Re Elkhoury, L.J. & Anor Ex Parte Farrow Mortgage Services P/L

[1992] FCA 952

JUDGMENT No. 2s? ..... 1 ,..?,.&.

IN TIIE FEDERAL COURT OF A U S T W I A	)
1
NEW SOUTH WALES DISTRICT RgGISTRY	1 No NP 2254 of 1992
)
-DIVISION	j

RE :	LOUIS JOSEPH ELKHOURY and
BRENDAN PHILLIP TORPET

( Debtors )

EX PARTE:	FARROW MDRTGAG	E SERVICES
PTY LIHITED

- I

(Petitioning Creditor)

Place: Sydney

Date :  11 December 1992

Him OF ORDERS

THE COURT ORDERS:

1. That a sequestration order be made against the estate of each of the debtors.

2.   That proceedings on the sequestration orders be stayed

for 21 days from this day.

1. That the costs of the petitioning creditor, including any reserved costs, be taxed and paid in accordance with the Statute.

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

4.    That the date of the act of bankruptcy of the firstnamed debtor be noted as 17 May 1992, and that the date of the act of bankruptcy of the secondnamed debtor be noted as 21 April 1992.

JN THE FEDERAL COURT OF AUSTRALIA	)
1

NEW SOUTH W W S	DISTRICT	REGISTRY	)	No NP 2254 of 1992
1

TCY DIVISION 1 -

_ A - ! -

RE :	LOUIS JOSEPH ELKBOURY and
BRENDAN PHILLIP TORPEY

..

- (Debtors)' - I I l

EX PARTE:	FARROW MORTGAGE SERVICES
PTY LIMITED
j  IN LIQUIDATION1

(Petitioning Creditor)

CQXaE:  Ryan J

place: Sydney

m:  11 December 1992

man J: The abovenamed judgment debtors have filed a Notice

of Intention to appear at the hearing of this petition

specifying the following grounds of opposition:

"1.	The Judgment was entered against the Debtors without a trial of the proceedings and does not evidence a true indebtedness of the Debtors to the Petitioner by reason of the Debtors having good defences to the Petitioner's claim which have not been tried, namely:
(a) the repudiation by the Petitioner of the

Mortgage/~uarantee in respect of which the said Guarantee

was given and the acceptance of this repudiation;

(b)

the misleading and deceptive conduct of the Petitioner in:

(i)	entering into the said Mortgage and Guarantee at a time when it knew or ought to have known that in view of the matter described in (c) and its financ~al position there was a likelihood that it would be unable to advance the funds described in the Mortgage and not informing the Debtors of that financial position;
(ii)	after the date of the Mortgage and Guarantee but before the funds described in the Mortgage had been fully advanced not informing the Debtors that Ln view of the matter described in (c) and its financial posit~on there was a likelihood that it would be unable to advance the funds described in the Mortgage.

( c )

t h e i l l e g a l i t y of t h e t r ansac t ion evidenced by t h e s a i d Mortgage and Guarantee pursuant t o t h e provisions of t h e Building Soc ie t i ee A c t 1986 (Vic to r i a ) rendere t h e Guarantee void;

( d )

t h e conduct of t h e P e t i t i o n e r i n and about t h e Guarantee

af fording t h e occasion not t o enforce t h e s a i d Guarantee

under t h e Trade P r a c t i c e s A c t ( a s i n (b) above) or t h e

Contract6 Review A c t .

2 . Al ternat ive ly t o 1, by reason of t h e mat ters r e f e r r e d t o i n 1,

t h e Debtors are e n t i t l e d t o damages agains t t h e P e t i t i o n e r

which a r e equal t o o r g r e a t e r than t h e debt spec i f i ed i n t h e

Pet i t ion ."

