Re Birnzwejg, Nathan & Anor Ex Parte Permanent Trustee Co Ltd

[1996] FCA 496

IN THE FEDERAL COURT OF AUSTRALIA         )
GENERAL DIVISION  )
   No. QP100 of 1996 
BANKRUPTCY DISTRICT OF THE          )
STATE OF QUEENSLAND  )

RE:NATHAN BIRNZWEJG and KATHLEEN MARY BIRNZWEJG

EX PARTE:PERMANENT TRUSTEE COMPANY LIMITED

MINUTES OF ORDER

JUDGE MAKING ORDER:       Spender J

DATE OF ORDER:            12 June 1996

WHERE MADE:               Brisbane

THE COURT ORDERS THAT:

1. The petition be adjourned to 9.30 am on 19 June 1996;

1. Costs be reserved.

NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA         )
GENERAL DIVISION  )
   No. QP100 of 1996 
BANKRUPTCY DISTRICT OF THE          )
STATE OF QUEENSLAND  )

RE:NATHAN BIRNZWEJG and KATHLEEN MARY BIRNZWEJG

EX PARTE:PERMANENT TRUSTEE COMPANY LIMITED

CORAM:     Spender J
DATE: 12 June 1996
PLACE:     Brisbane

REASONS FOR JUDGMENT

This is a contested creditor's petition. It was accepted by Mr Hack, counsel for the debtors, Mr and Mrs Birnzwejg, that the requirements of the Act concerning the making of a sequestration order were satisfied, but the making of the order at this stage was opposed and reliance was placed on the provisions of s 52(2) of the Bankruptcy Act 1966 ('the Act').

That subsection provides:

"If the Court is not satisfied with the proof of any of those matters, [being those matters referred to in subsection (1)] or is satisfied by the debtor:

(a)  that he is able to pay his debts; or

(b)that for other sufficient cause a sequestration order ought not be made;

it may dismiss the petition. "

It was submitted on behalf of the debtors that there was, in this case, a basis for "other sufficient cause" and that the Court, in its discretion, ought not to make a sequestration order.  More precisely, it was submitted that the Court should not proceed to make a sequestration order at this stage, but should make orders in the nature of orders for discovery against the petitioning creditor and others in respect of documents associated with two transactions involving land owned by a company of which the debtors were guarantors, Menderzycka Proprietary Limited, which owned land in a number of parcels at Hawken Drive, St Lucia which included, amongst other assets, a building in which a restaurant, the "Cats Tango", was conducted.  This discovery was sought by the debtors to advance their claim that there was "other sufficient cause" such that the Court in its discretion ought not make the sequestration order sought by the petitioning creditor.

There were two components of the debtors' case, each of which was necessary, it was accepted by Mr Hack, for the debtors' case to be made good.  The first aspect concerns an offer to purchase land at 242 Hawken Drive, St Lucia by a company for approximately $780,000 in about June 1995.  On this aspect of the matter, it was submitted that it was unreasonable for the petitioning creditor, who held security over property that included the property at 242 Hawken Drive, St Lucia, not to release part of that security for the offered purchase price or some part of it.

The actual details of what the secured creditor was to do concerning the purchase price was not made particularly clear, but in any event the essence of the contention on behalf of the debtors was that it was unreasonable for a secured creditor not to release part of his security in exchange for some or all of the offered purchase price for that security.  This contention was unsupported by authority and it seems to me that there was never any legal obligation on a secured creditor to partially release its securities. 

If in fact the company wished to sell the property pursuant to that contract in June 1995, it was open to it to pay out the secured creditor in respect of all monies the payment of which was secured.  There was, however, no obligation on Permanent Trustee Company Limited to accept a partial release of its security for the purchase price or some lesser sum.  In my opinion, the simple answer to this aspect of the case is that a creditor is not obliged to agree to release part of his security for any particular sum.  It was further submitted that even though there was no legal requirement, it was unreasonable that the creditor did not agree to a partial release of its security, such as to excite the Court's discretion to decline to make a sequestration order

I cannot accept that contention.  It asserts that there is some moral obligation which has no legal underpinning.

That is sufficient in fact to dispose of the matter, although the other aspect raises serious questions.  It is accepted that, without the bringing into account of the $780,000 or some amount of that order, the amount outstanding by the debtors to the petitioning creditor (which is of the order of $1.3 million) would not be discharged. 

The second aspect of the matter, which does trouble me, relates to a claim that the sale in March 1996 of land owned by Menderzycka Proprietary Limited at 242 Hawken Drive, St Lucia was at an undervalue and that the receivers in respect of that sale and in respect, more generally, of their functions in relation to that property were the cause of a substantial loss to the company.  As a consequence, it is submitted that the amount owed by the guarantors is substantially more than it ought to have been.  Discovery concerning that sale in March 1996, as well as in relation to other matters, is sought, to make good the contention of the sale at an under value, and that mismanagement and other loss was caused by the receivers.

It seems to me that there is an evidentiary basis raised in the material on behalf of Mr and Mrs Birnzwejg that a case of a sale at under value is at least arguable.  The contention in the evidence is that the sale occurred without sufficient or any advertising, and the property was inadequately marketed.  This claim is buttressed by a valuation some little time earlier than the sale in March 1996
of the land at a value substantially greater than the $2.4 million approximately that it achieved in March of this year. It is said that the difference between the valuation (which, one infers, was prepared for financiers of the mortgagor) over the amount realised by the receivers in circumstances where there is at least a question mark over the marketing of the property, supports that contention.

