, either liquidated or unliquidated. It is a claim for the proper administration of the trust which he alleges exists and, one would presume, ultimately for an order for sale or the appointment of a different trustee for sale.
…
The debtor's claim against the creditor for a declaration of trust in the present case is neither a claim which sounds in money nor a claim for immediate delivery of a specific chattel. Indeed, even if the debtor succeeds in obtaining against the creditor a declaration of trust and, ultimately, an order for sale, that declaration and order would not provide legal justification for a refusal to pay the amount of the judgment debt on account of money lent. It follows that the debtor's primary claim in the present matter is not a counterclaim, set-off or cross demand of the relevant type.”
If Property Builders is successful in its appeal against Adelaide Bank it would, at best, hold any money received in trust for the second mortgagee and the money might thereby find its way to Carlamax. However, Mr Phontos was sued as a guarantor under a guarantee which is annexed to his affidavit and contains the following clauses:
“2. Guarantee and indemnity
The guarantor irrevocably and unconditionally guarantees to the Lender the due and punctual payment of the Debt to the Lender and the due and punctual performance of all the obligations undertakings and provisions contained in or implied by the Documents other than those imposed on the Lender and indemnifies the Lender against all loss damage costs and expenses suffered or incurred by the Lender as a result of any failure by any person to pay in a due and punctual manner the Debt on due date or as a result of any breach of any of the covenants and conditions contained in or implied by the Documents.
The Guarantor must pay the Debt immediately on demand to the Lender.
3. Continuing guarantee
This Guarantee is continuing and irrevocable and the obligations of the Guarantor are absolute and unconditional in all circumstances. The Lender is not obliged to take any action against any person or under any security prior to claiming from the Guarantor.
…
5. Principal obligation
5.1This Guarantee is a principal obligation and will not be treated as ancillary or collateral to any other obligation to the intent that this Guarantee is enforceable although the Documents or any other obligation arising between the Lender and the Borrower or any other person becomes in whole or part unenforceable for any reason.
5.2This Guarantee is in addition to and not in substitution for any other rights which the Lender may have.”
In all these circumstances, I fail to see how it can be said that the matters referred to in the affidavit of 23 February 2011 would constitute evidence of a cross demand equal to or exceeding the amount of the claim. It is no more than an indication that in the happening of certain circumstances, the principal obligee of the respondent would have funds available to repay its obligations and thus effectively release the debtor from his own. But the debtor is by virtue of the deed of guarantee an independent obligor who has not shown the existence of any cross-claim, set-off or cross demand against the creditor.
The further affidavits of the applicant
The applicant relies on what fell from Lockhart J in Re Brink (supra) where his Honour discussed the nature of the evidence that is to be brought in support of an application under s.41(7):
“Upon the hearing of a matter under subs.41(7) the Court has before it the initial affidavit which brings the subsection into play. There may of course be no other evidence. On the other hand, there may be a great deal of evidence. This will depend on the circumstances of each case. Plainly, this Court has power to permit the debtor to supplement his case by additional evidence…
In my opinion the affidavit cannot merely contain an assertion that the debtor has a counterclaim, set-off or cross demand which he could not have set up in the action in which the judgment or order was obtained. The affidavit must show a counterclaim, set-off or cross demand which equals or exceeds the amount of the judgment debt and which the debtor could not have set up in the action in which the judgment or order was obtained: see Vogwell v. Vogwell; Ebert's case; Re A Debtor per Slesser L.J..
It is as well to remember that the initial affidavit has to be filed within a limited time, namely, the number of days after service of the bankruptcy notice upon the debtor fixed by the Registrar. These times are fixed by him without any knowledge on his part of the possibility of a counterclaim, set-off or cross demand being propounded by the debtor. In many cases it is difficult, if not impossible, for the debtor to present more than a mere outline of his case in the time available.
