Prime Capital Securities Pty Ltd v Papoutsakis
[2021] FCCA 1594
•15 July 2021
Federal Circuit Court of Australia
Prime Capital Securities Pty Ltd v Papoutsakis [2021] FCCA 1594
File number: SYG 534 of 2018 Judgment of: JUDGE CAMERON Date of judgment: 15 July 2021 Catchwords: BANKRUPTCY – Application for annulment of bankruptcy – relevant considerations. Legislation: Bankruptcy Act 1966 (Cth) ss 5, 54, 80, 109, 139U, 153B, 154, 265
Corporations Act 2001 (Cth) s 206A
Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) r 7.06
Cases cited: Rigg v Baker (2006) 155 FCR 531
Bulic v Commonwealth Bank of Australia Ltd (2007) 5 ABC(NS) 122
Francis v Eggleston Mitchell Lawyers Pty Ltd (2014) 12 ABC(NS) 25
Sandell v Porter (1966) 115 CLR 666
Stankiewicz v Plata [2000] FCA 1185
Number of paragraphs: 71 Date of hearing: 16, 17 June 2021 Place: Sydney Counsel for the Applicant: No appearance by or on behalf of the Applicant Counsel for the Respondent: The Respondent appeared in person Solicitor for the Trustee: Mr C. Groves (Dobson Mitchell Allport)
Table of Amendments 30 August 2021
The dollar figure on paras.17 line 2 and 66, line 1 has been removed and replaced with the letter “A”.
The dollar figure on para.28, line 5 has been removed and replaced with the letter “B”.
The dollar figure on para.28, line 6 has been removed and replaced with the letter “C”.
The dollar figure on para.28, line 8 has been removed and replaced with the letter “D”.
The dollar figure on para.30(b) has been removed and replaced with the letter “E”.
The dollar figure on para.33, line 7 has been removed and replaced with the letter “F”.
The dollar figure on para.33, line 8 has been removed and replaced with the letter “G”.
The dollar figure on para.34, line 5 has been removed and replaced with the letter “H”.
The word “his” on para.41, line 12 has been removed and replaced with the word “their”.
The dollar figure on para.55, line 12 has been removed and replaced with the letter “I”.
ORDERS
SYG 534 of 2018 BETWEEN: PRIME CAPITAL SECURITIES PTY LTD ACN 168 662 173
Applicant
AND: ANTONIOS PAPOUTSAKIS
Respondent
ROBERT TENBENSEL
Interested person
order made by:
JUDGE CAMERON
DATE OF ORDER:
15 July 2021
THE COURT ORDERS THAT:
1.The application for annulment of the respondent’s bankruptcy be dismissed.
REASONS FOR JUDGMENT
(As Amended)JUDGE CAMERON
Introduction
This proceeding commenced as a late application for review of the order made by Registrar Wall on 21 May 2018 that the estate of the respondent, Antonios Papoutsakis, be sequestrated. However, at the hearing, Mr Papoutsakis changed tack and instead sought an annulment of his bankruptcy.
The applicant, Prime Capital Securities Pty Ltd (“PCS”) has been deregistered and has not participated in this stage of the proceeding. The trustee of Mr Papoutsakis’s bankrupt estate, Robert Tenbensel (“Trustee”), has participated as an interested person. He also provided a report to the Court pursuant to r.7.06 of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth).
BAckground
In 2016 Mr Papoutsakis and his wife, Marietta Papoutsakis (“Ms Papoutsakis”) were intended guarantors of a proposed loan by PCS to Papou Pty Ltd, of which Mr and Ms Papoutsakis were both directors. This loan did not proceed and the principal amount was never advanced. However, application fees and expenses were allegedly incurred and in that regard on 30 March 2017 PCS issued an invoice to Papou Pty Ltd for $26,606.63. The invoice was not paid and PCS commenced proceedings in the Local Court of New South Wales at Sydney (“Local Court”) against Papou Pty Ltd and Mr and Ms Papoutsakis as guarantors. On 24 July 2017 default judgment against Papou Pty Ltd and Mr Papoutsakis was entered.
On 29 September 2017 a bankruptcy notice was served on Mr Papoutsakis for a total debt of $28,969.05 and on 28 February 2018 PCS presented a creditor’s petition. Mr Papoutsakis failed to file any notice stating grounds of opposition or affidavit in support and on 21 May 2018 Registrar Wall ordered that Mr Papoutsakis’s estate be sequestrated.
legislation
Sections 153B and 154 of the Bankruptcy Act 1966 (Cth) relevantly provide:
153B Annulment by Court
(1) If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.
(2) In the case of a debtor’s petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.
(3) The trustee must, before the end of the period of 2 days beginning on the day the trustee becomes aware of the order, give to the Official Receiver a written certificate setting out the former bankrupt’s name and the bankruptcy number and the date of the annulment.
…
154 Effect of annulment
(1)If the bankruptcy of a person (in this section called the former bankrupt) is annulled under this Division:
(a)all sales and dispositions of property and payments duly made, and all acts done, by the trustee or any person acting under the authority of the trustee or the Court before the annulment are taken to have been validly made or done; and
(b)the trustee may apply the property of the former bankrupt still vested in the trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the trustee; and
(c)subject to subsections (3), (6) and (7), the remainder (if any) of the property of the former bankrupt still vested in the trustee reverts to the bankrupt.