The bankruptcy notice relied on by the petitioning creditor

Farrow Mortgage Services Pty Limited (in liquidation)

("Farrow") as founding the petition was based on a judgment

debt of $2,628,160.51 alleged to be due by the debtors to

Farrow under a final judgment obtained in the Supreme Court of

New South Wales on 27 November 1991. The transactions leading	-
to the entry of judgment for the amount of the judgment debt	--
2 -
have had a somewhat tortuoua history. The following recital	,
of relevant facts is made on the assumption that, if I were to accede to their application to go behind the judgment of the

' Supreme Court of New South Wales, the debtors could establish

those facts which are not common ground.

the second debtor, Mr Torpey is a director and shareholder and	In 1989 two companies, Donmint Pty Ltd ("Donmint") of which
Vamugi Pty Ltd ("Vamugi") of which the firstnamed debtor, Mr Elkhoury is a shareholder and director, arranged in partnership to acquire and develop two properties, one at Leichhardt and the other at Parramatta. By letter dated 7 July 1989, Farrow offered to lend the partnership $295,000.00 to assist in the purchase of the Leichhardt property for $410,000.00, the principal of the loan to be secured by a first mortgage over the property. By further letter dated 17 July 1989, Farrow offered to lend a further $3,876,000.00 (including a provision of $400,000.00 for capitalised interest) to be advanced by a series of progress payments. The purpose of the loan was stated to be "to purchase development site and fund the construction of residential home units at Parramatta for resale on completion.' That second loan was to be secured by a second mortgage over the Parramatta property and a second mortgage over the Leichardt property.
On 1 December 1989, the loan moneys were disbursed by way of $295,000 in respect of the Leichhardt property and $l.lm in respect of the Parramatta property which had been purchased for a price of $900,000. Instruments of mortgage were executed and performance of the mortgagors' obligations was guaranteed by, amongst others, each of the debtors.
Companies (including Farrow) was appointed pursuant to the On 22 June 1990, an administrator of the Farrow Group of
provisions of the Victorian Building Society Act 1986. Neither Donmint nor Vamugi had funds available from any source other than Farrow with which to commence construction of the units on the Parramatta property. However, on or about 22 August 1990, a Mr Acreman, apparently on behalf of the administrator of Farrow, made a statement to M r Torpey to the effect that:

"Constructions funds should have been forthcoming but we are now unable to proceed with the financing and you should make an offer of settlement to Farrow and refinance the project."

In response to that invitation, M r Torpey, by a "without prejudice" letter dated 31 October 1990 offered to refinance the Parramatta project in a manner which would return to Farrow $342,789.00 and to pay Farrow the sum of $272,041.00 in consideration of its discharging the mortgages over the Leichhardt property. Although it appears that Farrow was at one point prepared to accept the latter offer, it later threatened, in November 1991 to commence default proceedings under both mortgages.

On 17 April 1991, an order was made in the Supreme Court of Victoria that Farrow be wound up, and on the next day, Donmint and Vamugi commenced an action against Farrow in the Equity Division of the Supreme Court of New South Wales claiming damages and further or alternatively relief against forfeiture for breaches by Farrow of its obligations under the mortgage

of the Parramatta property, particularly its failure to capitalise interest in accordance with the following clause:

"Eighthly, upon the written request of the mortgagor accompanied by

evidence satisfactory to the mortgagee that no less than 30% of the proposed strata units have been pre-sold under binding and enforceable contracts for sale for prices and an aggregate price approved by the mortgagee, then interest during the period from the date of the first advance hereunder until the principal sum is fully advanced or until such earlier date as the mortgagee may in its absolute discretion determine ehall be capitalised monthly on each monthly due date, that 18, added to the balance of the total moneys including capitalised interest then owing and shall thenceforth bear interest at the rate and In the manner hereinbefore provided."

The statement of claim in the proceedings in the Equity

Division included these paragraphs:

"12. The Defendant, by its conduct, has evinced an intention no longer to be bound by the Mortgage and has repudiated the same. Alternatively, in breach of the said implied term the defendant has failed to act reasonably or in good faith so far as it was by clause eighthly of the mortgage required so to act.

