Singh v Khatri and Griffin as Trustees of the Bankrupt Estate of Ronald Peter Singh - [2011] FMCA 804

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SINGH v KHATRI & GRIFFIN AS TRUSTEES OF THE BANKRUPT ESTATE OF RONALD PETER SINGH

[2011] FMCA 804

BANKRUPTCY – Proof of debt – application for an extension of time within which to file an application seeking review of Trustee’s decision to reject proof of debt – whether debt was legally enforceable – whether sufficient evidence of legally enforceable contract – allegation of sham contract – whether transaction represented gifts – indebtedness was contingent and remained a provable debt and is provable in the bankrupt’s bankruptcy.

Bankruptcy Act 1966 (Cth), ss.82, 104(1), 104(3)

Community Development Pty Ltd v Engwirda Construction & Co (1969) 120 CLR 455
Gaffney v Federal Commissioner of Taxation (1998) 81 FCR 574
Hardy v Fothergill (1888) 13 App Cas 351
Jones (as Trustee of the Bankrupt Estate of Graham) v Deputy Federal Commission of Taxation (1998) 157 ALR 349
Lofthouse v Commissioner of Taxation [2001] VSC 326
Lyford v Carey (1985) 3 ACLC 515
Re Kongonis (1963) 19 ABC 96
Re DK Rogers; Ex parte CMV Parts Distributors Pty Ltd (1989) 20 FCR 561
Re Hope; Ex parte Carter (1985) 59 ALR 609
Re Van Laun; Ex parte Pattullo [1907] 1KB 155
Rocom International Pty Ltd (In liq) v Prentice [2002] FCA 604
Something Better Pty Ltd & Ors v Pyramid Building Society (In liq) [1996] 2 VR 352

Applicant:

PETER SINGH

Respondent:

RAJ KHATRI AND MICHAEL GRIFFIN AS TRUSTEES OF THE BANKRUPT ESTATE OF RONALD PETER SINGH

File Number:

BRG 557 of 2010

Judgment of:

Burnett FM

Hearing dates:

7 and 8 February 2011

Date of Last Submission:

10 October 2011

Delivered at:

Brisbane

Delivered on:

27 October 2011

REPRESENTATION

Counsel for the Applicant:

Mr D. de Jersey

Solicitors for the Applicant:

Minter Ellison

Counsel for the Respondent:

Mr M. Cooke

Solicitors for the Respondent:

O'Reilly Lillicrap

ORDERS

That the time for appealing against the respondents’ rejection of the applicant’s proof of debt be extended pursuant to s.104(3) of the Bankruptcy Act1966 (Cth) to 4 June 2010.
The parties are directed to submit orders to give effect to the findings in the judgment within seven (7) days of today’s date.
Subject to either party applying for any other order, it is directed that the respondent pay the applicant’s costs of and incidental to the application to be assessed on the standard basis.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT BRISBANE

BRG 557 of 2010

PETER SINGH

Applicant

And

RAJ KHATRI AND MICHAEL GRIFFIN AS TRUSTEES OF THE BANKRUPT ESTATE OF RONALD PETER SINGH

Respondent

REASONS FOR JUDGMENT

By letter dated 10 May 2010 the respondent as trustee for the estate of Ronald Peter Singh enclosed a notice of rejection of the applicant’s proof of debt dated 28 February 2008 pursuant to s.104(3) of the Bankruptcy Act 1966 (Cth) (the Act). The applicant, Peter Singh, was the bankrupt’s father. He contends that he had entered into two contracts with the bankrupt for the sale of pharmacies which were then owned by him. Each contract incorporated wholly or in part a component of vendor finance. As will be explored below, the recording of these transactions was wholly unsatisfactory and in the result the trustees were not satisfied that a state of indebtedness existed between the applicant and the bankrupt. Accordingly he determined to reject the applicant’s proof of debts. The applicant now seeks a reversal of the trustee’s rejection and admission of his proofs of debt in full.