…
Mr Papoutsakis’s Evidence
Mr Papoutsakis deposed in his affidavit sworn 5 November 2020 that he was solvent at the time the sequestration order was made and had never borrowed any money from PCS. He deposed that the agreement between Papou Pty Ltd and PCS had involved securing the proposed loan over one property, 28 Shepherd Street, Sandy Bay, Tasmania, but that PCS changed the loan’s terms such that four properties would be provided as security and so he did not proceed with the loan. Mr Papoutsakis submitted in his affidavit of 5 November 2020 that PCS’s claim for costs made in the invoice dated 30 March 2017 fell outside the scope of the terms of the agreement. In his affidavit sworn 24 March 2021 he annexed a copy of an ASIC search showing that Prime Capital Mortgages Pty Ltd, formerly Prime Capital Securities Pty Ltd, was deregistered on 5 July 2017.
Mr Papoutsakis adduced one version of the loan documents and the Trustee adduced another one. Annexure AP-2 to Mr Papoutsakis’s affidavit sworn 5 November 2020 is a copy of what Mr Papoutsakis said was the loan application. In his oral evidence Mr Papoutsakis identified the signatures on the loan documents as his own and those of his then wife and the broker as witness.That document is plainly a different version of a document included in the Trustee’s report to the Court, referred to later in these reasons, in that section 6 in both versions carries the same signature of Mr Papoutsakis dated 1 August 2016. The only difference between the documents that is material to this case appears to be that in the version annexed to Mr Papoutsakis’s affidavits of 5 November 2020 and 6 May 2021, the sums stated to be secured by three of the properties referred to in the document have been crossed out and some names or signatures inserted in the section above that list of properties.
In his affidavit of 15 June 2021 Mr Papoutsakis deposed that he had never received any loan application documents from PCS or his finance broker other than;
the document I signed which crossed out 3 of my properties.
In his oral evidence he said:
… I decided to get a loan so I said – he said to me he’s working for MBA Finance which is Master Builders Association. I said, okay, can you organise so I can get half a million dollars for working capital and he says no problem. And that’s how it was. I said to him only one property, … When I received these documents over here, they have three – they have three – four properties. I said I didn’t ask you for four properties, I asked you for one. He said, it doesn’t matter, he says. Just ..... three property sale and when these documents go to Prime Capital here in Sydney, they will adjust it in their proper documents to have only one. When the solicitor in Hobart called me to go and sign the papers, I noticed they have four properties in it ..... the solicitor ..... when I saw the documents they have four properties there on it, I said, look, I’m rejecting and my ex-wife was going to come and sign afterwards and I said when she comes, tell her not to sign because I’m rejecting the offer again because they didn’t honour my offer at the beginning: one property and not as four. …
… They are the papers which I have signed for the loan which they’re not fully signed. They are being crossed out because they only have offer one property and not four. This is the reason I have crossed them off …
…
… I’ve been convinced by the MBA Finance that they would change the documents when the proper documents would come and they’ve never done it.
Mr Papoutsakis deposed that following the sequestration order his then-solicitors acted negligently and not in accordance with his instructions by responding to the Bankruptcy Notice outside the required time period. In his affidavit sworn 6 May 2021 Mr Papoutsakis deposed that the sequestration order dated 21 May 2018 was made in his absence and was made because his solicitor failed to attend court. However, in cross examination Mr Papoutsakis’s evidence was to the effect that he had only instructed his solicitors to assist him to obtain an adjournment of the creditor’s petition at its first return date and that he had been successful in obtaining that adjournment to 21 May 2018 with a related order that he file and serve any notice of ground of opposition and affidavit in support by 16 May 2018. His oral evidence was to the effect that once he had obtained the adjournment, he left the issue in the hands of the finance broker who had negotiated the PCS loan but that that person let him down. He agreed that he had been aware of the terms of the Court’s orders made at the first return date, that documents of the sort referred to in those orders were not filed and that he did not appear and was not represented on 21 May 2018, when the sequestration order was made.
Mr Papoutsakis said that in the first week of June 2018, with his solicitor, he met the Trustee and told him that he intended to have the bankruptcy annulled. On 23 October 2018 he incorrectly told the Trustee that an application to annul the bankruptcy had been filed. On 28 July 2020 he wrote to the Trustee saying that he intended to apply for an annulment.
In his affidavit of 6 May 2021, Mr Papoutsakis deposed that he met with his barrister on 10 October 2018 to sign a bankruptcy annulment application to be submitted to the Court. Two weeks later, the Trustee telephoned Mr Papoutsakis’s counsel, in his presence, to confirm that the application had been submitted but refused to provide Mr Papoutsakis with the details of their discussion. On about 10 January 2019 Mr Papoutsakis telephoned the Court and was informed that the application had not been received. Mr Papoutsakis deposed that he telephoned his counsel who said that he had forwarded the application to the Court for review prior to filing.
In his affidavit sworn 5 November 2020, Mr Papoutsakis deposed that he filed in the Local Court an application [to set aside the default judgment], but was advised by that court that the motion could not proceed because Capital Securities XVI Pty Ltd [sic] was in liquidation. In his oral evidence, Mr Papoutsakis identified his Local Court notice of motion to set aside the default judgment which bore a court stamp of 8 May 2019. In his affidavit sworn 5 November 2020, Mr Papoutsakis deposed that 30 days after having advised him that [the creditor plaintiff] was in liquidation, the Local Court notified him that it would not consider the matter without the Trustee’s consent. He also said that for a period a firm of solicitors in Sydney had acted for him in relation to that stage of the Local Court proceedings. Exhibit T14 is a copy of those solicitors’ tax invoice which recorded that they attended the motion’s return date on 30 May 2019 and a further hearing listing on 27 June 2019 but ceased to act in July 2019.