13.  In the premises the Pla~ntiffs, as they are entitled to do, have accepted the Defendant'e repudiation as putting an end to the Mortgage."

Donmint and Vamugi then applied to Master McLaughlin for leave, pursuant to s.471(2) of the Corporations Law, to proceed with its action against Farrow in liquidation. In a judgment given on 1 October 1991, the learned Master refused that application on the ground that Donmint and Vamugi had not established a prima facie case of a breach by Farrow of the clause set out above, or that they had suffered any damage as a result of any alleged breach of the mortgage.

In the meantime, on 16 August 1991, Farrow had instituted its own action No 50493 of 1991 in the Commercial Division of the Supreme Court of New South Wales against the debtors and Oakbury Pty Ltd seeking to enforce the guarantees of the

the mortgages. On 20 September 1991 the defendants filed a	performance by Donmint and Vamugi of their obligations under
defence which included these paragraphs:

"4.

It was a term and condition of the Defendant'a liability to the Pla~ntiff pursuant to the Guarantees referred to in paragraph C2 of the Summons that the Plaintiff complied with all obligations imposed upon it in favour of Donmint Pty Limited and Vamugi Pty Limited ("the Mortgagors") which were contained in or arose out of the terms of the Mortgages referred to in the said paragraph.

5 .

In proceedings No 2393 of 1991 in the Equity Division of this Honourable Court, the Mortgagors as Plaintiffs have sought relief against the Plaintiff as a Defendant in those proceedings alleging, ~nter alia, breaches of the terms of the Mortgages containing the principal obligations which the present Defendants have guaranteed. The Defendants will seek to refer to the terms of the Statement of Claim filed by the Mortgagors in the Equity Division for the full and precise terms of the allegations pleaded against the Plaintiff in the present proceedings."

It seems that Farrow moved in some way for summary judgment in its action on the guarantees, and on 4 October 1991, a hearing occurred before Cole J. The debtors were then represented by

Mr Harrison of Counsel who had also appeared for Donmint and

Vamugi before Master McLaughlin. In the transcript of the hearing before Cole J, Mr Harrison is recorded as saying:

"The guarantors in these proceedings have no defence save for the fact that the principal debt is not due as the result of either a repudiation of its obligation under the mortgage to comply with a particular clause or the companies, which the defendants guarantee - for a crose-claim which amounts to at least that amount. It may be that there being no defence my friend will move today for judgment. If so I would be seeking a stay for proof of debt. There was a clause in the mortgage which required Capitalisation of interest. It was a building project. They did not capitalise the mterest. We say that was a repudiation. The default is they did not pay the money. The only basis of defending the default is that the mortgage either is repudiated or they have a cross-claim. In the circumstances your Honour would not grant the application or alternatively stay for a period pending determination of the lodgment of the proof of debt by the company. In all events antecedent to that I would make an application for an adjournment for one week of my friend's application because I would like to have the opportunity to bring these matters to the attention of the present defendants. I have not had the opportunity to speak to them."

The transcript concludes with Cole J's ruling in these terms:

"In those circumstances a claim is made for summary judgment upon the basis that notwithstanding the filing of a defence it 1s accepted by counsel for the defendants that they have no defence other than for a defence which the principal debtor company may have. The principal debtor company sought by applicat~on leave to proceed against the plaintiff, which application was refused by Master McLaughlin Tuesday last. It would seem to establish that there is no prima facie case which the principal debtor company has against the plaintiff. In those circumstances the defences of the defendants can be no greater than the principal debtor company. Accordingly lt seems to me appropriate that there be entry of judgment in favour of the plaintiff against the t h ~ r d defendant. I grant leave to the plaintiff to enter ludgment in the Registry in compl~ance with the rules notwithstanding that the proceedmge commenced by way of Summons. I grant a stay of entry of that xudgment until 11 October 1991. "

Judgment was then passed and entered against all three defendants on 27 November 1991 and by notice of motion filed on 9 October 1992, the debtors moved for, amongst other things, the following orders:

"1. An Order extending t h e s t a y of t h e Order made on 4 th October

1991 whereby t h e P l a i n t i f f w a s granted leave t o e n t e r Judgment

aga ins t t h e Defendants i n t h e Registry s o a s t o pennit t h e

Defendants	t o f i l e t h i s Notice	of	Motion	t o set	a s i d e t h a t
Order.