The difficulty about this aspect of the matter, however, is that that claim, if it be made good, is a claim that the company mortgagor has; and it is a claim which the mortgagor has, at least at first instance, against the receivers.  I have been troubled in this case, as I have on many previous occasions, with the standard form contained in the mortgage document.

The mortgage which was given on 14 July 1988 is an all-moneys mortgage over two blocks of land at Indooroopilly.  Clause 31 is in these terms:

"If the Mortgagor shall be in default under any of the covenants expressed or implied in this Mortgage the Mortgagee may appoint such person as the Mortgagee thinks fit to be a Receiver or Receiver and Manager of the mortgaged premises and of the income of the mortgaged premises or any part thereof.  A Receiver appointed hereunder shall be deemed to be the agent of the Mortgagor who shall be solely responsible for the Receiver's acts and defaults.  Every Receiver or Receiver and Manager, in addition to the powers conferred on a Receiver by the Property Law Act or by law at the material time in force may exercise any and all powers which may have been delegated to him by the Mortgagee including or in addition to the following powers:-

(a)To enter upon and take possession of the whole or such part of the mortgaged premises of which he is appointed Receiver or Receiver and Manager and to demand call in collect and recover all or any such property and the income and profits thereof by action distress or otherwise in the name either of the Mortgagor or of the Mortgagee to the full extent of the estate or interest which the Mortgagor could dispose of and to give effectual receipts accordingly for the same.

(b)To sell and/or give options to purchase or concur in selling or otherwise disposing of the whole or any part of the mortgaged premises or any interest therein and either by public auction or private contract and to carry on any such sale into effect by conveying and transferring in the name and on behalf of the Mortgagor or otherwise.

...

(g)To carry on and manage as he shall think fit any or all the business or businesses which may be or have been carried on at or from the mortgaged premises with power to receive and pay debts.

...

(n)Generally and without being limited by the particularity of the foregoing provisions hereof to do or cause to be done such acts and things respecting the property of which he is appointed Receiver or Receiver and Manager as he may think necessary or expedient or desirable and could have done or caused to be done if he had the absolute ownership of the said property. "

The contention relied on by Mr Bain, counsel for the petitioning creditor, is that in accordance with cases such as Gosling v Gaskell and Grocott [1897] AC 575, the effect of such a clause is to make the receivers agents for the mortgagor and that any claim in respect of default by the receivers is not maintainable against the petitioning creditor, because the receivers were the agent of the mortgagor.

In my opinion, a term such as cl 31, whatever may be its efficacy in contract, cannot subvert reality, if a receiver in fact acts as the agent of the appointing creditor.  If a receiver is appointed by the mortgagee, has the benefit of an indemnity from the mortgagee in respect of his conduct as receiver, in fact acts at the direction or behest of the mortgagee in respect of the receivership, reports to the mortgagee, never consults with or reports to or takes any direction from the mortgagor (of whom the receiver is said to be the agent), it seems to me at least arguable that the fact is that such a person is the agent of the mortgagee, at least for the purposes of making the mortgagor liable for any default by the receiver in, inter alia, selling the mortgaged property.

However, it is unnecessary to wrestle with the serious issues that such a question raises in the circumstances of this case, because even if it be accepted that there may be a claim by the mortgagor against Permanent Trustee Company Limited in respect of the alleged misconduct or default by the receivers in the discharge of their functions, particularly in relation to the sale of the property at 225 Hawken Drive, St Lucia, in March of this year, and that such a claim would have a consequence of resulting in diminishing the amount owed by the guarantors to the petitioning creditor, there is nonetheless a very substantial sum which is, in truth and reality, owed by the debtors to the petitioning creditor.

In this case, as argued, Mr and Mrs Birnzwejg did not seek to assert that there was not, in truth and reality, a debt owed to the judgment creditor.  Mr Hack did not seek to argue that there were in fact legal claims, a consequence of which was that no debt was owed by the judgment debtors to the judgment creditor on a proper accounting of moneys received by or on behalf of the judgment creditor from a sale of properties or income from properties owned by the mortgagor.  This is so, notwithstanding that such a claim was advanced as the first ground of opposition in the notice of intention to appear at the petition, which was filed on behalf of the debtors on 10 April 1996.

It was not pressed that as a matter of law there was in truth and reality no debt.  What was sought to be relied on was the Court's discretion to decline, in all the circumstances which constitute those matters to which I have just referred, as a matter of "other sufficient cause" not to make a sequestration order.  Because the first element of the sums involved, being that amount which is said to be connected with the decision by the mortgagee not to give a partial release in June 1995 in respect of the land at 242 Hawken Drive, St Lucia, cannot be made out, notwithstanding the misgivings I have in relation to the others aspect of the matter, I ought to make the sequestration orders sought.

At the request of Mr Barbi, solicitor for Mr and Mrs Birnzwejg, I will adjourn the making of any sequestration order until 9.30 am on 19 June 1996.

I will reserve today's costs.

I certify that this and the  preceding eight (8) pages are a true copy of the reasons for judgment herein of the Honourable Justice Spender.

Associate

Date:  12 June 1996

Counsel for the debtors        :         Mr P E Hack
instructed by                  :         N R Barbi

Counsel for the applicant
creditor  :         Mr R G Bain QC
instructed by                  :         Clayton Utz

Date of Hearing                :         12 June 1996