In his affidavit sworn 15 June 2021, Mr Papoutsakis deposed that the Trustee had made no attempt to recover funds owed to him or his related entities.In cross examination he agreed that he thought that the Trustee should have pursued a claim he had against a supplier who had failed to record credits that should have been applied to his accounts and were worth a significant amount. In that connection he identified an order of the Supreme Court of Tasmania dated 6 August 2014, which restrained the supplier from destroying or disposing of certain records. The plaintiffs in those proceedings were two of Mr Papoutsakis’s companies, Fresco Mega Pty Ltd and Papou Properties Pty Ltd but Mr Papoutsakis agreed that Fresco Mega Pty Ltd had been deregistered in 2014. He said that the claim really belonged to Papou Properties Pty Ltd as Fresco Mega Pty Ltd had only received the stock on behalf of Papou Properties Pty Ltd.
Mr Papoutsakis agreed in cross-examination that he:
(a)had sworn at the Trustee, had threatened to commence proceedings against him and had also threatened to burn some of the shop fittings at the recently sold properties at 644 Sandy Bay Road, Sandy Bay and 1 Beach Road, Sandy Bay, although he said he had not been serious;
(b)had written to one of the Trustee’s employees threatening to hold her responsible “for any wrongdoing”; and
(c)had sent emails to an employee of the Trustee’s solicitors saying:
… you are going to compasate [sic] me for your wrong doing [sic] in all the matters ...
and
… someone has to pay for the wrongdoing …
and
… if any money been deducted from the initial offer I claim you responsible and your client for misevaluate [sic] the property and the chattels your valuear [sic] amount was for the whole chattels 19800 plus get I count yous [sic] liable for all the demages [sic]
and
I am warning you for your Fraudulent claims you are paying from my estate I count you responsible for any wrong doing [sic].
He explained this conduct saying:
… Because Mr Tenbensel has been appointed as trustee to my estate by a wrong decision of the court, that doesn’t mean he has to act in an inappropriate matter to destroy me and give everything away and don’t count all my thoughts and my – and my ideas.
Mr Papoutsakis conceded that he had also sent an email to the Trustee’s insurance broker saying:
I like to inform you that the claim the said trustee is claiming is not legal the simple reason he dind [sic] had a current list of the chattels plus he had no idea what chattels were belonging to that property so any claims made by the trustee and you honor those claims I will count you responsible later on …
and another saying:
No claims are to be paid from my policy I don’t accept the claim those chattels never belong to that property as claim by the claim to be trustee of my estate no proof of the true chattels plus no current list was provided any wrong doing [sic] and I will press charges for the responsible person … .
Mr Papoutsakis deposed that the sale of his properties at 644 Sandy Bay Road, Sandy Bay and 1 Beach Road, Sandy Bay completed on 11 June 2021 leaving a surplus of $A after payment of secured creditors. He deposed that were his bankruptcy to be annulled, he was agreeable to this amount being applied as security for the Trustee’s costs and to compromise the debts of any unsecured creditors.
Further in that connection, Mr Papoutsakis deposed in relation to the two remaining properties with which he is associated that 28 Shepherd Street, Sandy Bay is unencumbered and that the property at 621-623 Sandy Bay Road, Sandy Bay has a mortgage debt of $227,000.He deposed that:
Given the significant equity available in 28 Shepherd Street and 621 Sandy Bay Road properties, I have the means to refinance debts in a relatively short period of time to secure the discharge of costs due to the Trustee or creditors and avoid the need to sell further properties. Alternatively, I can refinance debts and sell … 28 Shepherd Street together with my ex-wife without the interference of the Trustee and negative stigma of a bankruptcy sale, which will minimise the achievable sale price.
Mr Papoutsakis deposed that he and his ex-wife wished to reach a commercial compromise of any creditors’ claims although he had not been told by the Trustee which creditors remain unpaid.
Mr Papoutsakis also deposed to having given notice of this proceeding to his creditors.
the TRUSTEE’S evidence
The Trustee deposed that he is a chartered accountant and a registered trustee in bankruptcy with over 32 years’ experience in the area of corporate and personal insolvency.
Background
The Trustee’s affidavit affirmed 1 June 2021 contained his report to the Court. It was deposed at a point between exchange and settlement in the recent sale of the conjoined shop properties at 644 Sandy Bay Road, Sandy Bay and 1 Beach Road, Sandy Bay. In that affidavit the Trustee recorded that Mr and Ms Papoutsakis had run a number of shops in Hobart that traded under the name “Fresco” but the couple was now separated and a Family Court property proceeding was on foot between them.
The Trustee deposed that, relevantly, Mr Papoutsakis was associated with two companies, Papou Pty Ltd (which was deregistered on 19 November 2017 and re-registered at some point between 21 May 2018 and 3 July 2018) and Papou Properties Pty Ltd (which was deregistered on 7 May 2017 and re-registered on 6 August 2018 after payment to ASIC of outstanding fees). Mr Papoutsakis’s shares in those companies vested in the Trustee upon his appointment. A further associated entity was the Papoutsakis Family Trust and Mr Papoutsakis’s beneficial interest in that trust also vested in the Trustee.