2. An Order s e t t i n g as ide t h e Order t h a t leave be granted t o t h e

P l a i n t i f f t o e n t e r Judgment agains t t h e Defendants i n t h e

Registry upon compliance with t h e Rules of Court.

3. An Order s e t t i n g as ide t h e Judgment entered."

That motion was heard by Rolfe J who gave detailed and comprehensive reasons for judgment on 29 October 1992. His Honour concluded that the judgment of Cole J was not a default judgment within the meaning of the relevant provisions of the New South Wales Supreme Court Rules, so that it was not capable of being set aside on motion but was only susceptible of variation on appeal. Rolfe J also concluded that since judgment had been entered it was not open to him to extend the time staying the entry of judgment. However, his Honour went

on to consider the defences based on illegality, repudiation	by Farrow and contravention of the Trade Practices Act and the
Contracts Review Act respectively raised by sub-paragraphs (c)(a) and (d) of paragraph 1 of the grounds of opposition relied on by the debtors before this Court. After reviewing all these matters, he concluded that the debtors, as applicants before him, had "failed to disclose any defence on the merits". Accordingly, he dismissed the motion.
On 6 November 1992, the debtors by Summons No. CA 40667 of
1992 applied to the New South Wales Court of Appeal for:

"1.	M Order granting to the Claimants leave to appeal from the
order of Mr Justice Rolfe made on 29th October 1992 dismissing the Notice of notion of the Claimants dated 9th October 1992.
2.	Alternatively, an Order extending the time in which to appeal or alternatively to seek leave to appeal from a decision, Judgment or Order of Cole J made on 4th October 1991 whereby Judgment was signed in the Registry on 28th November 1991 againet the Claimants for $2,568,397.00."

Among the statements of reasons why leave should be given which were appended to that Summons were:

"6. Further, Rolfe 3 was in error in finding that the ~efendants/Claimants had failed to make out any arguable defences on the merits namely any defence of illegality, under the Trade Practices Act, under the Contracts Review Act and repudiation.

8.    Important questions of law are raised namely, when a lender repudiates an agreement of loan under which further instalments of principal are to be lent and the repudiation is accepted by the Borrower who terminates the agreements

(a)	can the lender recover a8 a debt the amount already lent (which was not due at the time of termination) or must the claim be for restitution;
(b)	can the lender recover as a debt from a guarantor that amount already lent or is the guarantor not liable to the lender. "

That Summons was heard in the Court of Appeal on 23 November

and 2 December 1992. There were before the Court, on 23 November, written submissions on behalf of the debtors. Those submissions were supplemented by further written submissions dated 24 November. Answering submissions dated 26 November were then filed on behalf of Farrow. A six page written submission in reply dated 1 December 1992 was prepared by Senior Counsel for the claimants. After a further hearing on 2 December 1992, the Court of Appeal dismissed the summons without publishing any reasons.

