Raupach v MacDonald

[2010] NSWSC 1326

CITATION:	Raupach v MacDonald [2010] NSWSC 1326
HEARING DATE(S):	19 July 2010; 20 July 2010; 4 August 2010
JUDGMENT DATE :	24 November 2010
JUDGMENT OF:	Price J at 1
DECISION:	1. Declare that the defendant is indebted to the plaintiff in the sum of $80,000. 2. Verdict and Judgment for the plaintiff against the defendant in the sum of $80,000. 3. The defendant is to pay interest on the sum of $80,000 from 20 June 2004 until the date of judgment. Such interest is to be calculated at the rate prescribed under UCPR r 36.7 and added to the Judgment. 4. Verdict and Judgment for the first, second and third cross-defendants against the cross-claimant (Neil MacDonald) on the cross- claims.
CATCHWORDS:	CONTRACT - whether Deed of compromise valid and enforceable - BANKRUPTCY - whether failure to comply with s 58(3) Bankruptcy Act vitiated Deed - whether obligations under Deed a provable debt - whether annulment of bankruptcy removed any impediment to enforceability of Deed - UNJUST CONTRACT - Contracts Review Act - whether Deed unjust - estoppel - mutual mistake - whether proceedings abuse of process.
LEGISLATION CITED:	Bankruptcy Act 1966 (Cth) s 58(3), s 73, s 74, s 75(2)(a), s 82, s 82(1), s 153B, s 153(2)(b) Contracts Review Act 1980 s 4, s 7, s 7(1), s 9(2)(a) s 9(2)(b), s 9(2)(e), s 9(2)(h), s 9(4), s 9(2)(i), s 9(2)(j) Evidence Act s 128, s 28(3), s 128(5) Fair Trading Act 1987 s 42 Limitation Act 1969 s 42 Uniform Civil Procedure Rules 2005 r 13.4, r 14.28, r 36.7
CATEGORY:	Principal judgment
CASES CITED:	Baltic Shipping Company, The Mikhail Lermontov v Dillon (1991) 22 NSWLR 1 Bartlett v Coomber [2008] NSWCA 100 Boyapati v Rockefeller Management Corporation (2008) 77 IPR 251 Cit Credit Pty Ltd v Keable [2006] NSWCA 130 Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56 Lewis v Combell Constructions Pty Ltd (1989) 18 NSWLR 528 Morkaya v Parkinson [2010] NSWSC 1194 More v More [1962] Ch 424 Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284 Oates v Commissioner of Taxation (1990) 27 FCR 289 Perpetual Trustee Company Limited v Khoshaba [2006] NSWCA 41 Re Coyle (1993) 42 FLR 72 Re Giuca; Ex parte The Bankrupts (1986) 70 ALR 219 Rejfek v McElroy (1965) 112 CLR 517 Re Spratt; Ex Parte Wilde [1986] FCA 33 Reynolds v Reynolds [1977] 2 NSWLR 295 Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 Spina v Permanent Custodians Limited [2009] NSWCA 206 Union Club v Battenberg (2006) 66 NSWLR 1 West v AGC (Advances) Ltd (1986) 5 NSWLR 610
PARTIES:	Douglas Raupach - Plaintiff/First Cross-Defendant Neil MacDonald - Defendant/First Cross-Claimant Enrico Di Lario - Second Cross-Defendant Sandra Simone Di Lario - Third Cross-Defendant
FILE NUMBER(S):	SC 2007/261840
COUNSEL:	Mr V Bedrossian (Plaintiff) Mr B De Buse (Defendant) Mr R Higgins (2nd + 3rd Cross-Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION

24 November 2010

2007/13468 Raupach v MacDonald

JUDGMENT

On 21 April 2004, Neil MacDonald entered into a Deed (the Deed) with Douglas Raupach and Enrico Di Lario and Sandra Simone Di Lario whereby he agreed to pay a total amount of $100,000 to Mr Raupach. All of the parties to the Deed were parties to proceedings no 10533 of 2001 in the District Court of New South Wales (the District Court proceedings). Mr Raupach and Mr and Mrs Di Lario were also parties to proceedings no 5263 of 2002 in the Supreme Court of New South Wales. Included in the introduction to the Deed was the following (cl A3):

“The parties to this agreement have resolved to settle their differences on the terms set out herein without prejudice and without acknowledgement.”

2 Clause 1 of the Deed provided that the $100,000 was to be paid by an amount of $10,000 held in the trust account of Searle and Associates, solicitors and by monthly instalments of $10,000. Mr MacDonald thereafter paid one monthly instalment.

3 By cl 2 of the Deed, the defendant was obliged to provide on or before 15 July 2004 to the plaintiff as security for the payment of the monies referred to in cl 1, all documents required to effect a legal transfer of 28.5 per cent of the fully paid issued shares and or unit entitlements in the company known as W2C2=$ Pty Limited (W2C2). The documents were to be held in escrow and not to be used to effect a transfer by the plaintiff unless there was a default by the defendant. No such documents were executed by the defendant.

4 Clause 11 of the Deed is as follows:

“Notwithstanding anything contained in this Deed, this Deed operates as a complete release of any action or claim Raupach has against Di Larios or Di Larios have against Raupach and can be pleaded as a complete defence to any action brought or pursued by any one of them against the other.”

5 At the time he entered into the Deed, Mr MacDonald was an undischarged bankrupt. He was not legally represented in the District Court proceedings. The principal issues that these proceedings raise are whether the Deed is valid and its terms are enforceable. Another significant issue is the question of injustice under the Contracts Review Act 1980 (CRA).

The present proceedings

6 By an amended statement of claim filed on 18 January 2008, Douglas Raupach (the plaintiff) seeks a declaration that Neil MacDonald (the defendant) is indebted to him in the amount of $80,000 and an order that the defendant pay that amount to him. In the alternative, the plaintiff seeks a declaration that the defendant is estopped from denying his liability to the plaintiff in the amount of $80,000 plus interest in accordance with the express terms of the Deed.

7 In a defence filed 19 May 2008, the defendant inter alia pleads that the amount claimed by the plaintiff was a provable debt pursuant to s 82 Bankruptcy Act 1966 (Cth) and by reason of his bankruptcy, the purported joinder of the defendant as a cross-defendant in the District Court proceedings, without leave of the Federal Court or the Federal Magistrates Court pursuant to s 58(3) Bankruptcy Act was incompetent.

8 The defendant pleads that by reason of his bankruptcy, he did not have the power, capacity or authority to settle the District Court claim, such power, capacity or authority residing only in his Trustee in Bankruptcy. He pleads that the Deed is liable to be set aside. The defendant also pleads that he has relied on representations made by the plaintiff to his detriment and the plaintiff is estopped from seeking to enforce the Deed and is liable to repay him the payments made. Further and in the alternative, the defendant says that the Deed was unjust in the circumstances and seeks orders pursuant to s 7 CRA.

9 By a first cross-claim filed on 21 July 2006, the defendant seeks orders declaring the Deed void in whole or in part and an order that the plaintiff pay to him the sum of $20,000. The defendant pleads that the Deed is unjust pursuant to s 9 CRA.

10 In a second cross-claim, the defendant joined Enrico Di Lario and Sandra Simone Di Lario as the second and third cross-defendants respectively. The defendant seeks the following declaratory relief:

“1. A declaration that proceedings 10533 of 2001 in the District Court of New South Wales are incompetent as against [him].

2. A declaration that proceedings 1524 of 2006 in the District Court of New South Wales are incompetent as against [him].

3. A declaration that the Deed dated 21 April 2004 between the parties is void ab initio and of no effect.

4. An order that the Deed dated 21 April 2004 between the parties be set aside.

5. An order that [the plaintiff] pay to [him] the sum of $20,000.

6. A declaration that the Deed does not express the true agreement of the parties and was executed under a common mistake.

7. A declaration that the cross-claimant is and never was bound to perform the agreement set out in the Deed.”

11 Amongst the matters pleaded in the second cross-claim were that the debt was a provable debt pursuant to s 82 Bankruptcy Act; the joinder as a cross-defendant without leave of the Federal Court or Federal Magistrates Court pursuant to s 58(3) Bankruptcy Act was incompetent; that representations made by the defendant were misleading and deceptive and contravened s 42 Fair Trading Act 1987; that the Deed was unjust; that the defendant was under a special disadvantage in dealing with the plaintiff; that it was unconscionable for the plaintiff to prove or accept the defendant’s “ascent [sic]” to the Deed and that the Deed was entered into under mutual mistake.

12 Included in the defence pleaded by the plaintiff in his defence to second cross-claim, is the assertion that even if there is a provable debt within s 82(1) Bankruptcy Act, the debt was incurred by means of fraud or a fraudulent breach of trust to which the defendant was a party. Consequently, by reason of ss 75(2)(a) and 153(2)(b) Bankruptcy Act, the annulment of the bankruptcy did not release the defendant.