The Trustee deposed that:
(a)28 Shepherd Street, Sandy Bay had been jointly owned by Mr and Ms Papoutsakis up to the date on which Mr Papoutsakis was made bankrupt, when the joint tenancy was severed;
(b)621-623 Sandy Bay Road, Sandy Bay is owned by Papou Properties Pty Ltd as trustee of the Papoutsakis Family Trust;
(c)644 Sandy Bay Road, Sandy Bay was solely owned by Mr Papoutsakis; and
(d)1 Beach Road, Sandy Bay was [solely] owned by Papou Properties Pty Ltd as trustee of the Papoutsakis Family Trust.
Administration of estate
The Trustee deposed to the difficulties he had had in bringing about the sale of the properties at 644 Sandy Bay Road and 1 Beach Road arising out of a lack of co-operation from Mr and Ms Papoutsakis in the sale process, particularly in relation to setting a price range and agreeing on a sale price, notwithstanding that the Family Court had made orders as early as 6 February 2019 for the effectuation of such a sale. The Trustee obtained formal valuations of the property but the values advised were not acceptable to Mr and Ms Papoutsakis who had been told by real estate agents that the properties were worth more than the valuations indicated. The Trustee and Mr and Ms Papoutsakis marketed the property separately, the latter without the Trustee’s authority or agreement. The best offer received by the Trustee exceeded the figure in the more recent valuation but he had not been told by Mr and Ms Papoutsakis how they had fared in their marketing campaign. On 1 April 2021, after agreement could not be reached to sell the property for the amount offered to the Trustee, the Family Court appointed him as trustee for sale.
In relation to the net value of the remaining properties, the Trustee recorded that there was a debt of $452,000 secured against 28 Shepherd Street and that council rates of $47,000 owed in respect of that property were to be paid from the sale of 644 Sandy Bay Road and 1 Beach Road. He also recorded that outstanding council rates of $95,000 and land tax of $131,501 in relation to 621-623 Sandy Bay Road and 1 Beach Road were to be paid from the proceeds of sale of 1 Beach Road.
As to other assets, the Trustee deposed that although Mr Papoutsakis had claimed to have rights of action against many of his creditors and former advisers, he not provided the Trustee with information sufficient to assess the merit of such claims.
The Trustee expressed the preliminary view, based on facts he cited, that Papou Pty Ltd was, and had for some time been, significantly insolvent.He also expressed the view that even if the debt to PCS was not a valid debt, Mr Papoutsakis was nevertheless significantly insolvent as at the date of the sequestration order and that as at 21 May 2018 the estimated value of his unsecured liabilities, including the PCS claim, was $B. In that regard he deposed that Mr Papoutsakis had disclosed in his statement of affairs liabilities totalling $C whereas the Trustee estimated those and other liabilities that had not been disclosed in the statement of affairs to total $D.
On the question of solvency, the Trustee deposed:
Based on my investigations to date, I believe the Bankrupt may have been insolvent since 30 June 2013 (the last date of the first quarter in the DPN I refer to in subpara.g. below) for the following reasons:
a.The Bankrupt failed to pay water charges since December 2013, in respect of [644 Sandy Bay Road] a commercial property that he is the sole registered proprietor of
b.The Bankrupt failed to pay rates since August 2014, in respect of [644 Sandy Bay Road] and [28 Shepherd Street] being properties he is the registered proprietor of
c.The Bankrupt failed to pay land tax since November 2014, in respect of [644 Sandy Bay Road], a commercial property that he is the sole registered proprietor of
d.The Bankrupt, in his capacity as guarantor under a commercial lease agreement on the North Hobart Fresco store premises, failed to ensure rent obligations were met from 1 November 2015.
e.The Bankrupt, in his capacity as joint and several guarantor under a commercial sub-lease agreement on the Glenorchy Fresco store premises, failed to ensure rent obligations were met from 1 May 2017.
f.As joint and several guarantor and joint mortgagor, the Bankrupt failed to comply with a Notice of Default and Demand for Possession [of 28 Shepherd Street] under section 77 of the Land Titles Act 1980 (Land Titles Act) and remedy the default by the due date, being 6 January 2018;
g.The Bankrupt failed to pay superannuation guarantee obligations originally incurred by [Papou Pty Ltd] from the June quarter of 2013 to 30 June 2015, as required by a Director Penalty Notice (DPN) issued 29 March 2018.
The Trustee deposed that Mr Papoutsakis had contravened the Bankruptcy Act and the Corporations Act 2001 (Cth) in a number of respects, namely by:
(a)failing to submit his Statement of Affairs within prescribed period – s.54(3) of the Bankruptcy Act;
(b)omitting material particulars from his statement of affairs, specifically creditors estimated by the Trustee at $E – s.265(1)(f) of the Bankruptcy Act;
(c)failing to tell the Trustee in writing of a change in the address of his principal place of residence – s.80 of the Bankruptcy Act;
(d)failing to provide the Trustee with evidence of income within 21 days after the end of a Contribution Assessment period – s.139U of the Bankruptcy Act;
(e)managing the business of a corporation or corporations while disqualified following bankruptcy – s.206A of the Corporations Act; and
(f)refusing or failing to sign a document after being lawfully required by the Trustee to sign that document.
