Ritossa v RUTLAND

[2019] FCCA 1219

FEDERAL CIRCUIT COURT OF AUSTRALIA

RITOSSA & ANOR v RUTLAND & ANOR [2019] FCCA 1219

Catchwords:
BANKRUPTCY – Application for a sequestration order – where parties had entered into a deed of forbearance – whether payments made in respect of legal costs pursuant to deed should be allocated to judgment debt – no basis for finding that the debt the subject of judgment is not due and owing –  alternatively, whether clause in deed amounted to a penalty – clause found not to be penalty – no other sufficient cause made out as to why sequestration order ought not to be made – no evidence adduced that first respondent is solvent – sequestration order made.

Legislation:

Bankruptcy Act 1966 (Cth), ss.27, 43, 52

Legal Profession Uniform Law (NSW), ss.171, 176, 178, 198

Cases cited:

Andrews v Australia and New Zealand Banking Group Limited (2012) 247 CLR205
Paciocco v Australia and New Zealand Banking Group Limited (2016) 258 CLR525

First Applicant: IVAN ROBERT RITOSSA

Second Applicant: MARINA BOZICA RITOSSA

First Respondent: HELEN RUTLAND

Second Respondent: MARK SKINNER

File Number: SYG 1434 of 2018

Judgment of: Judge Street

Hearing date: 9 May 2019

Date of Last Submission: 9 May 2019

Delivered at: Sydney

Delivered on: 9 May 2019

REPRESENTATION

Counsel for the Applicants: Mr A d'Arville

Solicitors for the Applicants: Dentons

Counsel for the Respondents: Mr S Sykes

ORDERS

BY CONSENT, THE COURT ORDERS THAT:

1. The Applicants be granted leave to rely on the affidavit of Patrick Dunn affirmed 26 March 2019 and exhibit PD-1.

THE COURT ORDERS THAT:

1. Grant leave with the agreement of the parties under s 191 of the Evidence Act 1995 (Cth) for the identification of the agreed facts marked in Exhibit B.

2. A sequestration order is made against the estate of Helen Rutland.

3. The Applicants’ costs be paid out of the estate with the priority to which they are entitled fixed in an amount as agreed or assessed.

THE COURT NOTES THAT:

1. The act of bankruptcy occurred on 7 May 2018 and that a consent to act as trustee has been filed identifying David John Frank Lombe as the proposed registered trustee.

DATE OF ORDER: 9 May 2020

FEDERAL CIRCUIT COURT
OF AUSTRALIA
AT SYDNEY

SYG 1434 of 2018

IVAN ROBERT RITOSSA

First Applicant

MARINA BOZIKA RITOSSA

Second Applicant

And

HELEN RUTLAND

First Respondent

MARK SKINNER

Second Respondent

REASONS FOR JUDGMENT

1. This is an application within the Court’s jurisdiction under s 27 of the Bankruptcy Act 1966 (Cth) (“the Act”) for a sequestration order against the first respondent. 

2. The creditor’s petition was originally presented against the first respondent and her partner, the second respondent, who has since been made bankrupt. 

3. The proceedings arise out of a judgment obtained in the Local Court of New South Wales in the sum of $68,729.36 on 9 March 2018. On 29 December 2017, the applicants commenced proceedings for that Local Court judgment. On 19 March 2018, a bankruptcy notice was issued and was served upon the first respondent. The Court is satisfied that the act of bankruptcy in respect of the first respondent occurred on 7 May 2018. 

4. On 22 May 2018, these proceedings were commenced seeking a sequestration order. On 19 June 2018, the parties entered into a deed of forbearance. That deed referred to these proceedings in which a sequestration order was being sought, and provided a regime for obligations for payment over a period of time by the respondents. Those payments had to be made into a particular account, and there was an express allocation of those payments to be applied, firstly, in relation to legal costs, secondly, in relation to interest, and thirdly, in relation to the judgment debt the subject of the Local Court proceedings. 