Background Facts

Prior to July 2002 the applicant was the registered proprietor of a number of pharmacies including in particular two pharmacies at the Brookside Shopping Centre; one at Shop 42 and the other at Shop 109. He was also the registered proprietor of a pharmacy at the Chermside Westfield Shoppingtown.
By a contract dated 29 July 2002 the applicant sold to the bankrupt the two Brookside Shopping Centre pharmacies in one line. The consideration for the sale of the two pharmacies was $2,500,000.00 plus stock in trade. The contract between the applicant and the bankrupt was recorded in the form of a REIQ business sale contract. The particulars of the contract were completed in handwriting. They identified the parties, the date of the contract and the consideration as earlier noted. A deposit of $500,000.00 was made by presentation of a cheque. Completion was to take place 30 days from the date of contract. That is on or about 29 August 2002. The contract was subject to finance with the loan amount being identified as “sufficient to complete”. There also were a number of other conditions which are not material to the application.
Settlement appears to have occurred although the applicant says that only part of the consideration was paid. By reference to the consideration declared for stamp duty assessment the grossed up contract price was $2,786,972.00. It is apparent from subsequent events that no money passed hands on settlement. The bankrupt was permitted into possession without having done more than giving the applicant a cheque for $500,000.00. The applicant agreed to provide vendor finance to assist the bankrupt with the purchase. However even the final quantum of that finance was not settled until after some bank finance had been negotiated.
The applicant says $1.6M was reportedly borrowed by the bankrupt from the National Australia Bank (NAB) to assist him with the purchase. Of the sum borrowed by the bankrupt, $1.5M was to be paid to the applicant. The balance due under the contract was to be funded by vendor finance.[1]
[1] The bank statements present a very confusing picture of this transaction. From the bankrupt’s
He says that in late 2002 he and the bankrupt engaged the services of Zappula Trikhem and Partners Solicitors to draft a loan agreement reflecting the amount which was due by the bankrupt to him and which represented the balance of the purchase monies due in respect of the pharmacies and which remained unpaid. He says a document of that form entitled Loan Agreement was prepared but the parties never proceeded with it or its execution due to the significant stamp duty which was estimated as being payable upon it. Initially it was orally agreed between the applicant and bankrupt that vendor finance would be provided in respect of the balance due ($1,286,972.00).
The terms of the draft loan agreement suggested the principal provisions provided that the indebtedness was in the sum of $1,286,972.00 with repayment of the principal advanced to be at the rate of “$100,000.00 per annum first payment commencing on the anniversary of the date National Australia Bank waives in writing its requirement”; “any vendor or third party contribution will not be repaid prior to meeting National Australia Bank commitments”. Provision provided for interest in terms of clause 2 at the prevailing prime rate plus 2% per annum rest periods annually and on dates set out in the second appendix to the agreement.
The applicant contends that in any event the agreement as prepared by the solicitors did not truly reflect the agreement struck between he and the bankrupt. The terms were subsequently varied. Those terms were varied in December with the principal repayments being subject to the bankrupt performing under his NAB loan. Finally in about January that term was said to be varied again to provide the principal repayments were only required in the event of the business “returning to profitability”. No minute or other record was made of the oral agreement as varied when concluded between the applicant and the bankrupt.
Throughout all this time the applicant had been involved in unlawful and criminal drug related conduct. From submissions made in the course of his subsequent sentencing for this conduct it transpired that he was suspicious at that time that he may have been under police surveillance (as was the fact) in respect of that unlawful activity. Undoubtedly he was under considerable pressure at that time. Particularly as he had no prior criminal history and, as a pharmacist, he must have been acutely aware of both the risks and consequences of his behaviour for which he was subsequently arrested in late 2002.
Towards the middle of 2004 the applicant was facing the prospect of a lengthy jail sentence for his involvement in the production of methylamphetamine. At about that time he entered into a contract with the bankrupt on 26 April 2004 to sell the third pharmacy, the Chermside pharmacy, to the bankrupt. The consideration for the sale of that pharmacy was agreed at $2M. In respect of that pharmacy the applicant says that he agreed with the bankrupt to provide full vendor finance.
In support of that transaction he says that he negotiated a transfer of the lessees name from his own to that of the bankrupt and sought the National Health Services and Pharmacy Board approvals for the transfer of the pharmacy licences from himself to the bankrupt. These matters were the subject of formal documentation as would be expected given they concerned third parties. In respect of the vendor finance agreement, he says he orally agreed with the bankrupt that the bankrupt would make repayment of the principal amount on the Chermside pharmacy and payments for interest on that principal amount upon the same terms as had been agreed in respect of the Brookside pharmacies.
The bankrupt traded from the time of acquisition of those pharmacies until his ultimate bankruptcy on 30 November 2007.
On 27 February 2008 the applicant lodged with the trustees a proof of debt. In the proof of debt at item 6 the applicant claimed a debt incurred on 14 October 2002 in respect of the Brookside pharmacy and a Brookside Centre pharmacy in the sum of $1,186,972.00 and a debt incurred on 1 July 2007 in respect of the “Peter Singh Chemist” (the Chermside pharmacy) for $2M.
By letter dated 10 May 2010 the trustee rejected in full the applicant’s proof of debt on the following grounds:
a)There was no “written vendor finance agreement between [the applicant] and the bankrupt to create an obligation for the bankrupt to repay [the applicant];
b)The failure by the bankrupt to repay any monies pursuant to the transfer of the Brookside and Chermside pharmacies “is in issue that there was no vendor finance agreement between [the applicant] and the bankrupt;
c)Insufficient evidence has been supplied to demonstrate that [the applicant] is a creditor of Mr Singh’s bankrupt estate.