13 The plaintiff was represented by Mr V Bedrossian, the defendant by Mr B De Buse and the second and third cross-defendants by Mr R Higgins.

Issues for determination

14 The plaintiff identified the following matters as being the real issues requiring determination:

“1. Whether, by execution of the Deed dated 21 April 2004 ("the Deed"), the Defendant entered into a binding and enforceable obligation to pay a total of $100,000.00 to the Plaintiff. [Am SofC paras 12-14]

2. Further to Issue (1) above and as a sub-set thereof, whether any or all of the following facts impacted upon the Defendant's capacity to enter into binding obligations as identified in the Deed and/or now impact upon the Plaintiff’s ability to seek to enforce the terms of the Deed against the Defendant:

(a) the Defendant was made a bankrupt by a sequestration order made on 5 March 2002;
(b) the Defendant was purportedly joined as a party to the District Court proceedings on 5 November 2002;
(c) the claim made against the Defendant in the District Court proceedings and the underlying liability, from which the Plaintiff says the Deed permitted the Defendant to be released, was a liability arising from conduct of the Defendant that was fraudulent or a fraudulent breach of trust to which the Defendant was a party;
(d) the Defendant remained an undischarged bankrupt at the time of the execution of the Deed on 21 April 2004; and
(e) the Defendant subsequently, on 4 March 2005, entered into a composition with certain of his creditors pursuant to section 73 of the Bankruptcy Act 1966 (Cth) and thereby had his bankruptcy annulled.

3. If the answer to Issue (1) above is "No", whether the Defendant is nevertheless estopped from denying the existence of a binding and enforceable obligation, in accordance with the terms of the Deed, to pay a total of $100,000.00 to the Plaintiff. [Am SofC paras 1-11]

4. Whether the Plaintiff is estopped from seeking to enforce the Deed. [Def to Am SofC, para 31]

5. Whether it is unconscionable for the Plaintiff to seek to enforce the Deed, because the Defendant was under a 'special disadvantage' at the time of execution of the Deed. [Cross-Claim, paras 23-26]

6. Whether the Deed is liable to be set aside pursuant to the Contracts Review Act 1980 (NSW). [Cross-Claim, paras 21-22]

7. In the event that the Plaintiff is estopped from seeking to enforce the Deed or the Defendant is entitled to have the Deed set aside, whether the Plaintiff is liable to repay to the Defendant the sum of $20,000.00, which has already been paid by the Defendant to the Plaintiff pursuant to the terms of the Deed.

8. Whether, in the course of the negotiations that preceded execution of the Deed, the Plaintiff breached section 42 of the Fair Trading Act 1987 (NSW) by engaging in misleading or deceptive conduct and, if so, whether the Defendant is entitled to any damages as a consequence thereof. [Cross-Claim, paras 12-20]

9. Whether the parties to the Deed executed the Deed under a common mistake of fact and/or law and, if so, whether that circumstance has the consequence that the Deed is not binding upon or enforceable against the Defendant. [Cross-Claim, paras 27-29]

15 Mr De Buse did not suggest that the issues had been incorrectly identified. Mr Higgins emphasised that Mr and Mrs Di Lario’s interest in the proceedings is limited to cl 11 of the Deed. He submitted that if the court decides to review the Deed under the CRA then cl 11, which contains mutual full releases between the plaintiff and his clients, should be severed.

Some matters of fact

16 As the issues to be determined include assertions of injustice, unconscionability and misleading and deceptive conduct, it is necessary to consider the facts in some detail.

17 In approximately mid-1994, Buvete Pty Ltd was in need of funds to pay staff wages. Mr Di Lario (the second cross-defendant) was a director and major shareholder of the company. His mother had paid the company staff their wages on his behalf and Mr Di Lario sought to borrow $40,000 to repay her. He was referred to Finance & Mortgage Corporation Limited (Finance and Mortgage) and to the defendant.

18 The defendant was a director of Finance and Mortgage which provided mortgage and finance broking services.

19 In about early October 1994, Mr Di Lario met the defendant at his office in North Sydney and told him that he needed $40,000 to pay staff. The defendant said that he knew where he could get it and a mortgage was required over Mr Di Lario’s house. When informed by Mr Di Lario that the house was subject to a mortgage, the defendant said that a second mortgage would be put on the home. Mr Di Lario said that he needed the money for about a month.

20 Peter Raupach, the plaintiff’s son, was working at that time as a consultant with Finance and Mortgage. During his evidence, he described his involvement with the company as mainly finding people who wanted to borrow money. He advised his father that Finance and Mortgage was looking to place a second mortgage for $42,500 for one of its clients for a period of one month. The plaintiff decided to advance the monies, which amounted to $40,000 as interest of $2,500 was to be pre-paid.

21 Mr Di Lario returned with his wife to the defendant’s office a “couple of days later”. The defendant took them upstairs to the office of Mr Derwin, a solicitor. Both Mr and Mrs Di Lario signed the mortgage.

22 Peter Raupach, in cross-examination, said he did not have any role in the preparation of the mortgage. He gave evidence that he did not give instructions to Mr Derwin to prepare the mortgage and a caveat and assumed that the defendant or someone from Finance and Mortgage had.

23 I pause here to note that in his affidavit sworn 24 June 2010 (ex 3), the defendant stated at par 17:

“All of the discussions and dealings concerning those loans including the loan advance to Mr and Mrs Di Lario which occurred in October 1994 were arranged and facilitated by Peter Raupach. I do not recall having any direct or any significant involvement in the loan transaction between Douglas Raupach and Mr and Mrs Di Lario which is said to have taken place on 13 October 1994.”

24 What is stated here stands unhappily with the testimony of Mr Di Lario and Peter Raupach. The defendant agreed in cross-examination that he negotiated the terms of the loan with Mr and Mrs Di Lario. I prefer and accept the evidence of Mr Di Lario and Peter Raupach of the defendant’s involvement in the loan transaction (the Di Lario loan).

25 It is convenient now to state my assessment of the credit of the witnesses. I found the plaintiff, Peter Raupach and Mr Di Lario to be honest and reliable. The defendant, however, impressed me as being less than frank when he endeavoured to distance himself from the management and settlement of the Di Lario loan. Similarly I found to be disingenuous, in important aspects, his testimony of his understanding of the District Court proceedings and his circumstances in entering into the Deed.

26 Mr and Mrs Di Lario signed the mortgage on 13 October 1994. Clause 2 of the mortgage provided that the principal sum was to be repaid on 11 November 1994. If the principal sum was not repaid as required by cl 2, the mortgagors covenanted to pay interest on the principal sum or “on so much thereof as for the time being shall remain unpaid at the rate of 25% per annum” compounding daily until payment in full: cl 3.2. The mortgagors were also obliged to pay a “facility management fee” of $500 per month for each month that the principal sum was not repaid after 11 December 1994.

27 The mortgage was given over the land in certificate of title folio identifier 548/739815 (the property). The mortgage was not registered but a caveat was placed on the title to protect the plaintiff’s interest.

28 The principal sum was not repaid within one month but Mr and Mrs Di Lario paid compound interest and facility management fees in a total amount of $68,692 to Finance and Mortgage up until 10 July 2001. None of these monies were forwarded by Finance and Mortgage to the plaintiff.

29 The St George Bank records (ex E) and the bank cheque (ex F) establish that the principal amount of the loan was repaid by Mr Di Lario with a bank cheque dated 15 November 2000 in the sum of $41,321.40. This cheque was deposited in the Finance and Mortgage Business Cash Management account with St George Bank on 17 November 2000. None of the monies paid by Mr Di Lario were forwarded by Finance and Mortgage to the plaintiff.

30 The St George Bank records disclose that the opening balance of the Finance and Mortgage account in November 2000 was $7.04. On the same day the bank cheque was deposited, cheques were drawn against the account, including a cheque for $19831.61 made out to American Express, a cheque to M Jago for $1665.69 and a cheque for $15,000 to Terashore Pty Ltd (Terashore). The defendant was a director of Terashore and his daughter Phillipa was the beneficial holder of the issued capital. It appears that these cheques were signed by Cheryl Matthews who was a director of Finance and Mortgage. The defendant gave evidence that he had day-to-day management responsibilities of Finance and Mortgage and expected Ms Matthews to inform him about sums of money more than $5,000. When cross-examined on the letter dated 1 December 2000 to the St George Bank concerning two dishonour fees, the defendant said that he had not signed the letter. The letter requested that the cheque to Terashore and M Jago be stopped. In cross-examination, the defendant gave the following evidence (T 126 L 49 – T 127 L 1-20):

“Q. In any event, at the time that that letter went out, you knew about it and approved its contents?

A. More than likely.

Q. And you knew, therefore, at 1 December 2000, that two cheques were being paid out of the Finance & Mortgage account, one to M Jago for $1,665.69?

