Re Grose, D.J. v State Bank of New South wales Ltd

[1992] FCA 292

JUDGMENT No ........ ........ ... 2% 1.92

IN THE FEDERAL COURT OF AUSTRALIA )

GENERAL DIVISION	)	No. NP 3713 OF 1991
)
EiANKRUPTCY DISTRICT OF THE	1
STATE OF NEW SOUTH WALES	)

BETWEEN :	DAVID JOHN GROSE
Debtor
AND :	STATE BANK OF NEW

corn:	WILCOX J
PLACE :	SYDNEY
DATE :	3 APRIL 1992

EXTEMPORE REASONS FOR

WILCOX J: There is before the Court for hearing a petition

for a sequestration order filed by State Bank of New South Wales Limited. The respondent to the petition, named as debtor therein, is David John Grose. The petition claims that the debtor is indebted to the petitioning creditor in the sum of $21,887,451.31.

The matter was before the Court a few weeks ago when Mr Grose was represented by senior and junior counsel. A number of grounds of opposition were mentioned, only some of which had been foreshadowed in a Notice of Opposition filed last January. One of these matters was an alleged defect in properties over which the creditor held security, only one of the Creditor's Petition. It was said that there were two

which had been disclosed in the Petition. As a result of the discussion which occurred, leave was sought by the petitioning creditor to file an amended Petition. This leave was granted, subject to filing by a particular day. I also directed that an amended Notice of Opposition be filed, so as to pick up all of the grounds upon which the debtor proposed to rely at the hearing, whether stated in the original notice or not. Pursuant to the leave given, an amended Creditor's Petition was filed on 20 March 1992. This has been duly verified. On 2 April 1992, an amended Notice of Opposition was filed. This document sets out five grounds as follows:

"1. The debtor did not commit an act of bankruptcy on or before 25 September 1991 as alleged in paragraph 4 of the Creditors Amended Petition.

2.  The Petition should be dismissed for non- compliance with sub-sections 44 (3) and

(4) of the Bankruptcy Act.

3. The debtor is not insolvent.

4.  The debt the subject of the Notice was

compromised.

5.  Service of the Notice and the Petition was not validly effected."

Ground 5 was not pressed at the hearing and need not be further considered. Grounds 1 and 4, although stated separately, raise similar matters. Under this heading a number of propositions were put. In order to understand them, it is necessary to know that the act of bankruptcy upon which the petitioning creditor relies is the alleged failure of the debtor, on or before 7 August 1991, to comply with the requirements of a bankruptcy notice served on him on 24 July

1991 or to satisfy the Court that he had a counter-claim, set-

off or cross-demand equal to or exceeding the sum specified in
paragraph (a) of the bankruptcy notice.

The relevant bankruptcy notice was issued out of this Court at the instance of St George Commercial Credit Corporation Limited (hereafter "St George"). The bankruptcy notice was dated 19 July 1991 and it claimed a debt of

$26,322.85. That sum is identical with the amount referred to

in a document, tendered in this proceeding and marked exhibit 1, being short minutes of an order in proceeding 2973 of 1991

in the Equity Division of the Supreme Court of New South Wales. That document is dated 24 June 1991. It includes the following orders:

"1. Summons dismissed.

2.  Judgment for the defendant in the sum of

$26,322.85."

The document also includes an order for costs and leave to relist the matter in relation to any motion for contempt. There is no evidence that the order made by the Court pursuant to the short minutes was formally entered in the office of the Equity Division. Neither is there evidence to the contrary.

The bankruptcy notice was served upon Mr Grose on 24 July 1991. It required compliance within 14 days. Accordingly the date upon which an act of bankruptcy would be committed, if there was a failure to comply with the bankruptcy notice, would be 7 August 1991. It is not now suggested that Mr Grose did comply with the requirements of the bankruptcy notice. At one stage there was a suggestion that, within the 14 day period, he came to a composition with St George. Reference was made to a meeting at which there was a discussion between Mr Grose and Mr Stephen Eddy, the national credit manager of St George. It is clear that there was in fact a meetlng, and that the participants in the meeting included not only Mr Grose and ~r ~ d d y but also Mr James Millar, the receiver of a property known as Kogarah Town Centre which was owned by a company associated with Mr Grose and mortgaged to St George, and Mr D.A. Houlihan, an account manager working with Mr Millar. Mr Millar is a member of the firm Ernst and Whinney, Chartered Accountants. Also present at the meeting was a Mr Chapman who is associated in some way

with Mr Grose.

