Re Coci, Joseph & Ors Ex Parte Barwick Management Pty Ltd
[1997] FCA 927
•10 SEPTEMBER 1997
FEDERAL COURT OF AUSTRALIA
BANKRUPTCY - creditor's petition - whether debtors have established sufficient cause why sequestration order ought not to be made - whether debtors have cross-claim against creditor - nature of pleadings formulating cross-claim.
Bankruptcy Act 1966 (Cth), ss 40(1)(l), 52(2)(b), 188
Re Verma; Ex parte Deputy Commissioner of Taxation (1984) 4 FCR 181
Re Maddestra; Ex parte Penfolds Wines Pty Ltd, (Lee J, Federal Court of Australia, 3 February 1993, unreported)
Cain v Whyte (1932‑1933) 48 CLR 639
Consul Developments Pty Limited v DPC Estates Pty Limited (1975) 132 CLR 373
Green and Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1
Barnes v Addy (1874) 9 Ch App 244
Re Bendall & Bendall; Ex parte Langley and Vipond Pty Ltd (1929) 1 ABC 167
RE JOSEPH COCI and ORS; EX PARTE BARWICK MANAGEMENT PTY LTD (ACN 008 764 770)
WG 7061 of 1997
R D NICHOLSON J
PERTH
10 SEPTEMBER 1997
GENERAL DISTRIBUTION
IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY WG 7061 of 1997 of GENERAL DIVISION
RE: JOSEPH COCI, HELEN JOY COCI, ERNEST RAMPELLINI and
JENNIFER ANNE RAMPELLINI
DebtorsEX PARTE: BARWICK MANAGEMENT PTY LTD (ACN 008 764 770)
Creditor
JUDGE: R D NICHOLSON J DATE OF ORDER: 10 SEPTEMBER 1997 WHERE MADE: PERTH
THE COURT ORDERS THAT:
Unless within 7 days the parties agree the orders, the matter be listed for orders on 23 September 1997 at 12.15pm.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
GENERAL DISTRIBUTION
IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIAN DISTRICT REGISTRY WG 7061 of 1997 GENERAL DIVISION
RE: JOSEPH COCI, HELEN JOY COCI, ERNEST RAMPELLINI and JENNIFER ANNE RAMPELLINI
DebtorsEX PARTE: BARWICK MANAGEMENT PTY LTD (ACN 008 764 770)
Creditor
JUDGE: R D NICHOLSON J DATE: 10 SEPTEMBER 1997 PLACE: PERTH
REASONS FOR JUDGMENT
HIS HONOUR: The creditor brings a petition for a sequestration order against the estate of the debtors other than Joseph Coci, in respect of whom there is already a petition. The description "the debtors" will therefore be used to refer to the debtors other than him.
The petition asserts the debtors are indebted to the creditor in the sum of $15,452.98 for a debt due pursuant to a deed dated 28 September 1994 ("the Management Deed"). The debt is said to comprise management fees in the sum of $7,336.14 and reimburseable disbursements of $8,116.84.
The act of bankruptcy relied upon in the petition is the debtors within six months before presentation of the petition signed an authority under s188 of the Bankruptcy Act 1966(Cth) ("the Act") on 18 March 1997 and a meeting of the debtors' creditors was called pursuant to that authority.
MANAGEMENT DEED
The Management Deed was made between various persons therein called "the Proprietors" but here described as "the Syndicate"; Barwick Consultants Pty Ltd ("Barwick Consultants"); and the creditor, therein described as "the New Manager".
The deed recites the Syndicate are the registered proprietors of land on which is situated the Peninsula Hotel in Mandurah, Western Australia. It is further recited that by a Syndicate Agreement dated 28 June 1991 the Syndicate agreed to appoint Barwick Consultants as Manager; that company wishes to resign as Manager; and the creditor has consented to appointment as Manager pursuant to the Syndicate Agreement.
By cl 2 of the Management Deed Barwick Consultants tendered its resignation as Manager and it was further provided "the effective date of the resignation shall be the 25th day of February 1993". By cl 5 the creditor accepted appointment as Manager. Inasmuch as the date of the deed is 28 September 1994 and the effective date of the resignation of Barwick Consultants was 25 February 1993, there appears to be a vacancy in the office of Manager between those two dates.