The Trustee deposed to difficulties he had had in his dealings with Mr Papoutsakis, including:
(a)receiving at least 30 abusive telephone calls from Mr Papoutsakis as well as numerous argumentative text messages threatening proceedings against him; and
(b)being verbally and physically threatened by Mr Papoutsakis and his son George on 10 May 2021.
Mr Papoutsakis’s conduct and behaviour has led to the Trustee banning him from attending the Trustee’s place of business and ultimately taking out an interim restraint order against him.
The Trustee deposed that the interposition of the Family Court proceeding, to which he had been joined as a party, had slowed the realisation of assets and a return to the bankrupt estate and that until its conclusion he could not deal with Mr Papoutsakis’s share of the matrimonial asset pool because he did not know what it was. He also deposed that the costs and expenses of administering the bankrupt estate were substantial, having been increased by the Family Court proceeding and by the conduct of Mr Papoutsakis and his associated entities. The Trustee estimated the costs and expenses of the estate, as at the date of his affidavit, to be $F for legal fees and $G for trustee’s fees, of which about 75% was connected with the Family Court proceeding and the attempts to sell 644 Sandy Bay Road and 1 Beach Road. He estimated that further expenses of the following order were likely to be incurred before the administration was complete:
(a)$75,000 - further valuation and property selling costs;
(b)$82,500 – legal fees, including the costs of this proceeding; and
(c)$74,800 – trustee fees, including an estimated $19,800 “relating to the conduct and behaviour of the Bankrupt”.
Relevant to those expenses is the fact that the Family Court matter had been listed for hearing over three days commencing on 19 July 2021.
The Trustee estimated that the net value of the matrimonial pool after payment of the Trustee’s remuneration and legal costs associated with the Family Court proceeding, but before payment of unsecured creditors, was between $3 million and $3.2 million and, if all debts were recognised as debts of the marriage, that there would be a net divisible pool of around $H million. In his oral evidence the Trustee stated that this figure erroneously took account of a fee ultimately due to the Australian Financial Security Authority set at 7% of assets realised in a bankruptcy.He deposed:
Given the costs and delay which the finalisation of the Bankrupt Estate (including the Family Court proceedings) are likely to involve, and the likelihood in my opinion that the Bankrupt is likely to be considered responsible for matrimonial debts in a proportion greater to Marietta, a sizeable surplus is unlikely but a small surplus (again assuming all assets are sold to pay debt) is likely.
If the Family Court orders a division in favour of Marietta, then the return to creditors will be detrimentally affected, and could – if Marietta achieves a significant apportionment in her favour as is sought, mean creditors receive a dividend of well under 100 cents in the dollar.
The Trustee deposed that he is aware that Mr Papoutsakis disputes a number of debts, however, he was unaware of the commencement of any legal action in respect of any dispute, or of any action in which there was a cogent defence or set-off available to him as Trustee or which had been available to Mr Papoutsakis prior to his bankruptcy.
Prime Capital debt
Annexed to the Trustee’s affidavit was a copy of Papou Pty Ltd’s signed acceptance of PCS’s approval of its loan application. The loan documents record Mr and Ms Papoutsakis as guarantors and bear their signatures as such but does not identify the lender other than as “Prime Capital” simpliciter. Although there appears to be a rough, hand-drawn line of uncertain significance through the reference to the 1 Beach Road property, this copy of the loan documents does not indicate that Mr Papoutsakis rejected the inclusion of three of the four properties as security for the loan.
The loan documents also stated:
Fees And Costs
14.The fees, costs and outlays outlined herein are payable by you on the earlier of: (i) the first drawdown date (ii) your withdrawal from this offer (if applicable) and (iii) and 30 days from the date of acceptance by you.
15.We require an Application Fee as outlined in section 6.0 to be paid upon acceptance of this offer by you.
…
Withdrawal By You
17.Once you accept this offer it cannot be withdrawn by you unless you request so in writing and we agree in writing to your withdrawal.
18.If you withdraw from the offer after signing it, or the loan is not drawn down for any reason within 30 days after acceptance, or the proposed funding is cancelled by us in any circumstances, then you agree to immediately pay (i) all fees, costs and outlays payable herein including any recovery costs and (ii) liquidated damages equivalent to one month’s interest at the Lower Rate.
19.You and each Guarantor charge all present and after acquired property in favour of us in respect of monies payable under these terms.
…
Acceptance by Borrower
By signing this document the Borrower accepts this offer and represents and
warrants to us …
…
By accepting this offer the Borrower also acknowledges and agrees that:
(i)a legally binding contract between you and us is created on the terms set out in this offer and the General Terms;
(ii)fees, costs, outlays and other monies are payable even if the loan does not proceed or is cancelled;
…
The agreement recorded its associated fees and costs as follows:
Other fees & costs as set
out in the General TermsDiscount Establishment Fee
2.2% of Facility limit Loan Management Fee 0 2% per month
Legal Fees At cost per lawyers
Valuation Fee At cost, per valuer
Also annexed to the report affidavit was a copy of the “Prime Capital” invoice dated 30 March 2017 addressed to Papou Pty Ltd and Mr and Ms Papoutsakis, charging them for the following items:
That invoice also referred to “Prime Capital” simpliciter but it did cite an Australian Business Number: 18 147 893 356 which, the Trustee deposed, had belonged to Prime Capital Mortgages Pty Ltd, a company that was deregistered on 5 July 2017.