I do not think any good purpose would be served by my attempting to express a definitive formula as to what the original affidavit must contain. That must depend in every case on the particular facts and circumstances: see Re A Debtor; Ex parte The Debtor v. Tossoun per Upjohn L.J..
The fact that it is within the power of the court to determine when the hearing of a matter under s 41 (7) will take place, and thus the length of the extension of time to comply with the requirements of the bankruptcy notice; and the difficulty, if not impossibility in some cases, of the initial affidavit being anything other than a mere outline of the debtor's case due to the temporal constraints imposed by the notice, all point to the conclusion that the courts should adopt a benevolent construction to the initial affidavit.” [439 - 440]
His Honour’s views have long been accepted as authoritative. However, in Re Brink he found that the original affidavit did not answer the description of an affidavit required by s.41(7) because it did not establish that the applicant could not have brought his claim in the original proceeding. Mr Phontos filed two further affidavits in the instant case. One on 11 March and one on 17 March. The affidavit of 11 March refers to the proceedings in the District Court before Judge Rolfe and, in particular, the cross-examination of the sole director and shareholder of the respondent company. It deals with the circumstances in which the respondent allowed the postponement of its mortgage to the Adelaide Bank. It states that Mr Phontos has received advice from counsel to join the respondents to the proceedings before the Court of Appeal and that he intends to file a notice of motion seeking that joinder. He exhibits demands that Mr Phontos and Property Builders have served upon Carlamax which state as follows:
“MP, PB and PBC demand that Carlamax seek an account of the proceeds of sale of Villa 4 (defined below) and the payment of its full debt from Gadens, Lawyers and / or Eurofinance Capital Ltd being the judgment debt obtained by Carlamax in District Court Proceedings matter no. 2010/110055, its associated costs and interests arising from the failure of Gadens and/or Eurofinance to pay the proceeds of the sale to Carlamax on the discharge of its first mortgage.”
The demand that a party seek an account is not a demand sounding in money; James v Abrahams (supra). The second demand annexed to the affidavit states:
“MP, PB and PBC demand that Carlamax seek to alter the security priority of its mortgage so that its mortgage has priority over the mortgage of Adelaide Bank Ltd.”
That is also not a demand sounding in money. In my view, even if the second affidavit was permitted to supplement the first, it advances the applicant’s case no further.
The third affidavit merely annexes a copy of the Notice of Motion filed in the Supreme Court for the appellants to file an amended Notice of Appeal which seeks to join Carlamax as the fourth respondent but in respect of the orders sought asks relevantly for:
“7. Postponement of registered mortgage no. AE 48119 giving priority to mortgage no. AC 741324 over mortgage AB 566694 be withdrawn.
8.The first respondent account and pay to the fourth respondents such amount as is required to discharge the debt of the appellants to the fourth respondents to the net proceeds of sale of lots 3, 1 and 5 in strata plan 77529 and account and pay to the appellants the balance of such proceeds.”
This Notice of Motion has not yet been heard. The amended Notice of Appeal has not yet been permitted to be filed, the creditor in these proceedings has not been joined as fourth respondent and, most significantly, the appeal seeks an account which does not constitute a cross demand sounding in money.
I am not satisfied that the applicant debtor has established that he has a cross demand of the type required by s.41(7) and the authorities. Neither am I satisfied that the affidavit of the applicant complies with the Act and Rules, the effect of which shall be discussed below.
The abuse of process claim
I have already noted that, on its own, the abuse of process claim was one which would have required the leave of the Court to extend time for compliance with the Bankruptcy Notice. No such leave was sought directly from the Court or obtained prior to the time for compliance running out, although there was the interim application. The normal procedures in this Court is for an applicant to apply to a Registrar for such an extension of time, which the Registrar considers on its merits. If the Registrar refuses the extension of time, the debtor could apply for review of that decision and, in my view, the effect of such an application would be to prevent an act of bankruptcy having been committed provided the original application was made within time Streimer v Tamas (1981) 37 ALR 211.