Annexed to the Management Deed is a copy of the Syndicate Agreement. It recites the purchase by the Syndicate of the freehold business known as the Peninsula Hotel, Mandurah. By cl 5.1 the Syndicate members acknowledged and declared they would appoint a Manager with certain duties. By cl 5.2 provision is made for the Syndicate to remunerate the Manager. In particular, the clause provided in para 5.2(b) for the entitlement of the Manager to an annual management fee calculated at the rate of 1 per cent of the total value of the Land (as defined) together with the benefit of all improvements, Leases and Licenses (as defined) payable quarterly in arrears. By para 5.2(d) provision was made for payment of the manager's remuneration within 30 days of the manager invoicing the Syndicate.
By cl 5.3 it was provided Barwick Consultants would be the first manager. Provision was made for it to execute the Syndicate Agreement and thereby to consent to act as Manager upon the terms and conditions set out in it, which it did.
MANAGEMENT FEES INDEBTEDNESS
The petition is supported by an affidavit of a director of the creditor (Casey) who supports the statements in his affidavit by swearing they are within his own knowledge true.
In relation to the management fee portion of the claimed indebtedness, he refers to a copy of a computer printout showing management fees due to the creditor pursuant to the Management Deed as at 30 April 1997 are $99,038. He further avers the portion claimed of $7,336.14 is arrived at by multiplying the total amount due by 6/81, being the share which the debtors have in the Syndicate.
Objection is taken to this evidence on the ground it is secondary proof and primary evidence by production of relevant invoices is not before the Court. In response for the creditor it is said this contention cannot be raised for the debtors because the case which they have made in their Notice of Intention of Debtors to appear at Hearing of Petition (“the notice”) as to why there is "other sufficient cause a sequestration order ought not to be made" pursuant to s 52(2)(b) of the Act is reliant only upon the existence of what the debtors' claim to be a legitimate cross‑claim. Pursuant to Re Verma; Ex parte Deputy Commissioner of Taxation (1984) 4 FCR 181 it is contended the debtors are therefore confined to the ground raised in the notice. That this is the case is said on behalf of the creditor to be shown by the absence of any attempt on behalf of the debtors to call Syndicate member Casey for cross‑examination and by the reliance placed by the debtor Ernest Rampellini in his affidavit on the fees owing.
A submission on behalf of the debtors that the evidence of Casey concerning management fees was a conclusion of law was contested on behalf of the creditor, which says the evidence is correctly seen as a statement of fact. I accept the correctness of the creditor's submission on this aspect.
Reference was also made to ss 48(1)(d) and 69 of the Evidence Act1995 (Cth).
In reply for the debtors it was submitted there is an onus on the creditor to get in a prima facie case and, until that point is reached, it is unable to proceed with its case.
The issue was reserved for examination in the light of other issues to be raised but, as the matter falls out, it is not necessary to rule on the objections.
DISBURSEMENT INDEBTEDNESS
In his affidavit Casey also avers the creditor has been incurring expenses on behalf of the Syndicate in the amount shown in an annexure constituted by a computer printout showing a total amount due of $109,577.48. The portion relied on in the petition of $8,116.84 is arrived at by again applying the fraction of 6/81 to that total.
Objections are made to this evidence in the same terms as the objection to the evidence of the management fees due.
OTHER SUFFICIENT CAUSE
The debtors bear the onus of showing "that for some other sufficient cause a sequestration order ought not to be made" by demonstrating a genuine dispute based on substantial grounds: see Re Verma at 187. The word "ought" as it appears in s 52(2)(b) limits the Court's discretion not to make the sequestration order in the sense the Court must be satisfied there is a sufficient cause as a result of which an order ought not be made: Re Maddestra; Ex parte Penfolds Wines Pty Ltd, (Lee J, 3 February 1993, unreported) at p4. The High Court in Cain v Whyte (1932‑1933) 48 CLR 639 at 646 concurred with the decision of Henchman J in the Court of Bankruptcy (District of Southern Queensland), where his Honour said:
"... it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause can be shown against the making of a sequestration order.”
THE CROSS-CLAIM
The case for the debtors is it has a claim for an amount which exceeds the amount relied upon as indebtedness in the creditor's petition ("the cross-claim"). The nature of the cross‑claim appears from the affidavit of the debtor Ernest Rampellini and is as follows.