A. I more than likely knew what cheques were coming out of the account. I do not dispute that.

Q. And you would have at least curious, if not obligated by your role as a director, to know or find out why it was that a total of $16,500 was coming out of the Finance & Mortgage account, including an amount of $15,000 to a company, the beneficial of which was your daughter, Philippa; were you not curious about that?

A. I probably gave the direction. It was probably my direction to do that. I don't know what I was paying or what we were paying to Terashore at that time. At that particular time, First Netcom was in liquidation. It did not have any trading accounts of its own.

Q. Is that your answer?

A. Yes. “

31 In his affidavit (ex 3), the defendant stated that “[he] did not…have day to day management of the Di Lario loan and would not have known from one month to the next whether interest payments were made or otherwise”: ex 3 par 20. It is plain, however, from the tendered facsimiles (ex N) and the defendant’s answers in cross-examination that the defendant from time to time chased up payments of interest on the Di Lario loan that were in arrears. Furthermore, it is evident from the file notes (ex D) that it was the defendant with whom the second cross-defendant’s solicitors discussed the repayment of the loan, the withdrawal of the caveat and settlement in November 2000.

32 I find on the balance of probabilities that the defendant participated in the settlement of the loan. I am also satisfied on the balance of probabilities that the defendant knew that the principal amount of the loan had been paid into the Finance and Mortgage account. He was also aware of the cheques drawn on the account that were signed by Ms Matthews.

33 The plaintiff stated in an affidavit sworn 19 July 2010 (ex A annex A) that at about the same time as the Di Lario loan he had advanced another three loans to other persons for similar sums of money. He did not remember that the Di Lario loan had not been repaid by the due date and it was not until the middle of 2001 that he realised that he had not received any payment. He then instructed solicitors to make enquiries.

34 His solicitors informed him that there was neither a mortgage nor a caveat lodged over the property. Annexure E to the affidavit is a withdrawal of caveat. The plaintiff said that he had not signed the withdrawal and the signature of caveator purporting to be “D Raupach” was not his. The name of the witness to the caveator’s signature is given on the document as “N A MacDonald”. The defendant denied in cross-examination that he had forged the plaintiff’s signature on the withdrawal of caveat.

35 It was the defendant’s evidence that as he did not recollect physically seeing the plaintiff sign the withdrawal of caveat, he believed that the document was presented to him by Peter Raupach: ex 3, par 23.

36 Peter Raupach testified that he did a historical search on the property and obtained a copy of the last withdrawal of caveat “which showed that the caveat to [his] father had been withdrawn several months before that”: T 87 L 2-4. He thought that this was in 2001. He spoke to his father about the withdrawal of caveat who had no recollection of having signed it.

37 The defendant also stated that one of the procedures typically adopted by Finance and Mortgage in relation to a short term loan was that the lender would provide “a duly executed but incomplete and undated discharge of mortgage and/or withdrawal of caveat which would be held on file pending repayment”: ex 3 par 22. The file note, however, from Albert A Macri Partners, the solicitors acting for Mr and Mrs Di Lario includes the following:

“9 November 2000
…
Neil [MacDonald] said they will organise the Withdrawal of Caveat”

and

“16 November 2000
...
Neil Macdonald from Finance and Mortgage Corporation phoned and said they have prepared the Withdrawal of Caveat and he can settle tomorrow…”

38 I find on the balance of probabilities that an undated withdrawal of caveat signed by the plaintiff was not on the file. I also find that the defendant was involved in the preparation of the document. I do not accept the defendant’s evidence that Peter Raupach presented him with a signed withdrawal of caveat. I do not find on the evidence, however, that the defendant forged the plaintiff’s signature on that document.

39 It appears from the title search (ex A annex 26) that Mr Di Lario had transferred his interest in the property to his wife on or about 6 March 1998. At that time the first mortgage on the property was re-financed and the caveat lodged to protect the plaintiff’s interest was withdrawn. The plaintiff was neither notified of this transaction nor did he authorise the withdrawal of the caveat. Another caveat was lodged on 6 July 1999 and was withdrawn on 30 November 2000 without his knowledge and consent.

40 A caveat was placed on the title to the property by the plaintiff on 2 July 2001.

41 By a Statement of Liquidated Claim filed in the District Court on 22 October 2001 (proceedings no 10533 of 2001) the plaintiff claimed that Mr and Mrs Di Lario owed to him under the loan agreement $239,972.92 being principal, interest and mortgage management fees. In a defence filed on 5 November 2002, Mr and Mrs Di Lario asserted that all of the loan monies had been paid to the plaintiff’s agent Finance and Mortgage and or in the alternative, to the defendant. A cross-claim against the defendant and Finance and Mortgage was filed on the same date.

42 A further amended defence dated 2 February 2004 was filed on behalf of Mr and Mrs Di Lario. The pleaded defences included the assertions that the loan agreement was unenforceable pursuant to the CRA and insofar as the plaintiff sought to recover money alleged to be due or owing before 22 October 1995, the proceeding were barred by the Limitation Act 1969.

The defendant’s bankruptcy

43 I digress to consider the defendant’s bankruptcy. He was rendered bankrupt pursuant to a debtor’s petition on 5 March 2002. Schon Condon of Jones Condon, chartered accountants, was appointed a trustee of the bankrupt estate. His bankruptcy was due to be discharged on 5 March 2005. On 1 February 2005, the defendant wrote to Mr Condon proposing a composition pursuant to s 73 Bankruptcy Act. Mr Condon as Trustee on 24 February 2005 provided a report to creditors detailing his assessment of the defendant’s proposal and advising that a meeting of creditors had been called for 4 March 2005. The list of creditors did not include the plaintiff nor was the plaintiff sent the Trustee’s report.

44 The defendant’s proposal for composition was accepted at the creditor’s meeting on 4 March 2005 and his bankruptcy was annulled pursuant to s 74 Bankruptcy Act. The defendant acknowledged in cross-examination that he knew of the difference between an annulment and a discharge of bankruptcy and that was the reason he was anxious to have his proposal accepted one day before his bankruptcy would have been discharged.

45 During cross-examination, the defendant accepted that he at no time disclosed to Mr Condon that he had any liability or potential liability to the plaintiff. On this topic, his testimony in cross-examination by Mr Bedrossian included the following (T 107 L 9-28):

“Q. It remains your position today that as at March 2002 you did not have any personal liability to Douglas Raupach, correct?
A. Sorry, as at the date I filled out my statement of affairs.

Q. I will ask a complete question. At any time from 5 March 2002, including when you prepared and submitted your statement of affairs, including up to and including the date of the annulment of that bankruptcy, you agree, don't you, you did not tell Mr Condon, your trustee, of any personal liability of yours to Mr Douglas Raupach arising from the loan transaction, the subject of these proceedings; that's correct, isn't it?
A. Again, I say why would that have been an issue? Because it was a company debt.

Q. So, you agree you did not?
A. I agree I did not.

Q. Your position to this day is that you have no such liability, correct? To this day, you say to this Court, that you agree that you did not have any such personal liability to which I have just referred?
A. Yes.”

46 Furthermore, the defendant agreed during cross-examination by Mr Higgins that at no time did he disclose to Mr Condon any liability or potential liability to the second and third cross-defendants.

47 Finance and Mortgage was de-registered on 15 December 2002.

The District Court proceedings

48 I return now to the District Court proceedings. Deborah Searle, the plaintiff’s solicitor, wrote to the defendant on 9 September 2003 enclosing copies of the short minutes of order detailing the court timetable. In November and December 2003, there were emails forwarded by the defendant to Ms Searle which manifest attempts by him to settle the plaintiff’s claim: ex J CB 154-164. I observe here that the plaintiff had at this stage made no claim against the defendant but he had been made a party to the proceedings by Mr and Mrs Di Lario’s cross-claim.

49 In a letter dated 19 March 2004 written to Ms Searle, the defendant wrote the following:

“I refer to our discussions in December and I advised at that time that I would have sufficient cashflow to meet [the plaintiff’s requirements] from March on.

Enclosed herewith is a cheque for $10,000 and I would expect to have the further $20,000 over the next two or three weeks.

Could you please contact me to discuss.”

50 The solicitor responded to the defendant’s settlement offer in a “without prejudice” letter dated 24 March 2004. The defendant was informed that there was not “the slightest possibility” the plaintiff would accept $30,000 but he would accept $130,000 plus half his legal costs. A condition of the offer was that the defendant negotiated with Mr and Mrs Di Lario to discontinue the proceedings without any order as to costs. Ms Searle made it plain to the defendant that if the condition was not fulfilled, the matter would proceed to trial.