In the light of these facts I am invited by Mr Beech-Jones of Counsel for the debtors to go behind the judgment of the Supreme Court of New South Wales and examine for myself whether the judgment debtors are, in fact, indebted to Farrow as claimed in the petition. In support of that invitation, I have been referred to Wren v Mahony (1972) 126 CLR 212 where Barwick CJ, with whom Windeyer and Owen JJ agreed, after referring to an obselvation of Lord Esher in Re Flatau; Ex

parte Scotch Whisky Distillers Ltd (1888) 22 QBD 83, said, at

"His Lordship, in using this expression, was not intending, in my opinion, to weaken the emphasis he had always placed on the need for the Court of Bankruptcy to be satiefied of the existence of the petitioning creditor's debt. Rather, if one reads all his expressions in the eeveral cases I have cited, he was pointing out that the Bankruptcy Court could in general accept a judgment debt as sufficient proof of that debt particularly where it resulted from a fully heard contest between parties but that it always had the power to go behind the judgment and if the case was a proper one, should do

60. The judgment is never conclusive in bankruptcy. It does not

always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt.

accept the judgment. But it has been made quite clear by the

In that sense that court has a discretion. It may or may not so

decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration. It is not the law, in my opinion, that whether in any case the Court of Bankruptcy will consider whether there is satisfactory proof of the petitioning creditor's debt is a mere matter of its own discretion. Nothing in Corney v Brien (1951) 84 CLR 343 lends support for such a view. Rather the emphasis is upon the paramount need to have satisfactory proof of the petitioning creditor's debt. The Court's discretion in my opinion is a discretion to accept the judgment as satisfactory proof of that debt. That discretion is not well exercised where substantial reasons are given for questioning whether behind that judgment there was in truth and reality a debt due to the petitioner."

- l0 -

It was argued that the debtors' defences have never been considered in the Supreme Court of New South Wales in a hearing "on the merits" and, accordingly, the judgment against them should be regarded as closer in kind to one entered in default than to one which "followed a full investigation at a trial on which both parties appeared": (see per Fullagar J in

C o r n e y v B r i e n (1951) 84 CLR 343 at 357). However, an

examination of the history of the litigation which I have set out shows that each of the defences which the debtors now seek to raise was fully considered by Rolfe J after making, so it seems, all necessary assumptions in favour of the debtors. Moreover, the same defences were fully exposed in written and oral submissions L-fore ;he Court of Appeal which must be taken to have considered that none of them could have availed the debtors in resisting liability on the guarantees. 1n these circumstances, I consider that I could only exercise my discretion to go behind the judgment if I were persuaded that the judgment is infected by an identifiable error of substantive law so that its continued existence represents a

miscarriage of justice. I am not so persuaded and I indicate	briefly, in respect of each of the defences sought to be
invoked by the debtors, my reasons for that conclusion.
Re~udiation: Assuming in favour of the debtors that the statement by Mr Acreman amounted to an unequivocal assertion by Farrow that it would not make any future progress payments to which Donmint and Vamugi might become entitled under the mortgage and that
anticipatory breach amounted to a repudiation which was accepted by the mortgagors, the termination thereby brought about did not extinguish Farrow's accrued right to repayment of the principal already advanced and interest accrued thereon. This conclusion, I consider, accords with the observation of Dixon J in McDonald v Dennys Lasce l l e s Ltd
(1933) 48 CLR 457 at 476, that:

"When a party to a simple contract, upon a breach by the other contracting party of a condition of the contract, elects to treat the contract as no longer binding upon hkn, the contract is not rescinded as from the beginning. Both parties are discharged from the further performance of the contract, but rights are not divested or discharged which have already been unconditionally acquired. Rights and obligations which arise from the partial execution of the contract and causes of action which have accrued from its breach alike continue unaffected. When a contract is rescinded because of matters which affect its formation, as in the case of fraud, the parties are to be rehabilitated and restored, so far as may be, to the position they occupied before the contract was made. But when a contract, which is not void or voidable at law, or liable to be set aside in equity, is diesolved at the election of one party because the other has not observed an essential condition or has committed a breach going to its root, the contract is determined so far as it is executory only and the party in default is laible for damages for its breach. "

See also Westralian Farmers Limited v Commonwealth

Agricul tural Serv ice Engineers Limited ( In Liquidat ion) ( 1936)

54 CLR 361 at 379-80 and Hyundai Heavy Indus t r i e s CO Ltd v

Papadopoulos [l9801 1 WLR 1129.

