Re New, F.A. & G.M.; Ex parte Burns, R.J.R v Eftanissa Pty Ltd

[1989] FCA 423

IN THE FEDERAL COURT OF AUSTRALIA	)
GENERAL DIVISION	) QLD PART X 250 of 1986
BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND )

RE: FRANK ALBERT NEW and

GEORGINA MAY NEW

EX PARTE: ROBERT JOHN FRED BURNS and

PETER IVAN FELIX GEROFF

Applicants

EFTANISSA PTY. LTD.

Respondent

MINUTE OF ORDER

JUDGE MAKING ORDER:	SPENDER J .
DATE OF ORDER:	7 AUGUST 1989
WHERE MADE:	BR1 SBANE
THE COURT ORDERS THAT:

(1) The trustees be given leave to disclaim the lease on condition that they pay $8,177.10 to the respondent company, representing rent for the months September and October 1987.

=he Bankruptcy Rules.

NOTE :  Settlement and entry of orders is dealt with by Rule 124

',

IN THE FEDERAL COURT OF AUSTRALIA	)
GENERAL DIVISION	) QLD PART X 250 of 1986
BANKRUPTCY DISTRICT OF THE SOUTHERN ) DISTRICT OF THE STATE OF QUEENSLAND )

RE: FRANK ALBERT NEW and

GEORGINA MAY NEW

EX PARTE: ROBERT JOHN FRED BURNS and

PETER IVAN FELIX GEROFF

Applicants

EFTANISSA PTY. LTD.

Respondent

SPENDER J.

BRISBANE

7 AUGUST 1989

REASONS FOR JUDGMENT

This is an application under S. 133 of the Bankruptcy Act 1966 to disclaim a lease.

The applicants are trustees administering the estate of

Frank Albert New and Georgina May New ("the debtors") under Part
X of the Bankruptcy Act 1966 (Cth.)

A deed of arrangement dated 10 December 1986 vested in the trustees all the divisible property of the debtors, who carried on a furniture removal and storage business in Kawana Waters. The lease in question was over premises at which this

!

business was being conducted. The lease i6 evidenced by a written Agreement to Lease dated 2 October 1986. It was entered into between the debtors and Eftanissa Pty. Ltd., the respondent in this matter.

The trustees sought in a written notice dated 28 September 1988 to disclaim the lease. The respondent company, as lessor, did not oppose the disclaimer per se, but exercised its right under S. 133(4)(b) of the Act to require the trustees to seek the leave of the court in disclaiming.

Section 133(5) of the Act relevantly provides:-

"The court may in relation to an application for

leave to disclaim a lease under this section -

(a)	impose such terms as a condition of granting the leave as the court considers just and
equitable. ''

The question before the court then is what conditions, if any, are to be attached to the disclaimer of the lease allowing compensation to the respondent company.

Mr. Noel Tilley, formerly an accountant with Browns

Burns & Co., assisted the trustees in the day-to-day

responsibility of administering the debtors' estate. Mr. Tilley says he was aware that the debtors were moving their business to new premises, namely those owned by the respondent company, in October and November 1986. In accordance with usual practice, he had the debtors complete a standard questionnaire, giving information on their business affairs. Both the process of

moving the equipment and furniture associated with the business and the completion of the questionnaire took place in the period of approximately two months between the signing of the written agreement to lease and the formalisation of the deed of arrangement.

However the existence of the agreement to lease between the debtors and the respondent company was not revealed explicitly in the questionnaire. One question was worded, "Have you engaged the services of a solicitor during the past twelve months? If so, supply nane and address of such solicitor advising as to nature of transaction involved. Give details of matters now currently being handled.' It was answered, in part, "Pollock, Ingram and Broderick, Wilcock Street, Caloundra. (1) advise on leases on stores...'

Several pages later in the questionnaire, the question "Are there any leases in existence which name you either as lessor or lessee with respect to any freehold property: ~f so, supply details" appeared. It received no answer at all. Although nost of the questions in the questionnaire were either

questions which received no answer at all. In cross-examination	answered affirmatively or negatively, there are a number of
about this Mr. Tilley said:-

"The practicalities of it is this. The debtors

take these things away, they take the questionnaire, they fill in the questionnaire, such questions as they understand, and they return

it. But in itself the fact that it is not answered

did not greatly concern me at the time."