5. The forbearance obligation was conditional upon compliance with the obligations under the deed. It is common ground that the payment obligations were not complied with and the debt the subject of the judgment remains due and owing.

6. The deed included a provision for interest, cl 4, which relevantly is as follows:

   4. Interest

   4.1 From the date of this deed until the Debt has been repaid in full, interest will:

   (a)be payable on the Debt at a rate of 1.5% per month; and

   (b)be calculated as if the Debt was a constant amount (i.e. without regard to any debt amortisation).

   4.2Should the Debtor Parties breach any term of this deed, from the date of the breach until the Debt and Legal Costs have been repaid in full, interest will:

   (a)also be payable on the Legal Costs at a rate of 1.5% per month;

   (b)be calculated as if the Legal Costs were a constant amount (i.e. without regard to any amortisation of the Legal Costs).

7. Counsel for the first respondent, Mr Sykes, has submitted that the payments that have been made in respect of legal costs pursuant to the deed should not have been allocated to legal costs, but should be allocated to the judgment debt, by reason of which it is contended that there should be no sequestration order, as an amount in excess of the bankruptcy notice has been paid.

8. The argument advanced by Mr Sykes was developed by reference to the provisions of the Legal Profession Uniform Law (NSW) (“the LPUL”) and the assertion that the first respondent should be characterised as a third party payer under s 171 of the LPUL and that there had been no disclosure as required under s 176 of the LPUL and it was contended that there was a contravention by the law practice under s 178 of the LPUL, which relevantly provides:

   178   Non-compliance with disclosure obligations

   (1)    If a law practice contravenes the disclosure obligations of this Part—

   (a)the costs agreement concerned (if any) is void; and

   (b)the client or an associated third party payer is not required to pay the legal costs until they have been assessed or any costs dispute has been determined by the designated local regulatory authority; and

   (c)the law practice must not commence or maintain proceedings for the recovery of any or all of the legal costs until they have been assessed or any costs dispute has been determined by the designated local regulatory authority or under jurisdictional legislation; and

   (d)the contravention is capable of constituting unsatisfactory professional conduct or professional misconduct on the part of any principal of the law practice or any legal practitioner associate or foreign lawyer associate involved in the contravention.

   (2)    In a matter involving both a client and an associated third party payer where disclosure has been made to one of them but not the other, this section—

   (a)does not affect the liability of the one to whom disclosure was made to pay the legal costs; and

   (b)does not prevent proceedings being maintained against the one to whom the disclosure was made for the recovery of those legal costs.

   (3)    The Uniform Rules may provide that subsections (1) and (2)—

   (a)do not apply; or

   (b)apply with specified modifications—

   in specified circumstances or kinds of circumstances.

9. The obligation to pay legal costs under the deed is not an obligation to pay the law practice, it is an obligation to pay the creditor who had brought the Local Court proceedings. The first respondent is neither a third party payer nor an associated third party payer within the meaning of ss 171(a) or (b) of the LPUL.

10. The first respondent might be characterised correctly as one in respect of whom they were a non-associated third party payer in respect of a legal obligation referred to in para (a) being owed to the applicants. 

11. The obligation for full disclosure referred to in respect of s 176 of the LPUL is in respect of an associated third party payer, and not, as the Court finds in the present case, a non-associated third party payer within the meaning of s 171 of the LPUL. Mr Sykes’ reliance upon s 178 of the LPUL, required relevantly that the applicants are correctly characterised as an associated third party payer. The applicants are not the client for the reasons the Court has already given, and they are not an associated third party payer. Further, the terms of s 178 of the LPUL do not undo the allocation of the payments that have been made under the deed up to the time of the filing of the assessment application which occurred on 8 May 2019. 

12. The Court does not accept that the pursuit by the applicants of the first respondent reflects any contravention by a law practice of a client identified in s 178(1) of the LPUL. Further, the work done by s 178 of the LPUL has no work to do in respect of the deed the subject of these proceedings, given that the applicants are not an associated third party payer. Further, even if the applicants had been so characterised as falling within s 178(1) of the LPUL, that provision has no impact in respect of the payments that have been made and allocated by reason of which it is the legal costs and interest that have been the subject of payments and not the judgment debt.

