Polis v Zombor

Case [2019] FCA 69

FEDERAL COURT OF AUSTRALIA

Polis v Zombor [2019] FCA 69

File number: VID 217 of 2018
Judge: MURPHY J
Date of judgment: 5 February 2019
Catchwords:

PRACTICE AND PROCEDURE – application for preliminary discovery under rule 7.23 of Federal Court Rules 2011 (Cth) – relevant principles for allowing preliminary discovery – application granted

BANKRUPTCY – where prospective respondent executed personal insolvency agreement under Part X of the Bankruptcy Act 1966 (Cth) – application for preliminary discovery for a prospective proceeding alleging deceit, misleading or deceptive conduct and unconscionable conduct – whether applicant barred from bringing preliminary discovery application or commencing prospective proceeding by operation of s 229(2)(c) – whether proposed claims are for unliquidated damages – whether proposed claims arise otherwise than by reason of contract, promise or breach of trust pursuant to s 82(2)
Legislation:

Bankruptcy Act 1966 (Cth)

Competition and Consumer Act 2010 (Cth)

Trade Practices Act 1974 (Cth)
Cases cited:

Cornelius v Barewa Oil & Mining (NL) (in liquidation) (1982) 42 ALR 83

Coventry v Charter Pacific Corp Ltd (2005) 227 CLR 234; [2005] HCA 67

EBOS Group Pty Ltd v Team Medical Supplies Pty Ltd (No 3) (2012) 199 FCR 533; [2012] FCA 48

Ex parte Llynvi Coal & Iron Co; Re Hide (1871) 7 LR Ch App 28

In the Estate of Gary Killington; Ex parte Chisholm [1998] FCA 1474

Melnik v Melnik (2005) 144 FCR 141; [2005] FCAFC 160

Official Receiver v Todd (1986) 14 FCR 177

Optiver Australia Pty Ltd v Tibra Trading Pty Ltd (2007) 247 ALR 199; [2007] FCA 2065

Optiver Australia Pty Ltd v Tibra Trading Pty Ltd (2008) 169 FCR 435; [2008] FCAFC 133

Paxus Services Ltd v People Bank Pty Ltd (1990) 99 ALR 728

Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd (2017) 351 ALR 103; [2017] FCAFC 193

Pfizer Ireland Pharmaceuticals v Samsung Bioepis AU Pty Ltd [2017] FCA 285

Re McMaster; Ex parte McMaster (1991) 33 FCR 70

Reeve v Aqualast Pty Ltd [2012] FCA 679

Spain v Union Steamship Company of New Zealand Ltd (1923) 32 CLR 138

St George Bank Ltd v Rabo Australia Ltd (2004) 211 ALR 147; [2004] FCA 1360

Tarea Management (North Shore) Pty Ltd (in liq) v Glass (1991) 28 FCR 93

Trustees Executors & Agency Co Ltd v Reilly [1941] VLR 110
Date of hearing: Heard on the papers
Date of last submissions: 27 June 2018
Registry: Victoria
Division: General Division
National Practice Area: Commercial and Corporations
Sub-area: Regulator and Consumer Protection
Category: Catchwords
Number of paragraphs: 45
Counsel for the Prospective Applicant: Mr A Shah
Solicitor for the Prospective Applicant: Enyo Lawyers
Counsel for the Respondents: The Prospective Respondents did not appear

ORDERS

VID 217 of 2018
BETWEEN:

HENRY PETER POLIS

Prospective Applicant
AND:

LUKE MICHAEL ZOMBOR

Prospective First Respondent

LMZ PROJECTS PTY LTD ACN 603 180 016

Prospective Second Respondent

LATRME PTY LTD ACN 603 176 996

Prospective Third Respondent

JUDGE:

MURPHY J

DATE OF ORDER:

5 FEBRUARY…

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AGLC
Polis v Zombor [2019] FCA 69
Case
[2019] FCA 69
Decision Date

CaseChat Overview and Summary

In the matter of Polis v Zombor, the Federal Court was tasked with determining whether Mr Polis, a creditor of Mr Zombor who had executed a personal insolvency agreement (PIA), was permitted to bring an application for preliminary discovery. The court considered whether Mr Polis was barred from initiating proceedings by virtue of section 229(2)(c) of the Bankruptcy Act 1966, which restricts creditors from taking legal action in respect of a provable debt if a PIA is binding. Furthermore, the court examined whether the proposed claims for deceit, misleading or deceptive conduct, and unconscionable conduct were for unliquidated damages that arose otherwise than by reason of contract, promise, or breach of trust, as per section 82(2) of the Act.