51 During cross-examination by Mr Bedrossian, the defendant acknowledged that he had tried to settle the “Raupach/Di Lario” dispute for good reasons, which were identified in his affidavit (ex 3). The defendant stated (ex 3 par 28):

“I did not at any time consider that I had personally received monies. I was concerned about my liability and responsibility for the loan by reason of my directorship and managerial responsibilities in respect of Finance & Mortgage Corporation. Further because of my long term relationship with the Di Larios and my relationship with Peter Raupach I believed that if possible a solution should be found to the dispute. Prior to my attendance at Court I wanted to resolve the matter commercially because of the relationship with the parties rather than because I believed that I was legally responsible.”

52 Included in the defendant’s oral evidence was the following (T 132 L 3-16):

“Q. So you say that voluntarily, because you wanted to save the relationship between the parties, you stepped up to the plate and offered something to settle this dispute, is that right?

A. Yes.”

53 The defendant was advised in a letter dated 22 December 2003 from Albert A Macri Partners, the solicitors for Mr and Mrs Di Lario, that the proceedings were listed for hearing in the District Court at Sydney on 19, 20 and 21 April 2004. The defendant wrote to Ms Searle on 8 April 2004 in which he referred to his “earlier offer” of settlement in an amount of $100,000 as still standing, that he had $10,000 “ready to go to you now” and he would have another $10,000 prior to the hearing. It appears that the cheque enclosed in the letter dated 19 March 2004 was paid by W2C2.

54 The defendant’s offer of settlement was not accepted by the plaintiff prior to the hearing. When the proceedings came on for hearing before Phegan DCJ, the plaintiff was represented by Mr Atkin of counsel and Mr Slowgrove of counsel represented Mr and Mrs Di Lario. The defendant had neither filed a defence to the cross-claim nor was he legally represented. All of the parties were aware of the defendant’s bankruptcy and the Judge was told that he was a bankrupt. Mr Atkin explained to his Honour that the plaintiff had no claim against the defendant or his company. The plaintiff’s case was that he loaned the money to Mr and Mrs Di Lario and had not been repaid. The defendant told the Judge at the outset of the hearing that he would submit to the orders of the court and was not defending the matter. He said that the issue was that no money had been paid to him but to the company of which he was a director.

55 I do not propose to detail here all of what occurred on the first day of hearing. It is evident that the Judge patiently explained to the defendant what his Honour at that stage perceived the issues in the proceedings to be and the possible implications for the defendant. During an exchange with the defendant, the Judge said (ex J CB 178-179):

“You can’t just ignore the fact that you have been involved as a defendant, effectively, a cross defendant, in court proceedings. You have to do something about it. If you don’t do anything about it, you’re exposing yourself to the risk, not only the more serious risk of the possibility of some criminal proceedings further down the track, but the immediate prospect that if you simply let the matter take its course, the defendants will succeed in persuading me that you’re liable as a cross-defendant because you won’t be here to do anything about it, and I will deal with it on the basis of the evidence, whatever that is.”

56 His Honour was advised by counsel that the defendant had been subpoenaed to give evidence in Mr and Mrs Di Lario’s case. After discussions with counsel, the Judge decided that the plaintiff’s claim against Mr and Mrs Di Lario was to proceed and the cross-claim was to be severed. His Honour made this decision, it appears, to enable the defendant to obtain legal representation. In answer to a question from the defendant, the Judge told him that he was not entitled to legal representation as a witness. The Judge explained that the plaintiff’s case against Mr and Mrs Di Lario was proceeding and he would make a decision as to whether the plaintiff’s claim was successful or not. The Judge said that once the defendant knew if the cross-claim was going ahead, he should obtain legal representation and “deal with the matter properly”. Amongst what was said by his Honour was the following (ex J CB 190-191):

“In other words, you will know about the outcome of this case, I would anticipate very likely, one way or the other, but you will certainly know about it if the defendants are unsuccessful, because they will want to go ahead with the cross-claim and it will be against you.

It will not be sufficient simply to shrug it off in the way you have up until now and say “Well, it was the company, not me.” It might be that you in the end can succeed with such a defence, but you will have to litigate it properly and you will have to put the defence on and you’ll have to satisfy the court that it’s a defence. You can’t just walk away.”

57 The defendant was excused but informed that he was required to respond to the subpoena at whatever stage he was advised. The plaintiff’s case against Mr and Mrs Di Lario then proceeded and the plaintiff and Peter Raupach gave evidence. After the luncheon adjournment on the second day, Mr Atkin informed the Judge that the parties had had discussions, which also involved the defendant. Agreement had been reached which would concern a private agreement between the parties. As it was anticipated that the private agreement would be executed by the following morning, the Judge was asked for the proceedings to be adjourned to the next day. He was also asked for leave to amend the statement of claim to join the defendant as a defendant in the plaintiff’s claim. The Judge was told that the relief sought was “in the nature of a summons to account” and the reason for the amendment was to have “on foot a claim against Mr MacDonald”. The precise terms of the amendment are as follows (ex 4):

“In the alternative, against the third defendant a claim for a summons to account in relation to monies paid under the mortgage between the plaintiff and the first and second defendants”.

58 The defendant was in court and told the Judge that he consented to the proposed amendment, which the Judge granted. The proceedings were adjourned to the following day.

59 In an affidavit sworn 23 April 2007 (ex 1.1) the defendant stated that he was approached by Mr Slowgrove, the barrister, appearing for Mr and Mrs Di Lario before the hearing commenced on the second day and asked if he was prepared to talk about settlement.

60 He stated that during the day, a meeting took place in which both Mr Atkin and Mr Slowgrove were present. He stated at ex 1.1 par 17:

“I was neither legally represented at that meeting nor do I have any legal training such that I was in a position to properly assess the claim which was brought against me or the stage that the proceedings had reached. I was also not in a position to understand precisely what the ramifications of the proceedings might be for me. The solicitor from whom I had received advice over a period of many years was acting on behalf of the plaintiff and instructing one of the barrister’s opposing me in the proceedings. I felt very intimated [sic] by the situation particularly where I was confronted by two barristers who appeared to be working together against me.”

61 The defendant stated that he did not precisely understand what had occurred with respect to the cross-claim. Whilst he understood that it was not proceeding on the first day of the trial he believed that it “could commence either on the second or third day of the hearing”: Furthermore, as a consequence of the comments made by the Judge he believed he “stood exposed to some form of criminal ramifications”: ex 1.1 par 13. He further stated that he was unable to obtain legal advice due to both his financial position and the fact that the matter was proceeding “on that day”. He formed the view that he should try and settle the claim “on whatever terms were available to [him]”: ex 1.1 par 19.

62 The defendant, however, told Peter Raupach that he was using Ken Madden as his solicitor: ex B par 17. He asked Mr Raupach to send a copy of the Deed to Mr Madden “to go over”. A facsimile letter was sent to Mr Madden by Searle & Associates enclosing a copy of the Deed. The defendant recalled a conversation that he had with Mr Madden in the late afternoon or early in the evening of 20 April 2004. According to the defendant, Mr Madden informed him that he had not read the Deed as he was a criminal lawyer and did not have the expertise or experience with commercial matters or Deeds of this kind. Mr Madden said he was unable to provide him with any advice. Although the Deed contains an acknowledgement in par 10 that each of the parties had obtained independent legal advice prior to its execution, the defendant stated that he had “no advice, whether independent or otherwise concerning the rights and obligations created by the deed or the proceedings generally.” He did not believe that he had any other choice but to enter into the Deed: ex 1.1 par 22.

63 On 21 April 2004, Mr Atkin informed the Judge that the parties had resolved all their differences by way of a private agreement but were not in a position to hand up terms to the court. His Honour stood the matter over in the “expectation of the resolution of the matter by way of settlement…But should such terms not be filed by 28 February 2005 the matter should be re-listed before [him]”: ex J CB 299. It appears that short minutes of order were signed by all the parties. According to Peter Raupach, the Judge would not accept the short minutes as they did not have an “amount filled out”. The transcript of the District Court proceedings makes no mention of the short minutes but the short minutes signed by the parties do not include a dollar amount in the judgment for the plaintiff against the defendant: ex J CB 298.

64 On 4 May 2004 consent orders were made in Supreme Court proceedings no 5263 of 2002 resulting in dismissal of the plaintiff’s claim against Mr and Mrs Di Lario with no order as to costs.

65 By letter dated 20 May 2004, the defendant forwarded a cheque in the sum of $10,000 to the plaintiff and offered to the plaintiff his sincere apologies. This payment was made pursuant to cl 1 of the Deed. No other payments have been made by the defendant. The plaintiff on 10 April 2006 commenced proceedings in the District Court (no 1524 of 2006) seeking judgment against the defendant with respect to the monies alleged to be outstanding under the Deed. During the following year, orders were made in the District Court transferring the proceedings to this court.

Is the Deed enforceable?