Extension of Time

The trustee’s notice to the applicant of his refusal of the applicant’s proof of debt was under cover of letter dated 10 May 2010. On 21 May 2010 the applicant engaged the services of solicitors to review the trustee’s adjudication of his proof and advise in respect of their rejection of it. Under instructions from the applicant his solicitors wrote to the trustees under cover of letter 25 May 2010 advising of their retention and their understanding of the issue between the applicant, their client and the trustee. After summarising the issues between them they concluded:
“We have advised our client to reserve his rights, which we now do on his behalf, to lodge an amended proof of debt claiming interest on the two amounts set out in the proof from the dates the debts respectively became due until the date of bankruptcy.
In the circumstances, we look forward to receiving your advice that the rejection of the proof has been expunged.”
The trustees responded by correspondence dated 31 May 2010 when they confirmed that they would not “withdraw [their] notice of rejection of proof of debt previously provided to [the applicant].”
By letter dated the same date the applicant’s solicitors responded to the trustee’s letter concluding:
“We respectfully request that you reconsider your position and do so as soon as possible in view of the fact that the 21 day time period of appeal will expire today.
If our client is forced to make an application under s.104(1) of the Bankruptcy Act for a review of the decision to reject in full our client’s proof of debt, our client will require an order of the court under s.104(3) to extend the time for the review.”
The letter enclosed a copy of the unsigned “Deed of Loan” for consideration by the trustee. It was plainly correspondence directed to the trustees requesting further consideration on the basis of additional material not previously raised.
That correspondence was responded to on 1 June 2010 when the trustee observed that it too was the first it knew of the purported instrument of loan. Their letter addressed further issues before concluding that they had not recanted from their position that the applicant had not in their view satisfied the definition of a provable debt pursuant to s.82 and that they would not withdraw the notice of rejection of proof of debt previously provided.
On 4 June the applicant commenced this application.
The principles for an extension of time under s.104(3) were examined in Rocom International Pty Ltd (In liq) v Prentice [2002] FCA 604 at [3] where Tamberlin J identified the following considerations as relevant to an application to extend time:
a)The shortness of the delay involved;
b)The promptness with which the matter is attended to when any failure is or ought to have been realised;
c)The absence of prejudice which cannot be rectified by appropriate orders.
At [4] his Honour stated:
“In his concurring judgment in Jackamarra v Krakouer (1998) 195 CLR 516 at 539 – 543, Kirby J assembles and considers a number of relevant factors concerning the grant of an extension of time, and these include the following considerations:
·    The discretion to grant an extension is broad and flexible;
·    Whether it is just in all the circumstances to grant an extension;
·    Where the time limits are of a substantive or procedural nature;
·    Whether the case is arguable;
·    Respective prejudice to the parties;
·    Length of delay;
·    Responsibility and reasons for the delay;
·    Whether the delay was intentional or the result of a bona fide mistake;
·    Whether the delay was caused by the litigant or legal advisers”.
I am satisfied from the evidence that from shortly after the original notice of rejection of proof of debt the applicant sought to actively engage with the trustees to amicably resolve the difficulties between the parties. The exchanges between the applicant’s solicitors and the trustees identified the principal issue which remained alive for the court to resolve. The applicant commenced his application only a matter of days after the due date and the application seeks only to prosecute matters put on notice in correspondence between the parties prior to the statutory time period allowed. No prejudice has been contended for or advanced on the part of the respondent in respect of an extension of time for the hearing of the application. In the circumstances it is appropriate that the time for appealing against the respondents’ rejection of the applicant’s proof of debt be extended and an order for enlargement of time will be made.

