Re Knigge, B. Ex Parte Morgan Corporate Ltd

[1992] FCA 533

JUDGMENT No. .,....,.....,/ 533 q2 -

OF AUS-	)
\

REGISTRY i NO. QN 226 of 1992

B E T W E E N :

RE: PRYAN KNIGGE

aK?!z:	Heerey J
D&mt	29 June 1992  - JERAL COURT OF

AUSTRALIA

m:  Brisbane PRINCIPAL REQ18TRY

m TEMPORE REASONS FOR JUDGMENT

This is an application to set aside a bankruptcy notice. The 4

notice was founded on a judgment obtained by the judgment creditor, Jarden Morgan Australia Limited (Jarden Morgan), against the applicant Bryan Donald Knigge and another defendant in the Supreme Court of Queensland on 17 January 1991. The claim arose out of certain share dealings, Jarden Morgan being a stockbroker, and it appears that after a trial extending over some six days judgment was ordered in the sum of $206,654.60 and costs.

in which the judgment or order was obtained;"

The applicant seeks to set aside the bankruptcy notice on the ground that he has in terms of s.40(l)(g) of the

&& 1966:

" . . . a counter-claim, set-of f or cross demand equal

to or exceeding the amount of judgment debt . . . being a counter-claim, set-off or cross demand that he could not have set up in the action or proceeding

The counterclaim etc relied on arises out of an arrangement made with Jarden Morgan after the judgment as a means of obtaining funds to satisfy the judgment debt and other debts of other creditors. The arrangement was that Mr Knigge's private family company, Stamford Developments Pty Ltd (Stamford), would:

"Obtain a development site with good profit-making potential and carry out the development of that site with a view to the profits therefrom being applied to extinguish my indebtedness to the creditors."

It seems likely that such an arrangement was in fact agreed to both because there is evidence of the purchase of two properties at Eight Mile Plains for the purpose of a town house development, and the lack of any evidence of pursuit by Jarden Morgan of the judgment debt prior to the issue of the bankruptcy notice on 14 February 1992.

There was a rather complicated arrangement to organise finance for the proposed development. On 4 September 1990 Stamford

Sabaron Corporation Pty Limited (Sabaron) of Brisbane, which	entered into what is called a consultancy agreement between
was contracting -

"In conjunction with Commercial Funding Company (CFC) of Fort Lauderdale in the State of Florida, USA. "

That agreement seems to contemplate that Sabaron would assist in the procuring of a loan of SUS4.53 million for the purposes

of the development.

One of the clauses in the consultancy agreement was in these

terms :

"(f) The Client expressly acknowledges that the guarantors and/or sources of finance, introductions, referrals, and information provided or disclosed by the Consultants [i.e. Sabaron] pursuant to this Agreement are valuable assets and the foundation of the business of the Consultants, and are of a confidential nature for the private benefit of the Client, without the intent of making such information public. Accordingly, in consideration of the undertakings and warranties made herein, the Client expressly agrees for itself and for each of its principals, partners, associates, affiliates, agents, and its employees, whether individual or corporate in nature, present or future, not to circumvent, use, by-pass or disregard the Consultants interests by disclosing, negotiating, contracting or in any other way dealing with the introductions, referrals, or any other information regarding any third party without prior authorisation and written consent of the Consultants. Any failure by the Client to comply with these undertakings will entitle the Consultants to recover from the Client, as damages, a sum equal to the fees, commissions, earnings or other benefits which the Consultants would have received but for the circumvention or unauthorised use, misuse or disclosure of such confidential information, introductions, or referrals."

I shall refer to this clause as "the circumvention clause".

As well as CFC it seems that two other United States companies	became involved in the arrangement of the finance. They were
the Commonwealth Investment Group of South Carolina, which, I was told, had the function of raising collateral, and Pennsylvania Investments, which was to provide collateral. The actual moneys, it seemed, were to be advanced through Barclays Bank of the UK. The material discloses also an agreement between Sabaron and Commonwealth Investment Group,
which seems to be a retainer of the latter for the purpose of seeking finance, and there is also an agreement in the form of a letter from Stamford to Pennsylvania Investments which, again, seems to be a retainer to the latter to seek finance on terms therein set out.
In the latter agreement it is stated:

"It should be understood that this letter is strictly a proposal and not a commitment to lend. Any commitment is contingent upon and subject to the approval of the lending institution or credit authorities."

The conduct of Jarden Morgan which is said to give rise to the proposed counterclaim, is a letter that was written on 30 May 1991 to Commonwealth Investment Group by a Mr Ross Prowd of Jarden Morgan's accounts receivable division. The letter is in the following terms:

"We Morgan Stockbroking Limited, have a strong interest in the success of a housing development being undertaken by M r Brian Knigge and his company

There appears to have been some delay in funds being Stamford Development Pty Ltd.	processed to Barclays Bank, London, and we are
concerned that the project may be jeopardised.
In order to alleviate our concerns, we would be pleased to receive your assurances that everything is in order and that the transfer of funds is hinent, if not already completed. Thank you for your assistance in dispelling any concerns we have."