66 Mr Bedrossian contended that the fact that the defendant was an undischarged bankrupt as at 21 April 2004 was not an impediment, legal or factual, to his execution of the Deed nor is it an impediment to the Deed’s enforceability. The Deed recorded a post-bankruptcy obligation and hence such obligation did not form part of the claims existing against the defendant’s estate as at the date of the sequestration order. Mr Bedrossian submitted that the debt was not a provable debt under s 82(1) Bankruptcy Act.

67 It was put to me by Mr Bedrossian that, in any event, the defendant had his bankruptcy annulled on 4 March 2005. Mr Bedrossian argued that consequently upon the annulment, the defendant was returned to his status as at immediately prior to the making of the sequestration order, and, importantly, the sequestration order was to be treated as though it was never made. Further, in obtaining the benefit of an annulment order pursuant to s 73 Bankruptcy Act, the annulment only worked to discharge liabilities which were listed as part of that composition. Because the plaintiff’s existence as a potential or actual creditor was not notified to the defendant’s trustee in bankruptcy, the plaintiff argued that the annulment had no impact upon the debt, upon which the plaintiff sues. Particular reliance was placed on the decision of the Court of Appeal in Union Club v Battenberg (2006) 66 NSWLR 1.

68 Another argument advanced for the plaintiff was that the facts and circumstances make it clear that the debt was a liability incurred by the defendant by means of fraud or a fraudulent breach of trust and is, therefore, excluded by ss 75(2)(a) and 153(2)(b) Bankruptcy Act from being released. This would be the case, Mr Bedrossian submitted, whether the defendant had been discharged from bankruptcy or had had his bankruptcy annulled.

69 Mr De Buse submitted that the claim by Mr and Mrs Di Lario and the claim by the plaintiff were each a provable debt under s 82(1) Bankruptcy Act. The defendant’s liability under the Deed arose as a result of an obligation incurred before the date of the defendant’s bankruptcy and the Deed could not be looked at in isolation. Mr De Buse further submitted that the proceedings commenced against the defendant were unlawful as no leave was sought under s 58(3) Bankruptcy Act. The compromise said to be effected by the Deed was brought about directly by the District Court proceedings and the court would refuse to enforce the contract. Bartlett v Coomber [2008] NSWCCA 100 and Lewis v Combell Constructions Pty Ltd (1989) 18 NSWLR 528 were cited. He argued that the consequence should be that the Deed is not enforced or is vitiated by the illegal conduct of the parties in the commencement of the cross-claim by Mr and Mrs Di Lario and the joinder of Mr MacDonald as the third defendant.

70 As to the decision in Union Club v Battenberg, Mr De Buse contended that the issue in that case concerned construction of club rules and there was nothing said which is relevant to the present case. Mr De Buse put to me that the effect of the defendant’s composition and annulment was that all of his provable debts were discharged and converted to a right to recover from the composition or deed of arrangement. In response to the plaintiff’s argument founded on fraud, Mr De Buse noted that no allegation was made of fraud by the defendant in the District Court proceedings.

71 Mr Higgins put to me that a failure to comply with s 58(3) Bankruptcy Act does not vitiate the Deed. He cited what was said by Pincus J in Re Spratt; Ex Parte Wilde [1986] FCA 33 at [24] and argued that s 58(3) neither directly affects the compromise nor fails to work if the compromise stands. Mr Higgins submitted that the words, “by reason of an obligation incurred before the date of the bankruptcy” in s 82(1), do not refer to deeds entered into to settle proceedings concerning matters that took place prior to bankruptcy. These words, he contended, instead refer to a liability that arises by necessity after the date of bankruptcy due to a pre-existing obligation. He argued that the Deed does not relate to a provable debt. Mr Higgins pointed to the annulment of the defendant’s bankruptcy and submitted that any defects in the execution of the Deed that flow from the bankruptcy are cured by annulment.

72 The District Court proceedings are a “legal proceeding” for the purposes of s 58(3)(b) Bankruptcy Act. Phegan DCJ gave leave to the plaintiff to join the defendant as a party to his claim but he would not have had the authority to do so if the proceedings were in respect of a provable debt. It appears that authority is reposed in the Federal Court of Australia or in the Federal Magistrates Court. In Morkaya v Parkinson [2010] NSWSC 1194 at [13], Brereton J said:

“It is true that under s 58(3)(b), leave can be granted to commence or to take a fresh step in a legal proceeding which is otherwise stayed by operation of s 58(3). Although there is some doubt about it, the balance of authority favours the view that such leave must be obtained from the bankruptcy court – relevantly, in this case, the Federal Magistrates Court [see Davies v Gertig (No 2) (2002) 83 SASR 521; Green v Schneller (2001) 164 FLR 82; 189 ALR 464; Gao v Official Trustee in Bankruptcy of Yu Jing Zhu [2002] VSC 285; Fraser Property Developments Pty Ltd v Sommerfeld (No 2) [2005] 2 Qd R 404 but compare Re Killington; Ex parte Chisholm v Official Trustee in Bankruptcy of the Estate of Killington [1998] FCA 1474]. At least in the absence of learned argument to the contrary, I should follow the overwhelming balance of authority to the effect that this court does not have jurisdiction to grant leave under s 58(3)(b). Accordingly, it is not competent for me to grant leave to Mr Parkinson to continue his claims”.

73 Mr and Mrs Di Lario commenced and continued their cross-claim without seeking approval of any kind.

74 The soundness of the defendant’s arguments are dependent upon a finding that the proceedings are “in respect of a provable debt” as s 58(3) provides:

“Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor:

(a) to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

(b) except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding.”

75 A “provable debt” is defined in s 5 Bankruptcy Act as “a debt or liability, that is, under this Act, provable in bankruptcy.” Section 82 Bankruptcy Act describes those debts and liabilities which are provable and relevantly provides:

“(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.

…

(8) In this section, liability includes:

(a) compensation for work or labour done;

(b) an obligation or possible obligation to pay money or money’s worth on the breach of an express or implied covenant, contract, agreement or undertaking, whether or not the breach occurs, is likely to occur or is capable of occurring, before the discharge of the bankrupt; and

(c) an express or implied engagement, agreement or undertaking, to pay, or capable of resulting in the payment of, money or money’s worth, whether the payment is:

(i) in respect of amount – fixed or unliquidated;

(ii) in respect of time – present or future, or certain or dependent on a contingency; or
(iii) in respect of the manner of valuation – capable of being ascertained by fixed rules or only as matter of opinion.”

76 An obligation or liability that answers the statutory descriptions in s 82 must arise before the bankruptcy: Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56. The Deed was executed after the bankruptcy but the defendant says that it reflects an obligation incurred before the date he became bankrupt.

77 Section 82(1) has wide operation. It refers to “all debts and liabilities, present or future, certain or contingent”. In Foots, Kirby J said at [117]:

“It follows that, in my opinion, “liabilities” in s 82(1) of the Bankruptcy Act should be interpreted to include obligations which (although they may be contingent or may not necessarily be immediately enforceable) are judged inevitable or highly probable at the time of the bankruptcy, such that they are capable of identification by the trustee or a court as envisaged by the Bankruptcy Act .”

78 The requirement that the debt must arise “by reason of an obligation incurred before the date of the bankruptcy“ is uncontroversial: Foots at [10]. The present focus of attention must be upon the defendant’s liability to the plaintiff before the commencement of his bankruptcy.

79 The plaintiff made no claim against the defendant prior to bankruptcy and brought an action against Mr and Mrs Di Lario. It seems that he had accepted there was no personal liability on the defendant’s part but that the obligation was that of Finance and Mortgage. The amendment to the pleading by which the defendant was joined as a party in the plaintiff’s claim was made after Mr Atkin announced to Phegan DCJ that an agreement had been reached. The amendment was in the terms of an account stated, which action is dependent upon an acknowledgement that a debt of a certain sum is due and payable. Before that time, no such acknowledgement had been given by the defendant as his position was that the monies had been paid by Mr and Mrs Di Lario to Finance and Mortgage and he was not personally liable. Although the defendant agreed to pay the plaintiff the sum of $100,000 in the Deed, the parties’ differences had been settled “without prejudice and without acknowledgement.”

80 The plaintiff was legally represented throughout the District Court proceedings. It is difficult on the evidence to take a different view than was taken for the plaintiff by his legal representatives at the commencement of the District Court proceedings and to judge that the defendant had an obligation to him that was “inevitable or highly probable” at the time of bankruptcy. Nothing has been identified by the defendant in the present proceedings which indicates that such an assessment should be made. The defendant denies any allegation of fraud and correctly points out that fraud had not been previously pleaded in the District Court proceedings. The assertion of fraud by the plaintiff in the defence to the cross-claim is pleaded in response to the defendant’s claim that the annulment of bankruptcy released him from any obligations under the Deed. In any event, where an allegation of fraud is to be established by a plaintiff, the evidence should be of a high probative value. The High Court (Barwick CJ Kitto, Taylor, Menzies and Windeyer JJ) said in Rejfek v McElroy (1965) 112 CLR 517 at 521:

“The “clarity” of the proof required, where so serious a matter as fraud is to be found, is an acknowledgement that the degree of satisfaction for which the civil standard of proof calls may vary according to the gravity of the fact to be proved.”