Proof of Debt

It is correct, as the applicant submitted that the court’s function under s.104 is to consider whether the debts are provable, not whether the trustee made a correct decision on the basis of the material before him or her; Re DK Rogers; Ex parte CMV Parts Distributors Pty Ltd (1989) 20 FCR 561. As the applicant submitted, the trustees right and duty when examining the proof of debt for the purpose of admitting or rejecting it “is to require some satisfactory evidence that the debt on which the proof was founded is a real debt”; Re Van Laun; Ex parte Pattullo [1907] 1KB 155 at [162].
It is accepted that a debt is provable if it is both legally enforceable; Re Kongonis (1963) 19 ABC 96 and capable of being quantified; s.82(6) and s.82(8).
The questions in issue in this proceeding are whether the debt in each instance was legally enforceable.
The principal contention advanced against the applicant by the trustee in respect of the Brookside pharmacies was that the debt was not legally enforceable because of a strong inference arising from contemporary correspondence that no vendor finance existed which required the repayment of the loan as an enforceable agreement. In other words the trustee considered the alleged loans to be gifts noting that while a debt creates present or future obligation to pay money, a gift is a gratuitous transfer of property from one person to another. As the applicant’s counsel noted, the essential point of enquiry for the trustees (and the court) was whether the alleged vendor finance created an obligation in Ronald Singh (present or future) to repay money to Peter Singh.
Although the trustees’ written submissions were premised in the context of decision review rather than review denovo the points made were plain. First, the trustee contended that the transfer of the Brookside pharmacies was not supported by consideration and on its proper construction was something other than a sale – possibly a gift. Alternatively, they contended it cannot be established that the alleged debt arose pursuant to the vendor finance arrangement which created a present or future obligation in the bankrupt to repay the money advanced to him by the applicant. Accordingly the loans too constituted gifts. Generally the trustee contended both transactions, in whatever form – sale or finance – were shams.
Plainly the trustee’s view of these matters were largely influenced by the point identified in correspondence of 26 May 2010 where it was noted:
“There is no written vendor finance agreement between [the applicant] and [the bankrupt] to create an obligation for [the bankrupt] to repay [the applicant];
· The failure by [the bankrupt] to repay any monies pursuant to the transfer of the Brookside and Chermside pharmacies is indicia that there was no vendor finance agreement between [the applicant] and [the bankrupt].”
In his submissions, counsel for the applicant correctly contended a loan agreement, even if it be oral, is still enforceable and would not fail for want of form. He submitted there was sufficient evidence of a loan agreement in this case because the evidence demonstrated:
a)The applicant and the bankrupt entered into binding written agreements for sale of the Brookside (and Chermside) pharmacies pursuant to which the bankrupt was to pay the purchased consideration to the applicant. There was no challenge by the trustee to the contracts of sale, their asserted terms or to the rights and obligations assumed by the parties pursuant to them.
b)Each of the applicant and bankrupt swore to the oral vendor finance loan agreements and their terms.
c)There is evidence of part performance of the vendor finance loan agreement in respect of the Brookside vendor finance agreement by:
i)On or about 5 July 2004 the bankrupt made two payments to the applicant each in the amount of $40,700.00 pursuant to and consistent with the terms of the loan agreement; and
ii)The bankrupt borrowed $1.67M from the National Australia Bank and in March 2003 paid an amount of $1.58M to the applicant as part payment of the purchase consideration of the Brookside pharmacies.
In contesting the applicant’s case the respondent principally sought to put in issue the credibility of the statements made by the applicant and the bankrupt particularly because of the close association between them which I am asked to infer would support a conclusion that they have conspired to give false evidence of these matters before the court.
Ultimately the case is largely one of credit and the outcome would follow my determination on the reliability and general credibility of each of the applicant and the bankrupt. The court is not bound to accept the uncontradicted evidence of any witness particularly in circumstances where the contradictor and the applicant can be seen to have a common motive for an outcome and as authority demonstrates is particularly so in applications of this kind: see Re Hope; Ex parte Carter (1985) 59 ALR 609.