In Webb v Hunter [1995] FCA 1443 a Full Bench, Burchett, Carr and Tamberlin JJ, contrasted the situation where an applicant files an affidavit which does comply with the provisions of s.41(7) and one that does not. It noted that in James v Abrahams (supra):
“…their Honours expressed their conclusion in the following terms:
"It follows that the time for compliance with the bankruptcy notice was not extended by the provisions of s.41(7) and that the Court could not, on the evidence, be satisfied that the debtor had a counter-claim, set-off or cross-demand of the kind mentioned in s.40(1)(g).””
The Court compared that situation with one in which the affidavit did comply and said at [15]:
“Of course, if the affidavit does comply with s.41(7), an automatic extension of the bankruptcy notice is obtained, notwithstanding that ultimately the Court does not accept the sufficiency of the case shown by the affidavit, i.e. the Court is not "satisfied" upon the question raised by it. That follows from the terms of the subsection.”
In the instant case, I have found that the affidavit does not comply with the terms of s.41(7) and, therefore, there was no effective extension of time for compliance with the Bankruptcy Notice. How does that affect the application to set aside the notice on the grounds of abuse of process? This is a matter coming under s.41(6A) and (6C) in respect of which the rules say:
“3.01 Extension of time for compliance with bankruptcy notice (Bankruptcy Act s 41 (6A) and (6C))
(1)An application for an extension of time for compliance with a bankruptcy notice must be accompanied by:
(a) a copy of the bankruptcy notice; and
(b) an affidavit stating:
(i) the grounds in support of the application; and
(ii)the date when the bankruptcy notice was served on the applicant; and
(c)a copy of any application to set aside the judgment or order in relation to which the bankruptcy notice was issued and any material in support of that application.
(2) The application may be made in the absence of a party.
(3)If an order extending the time for compliance with a bankruptcy notice is made, the following documents must be served on the respondent creditor within 3 days after the order is made:
(a) the application;
(b) the order;
(c) the supporting documents.
(4)The application need be heard in open court only if it is for an extension of time to a date after the first court date.
It seems clear from Order 3.03(3) that the application is one intended to be made to a Registrar. In this case, no such application was made. In my view, the failure to make this separate application and allowing the ground to piggyback on the s.41(7) ground means that, if the s.41(7) ground fails because the affidavit is non-compliant, then there is no extension of time which would serve the abuse of process claim. The act of bankruptcy will have taken place prior to the matter coming before this Court and, therefore, the application lacks utility. In case I am wrong about this finding, I propose to deal shortly with the merits of the application itself.
In the affidavit filed on 23 February 2011, Mr Phontos explains in some detail how a company with which he was associated, Property Builders (Constructions) Pty Ltd (“PBC”) was a further guarantor of the loan to Carlamax. He then goes on to talk about a deed of settlement and release that PBC entered into with three other parties under which these parties would pay certain monies to PBC. Later those three companies commenced proceedings against PBC. He goes on to make reference to the employment of a solicitor who also acted for the respondent in the current proceedings. He refers to the District Court proceedings in respect of which judgment was obtained against him and notes that a cross-claim was filed in those proceedings against the three parties. He states that on 23 November 2010 PBC offered to assign to the respondent so much of its projected claim in the cross-claim to discharge the uncontested part of the respondent’s claim in the District Court Proceedings and then says:
“25. On 19 January 2011, the Respondent obtained verdict and judgment against PB, PBC and me in the amount of $648,872.52 in the District Court Proceedings.
26.In the circumstances, I believe the Notice has been issued for an ulterior purpose to the purpose of seeking payment of its particular debt, being to prevent PBC from enforcing the Deed.”
There is nothing in the subsequent two affidavits of the applicant which I believe adds to this evidence. In his written submissions, counsel for the applicant states:
“52. The concept of “abuse of process” in this context involves a party using court proceedings and procedures for a purpose unrelated to the objectives which the Court process is designed to achieve. The concept of “abuse of process” was considered extensively by the High Court in Williams v Spautz [1992] HCA 34; (1992) 174 CLR 509. The decision makes it clear that:
“central to the tort of abuse of process is the requirement that the party who has instituted the proceeding has done so for a purpose or to effect an object beyond that which the legal process offers.”