81 I do not think that the evidence is so clear and so cogent that it was inevitable or highly probable at the time of the bankruptcy that it would be established on the balance of probabilities that the defendant acted fraudulently.

82 For a debt arising after the commencement of the bankruptcy to be provable, there must have been as at the commencement of the bankruptcy some obligation upon which the future debt could exist. In my opinion, no such obligation existed. The defendant’s liability arises in this case by reason of his decision to enter into the Deed. I am not persuaded that prior to the bankruptcy what occurred amounts to more than the circumstances which led the defendant to enter into the obligations under the Deed. The defendant made settlement offers prior to the commencement of the District Court hearing principally as he wished to save his relationship with the parties.

83 I conclude that there was no liability to which “a bankrupt was subject at the date of the bankruptcy” or “to which he…became subject before his …discharge by reason of an obligation incurred before the date of his bankruptcy”. Hence, the defendant’s obligation is not a provable debt.

84 If it be thought that this conclusion is wrong and an obligation existed at the commencement of the bankruptcy, it is not that obligation which these proceedings concern. It is the obligation in the terms of the Deed. In Foots the majority (Gleeson CJ, Gummow, Hayne and Crennan JJ said) at [11]:

“…there is no express or implied textual support for the notion of a debt being provable if it is incidental to, or consequent upon, a debt which is itself provable. Those debts which are provable are spelled out by the section: matters falling outside those categories are not provable.”

85 Such an obligation under the Deed arose, I would conclude, as a consequence of a pre-existing obligation and is not itself a provable debt. I do not accept Mr De Buses’s submission that it was a “crystallisation” of a pre-existing obligation. I find that it is not a provable debt and the restraints contained in s 58(3) Bankruptcy Act do not apply.

86 There is another reason that I am disinclined to accept the defendant’s argument that the bankruptcy impacted adversely upon the plaintiff’s ability to enforce the defendant’s obligations under the Deed. The defendant’s bankruptcy was annulled under s 74 Bankruptcy Act on 4 March 2005. Section 74 relevantly provides:

“…
(5) Upon the passing of a special resolution at a meeting of
creditors of a bankrupt under subsection 73(4), the bankruptcy is annulled, by force of this subsection, on the date on which the special resolution was passed.

…

(6) Where a bankruptcy is annulled under this section, 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 shall be deemed to have been validly made or done but, subject to subsection (7), the property of the bankrupt still vested in the trustee vests in such person as the Court appoints or, in default of such an appointment, reverts to the bankrupt for all his or her estate or interests in it, on such terms and subject to such conditions (if any) as the Court orders. “

87 In Union Club v Battenberg at [81], Giles JA, after a consideration of the history of the case law on annulment and its retrospective effect determined:

“Accidents of history may have been at work, but it is important that there be uniformity in this area, and I consider that I should follow the recent cases and, so doing, hold that annulment of the respondent’s bankruptcy reversed the fact that he had become bankrupt. ” (underlining added)

88 Bryson JA said at [153]:

“To be a bankrupt is a personal status which comes into being on the making of a sequestration order, and thereafter continues until brought to an end in some way provided for by the Bankruptcy Act (Cth). Annulment of bankruptcy removes this altered personal status ab initio as well as operating on more specific statutory consequences of a sequestration order.” (underlining added)

and at [180]:

“The consequences of annulment including its retrospective operation come with the adoption of the concept. Retrospective operation of annulment of a bankruptcy is a well established phenomenon, and apparent anomalies which result have to be accepted with full acceptance of the legal effect of an annulment.”

89 Both Giles (at [79]) and Bryson JJA (at [177]) cited with approval Re Coyle (1993) 42 FLR 72 in which Drummond J said at 77:

“In my view, the effect of annulment under s 153A and s 153B will generally be that the bankruptcy is set aside ab initio and the annulled bankruptcy will be treated as never having taken place for any purposes, save those set out in s 154 and save in other special situations of the kind referred to in Oates v Commissioner of Taxation at 297.”

90 I interpose here to note that a similar view to s 153A and s 153B was expressed in Boyapati v Rockefeller Management Corporation (2008) 77 IPR 251 by Kenny J at 275.

91 The effect of an annulment under s 74 was considered by both Giles (at [80]) and Bryson JJA (at [178]) to be the same as that under s 153A or s 153B Bankruptcy Act. I would reject the defendant’s submission that what was said in Union Club v Battenberg is not relevant to this case.

92 What then is the result of the annulment in the present case? The special situations of the kind referred to in Oates v Commissioner of Taxation (1990) 27 FCR 289 do not apply nor does s 154 have any application. The defendant’s bankruptcy is to be treated as never having taken place for any purposes. Even if the defendant’s argument that the obligations under the Deed were a provable debt in his bankruptcy was accepted, upon annulment that impediment to enforceability was retrospectively removed as was any question of its validity said to have arisen as a result of the bankruptcy.

93 The annulment of the bankruptcy had another result. Neither the plaintiff nor Mr and Mrs Di Lario had sought to prove any debt in his bankruptcy. Where a bankruptcy has been annulled, the rights of a creditor who did not prove in the bankruptcy are revived: More v More [1962] Ch 424; Re Giuca; Ex parte The Bankrupts (1986) 70 ALR 219. Accordingly, the defendant has not been released from any obligation owed either to the plaintiff or to Mr and Mrs Di Lario.

94 I reject the defendant’s argument that the annulment was binding on the plaintiff and Mr and Mrs Di Lario by reason of the operation of s 75 Bankruptcy Act with the effect that the debt alleged against him in the District Court claim was released.

95 It is unnecessary to consider the argument advanced by Mr Higgins founded on Pincus J’s decision in Re Spratt Ex Parte Wilde but I should state that the facts of that case can be distinguished as Mr Condon is not a party to the Deed whereas the Trustee was in the case relied upon. It is also not necessary to consider whether the defendant’s obligations under the Deed arose by reason of fraud or a fraudulent breach of trust to which he was a party: ss 75(2)(a) and 153(2)(b) Bankruptcy Act.

Was the Deed unjust?

96 The defendant submitted that the Deed was unjust within the meaning of s 7 CRA. He asks for orders declaring that the Deed is unenforceable against him and is void ab initio in whole. Furthermore, and in the alternative, the defendant claims that he was under a special disadvantage in dealing with the plaintiff at the time of the settlement discussions as he was unaware of the effect of his bankruptcy whereas Ms Searle had previously acted for him and the plaintiff knew of the effect of the defendant’s bankruptcy.

97 Section 7(1) of the CRA is as follows:

“7 Principal relief

(1) Where the Court finds a contract or a provision of a contract to have been unjust in the circumstances relating to the contract at the time it was made, the Court may, if it considers it just to do so, and for the purpose of avoiding as far as practicable an unjust consequence or result, do any one or more of the following:
(a) it may decide to refuse to enforce any or all of the provisions of the contract,
(b) it may make an order declaring the contract void, in whole or in part,
(c) it may make an order varying, in whole or in part, any provision of the contract,
(d) it may, in relation to a land instrument, make an order for or with respect to requiring the execution of an instrument that:
(i) varies, or has the effect of varying, the provisions of the land instrument, or
(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the land instrument.”

98 In determining whether a contract is unjust in the circumstances relating to the contract at the time it was made, the court must, in accordance with s 9(1) of the CRA, have regard to the public interest and to all the circumstances of the case. Section 9(2), without in any way affecting the generality of subsection (1), directs the court to have regard to certain specific matters to the extent that they are relevant to the circumstances. The specific matters described in s 9(2) are not exhaustive and each case must be determined on its own facts: Spina v Permanent Custodians Limited [2009] NSWCA 206 at [105].