The principal attack by the trustee upon the applicant focussed upon the lack of documentation and clarity in respect of the balance of monies due on the sale of the Brookside pharmacies and on the loan alleged in respect of the sum due on the sale of the Chermside pharmacy; a failure to make payments in accordance with any purported agreement; and, a general absence of arms length characterisation surrounding the transactions.
The lack of loan documentation in part requires consideration of the underlying transaction. That is necessary because, as was submitted by Mr de Jersey for the applicant, in practical terms it probably does not matter whether the loan agreements are enforceable or otherwise because the sums claimed by the applicant represent the unpaid balances due in respect of contracts for the sale of the various pharmacies. On that basis alone they constitute a provable debt thus the real issue is whether or not these transactions were genuine.
What underlay the trustee’s contentions was in essence an allegation that these transactions constituted a sham. If so, at its heart, for any sham to be efficacious it must not merely relate to the loan transactions but also to the underlying contracts for if, as the trustee submits, the contracts for sale of the pharmacies are a sham then there is no indebtedness from the trustee to the applicant either in respect of unpaid purchase monies, and/or alternatively the purported loan transactions. It is on this basis that I apprehend the trustee’s counsel to submit, in effect, that the transfers of the pharmacies by the applicant to the bankrupt constituted gifts.
Matters that were raised by the trustee to bring into question the genuineness of the transaction included the absence of any independent valuation in setting the contract price for the sale of the various pharmacies; the circumstances surrounding the sale of the second pharmacy particularly against a background where the applicant was to be imprisoned; if there was a bona fide agreement, whether or not there had been a forgiveness of the indebtedness pursuant to that agreement particularly in respect of the first sale of the pharmacies which were financed in part by the NAB; and matters pertaining to the payments of interest which it was alleged did not relate to the loan amounts outstanding.
The basis for the allegation of sham is arguably manifest because of the father/son relationship which exists between the applicant and the bankrupt and particularly that the related vendor finance transactions, are poorly documented suggesting an absence of objective intent to give effect to and perform the transactions as asserted leading to an inference that they were in the nature of gifts.
For the trustee it was contested that there ought be some doubt attended to the underlying contracts in particular because of their terms and structure. The trustees contended that for instance there was no evidence to demonstrate that the businesses have ever been subject to valuation prior to the contracts being negotiated between the applicant and the trustee which matter, it was submitted, would give rise to some doubt as to whether the contracts were genuine. In cross examination the applicant was quite adamant that the contracts were genuine and that no gift of the businesses was ever intended to the bankrupt.
In his evidence the bankrupt himself said that at the time of the purchase of the Brookside pharmacies he had been in the market trying to buy pharmacies. He stated he had been so for a couple of years beforehand. He stated he was aware from discussions with wholesalers and pharmacy brokers of what the market was and how to value a pharmacy. He acknowledged that of the two Brookside pharmacies one was not trading well. However he said he was also aware that the approval costs for a new pharmacy were approximately $350,000.00 and that when the added value of established fixtures and fittings and the benefit of being an established tenant in the Centre was also factored in, the taking on of that pharmacy was thereby justified. Indeed, as he noted, the object was to improve the poorly trading pharmacy so that it would also trade well and by inference he would then enjoy some additional capital appreciation. He noted that he was aware that in around 2000 the applicant had been speaking with another pharmacist from the Tweed Heads area and that at that time they were talking of a figure closer to $4M which was not a sum then payable by him. However what such a figure entailed, for instance whether it included taking on the loss making business, and the figures in respect of the business generally were never explored. On balance there is nothing to suggest on the evidence that the price agreed in respect of the Brookside pharmacies did not broadly represent a fair price despite the transaction not having an arms length appearance.
In evidence the applicant stated that he came up with a figure of $2M for the Chermside pharmacy based on a $1.2M cash shop fitout and approximately $800,000.00 in stock. Although his evidence was that the fitout had occurred in 2000 and that they were significantly more expensive (up to three times more) as at the date of trial, that appears to have been the rough but plausible methodology.
In respect of the Chermside pharmacy the additional factor identified by the applicant was that he required a quick sale. This was because of his then prospective jail sentence and the surrendering of his pharmacists licence. Those matters naturally would follow upon his conviction for drug offences. As the applicant noted, the bankrupt presented as the most likely purchaser although he acknowledged he thought he (the bankrupt) had acquired the pharmacy cheaply. However, that matter aside, the circumstances generally suggest that the applicant would have been a reluctant but obliged vendor left by his own omission to sell in unfavourable circumstances. Those factors alone would not impact upon the efficacy of the contract which was broadly valued at $2M based upon his view that the fitout was worth approximately $1.2M based upon its cost plus stock of $800,000.00.
I am satisfied on balance that each of the contracts dated 29 July 2002 and 26 April 2004 were contracts entered into bona fide for the consideration noted in each notwithstanding they did not have an arms length appearance.
In respect of the Brookside contract, issue was also taken with the deposit. The evidence is that the bankrupt gave the applicant a cheque for $500,000.00 which the applicant did not bank. The explanation for that conduct is plausible. Initially it was not banked in order to assist the bankrupt with his finance application with the NAB. There is nothing implausible about this arrangement given the familial association between the applicant and the bankrupt.
For reasons I noted in my footnote in the background section the arithmetic also does not allow for this sum particularly given the applicant says he always intended to bank the money as it formed part of his retirement savings. Again given the applicant’s age and in particular given his change of circumstances from 2004, this is not surprising.
Of course in 2002 when he entered into the contract and initially forbore from presenting the cheque his motivation may have been different. First the agreement surrounding vendor terms were unclear. In any event it is plain that his circumstances changed. Throughout this period the applicant was aware that he was under surveillance[2] so the prospect of requiring that sum in the future would have been alive in the mind of the applicant.
[2] Exhibit 5 page 9
Of course once he was charged with a criminal offence probably on or about 20 October 2002 after the execution of a search warrant at his property which revealed possession of the proscribed drugs,[3] the prognosis for his future would have compelled a conservative approach to the preservation of his assets. No doubt from that time realising the dire consequences of his conduct, the initial motivation for not presenting the cheque lapsed and was substituted by new and more pressing requirements.
[3] Exhibit 5.
In any event his statements that any transaction he undertook with the bankrupt was undertaken at arms length so as not to favour him also is in my view plausible. In fact his evidence that he intended to preserve his right to present the cheque is consistent with his oral agreement to provide vendor finance. The effect of not presenting the cheque was to effect an advance. The fact that he required a cheque from the bankrupt is clear evidence that he expected to be paid in exchange for the sale of the Brookside pharmacies. It was in my finding not to be a gift.
On the trustee’s case the arrangement was simply to pass the property to the bankrupt as a gift or if indebtedness was purportedly established then such transaction too was a sham and a gift was intended by forgiveness. In such circumstances the bankrupt as sole beneficiary would have received the lion’s share of the applicant’s personal estate to the detriment of not only the applicant’s wife but also his siblings. Such an outcome is counter-intuitive and against such a contention the applicant’s evidence was that he had no such intention is entirely plausible.
The trustee also questioned the vendor finance arrangements. Plainly they were unusual. They were not adequately recorded and the evidence demonstrates that in respect of the Brookside pharmacies the original terms that were orally agreed were subsequently amended on two later occasions. The vendor finance in respect of the Chermside pharmacy was not only not documented but it represented 100% finance. It too was never recorded and subject to oral agreement.