Mr Rampellini is a director and a shareholder of Northoak Holdings Pty Ltd ("Northoak") (receiver and manager appointed), the only other shareholder and director being Joseph Coci. Northoak was established to acquire a nightclub in Bunbury in 1990. The club had been badly run by previous owners. Joseph Coci had previous experience in managing night clubs and considered it could be made profitable. He and Ernest Rampellini engaged an accountant Thomas, to advise on the investment. In late 1990 Thomas moved to carry on business from the accounting firm of Barwick Partners and then became a partner of that firm.
The investment in the Bunbury nightclub, renamed "Alberts", was successful. Thomas continued to advise in relation to its operation.
In December 1990 Joseph Coci told Ernest Rampellini the Peninsula Hotel in Mandurah was up for sale and in receivership. He also advised there was a nightclub within the hotel complex. On 15 January 1991 Coci and Rampellini met with Thomas at Barwick Partners, told him of their interest in the nightclub in the Peninsula Hotel and instructed him to undertake investigations and advise Northoak on the matter.
After inspecting the hotel in early February, Coci and Rampellini requested Thomas later in February 1991 to advise whether it was viable for Northoak to purchase the hotel property, lease the hotel to someone else, and retain the nightclub for Northoak.
On 19 March 1991 Thomas advised Coci and Rampellini another partner at Barwick Partners (Black) was setting up a syndicate of their clients to purchase the Peninsula Hotel freehold. He recommended the best way for Northoak to proceed was to take a lease from the Syndicate. That advice was accepted.
In April Casey and/or Black encouraged Coci and Rampellini to invest in the Syndicate. They were also told Northoak would have to pay $400,000 in the first year to lease the hotel as this was the amount needed for the Syndicate to service its proposed borrowings and pay a fee to "Barwick Partners to manage the property".
On 28 June 1991 Northoak and the debtors entered into a lease of the Peninsula Hotel, together with a debenture and a loan agreement. The rental payable by Northoak under the lease was $375,000 per annum. The debtors also executed the Syndicate Agreement. In the circumstances leading up to the conclusion of that documentation, Thomas acted for Northoak (as the lessee) and his partner, Casey, acted for the Syndicate (as the lessor). Thomas told Coci and Rampellini Barwick Partners had a conflict of interest but there was no problem as he would look after them and Casey would look after the Syndicate.
The hotel did not trade profitably. Around 11 February 1995 Northoak's lease was terminated by the Syndicate.
On 14 August 1996 Northoak as first plaintiff and the debtors as second and third plaintiffs commenced proceedings in the Supreme Court of Western Australia against Thomas, Casey and others and the creditor. The cross-claim seeks damages, an account and other remedies in respect of alleged breaches of contract, of duty of care and of fiduciary duty in connection with the advice to Northoak regarding its purchase of the Peninsula Hotel and the purchase by the debtors of an interest in the Syndicate. The cross-claim is supported by contentions that prior to execution of the lease agreement and the conclusion of the investment in the Syndicate, no‑one advised the debtors or Northoak they should take independent advice concerning the reasonableness of the rent to be paid by Northoak nor advised them Barwick Partners or a company associated with the firm was proposing to charge the Syndicate a $400,000 fee for securing Northoak as lessee when independent advice was needed as to the reasonableness of that fee. All allegations in the Supreme Court action are unequivocally denied.
On 17 February 1995 M H Lyford was appointed receiver and manager of Northoak by the Syndicate. He then purported to direct the Supreme Court action be discontinued. On 2 May 1997 Master Ng in the Supreme Court ordered Mr Lyford be restrained from discontinuing the Supreme Court action. In his reasons he concluded the receiver had displayed a level of partiality or inability to act in the interests of the Syndicate and of Northoak. He was therefore guilty of misconduct within the meaning of s 434A of the Corporations Law or, failing that, bad faith falling within s423(1).