There was affidavit evidence from both Mr Grose and Mr Chapman to the effect that during the course of the meeting Mr Grose proposed to Mr Eddy that the sum of $26,322.85 demanded in the bankruptcy notice should be paid out of the proceeds of the sale of the lease of the Kogarah Town Centre. It was suggested that Mr Eddy agreed to this and said that his company would not be proceeding with the bankruptcy notice but that it intended to go ahead and sell the property.

Mr Eddy agrees that there was discussion about the sale of the property but he emphatically disagrees that there was any conversation about the bankruptcy notice. Both Mr Millar and Mr Houlihan said that there was no discussion in their presence about the bankruptcy notice. Mr Houlihan kept notes of the meeting which were made available to counsel for

M r Grose; but he was not cross-examined about his notes or

about the substance of the matters discussed. Counsel for the petitioning creditor, in the end, decided not to cross-examine Mr Grose and Mr Chapman in relation to their version of these discussions, no doubt because by that time it had become obvious that the relevant conversation took place after 7 August 1991. I say became "obvious" because each of Mr Eddy, Mr Millar and Mr Houlihan had a diary note of the appointment. Each of these dlaries was produced to the Court and there was no reason for doubt about the date. Neither Mr Grose nor Mr Chapman specified a date for the conversation. Accordingly,

whatever may have transpired at the meeting, it is quite clear	that the discussion took place after the expiration of the 14
day period; that is to say, after the act of bankruptcy had occurred. Under such circumstances, it is immaterial whether or not St George, through Mr Eddy, said something to indicate to Mr Grose that it would not proceed with bankruptcy proceedings against him. Once the act of bankruptcy was complete, it was an available act of bankruptcy for reliance by any creditor. I see no reason why the present petitioning creditor is unable to rely upon that act of bankruptcy.
In relation to the question whether there was an act of bankruptcy, a further submission was made. Firstly, it was submitted that there was here no final judgment as required by s.40(l)(g) of the Bankru~tcv Act 1966. The basis of this submission was that there was no evidence that the order made in the Supreme Court pursuant to the short minutes had been consummated by being formally entered. It was said that this was a fatal defect and reliance was placed on the decision of
the High Court of Australia In O ~ i e v O ~ i e (1951) 84 CLR 362.
In particular, counsel referred to a passage in the joint judgment of Dixon and Williams JJ commencing at the foot of 370.
I do not think that Q& governs the present problem. It was an unusual case because the bankruptcy notice then under consideration was founded upon an order made by a magistrate pursuant to the Deserted Wives and Children Act
Court of New South Wales, and accordingly available to support 1901, (NSW). That order only became a judgment of the Supreme
a bankruptcy notice, if it had been registered in a particular way. There was a prescribed method of proving the registration and the evidence did not show that this had been observed. Consequently, when in the relevant passage their Honours say: "There was no evidence of a judgment of the Supreme Court", they must be taken as saying that there was a gap in the evidence necessary to establish that the order of the magistrate had become a judgment of the Supreme Court available for the issue of a bankruptcy notice. I think that is a distinct situation from a case where an order is made in the Supreme Court.
I doubt that it matters whether or not the order made at the time of the handing up of the short minutes was formally entered; but I observe that there is no evidence that the order was not duly entered and I think that the presumption of regularity applies. Accordingly, I reject the submission that the judgment upon which the bankruptcy notice was based lacked finality within the meaning of s.40(l)(g).
The next ground, ground 2, was that the petition did not comply with s.44(3) and (4) of the Bankruptcy Act. Those subsections set out requirements for a creditor's petition to be observed by a creditor who is a secured creditor. It is necessary to read the two subsections in their context with
subs. (2) :

"(2) Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (l)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him exceeds the value of his security.

(3) A secured creditor may present, or join in presenting, a creditor's petition as if he were an unsecured creditor if he includes in the petition a statement that he is willing to surrender his security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.

(4) Where a petitioning creditor is a secured creditor, he shall set out in the petition particulars of his security."