On these grounds alone the transaction appears to be highly unusual.
There did however appear to be some method in the sums agreed to be subject to vendor finance. In respect to the Brookside pharmacies it appears that there was a debt of approximately $1.6M attached to those businesses which had to be discharged to enable the transfer to be effected. The bankrupt was required to borrow $1.6 to in effect assume that debt. The Chermside pharmacy was owned outright by the applicant and accordingly no formal debt agreement was incorporated into the contract.
Although, perhaps unsatisfactory, a plausible explanation exists for why none of these transactions were properly recorded. In his evidence the bankrupt stated that when he initially had solicitors draft a loan agreement it came to light that a sizeable sum of stamp duty would be payable once the agreement was formalised. It is entirely plausible given the relationship between the father and son that neither saw utility in needlessly paying stamp duty. It is fair to infer that the applicant did not anticipate the bankrupt falling into insolvency.
Further at a time closer to these events and before the prospect of this litigation was within the contemplation of any of the parties, the bankrupt had informed his bank that he was buying the Brookside pharmacies in part “on vendor terms”.[4] Coincidentally in respect of that transaction his bankers observed:
“[the bankrupt] has a good history and we are confident that the fortunes of the loss making shop can be reversed”.
[4] Exhibit 3.
These statements were recorded by the applicant’s banker at or about the time he was making application for finance to purchase the Brookside pharmacies. They re-enforced the favourable view I took of the bankrupt’s evidence on these matters and generally which evidence I accept. The sum of approximately $1.6M was subsequently drawn down on or about 24 March 2003 and in turn debited to the bankrupt and directed to the re-payment of the applicant’s loans.[5]
[5] Exhibit 6.
The trustee suggests the subsequent sale of the Chermside pharmacy on 11 June 2007 for $1.2M more accurately reflects its true value of that business occurred. The evidence does not provide any assistance concerning the manner and circumstances in which the subsequent contract price was agreed. For instance it may well be that as a consequence of the bankrupt’s poor business practices the Chermside business suffered a significant diminution in value between the time of acquisition and disposition. There could be any number of reasons why the business’ value reduced by $800,000.00 over the approximately three years in which the bankrupt was the proprietor. None of these matters were fully explored and no explanation was apparent. The evidence of subsequent sale price is in my view not sufficient to lead to any conclusion that the original consideration was excessive.
The trustee also sought to challenge the veracity of interest payments purportedly made by the bankrupt to the applicant shortly after his imprisonment. As a matter or arithmetic, each of the cheques for $40,700.00 can be related to the interest due on the principal then outstanding.[6] In my view the fact that the bankrupt sought to make payments which equate with the interest due further evidences the existence of the loan in respect of the Brookside pharmacies. Furthermore it gainsays any suggestion the applicant intended to transfer the assets by way of gift which would have denied his wife any recourse to these valuable businesses which had been developed through the course of their lengthy marriage. It was particularly apparent the applicant was concerned for the welfare of his wife especially while he was in prison. His concern could hardly have been manifest by a direction to redirect interest due to him if there was no underlying contractual obligation.
[6] From the calculations contained in the table forming part of Annexure C to the affidavit of Peter Singh filed 4 June 2010 it appears the loan amount was $686,972.00 – that is $1,186,972 (the sum expressed in the draft loan agreement) less $500,000.00 (the value of the deposit cheque) which further reinforces my view that it was always intended these moneys were to be repaid – even if in fact they were not.
In summary I accept on balance the evidence of the applicant and bankrupt as to the Brookside and Chermside sale and loan agreements. In my finding they did not constitute shams and were efficacious.