The liability of the debtors on their guarantees also remained

pro tan to unaffected: Hyundai Indus t r i e s v Papadopoulos ( s u p r a ) . The so-called repudiation by anticipatory breach by

Farrow of its obligations to make progress payments could only relieve the debtors of their liability as sureties if it amounted, on the proper construction of the guarantees, to a breach of the separate contracts which those guarantees embodied; see Ankar Pty Ltd v National Westminister Finance (Australia) Ltd (1987) 162 CLR 549. Since, for the reasons given above, an anticipatory breach by a creditor of a partly executed contract to lend money does not relieve a borrower of an accrued liability, I find no reason, as a matter of construction of the guarantees in the present case for treating such a breach as totally absolving the debtors from liability thereunder.

Jlleaality:
In my opinion, on its true construction, the Victorian
Building Societies Act 1986 does not render unenforceable by a
building society the liability of a borrower of an amount
which, contrary to s.57(l)(b), exceeds 66 2/3% of the value of
the land which secures the loan. In this regard, I prefer the
views of Rogers CJ in the Commercial Division of the Supreme
Court of New South Wales in Farrow Mortgage Services Pty
Limited v Daley (unreported, 5 November 1991) and of Byrne J

in the Supreme Court of Victoria in Geelong Building Society

reasoning of Einfeld J in this Court in Edgar v Farrow	(In Liquidation) v Love (unreported, 3 September 1992) to the
Mortgage Services Pty Limited (In Liquidation) (unreported, 26 August 1992). In the latter case, his Honour seems, with respect, to have misread s.52(1) of the Building Societies Act by regarding it as prohibiting a building society from making loans secured by mortgages of land outside Victoria and from purchasing mortgages of that kind.
Trade Practices Act: The existence of a cause of action under s.52 of the Trade Practices Act giving rise to a claim for relief by way of damages under 8.82 or for adjustment pursuant to 8.87 of rights and liabilities under either the mortgages or the guarantees did not give rise to a defence so as to require the judgment against the debtors in the Supreme Court of New South Wales to be set aside: see Bank of New Zealand v Spedley Securities Ltd (1992) 27 NSWLR 91 at 99, 106 and 108. At best such a cause of action may have founded a "counter-claim, set off or cross demand" within the meaning of S. 40 (l) (g) of the Bankruptcy Act but the debtors have made no attempt to satisfy this Court of the matters required by that paragraph.
Contracts Review Act: Like Rolfe J, I am not able to find that the facts surrounding the entry into the contracts of guarantee, even assuming that they would all be found in favour of the debtors, amount to "unjust" conduct by Farrow within the meaning of this Act.
opposition has not been pursued. Accordingly, as none of The alternative contention in paragraph 2 of the grounds of
those grounds has been made out, a sequestration order should be made against each of the debtors. I shall stay proceedings on the sequestration order for 21 days and order that the costs of the petitioning creditor (including any reserved costs) be taxed and paid in accordance with the statute. I note the date of the act of bankruptcy by the firstnamed debtor as 17 May 1992 and by the secondnamed debtor as 21 April 1992.

I certify that this and the

preceding thirteen (13) pages are a true copy of the Reasons for Judgment herein of his Honour MT: Justice Ryan

.

Associate:

Date:  l l

Counsel for the Debtors:	Mr R Beech-Jones
Solicitor for the Debtors:	Kemp Strang and Chippindall
Counsel for the Petitioning

Creditor:  Mr Heydon QC and Mr R Harper

Solicitor for the Petitioning

Creditor:  Abbott Tout Russell Kennedy

Appearance by the solicitor for a supporting creditor, Dikwa

Holdings Pty Ltd, noted.
Dates of hearing:	8, 9 December 1992
Date of judgment:	11 December 1992