The argument in the present case is that the petitioning creditor is a secured creditor - and I interpolate that this is conceded on the face of the petition itself - and that the petitioning creditor does not state that it is willing to surrender its security for the benefit of the creditors generally. It seems to me that the answer to this argument is provided by the decision of Lockhart J in & Wiaains; ex Darte Credit Assistance Ptv Limited (1979) 36 FLR 182. That was an application for substitution as a petitioning creditor. Objection to substitution was taken on the basis that the would-be petitioning creditor was a secured creditor. It was said that the petitioning creditor had to both value its security, and include in the petition an intimation of willingness to surrender it. Lockhart J rejected that submission. At 184-185 he said:

debtor would impose more restrictions on a	"The construction of s.44 contended for by the
petitioning secured creditor than applied under the earlier Act. If the language of s.44 leads to this result, so be it; but I do not think it.
does. In my opinion s.44 means that a petitioning secured creditor may in his petition estimate the value of his security or state that he is willing to surrender his security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.
If he takes the former course he is not bound by the estimate when he seeks to prove his debt. If he takes the latter course he is obliged, upon request by the trustee, to surrender his security after the making of a sequestration order, the sanction for noncompliance being contempt of courts see s.44(6) . "

In the present case the course taken by the petitioning creditor was to reveal in the amended Creditor's Petition that it held security over two properties of the debtor; one being a property at Edgecliff and the other the debtor's interest in the lease of Kogarah Town Centre. The first of these properties was valued at no more than $600,000, the latter at nil. The petition deducted the sum of $600,000 from the amount of the indebtedness, and claimed that the securities left an unsecured balance of at least $21,287,451.31. It is not suggested that the creditor holds security over any other property, or that the estimates of value are not genuine estimates; indeed, no attack whatever has been made on the estimates. In essence, the point that is put on behalf of the debtor is the precise point which was considered and rejected in Wiaains. I think that I should follow Wiaains . Accordingly, I reject this submission, and

with it, ground 2.

Ground 3, that is that the debtor is not insolvent, relies heavily upon prospects rather than present facts. The debtor does not contend that he is presently able to pay his debts as they fall due. He does not even suggest that he will be able to pay his debts within a short time. He does say that he has interests in a number of companies, which in turn hold commercial real estate in and around the city of Sydney. For this purpose counsel for the debtor sought to read two affidavits. One of the affidavits was sworn by his instructing solicitor. Annexed to it are four valuation reports, each being in respect of one property owned by a company associated with the debtor. Each of these valuation reports is prepared by a qualified valuer. Each of them sets out the assumptions upon which they are based. The first of those assumptions is that there is: "a willing, but not over- anxious vendor and purchaser". This is, of course, a standard assumption in determining fair market value. The valuations each deal with the proper method of valuing the site. In some cases, the properties are valued by reference to the rental income of the property, which is then capitalised. In one case, at least, the valuation proceeds on the basis of a purchase by a developer who would demolish the existing improvements and erect a new building.