The court found that Mr Polis was competent to make the application for preliminary discovery, despite the existence of the PIA. The court reasoned that the scope of section 229(2)(c) was not broad enough to preclude Mr Polis from bringing the application, as the provision only barred creditors from taking legal action in respect of a provable debt. Since the proposed claims were not for unliquidated damages arising by reason of contract, promise, or breach of trust, they were not caught by section 82(2) of the Act.

As a result, the court granted Mr Polis' application for preliminary discovery, ordering Mr Zombor to provide bank statements and documents related to the sale of a company and the incorporation of two other entities. The court also reserved the question of costs and provided an endorsement pursuant to Rule 41.06, warning the respondent of potential contempt penalties for non-compliance with the order.

Orders

Orders of the court

1. Service of these orders is taken to have been effected by the prospective applicant serving a copy of these orders on the first prospective respondent in the manner prescribed in Order 2(b) and (c) of the orders made on 26 April 2018.

2. Within 28 days of service of these orders on the first prospective respondent in accordance with Order 1, or within such further period as the Court allows on application by the first prospective respondent, the first prospective respondent give discovery to the prospective applicant of:

(a) all bank statements for any and all bank accounts owned, operated or controlled by the first prospective respondent during the period 1 January 2012 to 1 February 2018;

(b) all bank statements for any and all bank accounts owned, operated or controlled by the second or third prospective respondents during the period 3 December 2014 to 1 February 2018;

(c) any documents with respect to the sale of General Brokerage Services Pty Ltd (ACN 158266141) (GBS) to iSelect, the disbursement of the sale proceeds of GBS and the incorporation of the second and third prospective respondents.

3. The first prospective respondent have liberty to apply to vary or set aside this order, within 14 days of being served in accordance with the manner prescribed in Order 2(b) and (c) of the orders made on 26 April 2018, doing so on notice to the prospective applicant.

4. Costs be reserved.

Endorsement pursuant to Rule 41.06

To: the first prospective respondent

You will be liable to imprisonment, sequestration of property or punishment for contempt if:

(a) for an order that requires you to do an act or thing – you neglect or refuse to do the act or thing within the time specified in the order; or

(b) for an order that requires you not to do an act or thing – you disobey the order.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Mr Zombor entered into a personal insolvency agreement (PIA) under Part X of the Bankruptcy Act on or about 12 April 2013. Section 229(2)(c) provides that, if a PIA has become binding on the creditors of the debtor, as long as the agreement remains valid, a creditor cannot commence a proceeding in respect of a provable debt or take any fresh step in such a proceeding. The same or at least a similar question arises as to whether Mr Polis was competent to commence the present originating application and is permitted to apply for final orders for relief. While I have not had the benefit of submissions by Mr Zombor or any other contradictor which would have placed the Court in a better position to decide the application, for present purposes I am persuaded that Mr Polis is competent to make the application.THE FACTS AND PROCEDURAL HISTORY In an affidavit sworn 21 February 2018 Mr Polis states the following:(a)In about November 2007 he provided a $70,000 loan (Start Up Loan) to Mr Zombor and his son, Benjamin Polis, to assist them in starting a new business. The terms of the Start Up Loan included that the loan was interest-free, repayable at call and that Mr Zombor and Benjamin Polis were jointly and severally liable to repay the loan. Mr Polis transferred $70,000 to a bank account set up in the name of Polis Australia Pty Ltd (now deregistered), which later became known as Energy Watch.(b)In February 2009 Mr Zombor and Benjamin Polis incorporated Energy Watch Pty Ltd (Energy Watch), and the new business was operated through that entity;(c)In about August 2009 Polis Australia went into liquidation. Mr Polis did not lodge a proof of debt in the liquidation as the loan agreement was with Mr Zombor and Benjamin Polis personally.(d)In about early 2012 the public reputation of Energy Watch was damaged after extracts from Benjamin Polis’ Facebook account were published in the media. The business fell into severe financial difficulty.(e)In about June 2012 Energy Watch went into liquidation. Mr Polis did not lodge a proof of debt as the loan agreement was with Mr Zombor and Benjamin Polis personally.(f)Mr Polis had received some repayments of the Start Up Loan, but those repayments were wrongly recorded in Energy Watch’s books as a loan to Mr Polis, such that he was wrongly recorded as a debtor of the business. Mr Polis requested that the account ledgers be changed so that they accurately reflected the repayments of the Start Up Loan that were made, but that was not done. Mr Polis was later sued by Energy Watch’s liquidator for $75,412 for debts which Energy Watch’s books erroneously said he owed. The proceeding was later settled on terms not favourable to Mr Polis.(g)On or about 12 April 2013 Mr Zombor executed a PIA under Part X of the Bankruptcy Act, the agreement carrying Australian Financial Security Authority (AFSA) reference VIC 650/13/2. Mr Polis states that he was not notified of the proposed PIA nor afforded the opportunity to consider it or vote on it.(h)James Patrick Downey of JP Downey & Co, Level 1, 22 William Street, Melbourne was the controlling trustee under the PIA and provided a “Report by Controlling Trustee” which stated, amongst other things, that Mr Zombor had provided a Statement of Affairs which disclosed total liabilities of $9,694,182, made up of 15 unsecured creditors the largest of which was a potential $8.25 million insolvent trading claim by Energy Watch’s liquidator. The Statement of Affairs disclosed assets of only $13,000 and the estimated deficiency was therefore $9,681,182.(i)Under the PIA Mr Zombor was obliged to pay $10,000 on or before 31 May 2013 and a further $85,000 on or before 1 December 2013. On doing so he was to be “released from all provable debts within the meaning of the [Bankruptcy] Act”. The PIA was accepted by creditors (other than Mr Polis) and Mr Zombor complied with the PIA and paid $95,000 in two instalments by the due dates.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Full text does not contain this section.