The Syndicate then issued proceedings in the Supreme Court of Western Australia against the debtors on a claim said to arise out of a guarantee given to secure the lease obligations and certain other obligations of Northoak. An application was made for summary judgment but dismissed by Master Adams. In his reasons he said:
"The evidence indicates that Barwick Partners charged a success fee of $400,000 to secure Norfolk (sic) Holdings as a tenant in the venture, that being a charge to the syndicate. Various arguments were put to me as to the prospects of a defence on that recitation of the facts. What I think is significant about the case is that the firm of Barwick Partners acted for both parties. That much is clear. True it is that different personalities were involved but it seems that Barwick Partners were more than just professional advisers. They acted for the syndicate, and it seems they promoted it. They became through presumably one of the firm's companies managers of the syndicate. They collected a success fee for putting the transaction together and a management fee, so they clearly had a substantial financial interest in the matter being concluded successfully.
In those circumstances questions must arise as to whether the personalities involved in the firm were truly acting for the benefit of those who were said to be their clients. Where an agent is involved by both parties to a transaction, particularly a transaction where, as here, guarantees are involved, it needs to be carefully scrutinised particularly in a summary judgement application.
In my view, the involvement of Barwick Partners has infected everything that has transpired in this case. It may well be when all of the facts are known that there was nothing untoward about their conduct. It may well be otherwise. In any event it seems to me that this is not an appropriate case where summary judgment should be entered."
By reason of the matters pleaded in the Supreme Court action the debtors claim they are entitled to an account from the creditor for all monies received by it since its appointment as Manager of the Syndicate and the debtors deny any liability for the fees claimed to be due.
Additionally a claim by the creditor against the debtors in the Local Court for unpaid management fees is before that Court. An application by the creditor for summary judgment failed.
CREDITOR'S SUBMISSIONS ON CROSS CLAIM
The submissions for the creditor contend the creditor is that entity which among all the interests associated with Barwick Partners is furtherest removed from the conduct sought to be impugned in that it did not come into existence until after the acts of investment were complete. It is submitted the debtors have the onus to show the cross-claim has application to the creditor.
In particular it is submitted there is no principle in equity which would cast a fiduciary obligation on a party which it is said was not in existence at the time the breach of that obligation is alleged. In support of this submission reliance is placed on ConsulDevelopments Pty Limited v DPC Estates Pty Limited (1975) 132 CLR 373 at 397. There it was concluded by Gibbs J "...on principle, ... a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation." Reliance is also placed on Green and Clara Pty Ltd v Bestobell Industries Pty Ltd [1982] WAR 1 at 12where it was held the obligation to account survived the termination of the relationship and it was irrelevant the benefit of the contract would not be derived by the appellants until after the first appellant had left the employment of the respondent.
For the creditor it is submitted there is no precedent for debtors who do not dispute their insolvency and commit an act of bankruptcy of their own volition pursuant to s 188 to obtain dismissal of the petition under s 52(2)(b). This is said to be especially so where the debtors have authorised their registered trustee to proceed with the creditor's meeting under Pt X, their proposal for a deed of arrangement has been rejected by the creditors and the creditors have voted by special resolution that the debtors present debtor's petitions (as is the case here). The failure to comply with that resolution, without sufficient cause, constitutes a further act of bankruptcy: s 40(1)(l) of the Act.
The only authority which the creditor has been able to find where a court was satisfied there was sufficient cause for a sequestration order not to be made other than in respect of an act of bankruptcy flowing from non‑compliance with a bankruptcy notice issued pursuant to a judgment in the creditor's favour or the like was Re Bendall & Bendall; Ex parte Langley and Vipond Pty Ltd (1929) 1 ABC 167. There the satisfaction of the court derived from the inadequacy of the notice given by the trustee to the petitioning creditor which was not in the prescribed form.
It is further submitted for the creditor there is an important distinction to be drawn between the usual act of bankruptcy and those which occurred here. It is said the debtors' cross‑claim against the creditor would have greater importance where the act of bankruptcy was a private one such as non‑compliance with the creditor's bankruptcy notice. It is submitted it loses such importance when the act of bankruptcy is a public one involving the appointment of a registered trustee followed by the further act of calling a creditors' meeting and finally failing to comply with the creditors' resolution that they present a debtors' petition. In such circumstances it is said there is a public interest consideration requiring the debtors to show sufficient cause why the sequestration order should not be made.
DEBTORS' SUBMISSIONS ON CROSS-CLAIM
It is not disputed for the debtors they have other creditors, with the consequence the creditor, if successful on the petition, will not recover assets.