When this affidavit was sought to be read, I

rejected it. My reason was the absence of any evidence

overanxious purchaser of the various properties, or any of	indicating that there was in prospect a willing but not
them. It is one thing to say that a property would fetch a particular sum of money if there was a willing but not overanxious purchaser negotiating to acquire it. It is another thing to say that the selected sum of money is likely to be available within the foreseeable future. The determination of solvency does not require that a person be able to pay debts immediately, but it does require that the person be able to pay the debts within a reasonable time, having regard to the nature of his or her business. It is quite impossible to say that the amounts at which these properties have been valued will be available within any foreseeable time.
The other affidavit was an affidavit sworn by Mr Trevor Dunn, an accountant. This affidavit annexes the balance sheets of six companies apparently associated with Mr Grose and a balance sheet dealing with Mr Grose's own position. The figures are made up as at 30 June 1991. But there is no indication as to the basis upon which the asset values shown therein have been calculated. They may simply be historic costs. It is impossible to obtain any guidance from balance sheets such as those. It seems to me to be clear that
M r Grose is not in a position to pay his debts within the
foreseeable future.
There is one other aspect of the insolvency claim upon which reliance was put. An affidavit was read, being an affidavit of Mr Grose, to which was annexed a draft
Application which, it was said, would be filed in this Court in order to commence an action for damages against the present petitioning creditor. The damages were said to arise out of breaches of the Trade Practices Act or Fair Tradina Act, and there was an account given in the affidavit as to the basis of the action.
It is inappropriate to go into the detail of that account, except that I note that the discussions giving rise to the actions are said to have occurred in 1989. No action has yet been commenced. All that one can say is that the evidence discloses that Mr Grose's present intention is that he will commence such an action. Whether he will do so, and if so with what result, are matters of speculation. I do not think that the prospect of the damages claim bears upon his solvency.
The matters to which I have referred are enough to dispose of each of the grounds of opposition. The evidence affirmatively satisfies me of the matters which the petitioning creditor needs to establish, pursuant to s.52 of the Bankru~tcv Act. Each of the grounds of opposition having failed, I would normally proceed to make a sequestration order. However, counsel for the debtor has submitted that, if all else fails, I ought to give his client an adjournment. He has put two matters in support of that proposition. The first
of them is that Mr Grose annexed to his affidavit a copy of a document called "supplementary notice of appeal". This
document bears a file number in the Supreme Court, Court of Appeal Division, and shows the appellant as being Mr Grose and the respondent the State Bank of New South Wales. Various grounds are set out. The copy is incomplete in that it does not bear any signature of the appellant's solicitor, nor any date. But the affidavit to which it is annexed includes the statement:

"The judgment given in the Supreme Court of New South Wales is presently under appeal to the Court of Appeal. Annexed hereto and marked 'A' is a true copy of an amended notice of appeal".

That is the totality of the information which I have regarding the notice of appeal. I do not know when the appeal was filed. I do not know what steps are being taken to prosecute it, what date it is likely to be heard or anything about the merits of the appeal. Counsel referred me to an extract from a judgment of the full court of this court in Ahern v DeIJUtv Commissioner of Taxation (1987), 76 ALR 137 at 148, wherein the Court, consisting of Davies, Lockhart and Neaves JJ, said:

"It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds."

I think that the proviso is significant. In this case, there is nothing to suggest that the appeal is based on genuine and arguable grounds. Accordingly, I would not be disposed to withhold a sequestration order simply because of the fact that there appears to be an appeal on foot.

However, there is one other aspect of the case. In

an affidavit which was sworn yesterday, Mr Grose reveals an exchange of correspondence between himself and an American company called Castlepines Corporation. The exchange commences with a letter dated 26 March 1992 from Castlepines making an offer to purchase a property at Haymarket for the sum of $63 million. This is one of the properties referred to in the valuations which I have already mentioned. It is apparently owned by a company associated with Mr Grose. I infer from the addressee of the letter that the relevant company is Obita Pty Limited. The offer is made subject to a number of conditions. Perhaps the most significant of these conditions is that the necessary funding is made available. But the letter does say that a recent letter is in the possession of Castlepines which shows that finance has been assured from McKinley Mortgages Limited of Melbourne. McKinley Mortgages Limited is said to be ultimately owned by various European banks. The letter is accompanied by a letter from McKinley Mortgages to Castlepines dated 5 September 1991 confirming that mortgage funds are available for a building acquisition of $600 million subject to normal lending conditions and other procedural matters. There is also a