Nonetheless, Mr. Tilley asked the debtbrs whether or not a lease was in existence, being aware that they were moving into new premises. He says he was informed by the debtors that there was no lease as they had not had time to negotiate one but that they were moving into the business on the basis of a monthly tenancy with a rent free period lasting until February 1987. Subsequently, the debtors on 24 December 1986 showed to him an unsigned lease agreement, about which the male debtor said, according to Mr. Tilley, "he thought he could do better." Mr. Tilley says he is not aware of any further negotiations taking place in respect of the lease.

Further, in accordance with usual procedure, Mr. Burns as trustee of the estate sent a letter dated 24 December 1986 to the solicitors for the respondent company confirming that he and Mr. Geroff had been appointed trustees under a deed of arrangement dated 10 December 1986 and inquiring as to whether the respondent had any claims to be a creditor as at that date. In response to that letter, solicitors for the respondent company advised in a letter dated 7 January 1987 that their client did not have any claims to be a creditor prior to 10 December 1986.

Under the deed of arrangement the creditors allowed the debtors a six months moratorium. The policy of the trustees seems to have been to allow the News to continue the day-to-day management of the removal business within certain budgetary restraints with a view to scaling down their operations and trading out of their losses. The respondent company received from the debtors rental payments for the months of February, Harch and April as they fell due. However, in its new trading format the business continued to experience difficulties and consultants from the Queensland Road Transport Industry Training Committee were called in to help improve the business's efficiency.

Perhaps more out of a sense of optimism than of commercial reality, a meeting of creditors held on 9 May 1987 agreed to a twelve month extension on the deed of arrangement which extended its operation until 10 June 1988. At this stage the trustees were requiring the debtors to provide them with monthly reports on the trading of the removal business. The debtors fell into arrears with rental payments for May and June 1987 before the consultants from the Queensland Road Transport Training Council reached agreement with the respondent over a repayment schedule to bring up to date the overdue rent. In a letter to the respondent company dated 29 July 1987, the male debtor expressed his agreement with the repayment arrangement and enclosed a cheque for one month's rent. The repayment arrangement was not kept. As at the beginning of August 1987, two months rent was still overdue.

Apparently, at some time in June 1987, the debtors

sublet part of the premises in question to a church group, who
used the area at nights and on weekends.

With the business continuing to experience liquidity problems, the trustees issued a circular to creditors dated 24 August 1987 advising that the business was now operating only in a small way under the direction of the trustees and the whole or part of the business had been offered for sale.

With the business winding down, Mr. Tilley deposes that he "formally requested the debtors again to advise if they had received a copy of any lease for execution", but was told that there was no lease.

On 26 August 1987, a meeting occurred between Mr. Uttley, one of the directors of the respondent company, Mr.

Geroff, one of the trustees, and Mr. Tilley. At this meeting,

the respondents were informed that the trustees had then taken

possession of the premises and were requesting two months rent

free occupation to allow time to make arrangements to sell the

business, to obtain a new tenant, or to remove the business to

another location. The trustees proposed that the respondent

company would receive all rental moneys paid from the church

group who were subleting the premises in exchange for the

trustee's exercising a right to occupy the premises until the

removal of the furniture could be arranged. It was suggested

that this might take around six months. Mr. Uttley indicated that he would have to get instructions from all of the respondent's directors. The proposed arrangement was not

accepted by the respondent company.

It appears that this meeting came and went with the trustees remaining unaware that the premises were subject to a fixed period lease that had, by virtue of the deed of arrangement, vested in them. The respondents, still unaware of this misapprehension, did not clarify it.

On 7 September 1987, the solicitors for the respondents delivered a letter to Mr. Tilley advising that since payments for tental for the months of June, July, August and September had not been paid, their client intended to exercise its right to re-enter the leased premises and attached, in accordance with 6.124 of the Property Law Act, a "Notice to remedy breach of covenant." This notice claimed a breach of the lease by virtue of the non-payment of four months rent, amounting in total to $15,750.00.