The Trustee deposed that on or about 19 June 2018 he received a letter from Dentons, the solicitors acting for the petitioning creditor. Relevantly, the Trustee deposed that documents provided to him by Dentons disclosed that:
(a)Prime Capital Securities’ ACN was 168 662 173;
(b)a loan approval for $500,000 dated 18 July 2016 was accepted on 1 August 2016 by Papou Pty Ltd as borrower and Mr and Ms Papoutsakis as guarantors;
(c)the document did not identify which Prime Capital entity was the contracting party;
(d)the document disclosed four properties as security, with one property (1 Beach Road, Sandy Bay) marked as an uninitialled deletion; and
(e)the invoice from PCS dated 30 March 2017 addressed to Papou Pty Ltd contained the ABN 18 147 893 356.
In their letter Dentons advised:
Capital Securities XVI Ply Ltd (CSXVI) is a related body corporate of Capital Securities XV Ply Ltd (formerly known as Prime Capital Securities Ply Ltd). We understand the caveats were lodged pending the completion of the proposed finance facility which would have been provided to the borrower by CSXVI.
The Local Court statement of claim by which PCS commenced proceedings against Mr Papoutsakis on 1 June 2017 was also annexed to the Trustee’s report affidavit and pleaded clauses 17 and 18 of the loan agreement, quoted earlier. It further alleged that:
(a)PCS sent letters of demand dated 18 April 2017 to Papou Pty Ltd and to Mr and Ms Papoutsakis that they failed to comply with; and
(b)because the default had not been rectified “the whole of the amount owing pursuant to the Letter of Offer and Guarantor Acknowledgement became due and payable” by Papou Pty Ltd and Mr and Ms Papoutsakis.
CONSIDERATION
Although I do not believe that Mr Papoutsakis was seeking to mislead the Court, the impression I gained of him was that he was not always an accurate historian. His criticisms of the Trustee, largely to the effect that the Trustee was not administering the estate in a proper or business-like manner and was too interested in his fees, were not persuasive and seemed to overlook the complexities present in the administration of his estate, particularly by the contest in the Family Court. I found the Trustee to be a credible and reliable witness.
Should the sequestration order not have been made?
The first question to consider when deciding whether to annul a bankruptcy is whether the sequestration order should not have been made in the first place: s.153B(1) Bankruptcy Act; Rigg v Baker (2006) 155 FCR 531 at 543 [59] ff; Bulic v Commonwealth Bank of Australia Ltd (2007) 5 ABC(NS) 122 at 126-127 [12]; Francis v Eggleston Mitchell Lawyers Pty Ltd (2014) 12 ABC(NS) 25 at 30 [16]. That involves a consideration of all the true facts of the case, not just the facts known to the Court at the time of the order.
Failure to appear at hearing of creditor’s petition
In this case, the accepted fact is that Mr Papoutsakis did not appear and was not represented before the registrar on 21 May 2018 and had not filed a notice of grounds of opposition to the creditor’s petition or any evidence relevant to the petition notwithstanding that he had been aware of the terms of the Court’s orders made on 9 April 2018 concerning the filing of documents and the adjournment to 21 May 2018. The circumstances in which the sequestration order came to be made do not provide a basis to conclude that it should not have been made for procedural reasons. Moreover, it was not explained why, in circumstances where Mr Papoutsakis failed to appear in person or by a legal practitioner and had also failed to file a notice of grounds of opposition to the creditor’s petition or any evidence, the registrar had been bound not to make the sequestration order: Rigg v Baker at 546 [71].
Solvency
More significant, however, is Mr Papoutsakis’s financial situation at the time. His evidence is that he was solvent and able to pay his debts, the test for which is whether he had immediately available cash resources or other money which he could procure within a short time relative to the nature and amount of the debts and to his circumstances to pay all his debts as they fell due: s.5(2) Bankruptcy Act; Sandell v Porter (1966) 115 CLR 666 at 670 per Barwick CJ. Generally speaking, a temporary lack of liquidity would not support a finding of insolvency: Sandell v Porter at 670, but the fact that the value of Mr Papoutsakis’s assets at the date of the sequestration order may have exceeded his liabilities does not, on its own, establish that the sequestration order should not have been made: Stankiewicz v Plata [2000] FCA 1185 at [32].
Solvency - disputed debt
Mr Papoutsakis argued in his affidavit of 6 May 2021 that section 6.0 of the loan documents’ terms and conditions provided that three steps had to be completed to accept the loan approval and he deposed that only one of the three steps had been completed.The three steps referred to were:
Although the document was signed, steps 2 and 3, which concerned the payment of the application fee and provision of contact details for the borrower’s solicitor and for the person through whom access for a valuation would be arranged, were not completed. However, the relevant parts of the summary “Terms & Conditions” of the contract, extracted earlier in these reasons, provided that signature denoted acceptance of PCS’s offer and that that created “a legally binding contract between you and us”. That reflects the terms of the offer set out above, to the effect that signing and returning the documents “confirmed’ the loan approval, and other parts of the loan documents do not contradict what was said in the summary “Terms & Conditions”.
The formation of the contract did not, therefore, require anything more than return of a signed copy of the loan documents. Steps 2 and 3 were not preconditions to the entry into the contract but, properly understood, were obligations conditional upon that first step of acceptance having been taken. That being so, the fact that Papou Pty Ltd had not completed those second and third steps is of no relevant significance in circumstances where he it had, through Mr Papoutsakis, executed the agreement. The fact that those steps had not been completed did not affect the existence of the agreement with PCS.