13. Mr Sykes submitted that because the payments were made to the account, and because of the application that has now been made for an assessment of legal costs, which he says his client was entitled to pursue pursuant to s 198(7) of the LPUL, that the payments should be treated as available for allocation against the judgment debt. There is no force in that proposition, and it is contrary to the terms of the deed.

14. Accordingly, there is no basis for finding that the debt the subject of the judgment is still not due and owing. On the basis of the evidence before the Court, the Court is satisfied that the requirements of s 43(1) of the Act have been met. The Court is satisfied that the requirements of s 52(1) of the Act have been established by the petitioning creditors. The Court is satisfied that the first respondent is unable to pay the debts as they fall due.

15. Mr Sykes ran a further argument in respect of both limbs of cl 4 of the deed, contending the provisions constitute a penalty. Mr Sykes properly conceded that if his argument in respect of the allocation in respect of legal costs failed, this further ground would not prevent there being a debt due and owing. In these circumstances the Court is not satisfied that this penalty argument, even if of any substance, satisfied the Court that there is other sufficient cause why a sequestration order ought not to be made. The Court finds that it is not so persuaded, even if cl 4 of the deed, in either limb, could be characterised as a penalty. 

16. Mr Sykes took the Court to what was said in Andrews v Australia and New Zealand Banking Group Limited (2012) 247 CLR 205, and in particular at pg 10, as well as what was said in Paciocco v Australia and New Zealand Banking Group Limited (2016) 258 CLR 525, relevantly at para 57.

17. As a matter of substance, taking into account the terms of the deed and the circumstances at the time of making the deed, cl 4.2 provides for compensation for the prejudice suffered by reason of the breach identified. The quantification of the prejudice suffered identified on a monthly compounding basis with a base rate for calculation is, in substance, in identical terms to that found in cl 4.1, albeit that cl 4.2 concerns legal costs and interest and not the judgment debt. 

18. The machinery of cl 4.2 being of the same kind under cl 4.1, albeit relating to legal costs from the date of the deed, cannot be said to be out of all proportion to the interests of the creditor under the deed, damaged by reason of the default judged at the time of making the deed. The interest clause reflects an obligation to pay genuinely pre-estimated liquidated damages and its evident purpose was to protect the legitimate commercial interests of the creditor under the deed. The Court does not accept the contention that the provision in respect of interest under cl 4, either in respect of its first limb, cl 4.1, or in respect of its second limb, cl 4.2, constitutes a penalty. 

19. Further, as found above, even if the Court had been persuaded that cl 4.2 did give rise to a penalty, the Court would not be persuaded that other sufficient cause has been made out as to why a sequestration order ought not to be made. That is because the underlying judgment debt remains due and owing, and no evidence has been adduced that the first respondent is solvent, and the penalty interest argument would not give rise to circumstances where the judgment debt is not in substance still due and owing.

20. An argument was also advanced by reference to a recent payment made to the account in the sum of $3,500.00 on 8 May, which is the same date as the date of application for the assessment of costs. Even if it were the case that the Court should treat that payment of $3,500.00, made after the application for assessment, as falling within s 178(1) of the LPUL, and that the applicant should be characterised as falling within the provisions of subs (1)(b), and the work done by subs (1)(c), the court is not satisfied that this gives rise to circumstances whereby other sufficient cause has been made out why the sequestration order ought not to be made. Other sufficient cause has not been made out and the petitioning creditor, having made out the statutory requirements, is, in the present case entitled to the making of a sequestration order.

I certify that the preceding twenty (20) paragraphs are a true copy of the transcript of the published oral reasons for judgment of Judge Street delivered in open Court on 9 May 2019 and the parties were provided sealed copies of the Court’s orders.

Associate: 

Date: 21 August 2020