The matter then fell in the hands of the solicitors for both parties and, aside from the regaining of possession by the respondent in late October 1989 and the expiration of the deed of arrangement on 10 June 1988, nothing of relevance to this matter happened until 31 August 1988, when the respondent issued a plaint against the trustees in the District Court at Brisbane claiming $22,313.00, being the sum of $15,750.00 representing four months rental unpaid and $6,563.00 representing other outlays due under the lease as at 30 June 1987.

To meet this the trustees have sought to disclaim the lease. Such disclaimer, if successful, would by virtue of S. 133(2) of the Act relate back to the date that the debtors' property first vested in the trustees, i.e. 10 December 1986.

The fact that the respondent regained possession in
October 1987, does not in itself raise any barrier to the

trustee's right to disclaim: re Ex parte Patterson; in re Throckmorton (1879) 11 Ch. D. 908. A lease which is disclaimed is deemed to have been surrendered at the time at which it vested in the trustees and the decision to allow the disclaimer affects only the rights of the landlord as against the trustee. See also Ex parte Sir W. Hartdyke; in re Morrish (1882) 22 Ch.D. 410, where it was held that a trustee may disclaim a lease even where it has been determined before his appointment.

Similarly, the mere fact that the deed of arrangement terminated on 10 June 1988 raises no bar to the trustee's right of disclaimer in this case. In a traditional bankruptcy situation, the principle is that the discharge of the bankrupt does not put an end to the bankruptcy regarded as a series of judicial and administrative acts and rights and powers: see Greene M.R. in Re a Debtor 119391 Ch. 489 at 501. The position of the trustees under a deed of arrangement that has terminated is, in my view, in this respect no different.

The question remains what conditions, if any, should attach to the grant of leave to disclaim this lease.

The cases dealing with what compensation, if any, the trustee should be required to pay to the lessor of the property are few in number and of some vintage: see Ex parte Isherwood. In re Knight (1882) 22 Ch. D. 384; Ex parte Izard. In re Bushel1 (No. 2) (1883) 23 Ch. D. 115; and Ex parte Arnal. In re Witton (1883) 24 Ch. D. 26.

In Ex parte Izard, Jessel, N.R. said at p.117:-

"...you must first shew that a benefit has resulted to the bankrupt's estate from the trustee's occupation of the property. That is the foundation of the whole thing.'*

However, this narrow view of circumstances where the trustee could be required to make some compensation to the lessor is to be contrasted with the view of Cotton L.J. in the earlier case of Ex parte Isherwood, at 395:-

. ' l . .in determining what he ought to pay, regard

must be had to two things, whether the occupation has either in fact produced a benefit to the bankrupt's estate, or was contemplated as likely to produce a benefit, and the circumstance that, in consequence of the disclaimer relating back to the date of the adjudication, the owner of the estate is in the interval between the adjudication and the execution of the disclaimer in this position, that he has been lawfully kept out of the use of his property by virtue of the operation of the lease, and cannot after the disclaimer bring any action against the person who without his consent has been in the occupation of the property. These two things ought to be taken into consideration."