According to a letter from CFC to Sabaron dated 7 June 1991 this letter resulted in the proposed finance being withdrawn. It was said that the loan request for Mr Knigge:

"... has been nullified and revoked. It has been brought to light to me that [Mr Knigge] has written a letter to Commonwealth Investment Group complaining of the lack of speed in which Pennsylvania Investments has conducted its business. In the letter, I was informed that, Mr Knigge has paid a fee to PII, as well. At any rate, advised Mr Knigge that this is the decision of PI1 and not mine. He, as all the clients were informed, not to circumvent the system as it would cause problems. We can now witness that this was not a careless statement but one that should be heeded by all other clients. This move by Mr Knigge has caused a heated situation between CWI and PI1 and has caused CWI to become suspicious of our funding system. Needless to say this has caused PI1 to become extremely disturbed at Mr Knigge's doing. I am sorry for the outcome of this but it seems to me PI1 will not budge.

Of course the letter of 30 May complained of was not a letter from Mr Knigge, nor did it say anything about Mr Knigge paying a fee to PII. Moreover, I do not think the Jarden Morgan letter can be fairly taken as a letter complaining of the lack of speed in which Pennsylvania Investments has conducted its business.

There was evidence tendered in the form of an affidavit from a

New Zealand quantity surveyor, Mr Roy Hanns, which estimates a	financial loss from the development of $3.7 million. Mr Hanns
deposes that from his investigations he has ascertained that the letter of 30 May 1991:

"Was the sole cause of the funding for the
housing project to be terminated."

I am not satisfied on the evidence that that was in fact the case. Moreover it appears not clearly established on the evidence that there was in any event any commitment to advance funds for the project.

The applicable principles are not in doubt. In Ebert v The

n Trustee Com~anv of Australia Limited (1960) 104 CLR 346

at 350, Dixon CJ, McTiernan and Windeyer JJ said:

"The appellant cannot satisfy the Court that a cross demand exists by showing no more than that she

D ~ O D O U ~ ~ S one and states how she suggests that she
- -
can make it out. In re Duncan e x ~ a r t e M o d m (19171 17 SR (NSW1 152. Street J said that the debto; need noi sitisfy. the Court that there are reasonable grounds for believing that he will establish his cross action, but only that he has a bona fide claim which he is fairly entitled to litigate. This perhaps is expressed too favourably

to the debtor. In re A Debtor [l9581 1 Ch 81 at 99,

Roxburgh J said: "But not every demand will suffice. A demand made in bad faith would not be good enough. The debtor must satisfy the Court that he has a genuine demand ... But in my opinion a demand must be more than bona fide: the Court must be satisfied that it has a reasonable probability of success." Perhaps the standard may be expressed by saying that the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in this counter-claim, set-off or cross demand."

hurdles stand in the way of Mr Knigge establishing to the	In the present case in my opinion, a number of substantial
requisite standard that he has a counter-claim, set-off or cross demand. First, I am not satisfied that there is a relevant contract to which Jarden Morgan was a party of which the letter of 30 May 1991 would constitute a breach. The most the evidence establishes is that Jarden Morgan, a judgment creditor, was prepared to grant Mr Knigge the indulgence of having his company Stamford embark on this new project with a view to generating profits which might pay Jarden Morgan and the other creditors. That falls far short of a contractual undertaking by Jarden Morgan of the kind alleged.
The circumvention clause to which I have referred is not shown to be part of any contract to which Jarden Morgan might have been a party. In any case it is directed towards a quite different eventuality, namely, the possibility that a borrower in the position of Stamford might seek to go direct to a lender and cut out the broker.
Further, I am not satisfied that there was actually funding in place or that Stamford would have obtained funds had it not been for the letter of 30 May 1991. Allied with that ground is the fact that, in my opinion, the letter in question, even though Jarden Morgan were provoked to send a letter dated 12 June 1991 to apologise for sending it, could not, objectively speaking, be regarded as something that would be likely to
terminate a funding arrangement of the sort alleged. It certainly does not seek to allege blame against any brokers or
anybody else involved in the process. At most it indicates that Jarden Morgan are anxious to have the project proceed and are concerned about delay. And of course, any contract for the obtaining of finance was a contract to which Stamford was the party rather than Mr Knigge.
similar considerations lead me to the same conclusion.
It was also put that Mr Knigge had a claim in negligence, but duty of care to Mr Knigge, nor that the writing of the letter of 30 May caused any loss to him in the sense that it prevented what would otherwise be the advancing of funds to the project, which of course was a project in which Stamford rather than Mr Knigge was the proprietor. Also it does not seem to me, for the reasons I have mentioned, that it would be reasonably foreseeable that a letter like the letter of 30 May would have the results which it is contended happened.
It was also put that delay on the part of Mr Knigge should be sufficient to disqualify him. I do not rely on that ground. Effectively the period of delay has been from about June last year till March this year when the application to set aside the bankruptcy notice was launched. There is some evidence from which I can infer that neither Mr Knigge nor Stamford were in funds to take any steps by way of litigation in the meantime. And, of course, if there was delay it was equally
delay by Jarden Morgan in taking steps to enforce their judgment. However, for the reasons I have mentioned I do not think there
is a counterclaim, set-off or cross demand established to the requisite standard and the application will be dismissed.
I order that the debtor pay the petitioning creditor's costs to be taxed including reserved costs.
I order that the debtor pay the petitioning creditor's costs
to be taxed including reserved costs.

I certify that this and the preceding (8) eight pages are a true copy of the reasons for judgment of his Honour M r Justice Heerey.

Solicitor acting as counsel

for the debtor:	Mr P Clauson
Solicitors for the debtor:	Robert McIntyre & CO
Counsel for the creditor:	Mr P A Freeburn

Solicitors for the creditor: Morris Fletcher & Cross