99 Section 9(2) provides:

“Without in any way affecting the generality of subsection (1), the matters to which the Court shall have regard shall, to the extent that they are relevant to the circumstances, include the following:
(a) whether or not there was any material inequality in bargaining power between the parties to the contract,
(b) whether or not prior to or at the time the contract was made its provisions were the subject of negotiation,
(c) whether or not it was reasonably practicable for the party seeking relief under this Act to negotiate for the alteration of or to reject any of the provisions of the contract,
(d) whether or not any provisions of the contract impose conditions which are unreasonably difficult to comply with or not reasonably necessary for the protection of the legitimate interests of any party to the contract,
(e) whether or not:
(i) any party to the contract (other than a corporation) was not reasonably able to protect his or her interests, or
(ii) any person who represented any of the parties to the contract was not reasonably able to protect the interests of any party whom he or she represented,
because of his or her age or the state of his or her physical or mental capacity,
(f) the relative economic circumstances, educational background and literacy of:
(i) the parties to the contract (other than a corporation), and
(ii) any person who represented any of the parties to the contract,
(g) where the contract is wholly or partly in writing, the physical form of the contract, and the intelligibility of the language in which it is expressed,
(h) whether or not and when independent legal or other expert advice was obtained by the party seeking relief under this Act,
(i) the extent (if any) to which the provisions of the contract and their legal and practical effect were accurately explained by any person to the party seeking relief under this Act, and whether or not that party understood the provisions and their effect,
(j) whether any undue influence, unfair pressure or unfair tactics were exerted on or used against the party seeking relief under this Act:
(i) by any other party to the contract,
(ii) by any person acting or appearing or purporting to act for or on behalf of any other party to the contract, or
(iii) by any person to the knowledge (at the time the contract was made) of any other party to the contract or of any person acting or appearing or purporting to act for or on behalf of any other party to the contract,
(k) the conduct of the parties to the proceedings in relation to similar contracts or courses of dealing to which any of them has been a party, and
(l) the commercial or other setting, purpose and effect of the contract.”

100 Section 4 of the CRA defines the term “unjust” to include “unconscionable, harsh or oppressive”.

101 The consideration for relief under s 7 CRA involves a three-stage process. As was said by Handley JA in Perpetual Trustee Company Limited v Khoshaba [2006] NSWCA 41 at [99]:

“I agree that a case under the Contracts Review Act involves a three stage process – the making of findings of primary fact where these are disputed, the formation of an evaluative judgment as to whether or not the contract is unjust, and why, and then, if necessary, the exercise of the Court’s discretionary power to grant relief and determine its extent.”

102 Primary facts have been found throughout this judgment. Before proceeding to deal with the second stage in the process, I will refer to some general principles, which are relevant to the assessment of unjustness under the CRA and are uncontroversial.

103 The relevant time for assessing that the Deed was unjust is at the time the Deed was made: s 7(1) CRA. Section 9(1) permits the court to have regard to the consequences or result arising from compliance or non-compliance with the Deed: Cit Credit Pty Ltd v Keable [2006] NSWCA 130 per Spigelman CJ at [65]. Further, under 9(4) CRA, the court shall not have regard to any injustice arising from circumstances that were not reasonably foreseeable at the time that the Deed was made. An evaluation of injustice requires that regard be had to the position of all the contracting parties: West v AGC (Advances) Ltd (1986) 5 NSWLR 610 at 626; Riz v Perpetual Trustee Australia Ltd [2007] NSWSC 1153 at [75].

104 Mr De Buse in written submissions particularly relied on the following matters:

“a. the public interest in maintaining the integrity of the Bankruptcy Act and the policy that flows from it. [see s 9(1) of the Contracts Review Act ];

b. the lack of knowledge and the disadvantage of Mr MacDonald arising from being unrepresented and having, to the knowledge of the other parties, missed out on a substantial amount of information which affected his interest [see section 9(2)(a) and (i) of the Contracts Review Act ,] including:

(i) the exclusion of Mr MacDonald from the events surrounding the hearing;
(ii) the considerable advantage enjoyed by the plaintiff and the cross-defendants as to the events that had occurred in the course of the hearing;
(iii) the representation of the plaintiff and the fact that the plaintiff had knowledge of Mr MacDonald and his position through the solicitors that habitually acted for Mr MacDonald;
(iv) the maintenance of the proceedings in circumstances where they were unlawful.

c. the commencement of proceedings in breach of the Bankruptcy Act leading to the deed such conduct involving an unfair tactic [see s 9 (j) of the Contracts Review Act ], in particular:

(v) the ignorance of Mr MacDonald as to his alternatives;
(vi) the advertence to the possibility of criminal sanction made by the judge in the presence of the other parties of which he was not disabused;
(vii) the absence of any understanding by Mr MacDonald of the effect of the bankruptcy on his position;
(viii) the failure of either the Court or the other parties to consider Mr MacDonald position in accordance with the provisions of the applicable law being the Bankruptcy Act .”

105 My conclusion that there neither was a provable debt nor a failure to comply with s 58(3) Bankruptcy Act removes some of the defendant’s complaints but not all of them. In oral argument, Mr De Buse put to me that the exclusion of the defendant from hearing the testimony of the plaintiff by Phegan DCJ created a particular disadvantage as a 7 year limitation period applied and the plaintiff’s evidence of forgetting about the loan was of great significance. This argument lacks weight to my mind, as the relevant limitation period for the recovery of principal money secured by a mortgage is 12 years: s 42 Limitation Act 1969.

106 The principal considerations relevant to the issue of injustice arise, in my opinion, from the defendant’s evidence to which I have referred at [54] – [62] above. The defendant was at a disadvantage due to being self-represented whereas the other parties were represented by counsel and an instructing solicitor. In weighing whether his lack of representation amounted to a material inequality (s 9(2)(a) CRA), there are matters which diminish its significance. The plaintiff is an intelligent and experienced businessman who was not unfamiliar with legal process. He had some “30 years experience in banking, telecommunications, credit control, collections and general management skills”: ex J CB 344. As Peter Raupach recounted in his testimony, the defendant had decided what legal action was to be taken in collecting monies owed to First Netcom. He holds a Bachelor of Business degree majoring in Accounting, Economics and Law. Furthermore he was no stranger to bankruptcy as his estate had been placed in sequestration in 1989. The emails and letters written to Ms Searle demonstrate that he was reasonably able to protect his own interests and understood the settlement offers that he made: s 9(2)(e) CRA.

107 A factor which weighs heavily against a finding of material inequality is that the terms of the Deed mirrored his settlement offer as confirmed by letter to Ms Searle on 8 April 2004, save for the provision of the W2C2 shares as security. In cross-examination the defendant gave the following evidence (T 130 L 30-50 – T 131 L 1-5,19-41):

“Q. Over the page, in the letter dated 8 April 2004 which appears at pages 171 to 172, you formulate reasonably precisely the extent of the negotiations to that date, or at least your offers, and you identify that the total settlement figure will be $100,000?

A. Yes.

Q. So as at 8 April 2004, you were - I won't happy - can I say content, at least, to come up with an arrangement involving a headline settlement figure of $100,000 involving some component, a relatively small component, maybe $20,000 or $30,000 now, the rest later?

A. Yes.

Q. Ultimately when the 21 April 2004 deed was executed, that settlement - and please if you are not sure, I will take you to that document - that settlement was for $100,000 all inclusive with a relatively small amount, $20,000 or $30,000 there and then and thereafter periodic payments, correct?

A. Yes.

Q. So when you turned up to court and were involved in settling the District Court proceedings, 19 April, 20 April, 21 April, the deal you ultimately did was substantive, if not exactly, what you had already agreed on 8 April 2004 to do, correct?

A. It's not the same.

Q. In terms of the dollar figure involved, it was the same deal, correct?

A. In terms of the dollar figure involved, yes.

Q. There was an additional component in the ultimate deed which was the security involving the shares in that company, correct?

A. Yes.

Q. And when I say that company, W2C2 Pty Ltd?

A. Yes.

Q. But other than that security over those shares, and other than the inclusion of the usual terms regarding everyone releasing each other from liability, the deal done was the same as offered by you on 8 April 2004, correct?

A. Yes.

Q. And so in your affidavit materials and in your submissions or those of your representatives to the Court, when you say that you were burdened by oppressive conditions and pressure on 19 April, 20 April or 21 April 2004, including being unrepresented and not really knowing what was going on, the upshot of that is, you agree, that other than providing a small amount of additional security, you did exactly the same deal you wanted to do two to three weeks earlier; that's right, isn't it?

A. It was the same offer.“

108 I am not satisfied that there was any material inequality in the bargaining power between the parties to the Deed: s 9(2)(a) CRA.

109 The defendant had commenced settlement negotiations well before the hearing. He did so principally as he wanted to save his relationship with the parties, which was unconnected with anything said to him during the District Court hearing by any of the parties, their lawyers or the Judge. The obligations that the defendant entered into when he executed the Deed were the product of the negotiations, which he commenced in November 2003. I do not accept the defendant’s evidence that he formed the view, because of his lack of understanding, his inability to obtain legal advice and his belief that he was exposed to “criminal ramifications”, that he should settle the claim “on whatever terms were available to [him]”. Prior to the time the Deed was made its provisions were the subject of negotiation: s 9(2)(b) CRA.