Mr Papoutsakis further argued in his affidavits of 5 November 2020 and 6 May 2021 that:
(a)great doubt surrounds exactly which entity Papou Pty Ltd was dealing with when the loan application was made;
(b)the name of the lender at the time the sequestration order was made seemed to be Prime Capital Mortgages Pty Ltd (which used to be called Prime Capital Securities and before it was deregistered on 5 July 2017 had the ABN 18 147 893 356 which appeared on the “Prime Capital” invoice of 30 March 2017;
(c)the various corporate entities that featured in his case and were associated with Prime Capital did not have the same identifying company or business numbers; and
(d)based on the information contained in Denton’s letter to the Trustee dated 19 June 2018, neither Capital Securities XV Pty Ltd nor Capital Securities XVI Pty Ltd, a related body corporate, should have initiated proceedings against him or Papou Pty Ltd.
The lack of clarity over the identity of the lender is a perplexing aspect of this case but, as the applicant for annulment, Mr Papoutsakis bore the onus of demonstrating that that issue was material to the question of his solvency on 21 May 2018. This he has failed to do. It has not been demonstrated that the plaintiff in the Local Court proceedings, who was the petitioning creditor in this proceeding, lacked standing, based on the loan agreement pleaded, to bring the Local Court proceedings.
In his written submissions, Mr Papoutsakis argued that he had never owed PCS any money as he had not gone through with the loan because PCS had not honoured the terms of their agreement. I am not persuaded by Mr Papoutsakis’s assertion that Papou Pty Ltd and he were not bound by an agreement with PCS and, specifically, not bound to pay the amount invoiced on 30 March 2017. In that connexion, I do not accept that the version of the loan documents annexed to Mr Papoutsakis’s affidavits of 5 November 2020 and 6 May 2021, which had fewer pages than the version supplied by Dentons to the Trustee, was what Papou Pty Ltd’s finance broker provided to PCS. Mr Papoutsakis gave unclear evidence concerning what document was supplied to PCS and he failed to explain how PCS came to have a version of it, as provided by Dentons to the Trustee, that was signed by him and his then-wife but which did not bear the striking out of three properties as his own copy did. The version of the loan documents provided by Dentons appears to be a clean and complete version of what Mr Papoutsakis adduced. The inference I draw is that it was that version of the documents that was given to PCS by the broker and that a loan agreement came into being at that time (“Loan Agreement”). The evidence does not support a conclusion that the version of the documents adduced by Mr Papoutsakis, with its additional manual alterations, was ever part of the negotiations with PCS or that that company was aware of it. I conclude that the version of the documents relied on by Mr Papoutsakis had no contractual significance.
That being so, if Papou Pty Ltd withdrew unilaterally from the transaction with PCS, as Mr Papoutsakis’s evidence indicates it did, the effect of the Loan Agreement’s terms quoted earlier is that Papou Pty Ltd, and in default Mr and Ms Papoutsakis, were liable for the amounts set out in the “Prime Capital” invoice of 30 March 2017.
Solvency – not insolvent
Mr Papoutsakis deposed in his affidavit sworn 6 May 2021 that at all times, he could pay his debts as they became due.He submitted that the PCS debt of $26,606.32 was negligible in comparison to his overall assets, contending that at the time the sequestration order was made his property assets alone had a combined value of $6,625,000 and a monthly rental income of $8,500.Mr Papoutsakis submitted that he could have refinanced his debts or sold real property assets to trade out of his financial difficulties, if he had been allowed to set aside the sequestration order.
Mr Papoutsakis’s focus in his annulment application on the value of his real estate assets is, in large part, misplaced. The cases show that illiquid assets do not support a finding of solvency unless they can be realised or borrowed against in a relatively short time such that the debtor is able to pay all of his or her debts as and when they become due and payable. The evidence indicates that Mr Papoutsakis did not agree to the sale of the properties at 644 Sandy Bay Road and 1 Beach Road because he had an unrealistic opinion of their worth. That fact gives no reason to be confident that he would have been willing to accept a fair market price for an asset were its sale necessary to provide ready money, even assuming that a sale could be effected quickly enough to meet the test of solvency. An alternative would have been borrowing but Mr Papoutsakis did not lead evidence that there was credit available to him sufficient that he could pay all his debts as they fell due. In that regard it should be noted that the Trustee’s estimation of Mr Papoutsakis’s unsecured creditors as at 21 May 2018 was $I.
The Court is also unaware of the income that was being generated by the family business at the premises at 644 Sandy Bay Road and 1 Beach Road.
The practical value of the assets that have been discussed is also clouded by the uncertainty introduced by the need to have regard to the potential division by the Family Court of the pool of matrimonial assets and the fact that Mr Papoutsakis’s share of that asset pool is undetermined. The difficulties involved in the sale of the premises at 644 Sandy Bay Road and 1 Beach Road also point to the real estate assets not being practically available to assist with Mr Papoutsakis’s debts in a sufficiently prompt fashion. Ms Papoutsakis and the Family Court would also need to have agreed before any of the matrimonial assets could have been made available to Mr Papoutsakis, even in part, and there is no evidence from Ms Papoutsakis concerning how agreeable she would have been to that in May 2018.
Regard should also be had to the fact that the Trustee is a chartered accountant and registered trustee in bankruptcy with over 32 years’ experience in corporate and personal insolvency practice and that it was his opinion that Mr Papoutsakis was “significantly insolvent” as at the date of the sequestration order.
