Soutar Accountants Pty Ltd v Combis and Sijabat

[2019] FCCA 1766

FEDERAL CIRCUIT COURT OF AUSTRALIA

SOUTAR ACCOUNTANTS PTY LTD v COMBIS & SIJABAT AS TRUSTEES OF THE BANKRUPT ESTATE OF COSIMO GASPARRE

[2019] FCCA 1766

Catchwords:

BANKRUPTCY – Review of Trustees’ decision to reject a proof of debt – whether the creditor is a secured creditor considered – Trustees’ decision reversed.

Legislation:

Bankruptcy Act 1966 (Cth), ss.58, 84, 90, 91, 92, 93, 94, 95, 102, 104, 115

Conveyancing Act 1919 (NSW), s.54A

Cases cited:

Daevys v Official Trustee in Bankruptcy [2011] FCA 398

Dixon v Riquero & Anor [2004] FMCA 173

Epple v Wilson [1972] VR 440

Kondylis v Bacic [2017] NSWSC 66

Payne; Ex parte Levi [1986] FCA 320

Luxury Homes Pty Ltd v Danieli [2005] NSWSC 379

Re D K Rogers; Ex parte CMV Parts Distributors Pty Ltd (1989) 20 FCR 561

Re Masters; Ex parte Gerovich [1985] FCA 282

Sistrom v Urh (1992) 40 FCR 550; (1992) 117 ALR 528

Terry v O’Connell [2010] NSWSC 255

Zaccardi v Caunt (2008) 15 BPR 28,403; [2008] NSWCA 202

Applicant:

SOUTAR ACCOUNTANTS PTY LTD

(ACN 050 590 228)

Respondent:

NICK JIM COMBIS & LOUISA MENG LI SIJABAT AS TRUSTEES OF THE BANKRUPT ESTATE OF COSIMO GASPARRE

File Number:

SYG 2767 of 2018

Judgment of:

Judge Driver

Hearing date:

25 June 2019

Delivered at:

Sydney

Delivered on:

26 August 2019

REPRESENTATION

Counsel for the Applicant:

Mr D Birch

Solicitors for the Applicant:

Molloy & Schrader Solicitors

Counsel for the Respondent:

Ms Y C Lin

Solicitors for the Respondent:

CLH Lawyers

ORDERS

(1) Pursuant to s.104 of the Bankruptcy Act 1966 (Cth):

(a)       the decision of the respondents, as the Trustees in bankruptcy of the bankrupt estate of Cosimo Gasparre, to reject in full the applicant’s proof of debt in the amount of $130,412 is reversed;

(b)      in its place, the applicant’s proof of debt in the amount of $130,412 is to be admitted in full;

(c) the trustees shall deal with that proof of debt consistently with the reasons of the Court herein, in particular at [75].

1. FEDERAL CIRCUIT COURT

OF AUSTRALIA

AT Sydney

SYG 2767 of 2018

Soutar Accountants Pty Ltd (acn 050 590 228)

Applicant

And

nick jim combis & louisa meng li sijabat as Trustees Of The Bankrupt Estate Of Cosimo Gasparre

Respondent

REASONS FOR JUDGMENT

Introduction and background

1. By application filed on 28 September 2018 the applicant (Soutar) seeks relief under s.104 of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act) in the form of:

a)        an order that the decision of the respondents as Trustees in bankruptcy of the bankrupt estate of Cosimo Gasparre to reject in full Soutar’s proof of debt in the amount of $130,412 be reversed; and

b)        in its place, an order that Soutar’s proof of debt in the amount of $130,412 be admitted in full.

2.      The application is supported by affidavits by Mr Kenneth Soutar and Mr Gasparre.  Both were cross-examined on their affidavits.  I also received as an exhibit, correspondence dated 22 January 2018 concerning a caveat on real estate relevant to these proceedings.

3.      The general background is that Mr Soutar operates an accountancy business through his company, Soutar.  For approximately 30 years he provided accountancy services to Mr Gasparre and various of his companies.  The origins of the relationship occurred when Mr Soutar was part of another firm but for the greater part Mr Soutar has provided the accountancy services on behalf of Soutar.  The relationship proved to be a productive one and for many years there was never any issue concerning non-payment of accounts.  In recent years, when Mr Gasparre and his companies encountered financial difficulties, non-payment of accounts became an issue between them.

4.      Probably reflecting the informality and long duration of the relationship, Mr Soutar and Mr Gasparre did not enter into any formal agreement concerning the unpaid accountancy fees (prior to the bankruptcy of Mr Gasparre).  The evidence discloses, however, that an informal agreement was reached, the terms of which were that the outstanding accountancy invoices would be paid in full, together with some related expenses, and the payment would be made from the proceeds of the then anticipated sale of Mr Gasparre’s home in Hunters Hill.