110 One of the claims of injustice made by the defendant was that Ms Searle from whom he “had received advice over many years” was acting for the plaintiff. This complaint, in my view, lacks merit. The defendant knew well in advance of the hearing that the solicitor was acting for the plaintiff and could not provide him with legal advice. There is nothing in the evidence, which suggests that Ms Searle in any way used knowledge of the defendant or his affairs to the plaintiff’s advantage. It was open to the defendant to seek other legal advice and representation months before the hearing. He knew in December 2003 that Ms Searle could not act for him and Mr and Mrs Di Lario’s solicitors had advised him of the hearing dates in a letter dated 22 December 2003. Although it was the defendant’s evidence that he was unable to obtain legal advice because of his financial position, he gave no evidence of attempting to obtain legal representation and being rejected due to lack of means. Furthermore, he did not inform Mr Condon, his trustee of the proceedings.

111 I accept, however, that the defendant did not obtain independent legal advice: s 9(2)(h) CRA. Notwithstanding the lack of advice, I have little difficulty in concluding that the defendant understood the provisions of the Deed and their effect: s 9(2)(1) CRA.

112 The defendant’s complaint of injustice founded upon the Judge’s statements of possible criminal proceedings does not have substance. Whilst what was said by his Honour may have focussed the defendant’s mind on his position, he had been involved in the withdrawal of the caveat and the settlement of the Di Lario loan. The Judge had also explained the protection which might be afforded to the defendant against the use of his evidence in any criminal proceedings under s 128 Evidence Act 1995 in the following exchange: ex J CB 189:

“…if when you’re called to give evidence I am persuaded that evidence you give might expose you to criminal prosecution, I will offer you what I’m entitled to offer you by way of protection. In other words, that your evidence in this case will not be used against you in any criminal prosecution, if you’re prepared to give evidence. That’s at the risk of oversimplification.

Mr MacDonald: Is that done by way of certificate?

His Honour: That’s essentially the form it would take.” (underlining added)

113 The defendant’s question about a certificate reveals some knowledge on his part of the Judge’s ability to issue a certificate under s 128(3) or (5) Evidence Act so that his evidence could not be used against him in other proceedings.

114 I find on the balance of probabilities that the possibility of questions being raised about the commission of criminal offences neither surprised him nor created the anxiety of which he testified. This conclusion is fortified by the defendant’s absence of evidence of seeking advice from Ken Madden, a criminal lawyer, in their conversation of 20 April 2004 about his possible “exposure to criminal proceedings.”

115 Another matter that the defendant raised was that, whilst he understood that the cross-claim was not proceeding on the first day, he believed that it could commence either on the second or third day of the hearing. It is difficult to understand how the defendant with his intelligence, background and experience could hold such a belief as the Judge said to him (ex JAB 190 – 191):

“If it’s the defendant’s, given the fact they’ve already joined you as a cross-defendant, they would simply then reactivate the cross-claim and proceed with it, in circumstances which, as I say, I would hope that you would certainly by then have obtained legal advice and you would be put on notice that the cross-claim is proceeding, at which stage you would then put on a defence to the cross-claim. I think it probably is premature for you to do that right now. But once you know the cross-claim is going ahead, then you get yourself legal representation and you deal with the matter properly.

I would anticipate I would be asked, having handed down judgment, if it were in favour of the plaintiff, Mr Slowgrove would be asking for set of directions as to the conduct of the cross-claim which I would, in the circumstances, provide. And that would set a timetable within which you would then have to comply with all the various steps that have to be taken. In other words, you will know about the outcome of this case, I would anticipate very likely, one way or the other, but you will certainly know about it if the defendants are unsuccessful, because they will want to go ahead with the cross-claim and it will be against you.” (underlining added)

116 In any event, I do not consider that anything that the Judge said amounted to “undue” influence or pressure or was unfair. His Honour patiently made an effort to accord procedural fairness to the defendant. I am not satisfied that any undue influence, unfair pressure or unfair tactics were exerted on or used against the defendant by the Judge, by the legal representatives or the parties: s 9(2)(j) CRA.

117 An important consideration is that by signing the Deed, the defendant had expressed that he was willing to be bound by its terms. As was observed by Gleeson CJ in Baltic Shipping Company, The Mikhail Lermontov v Dillon (1991) 22 NSWLR 1 at 9:

“…The general policy of the law is that people should honour their contracts. That policy forms part of our idea of what is just.”

118 This observation is, to my mind, particularly apposite to a party who settles litigation by entering into a Deed. A further consideration militating against a finding of injustice is that the plaintiff, as a consequence of the Deed, settled his action against Mr and Mrs Di Lario and participated in the mutual releases in cl 11. Whilst a central issue to be determined by Phegan DCJ may have been the question of agency, Mr and Mrs Di Lario had the difficulty of overcoming the general principle that a finance broker is prima facie the agent of the borrower: Morlend Finance Corporation (Vic) Pty Ltd v Westendorp [1993] 2 VR 284 at 308; Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Ltd (1986) 160 CLR 226 at 234. It is unnecessary to forecast what might have been the outcome of the District Court proceedings other than to state that the plaintiff might have succeeded in his claim against them for an amount of about $240,000.

119 I have concluded that the Deed was not unjust in the circumstances relating to the Deed at the time it was made and decline to grant relief under s 7(1) CRA. Furthermore, I am not satisfied that the defendant was under a special disadvantage at the time of the settlement discussions.

Mutual mistake

120 The defendant submitted that having regard to the effect of the Bankruptcy Act at the time the proceedings were compromised neither party was in a position to perform, albeit by reason of mutual mistake as to the capacity of each to complete the obligations contained in the Deed. I find that none of the parties were mistaken as to their position and would reject this submission.

Estoppel

121 The defendant’s argument of estoppel was founded on the representation as to the liability of the defendant being misleading in the circumstances. I find that no misleading representations were made and would reject this submission. The estoppel claim was pleaded in the defence but not in the second cross-claim. I also find that there were no representations made which were deceptive or likely to mislead and deceive and that s 42 Fair Trading Act was not contravened.

The Notice of Motion

122 Before the substantive hearing commenced the defendant in a notice of motion filed on 12 July 2010, relevantly, sought the following orders:

“…

2. The plaintiff’s claim in these proceedings be struck-out pursuant to Rule 14.28 of the Uniform Civil Procedure Rules2005 .

3. In the alternative the plaintiff’s claim in these proceedings be dismissed pursuant to Rule 13.4 of the Uniform Civil Procedure Rules2005 .

…”

123 The defendant submitted that the plaintiff’s proceedings were an abuse of process and should be struck out. I rejected that submission and indicated that my reasons for so doing would be incorporated in this judgment. I now provide those reasons.

124 The District Court proceedings, Mr De Buse pointed out, have been adjourned from time to time and there has neither been an entry of judgment nor a dismissal of those proceedings. Mr De Buse said that the plaintiff should make a decision whether he was going to proceed with the District Court proceedings or the present proceedings. The present proceedings were an abuse of process, Mr De Buse argued, because they seek the same relief to which the plaintiff claims to be entitled by virtue of the consent judgment in the District Court proceedings. He put to me in written submissions that any judgment in either proceeding would be judgment for the same money sum arising out of the same transaction and amount to “concurrent proceedings abuse”. Mr De Buse cited Reynolds v Reynolds [1977] 2 NSWLR 295 Waddell J said at 306:

“It is well established that the maintenance of proceedings in two counts, in each of which the relief sought may be granted, may be an abuse of process…In such cases the existence of two proceedings is considered prima facie vexatious, and the court will generally, as of course, put the plaintiff to his election, and stay one of the proceedings; or it may, as in the latter case, stay the proceedings which it considers to be inappropriate.”

125 An obstacle for the defendant in making good his argument is that although short minutes of order were signed by the parties, the dollar amount for judgment was not entered in cl 1 and unsurprisingly no orders were made in the District Court: see [63] above. Nothing was said for the defendant, which indicates that he would be prepared to rectify this position by completing cl 1 of the short minutes and complying with the obligations under cl 6 of the Deed.

126 The present proceedings concern the validity and enforceability of the Deed whereas the plaintiff’s claim in the District Court concerns the monies owed to him under the loan agreement by Mr and Mrs Di Lario and as against the defendant in the terms of an account stated.

127 Mr De Buse argued that if the plaintiff was unsuccessful in the present proceedings, he could then prosecute the District Court proceedings. Whilst that is true, different issues would then be litigated. The parties would be returned to their position prior to the execution of the Deed.

128 For the foregoing reasons, I was not persuaded that the present proceeding was either an abuse of process or vexatious. I did not consider that the plaintiff should be put to his election. The notice of motion was dismissed.

Orders

129 I make the following orders:

1. Declare that the defendant is indebted to the plaintiff in the sum of $80,000.

2. Verdict and Judgment for the plaintiff against the defendant in the sum of $80,000.

3. The defendant is to pay interest on the sum of $80,000 from 20 June 2004 until the date of judgment. Such interest is to be calculated at the rate prescribed under UCPR r 36.7 and added to the Judgment.

4. Verdict and Judgment for the first, second and third cross-defendants against the cross-claimant (Neil MacDonald) on the cross-claims.

5. I shall hear the parties on the question of costs.

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