This wider view was quoted with approval by Baggallay,

L.J. in Ex parte Arnal, where he distinguished Ex parte Izard on

the grounds that it was a case where actual profit had resulted	to the bankrupt's estate from the trustee's occupation of the
property.
In this case, it is a matter for regret that matters could progress so far with neither the trustees being aware that the premises were subject to a written agreement to lease which had vested in them under the deed of arrangement, nor the respondent company ever explicitly making them aware of the existence of such a lease.
Counsel for each party attempted to draw various inferences from the evidence which, while not amounting to accusations of fault or blame against the other side, would be matters relevant to what compensation would be just and equitable in the circumstances to award.
It was the contention of the trustees that, relying on the representations of the debtors contained in the questionnaire/statement of affairs, and on oral representations that they were moving their business into new premises on the basis of a monthly tenancy with a rent free period until February 1987 and that no formal lease agreement had been signed, they concluded the nature of the occupation of the premises to be merely a tenancy from month to month.
For the respondent company it was said that Mr. Tilley, as the agent of the trustees, was well aware that in late 1986 the debtors were establishing the business at new premises and
under cross-examination, Mr. Tilley admitted that he had never enjoying a four months rent holiday in respect of the premises.
previously heard of an instance where lessees under a tenancy from month to month were granted a rent free period.
It was submitted for the respondent company that, since the very idea of a rent moratorium on a monthly tenancy was incongruous, that the trustees should have been put on inquiry as to the existence of a formal lease between the debtors and the respondent.
In my opinion, the evidence does not compel the inference that the trustees had constructive notice of the existence of the lease.
Similarly, counsel for the trustees pointed to thie inquiry made by Mr. Tilley on behalf of the trustees of the respondent company as to whether they had any claims to be a creditor of the estate at the time that the debtors' propertly became subject to the deed of arrangement. The respondent
company's answer to that was "no" . Strictly, since this question
was directed at a time when the rent "holiday" was still in effect, the respondent as lessor had no claim to be owed money by the debtors. However, with hindsight, it could be said that the answer should preferably have been the respondent company was not at present a creditor of the News.
There were a number of opportunities over the period between the formal entering of the lease and the 7 September when
when either side might have cleared up this misapprehension. the trustees had actual notice of the existence of the lease,
However, an important consideration seems to be that the respondent company as lessor continued to deal directly with the debtors as lessees by, for example, coming to an arrangement with them for the late payment of rental for the months June and July 1987. Those payments were never received. As the non-payment of rent gave the respondents the rights to terminate the lease and
retake possession of the premises, it would not be true to say that it was the actions of the trustees that put the respondent out of possession up until the end of August 1987. The respondent, no less than any of the creditors who consented to the deed of arrangement in the hopes that the business could trade out of its difficulties and thereby settle all outstanding debts in full, was taking a commercial risk in dealing with a firm whose financial position was, to their knowledge, less than sound.
In August 1987, in a move confirming the failure of the business to trade out of its difficulties, the trustees took control of the debtorsr business activities and possession of their assets. Aware of this new move, the respondent, through a representative Mr. Uttley, met with one of the trustees and Mr. Tilley, on 26 August 1987. At this conference, the trustees expressed their wish to continue the occupation of the premises to enable the removal of all the furniture stored there and to facilitate any possible sale of the business as a going concern. It appears that this arrangement was approved by the respondent company. However, on 7 September 1987, their solicitors sent a
letter and the S. 124 notice under the Property Law Act 1974 Qld. to the solicitors for the trustees claiming payment of four
months rent. As I have said, it was only through this letter that the trustees learned that the premises were occupied under a lease rather than under a monthly tenancy. The arrangement that was made on 26 August 1987 was, or at least should have been, contemplated as likely to produce a benefit to the estate being administered by the trustees.

A letter of 22 October 1987 from '~essrs. Cannan &

Peterson on behalf of the trustees says that "all furniture should be able to be removed by Monday 27 October 1987 at the latest." Also, at least one potential purchaser was showing interest in the business and an assignment of the lease in early October, as revealed in a letter dated 2 October 1987 to the solicitors for the respondent company. The letter, in part, saidr-

"We advise that the trustees have confirmed that they are negotiating with the proprietors of the following for purchase of the business operated by the abovenamed debtors;

Aust Express Removals

20A Slough Road

ALTONA 3018

Would you please advise your client's requirements
in regard to a proposed assignment of lease."

On two counts then, the continued occupation by the trustees was contemplated as likely to produce benefit to the estate.

The trustees should be granted leave to disclaim the

lease, but on condition that they pay $8,177.10, representing the

obligations under the lease for rent for September and October 1987.

I certify thzt t i i ! ~ crv' !'Y '2 prcccding

pages arc a truz zrr,v * ' , t'io rcz?nr; for

judgment l : : - : . ri ,;: I !, ; 1 : .~ric~?~r

Mr. JUS:IX ::lx:.:vI'?r

Associate

Dated 7 f y u ~ b 6~