Contingent Debt

Accepting the applicant and bankrupt’s statements concerning the structure of the transaction, as I do, part of the liability in this case was contingent. That is because it was agreed the principal debt would be repaid when the pharmacies returned a profitability and that interest would be paid on the outstanding debt at the rate agreed between the parties. A contingent or future debt is provable; s.82(1) and s.82(8). Although contingent liabilities are not defined in the Act the term contingent creditor has been considered. In Community Development Pty Ltd v Engwirda Construction & Co (1969) 120 CLR 455 Kitto J stated at 459:
“Not much assistance is to be gained, I think, from observations that are to be found in reported cases as to the import of the word “contingent”, and I shall refer to one only. In Re William Hockley Ltd [1962] 2 All ER 111, at p 113, Pennycuick AJ suggested as a definition of a “contingent creditor”, what is perhaps rather a definition of “a contingent or prospective creditor”, saying that in his opinion it denoted “a person towards whom, under an existing obligation, the company may or will become subject to a present liability on the happening of some future event or at some future date”. The importance of these words for present purposes lies in their insistence that there must be an existing obligation, and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen”.
As was submitted for the applicant the classic example of a contingent liability pursuant to s.82 of the Act is the liability of a surety; Something Better Pty Ltd v Pyramid Building Society (In liq) [1996]