Castlepines Corporation referring to the provision of finance	letter dated 1 April 1992 from McKinley Mortgages to
for a property in Melbourne. This letter suggests that there is a continuing willingness by McKinley Mortgages to lend money to Castlepines.
The offer letter to Mr Grose states that settlement is to take place on 26 August 1992 and to be in one lump sum in cash. The offer contains a number of other conditions. Any one of these could, I suppose, cause a problem but they do not go beyond what one would normally expect in a case of a property such as this and there is no reason to assume that the conditions will prove to be stumbling blocks. The letter requested a response by 5 pm on 1 April 1992, failing which the offer would expire. Mr Grose apparently responded
immediately. According to a notation on the document, on 26 March 1992 he notified his acceptance without variation of the conditions.
When this affidavit was read, I inquired how it would affect the claim made against Mr Grose by the State Bank. I was informed that there was a mortgage over the property. There is apparently some question about the amount which will be payable under the mortgage but it was stated by counsel for Mr Grose that the maximum amount which would be required to be paid under the mortgage would be $35 million. If this is so, there would of course be a residue of $28
million after the mortgage. It was claimed by counsel for the
debtor that this amount of money would be available to the company owning the site, which would in turn direct so much of
it as was necessary to pay off the debt the subject of the petition. None of these claims was disputed by counsel for the petitioning creditor; but in fairness I must say that he and his client would have had very little opportunity to check the position so I do not take his non-dispute as meaning that he necessarily accepts what was said. However, prima facie, if this sale goes through, the amount the subject of the
petition will be paid off. It is true, as counsel for the State Bank points out, that there is not yet a firm agreement in existence. It would be open to Castlepines not to go ahead
with the purchase. This may, of course, happen.
If the offer had been made a considerable time ago but had not yet been translated into a binding agreement, I would hesitate before allowing additional time because of the making of the offer. But I do not think that it would be reasonable to criticise the lack of a binding agreement given the circumstance that the offer was only received one week ago. Counsel for the debtor suggested that the further hearing of the matter should be adjourned for six weeks to allow his client to obtain a binding agreement and put appropriate material before the court. I think that this period is a little long. I do bear in mind the facts that the purchaser is an American company and that any contract will almost certainly have to be executed in the United States. However, I do not think that it need take six weeks to
exchange contracts. If both parties are keen to effect a transaction, documents can be got to and from the United
States fairly quickly. The conditions of the offer seem to have been settled. There may be a need for some refinement of the details. No doubt this is commonplace in properties of this nature. But I think with the resources of telephones and facsimile machines this should not cause any significant delay. The course that I have decided to take is to adjourn the further hearing of the matter until Tuesday, 28 April. On that day I will consider any further material that is put before me. If there is then evidence that a binding agreement has been entered into in respect of the Haymarket property and that there will be sufficient moneys available from the sale to pay out the debt of the petitioning creditor, I would look favourably upon an application by the debtor for a further adjournment to allow settlement of the sale and the payment of the debt. If there is no evidence of a binding agreement on that day, then my present expectation is that I would make a sequestration order. I do not put that in absolute terms because it is conceivable that evidence would establish that, although there was not yet a binding agreement, the parties were on the verge of a binding agreement and there was good reason to believe that the transaction would proceed. Accordingly I will not shut out that possibility. However, if, on 28 April, the evidence does not go much beyond a hope of a sale then I do not think it would be reasonable to further extend the time. The proper course under those conditions would probably be to make a sequestration order.
Similarly, I emphasise that it will not be sufficient just to prove that there is a contract in existence. I would wish to have affidavit evidence from Mr Grose, perhaps supported by evidence from his accountant, which deals in some precision with the amount that will have to be paid to discharge encumbrances over the Haymarket site and which shows, without any ambiguity, that there will be enough funds to pay out the State Bank. If this involves the assent of other people, whether mortgagees of other properties or other people who are concerned in the management of Obita, then there ought to be evidence that they, in fact, do assent to that course. I would not wish to have a situation where the petition is adjourned until after the completion of the sale of the Haymarket property only to find that, for some reason, there are insufficient funds available to pay out the State Bank.
I appreciate that it will be necessary for Mr Grose and his advisers to act with some urgency in order to meet the requirements I have specified but I do not think that it is inappropriate to impose that obligation upon them. Mr Grose should regard this as being a last chance, not the beginning of a continuing saga of adjournments; I will not allow that to happen. Accordingly, the only order I make today is that I adjourn the further hearing of the matter until Tuesday 28 April. I will put the matter in the list at 9.30 that morning if that is more convenient to counsel. (Counsel address) I
will say at 9.30. I will reserve the costs of today; I think
they are better considered in the light of what happens eventually, but I will also be bearing in mind the fact that today has been predominantly occupied on points on which the debtor has failed.
I certify that this and the preceding seventeen (17) pages are a true copy of the Reasons for Judgment of the Honourable Justice Wilcox.
Associate:
Dated:  3 April 1992

APPEARANCES

Counsel for the Debtor:	P E King
Solicitors for the Debtor:	Bouris Cominos
Counsel for the Creditor:	G C Lindsay
Solicitors for the Creditor:	Dunhill Madden Butler
Date(s) of hearing:	3 April 1992