It is said for the debtors the relevant circumstances are the creditor is not completely removed from involvement with Barwick Partners, the Syndicate and Barwick Consultants so it has the that potential to be "infected" in the manner found by Master Adams. This "infection", it is submitted, precludes any reliance on the submission that the creditor is so removed from the breach of any fiduciary duty the cross claim could not be made out against it. Furthermore the pleadings in the cross‑claim (dealt with below) assert the creditor was in existence at the time of the alleged breach and indeed at that time carried on the business of Barwick Partners.
For the debtors it is submitted the cross-claim thus disclosed has within it the potential to impugn the creditor's claim to the debt. In this respect it is said the Supreme Court has available to it the full range of equitable remedies. Included among these would be the equitable remedy of rescission of the lease. The submission is the cross-claim is therefore bona fide and substantial so there is sufficient cause why a sequestration order ought not to be made.
THE CROSS-CLAIM PLEADINGS
To resolve these submissions it is necessary to take a closer look at the pleadings in the Supreme Court action.
From the pleadings it is asserted Coci and Rampellini were at all material times directors of Northoak and owners of all its issued shares.
The defendants to the action are Thomas, Casey, Clafton, Olde and Waddell (as first defendants) and Black (as second defendant). It is claimed the first defendants and the second defendant or alternatively the first defendants carried on business in partnership as accountants under the name Barwick Partners or, in the alternate, held themselves out as so carrying on. The pleading continues that induced by certain representations and in reliance upon them the plaintiffs retained Barwick Partners to act as accountants and advisers to them in 1990 and thereafter. In the particulars of reliance it is stated "Had the plaintiffs known that Barwick Partners was carried on by a corporation with a paid up capital of $8 they would have retained other advisers".
This particular is explicative of the apparently inconsistent subsequent pleading that the creditor was incorporated on 1 February 1973 and carried on business in the provision of accounting services and advice under the name "Barwick Partners" since 1 March 1992. It is further pleaded Casey and Clafton were from 10 December 1991 directors of the creditor and Olde was a director from 10 December 1991 until 17 July 1992.
It is pleaded Barwick Consultants was incorporated on 5 June 1980 and carried on business in the period after 1 January 1991 from the defendants' office until its deregistration on 6 July 1994. It is claimed Thomas, Casey, Clafton, Olde, Waddell and Black were during the period 1 January 1991 to 1 March 1992 directors of Barwick Consultants.
Taking these pleaded circumstances as capable of being established, it seems to me they create a situation which, as Master Adams said, has been infected by the involvement of Barwick Partners. Not only is the creditor a defendant to the action, but it is claimed some partners of Barwick Partners were directors of it and that the creditor held the business name of the partnership. Such a close inter-relationship as pleaded between the creditor and Barwick Partners with the possibility of a cross‑claim being made out against the creditor cannot be discounted short of resolution at trial. On the pleadings, it is not the case the creditor was not in existence at the date of the alleged breach of fiduciary duty.
This view is supported by reference to the nature of the claim against the creditor. Relying on the fact some individual members of Barwick Partners, as pleaded, held directorships in the creditor, it is claimed the creditor "knowingly provided services to the syndicate and received payment for those services with the knowledge that the payment had been procured by Barwick Partners breaches of fiduciary duties".
The relief sought against the creditor in the Statement of Claim is an order of account for any profit or advantage received by the defendants in the course of the defendants acting for the plaintiffs and the Syndicate and an order for payment of any sum so received. There is no present claim for relief in the form of rescission of the lease to Northoak although of course leave for amendment could be sought during the course of the proceeding.
CONCLUSION
While it may be unusual the debtors as undisputed insolvents who have committed acts of bankruptcy seek to challenge the creditor's petition, in my view the nature of the cross‑claim is such it establishes for them a sufficient cause why a sequestration order ought not to be made until the cross‑claim is resolved. The debtors have discharged the onus of establishing the existence of such a cause. Thus, in accordance with s 52(2)(b), the petition should be dismissed. Counsel should be heard as to costs.
I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice R D Nicholson
Associate:
Dated: 10 September 1997
Counsel for the Creditor: M Blundell
Solicitors for the Creditor: Solomon Brothers
Counsel for the Debtors: A Metaxas
Solicitors for the Debtors: A Metaxas
Date of Hearing: 12 August 1997
Date of Judgment: 10 September 1997
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