Having regard to the matters I have discussed, I am not persuaded that Mr Papoutsakis was solvent when the sequestration order was made on 21 May 2018. That being so, and quite apart from the issue of his failure to appear at court on 21 May 2018 and having also failed to file a notice of ground of opposition to the creditor’s petition or any evidence in that connexion, I find that Mr Papoutsakis has not demonstrated that the sequestration order of 21 May 2018 ought not to have been made. In that circumstance, the Court may not make an order annulling his bankruptcy.
Mr Papoutsakis also submitted that the Trustee had failed to comply with his duties under the Bankruptcy Act, had made no attempt to recover any money owing to him from multiple debtors or to reduce the size of creditors’ claims through negotiation and had not obtained releases from any of the creditors whom he proposed to pay at settlement.However, those matters do not bear on the question whether the sequestration order ought not to have been made.
Discretion
The second issue which can arise for consideration on an application for annulment is whether, even if the sequestration order ought not to have been made, the bankruptcy should be annulled. That is a discretionary matter. However, given the finding I have made concerning whether the sequestration order ought not to have been made, the discretion is not engaged. Even so, some comments on the issue are appropriate.
Delay
It is apparent that this proceeding has been brought a considerable time after the relevant order was made. The delay is significant and material. During that period the Trustee has performed a considerable amount of work in the administration of the estate, incurring fees and expenses in the process. Not least significant of the issues of that sort is the Family Court matter. Were the bankruptcy to be annulled at this late date, the preparation work done by the Trustee in relation to that proceeding would be likely to be wasted.
Regard should also be had to the inconvenience imposed on Mr Papoutsakis’s unsecured creditors were the bankruptcy to be annulled. An annulment would require them, having waited for years without access to the funds they are owed, to put aside their proofs of debt and pursue their remedies afresh elsewhere.
Mr Papoutsakis argued, in substance, that the delay in bringing this proceeding was explained by the fact that the negligent inaction of his legal advisers had hindered his attempts to set the sequestration order aside or to have the bankruptcy annulled. However, although Mr Papoutsakis wanted from an early point to annul his bankruptcy, having said as much to the Trustee on more than one occasion, his efforts to achieve that appear to have been sporadic and lacking in determination. It is not clear on the evidence why Mr Papoutsakis’s attempts to reverse his change in status have gone nowhere but it does not seem that he was misled or deceived by his advisers or that they refused to take instructions. To the extent that the advisers may have been dilatory or ineffective, Mr Papoutsakis cannot avoid his responsibility to protect his own interests by pressing them into action.
Mr Papoutsakis submitted on this point that he should be shown leniency in respect of the delay because the Trustee had refused to consent to the annulment of the bankruptcy or to advise him of his options in the Federal jurisdiction. He submitted that it was not until 2020 that he discovered that he could bring this matter to the Court without the Trustee’s consent, which he immediately proceeded to do. Contrary to that submission, the Trustee did not owe Mr Papoutsakis any duty to advise him of his options. Further, Mr Papoutsakis’s claimed ignorance of his right to bring this proceeding is belied by his own evidence at the hearing in this matter that on 23 October 2018 he had told the Trustee that an application to annul the bankruptcy had been filed, although it never was because, he said, counsel failed to act in accordance with his instructions, and on 28 July 2020 he wrote to the Trustee saying that he intended to apply for an annulment.
Trustee’s fees
Mr Papoutsakis has indicated a willingness to apply the entirety of the $A surplus from the sale of 644 Sandy Bay Road and 1 Beach Road be applied to the Trustee’s costs as well as to “to compromise the debts of any unsecured creditors”. However, those funds are part of the matrimonial pool of assets and so Mr Papoutsakis is not the only person with an interest in them and, in any event, even if the entirety of the figure were to be available to him, the evidence indicates that it would be insufficient to satisfy the Trustee’s entitlements.
Solvency
The bankruptcy would be unlikely to be annulled unless Mr Papoutsakis were solvent now, but it is not apparent that he is.
The most significant issue associated with the question of present solvency is the inability to know how much of the matrimonial pool of assets Mr Papoutsakis will hold at the end of the Family Court proceeding, from which the Trustee’s fees and expenses are to be paid with priority: ss.109, 154 Bankruptcy Act. The Trustee has deposed that, depending on how assets and liabilities are apportioned between Mr and Ms Papoutsakis by the Family Court:
… creditors [might] receive a dividend of well under 100 cents in the dollar.
Despite Mr Papoutsakis’s complaints about the Trustee’s fees and expenses, it has not been demonstrated that creditors are likely to achieve from an annulment of the bankruptcy, as a result of which they would be able to pursue their rights through other avenues, an outcome better than the one they would achieve if the administration of Mr Papoutsakis’s estate continued to completion.
Conclusion on discretion
In circumstances where there has been a long and largely unexplained delay in bringing this proceeding, where an adequate proposal for paying the Trustee’s fees and expenses has not been made, where it has not been demonstrated that Mr Papoutsakis is presently solvent and where it would appear that creditors would not be better off with an annulment, even if I had concluded that the sequestration order ought not to have been made, I would not have exercised the discretion to annul Mr Papoutsakis’s bankruptcy.
CONCLUSION
The application for the annulment of Mr Papoutsakis’s bankruptcy will be dismissed.
I certify that the preceding seventy-one (71) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Cameron. Associate:
Dated: 30 August 2021
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