2 VR 352 per Tadgell JA at [368]. I accept as correct the applicant’s submissions that to be provable:
a)A debt need not be due and payable at the date of bankruptcy but there must be an obligation upon which the debt is founded; being an obligation which was incurred before the date of bankruptcy; Jones (as Trustee of the bankrupt estate of Graham) v Deputy Federal Commission of Taxation (1998) 157 ALR 349 at [354] per Branson J;
b)There must be “an obligation upon which the contingency can operate”, being an obligation which “must exist as at the date of bankrupt”; Lyford v Carey (1985) 3 ACLC 515 at [518]; and
c)There must be “existing circumstances which (give) rise to a contingent debt or liability, and which would crystallise by the happening of some future event”; Gaffney v Federal Commissioner of Taxation (1998) 81 FCR 574 at [578]. A contingent debt includes a potential liability arising from an obligation; Lofthouse v Commissioner of Taxation [2001] VSC 326.
None of these matters were challenged by the respondents.
As was observed by the court in Lofthouse v Commissioner of Taxation (supra) at [24] quoting Lord Halsbury LC in Hardy v Fothergill (1888) 13 App Cas 351 at [355 – 356] contingent debts are provable because:
“… the object of [s.82] is that the bankrupt shall be absolutely relieved from any liability under any contract that he has entered into” and s.82 ‘is to be given a wide signification with a view to providing for the result, as James LJ put it in Ex parte Llynvi Coal & Iron Co that: “…the bankrupt is to be a freed man – freed not only from debts, but from contracts, liabilities, engagements and contingencies of every kind.’”
In this case I am satisfied that the obligation arose pursuant to the terms of the vendor finance loans which existed between the parties. In any event were I wrong on this it is plain by reason of my findings that each of the transfers were intended for the expressed consideration and were not gifts. Irrespective of the legal enforceability of the loan agreements the underlying debt remained owing by the bankrupt for the unpaid purchase price pursuant to the sale contracts and on this basis alone the applicant was entitled to lodge and have admitted his proof of debt.

Summary

The applicant seeks orders for the reversal of the trustee’s decision to reject his proof of debt in respect of two loans provided by him in the nature of vendor finance in support of two contracts for the sale of three pharmacy businesses. I find that loan agreements were entered into and that although in each case it was an express term of the agreement that the debt would be repaid when the pharmacies returned to profitability and that as such the indebtedness was contingent, it remained a provable debt and is provable in the bankrupt’s bankruptcy. Even if the loan transactions are not enforceable for want of form I am satisfied the underlying transactions were genuine transactions and in that event the bankrupt remains liable to the applicant in respect of the unpaid purchase monies pursuant to each contract which sums equate to the principal claims in the loan agreements. Those sums are provable in the bankrupt’s estate.

Orders

The parties are directed to submit orders to give effect to the findings in the judgment within seven (7) days of today’s date.
Subject to either party applying for any other order, it is directed that the respondent pay the applicant’s costs of and incidental to the application to be assessed on the standard basis.

I certify that the preceding sixty-four (64) paragraphs are a true copy of the reasons for judgment of Burnett FM

Date: 27 October 2011

bank statements, Ex 6. It appears the sum of approximately $1.6M was not paid until 31 March 2003. That is about 6 months after the transaction. Further, by reference to the draft loan agreement which provided for vendor finance of $1,286,972.00 it meant the bankrupt was only required to pay the applicant $1.5M not $1.6M to complete the contract. There was no explanation for why the bankrupt paid the applicant an extra $78,066.43 but this matter was not explored at trial. In addition these figures seem to assume the $500,000.00 deposit cheque would never be presented yet in cross examination the applicant’s evidence proceeded on the premise that the cheque was always held by him with a view to the ultimate presentation at a time that suited his needs. His evidence on this pint reflects his confused mental state at the relevant time. I am willing to accept that fact against the background of the events then occurring in his life, especially his health and criminal conduct.