(per Mason CJ, Dawson, Toohey and McHugh JJ at 523)
53.It is clear that the only purpose served by bankrupting the Applicant is to stymie the proceedings as against Tresedar, Tetbury and Chris Evanian.
54.Neither Property Builders Pty Ltd or Property Builders (Constructions) Pty Ltd have requisite funds to continue the litigation without the assistance of Phontos Legal and its sole employed solicitor Michael Phontos.
55.It is not possible to appoint another sole director/secretary to a company whose sole assets are the choses in action presently pending before the Courts and which otherwise are without cash flow.”
It hardly needs saying that an allegation of abuse of process is a very serious allegation to make and, similar to an allegation of bias against a judicial officer, it is one that should be “distinctly made and proven”; Minister v Jia Legeng (2001) 205 CLR 507 at [69] per Gleeson CJ and Gummow J. The suggestion here being made seems to be that because the same firm of solicitors are acting on behalf of Carlamax and at some time acted on behalf of the three other companies, Carlamax is only seeking the bankruptcy of Mr Phontos in order to prevent Mr Phontos from bringing proceedings against the other three companies. There is no evidence that Mr Christmas, who is the sole director and shareholder of Carlamax, has any association with the three companies but what is clear is that, if the cross-claim is successful, then money will flow into Mr Phontos’ companies which could be used to pay the debt to Carlamax. This seems to contradict the suggestion that the bankruptcy proceedings are being brought to stymie that very action.
The test for abuse of process was considered in Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 in the context of bankruptcy proceedings:
“If the object sought to be effected by the process is within the lawful scope of the process, it is a use of the process within the meaning of the law, though it may be malicious, or even fraudulent, and in the circumstances the fraud may be an answer; if, however, the object sought to be effected by means of the process is outside the lawful scope of the process, and is fraudulent, then—both circumstances concurring—it is a case of abuse of that process, and the Court will neither enforce nor allow it to afford any protection, and will interpose, if necessary, to prevent its process being made the instrument of abuse. Grainger v. Hill laid down the distinction. A writ of capias was issued, not really for the purpose of arresting the man, but to intimidate him into giving up ship's papers, to which the plaintiff had no colour of title. That was held to be an abuse of process, because the law did not provide it for that purpose. The purpose is foreign to the nature of the process (see Ex parte Painter), and this, I apprehend, is what Lord Watson in King v. Henderson means by "unsuitable." See also per Williams J. in Gilding v. Eyre.” [references omitted]
In Williams v Spautz (1992) 174 CLR 509 the majority of the High Court, Mason CJ, Dawson, Toohey and McHugh JJ, noted that a heavy onus lies upon the party alleging abuse of process and that the power to grant a permanent stay should only be exercised in the most exceptional circumstances; 529. In establishing improper purpose the Court considered that an inquiry into motivation alone will usually be insufficient:
“…it is more satisfactory to base an exercise of the jurisdiction in cases of improper purpose upon a use or threatened use of the proceedings for such a purpose. Then the conclusion which the court reaches is more likely to be founded upon objective evidence rather than subjective evidence of intention.” [529]
In the absence of any further evidence or submissions, I would not be prepared to set aside the bankruptcy notice on the grounds that it was an abuse of process.
The findings which I have made lead inevitably to an order that the application should be dismissed. The respondents seek indemnity costs. Whilst I have been critical of the application, I do not believe that it was of so little merit that it should never have been brought. I do not propose to make any order other than the applicant pay the respondent’s costs to be taxed, if not agreed, in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006.
I certify that the preceding twenty-seven (27) paragraphs are a true copy of the reasons for judgment of Raphael FM
Date: 30 March 2011
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