Ratio Decidendi

Legal Principle Established

It could, however, be argued that by operation of s 229(2)(c) of the Bankruptcy Act Mr Polis was not competent to bring the originating application (nor to apply for orders for final relief) and/or is not competent to bring the proposed proceeding. For the reasons I now explain, for the purposes of the present application I consider Mr Polis is competent to bring the application and to apply for the orders sought.THE OPERATION OF SECTION 229(2)(C) OF THE BANKRUPTCY ACT Section 229, which is in Part X of the Bankruptcy Act, relevantly provides: Personal insolvency agreement to bind all creditors(1) A personal insolvency agreement that:(a) is entered into in accordance with this Part; and(b) complies with the requirements of this Part;is, upon being duly executed by the debtor and the trustee, binding on all the creditors of the debtor.(2)If a personal insolvency agreement has become binding on the creditors of the debtor, it is not competent for a creditor, so long as the agreement remains valid:…(c)to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.(3) This section does not:(a)affect the right of a secured creditor to realise or otherwise deal with the creditor’s security; or(b)prevent a creditor, after all the obligations that a personal insolvency agreement created have been discharged, from taking any proceeding or enforcing any remedy in respect of a provable debt from which the debtor is not released by the operation of the agreement.(4) … “Provable debt” is defined in s 5 of the Bankruptcy Act to mean “a debt or liability that is, under this Act, provable in bankruptcy.” Section 82 of the Act sets out what constitutes a debt provable in bankruptcy. It relevantly provides:Debts provable in bankruptcy(1)Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.(1A) …(2)Demands in the nature of unliquidated damages arising otherwise than by reason of a contract, promise or breach of trust are not provable in bankruptcy.…(Emphasis added.)Mr Polis’ submissions Mr Polis’ submissions assume that Mr Zombor’s PIA is valid and that all obligations created by the PIA have been discharged. He accepts that the phrase “in respect of” in s 229(2)(c) has a wide meaning but says that the decisions in Tarea Management (North Shore) Pty Ltd (in liq) v Glass (1991) 28 FCR 93 (Tarea Management) (Hill J with whom Lockhart and Einfeld JJ agreed); Re McMaster; Ex parte McMaster (1991) 33 FCR 70 (McMaster) (Hill J), In the Estate of Gary Killington; Ex parte Chisholm [1998] FCA 1474 (Mansfield J) and Melnik v Melnik (2005) 144 FCR 141; [2005] FCAFC 160 can be distinguished on their facts from the present case.