5. While sale arrangements were commenced prior to Mr Gasparre’s bankruptcy, the sale was completed after the bankruptcy. There is no dispute that the property sold vested in the Trustees in accordance with the Bankruptcy Act. The question is whether the agreement between Mr Soutar and Mr Gasparre places Mr Soutar in the position of the secured creditor in respect of the proceeds of the sale. Mr Soutar lodged a proof of debt as a secured creditor but that was rejected by the Trustees. The Trustees (Ms Sijabat and Mr Combis) oppose the application. They rely upon Ms Sijabat’s affidavit (which I received subject to paragraphs objected to, which objections were conceded save as to costs). Ms Sijabat was not required for cross-examination.

Consideration

Soutar’s contentions

Material facts

6.      Soutar conducts a chartered accountancy practice.  Its principal is Mr Soutar.  It commenced performing accounting work for Mr  Gasparre, his wife, Elizabeth Gasparre and the Gasparre group of companies in 1989 and continued to do so until 2017.

7.      The Gasparre group of companies conducted a business as importers and wholesalers of tiles for the building industry.  Mr and Mrs Gasparre were the owners of a house at 29 Woolwich Road, Hunters Hill (the Hunters Hill property).

8.      By April 2017, the Gasparre companies had accumulated at least $111,000 in unpaid invoices issued by Soutar.  Soutar holds internal time records supporting those invoices.

9.      At that time, Mr Soutar informed Mr Gasparre that he could no longer continue to perform accounting services for the Gasparre companies in light of the unpaid invoices.  Soutar alleges that Mr Gasparre promised Mr Soutar that he would personally pay Soutar for all old and new accounting work, and that he would put the Hunters Hill property on the market and pay Soutar from the proceeds.  In reliance on that promise, Soutar proceeded to perform further work for Mr and Mrs Gasparre and the Gasparre companies.

10.    After April 2017, that arrangement was purportedly confirmed between Mr Gasparre and Mr Soutar, including in writing.

11.    On 5 September 2017, Soutar lodged a caveat on the Hunters Hill property, stating: “The registered proprietor Cosimo Gasparre advised that monies referred to herein and due to the Chargee would be paid from the proceeds of sale of the land.”

12.    A contract for the sale of the Hunters Hill property was entered into on 9 November 2017.  Mr Gasparre’s solicitors confirmed that Soutar would be paid in full from the proceeds of sale. 

13.    On 23 November 2017, the Trustees were appointed.

14.    The settlement date for the sale of the Hunters Hill property was 9 February 2018. On 29 January 2018, Soutar withdrew the caveat on the basis of an undertaking that the Trustees’ solicitors would hold the balance of the sale proceeds in their trust account. Soutar asserts that the Trustees would have been required to give such an undertaking had they commenced proceedings to remove Soutar Accountants’ caveat prior to the sale.

15.    There is an amount of $198,711 from the sale being held in the Trustees’ solicitors’ trust account which could satisfy Soutar’s claim.

Trustees’ contentions

16.    Soutar claimed in its proof of debt that it is a secured creditor with security in form of a caveat.  This caveat came to existence on 1 September 2017.

17.    On 10 September 2018, the Trustees formally rejected the proof of debt on the basis that:

a)        Soutar was not a secured creditor; and

b)        the caveat relied upon by Soutar as security did not disclose a proper caveatable interest.

18.    The Trustees requested that Soutar lodge a proof of debt as an unsecured creditor, with the first request being made on 1 May 2018.

19.    Soutar bears the onus of proof to reverse the decision of the Trustees of the bankrupt estates.

20.    The Trustees submit that the issue for the Court to determine is not the correctness of the Trustees’ decision but rather to determine, in light of the material before it, whether Soutar has a debt, and if so whether it should be admitted as secured.

Parties

21.    On 23 November 2017 Mr Gasparre was declared a bankrupt and the Trustees were appointed the Joint and Several Trustees of his Bankrupt Estate in Administration Number NSW 4312 of 2017/5.

22.    On the same day Mrs Gasparre was declared a bankrupt and the Trustees were also appointed the Joint and Several Trustees of her Bankrupt Estate.

23.    These proceedings relate only to the Bankrupt Estate of Mr Gasparre and have no relation or connection to the Bankrupt Estate of Mrs Gasparre.

24.    Upon the date of bankruptcy, any joint estate held as joint tenants in the real estate owned by Mr and Mrs Gasparre was severed and was then and thereafter held as tenants-in-common in equal shares.

25.    No proof of debt has been lodged by Soutar in the Bankrupt Estate of Mrs Gasparre.

The proof of debt

26.    On 11 January 2018, Soutar completed and submitted the proof of debt to the Trustees in relation to the Bankrupt Estate of Mr Gasparre claiming to be a secured creditor in the total amount of $130,412.

27.    In respect of the proof of debt, Soutar:

a)        marked both “NO” and “YES” to the question “do you hold a security”;

b)        in the area requiring “description of security property” wrote “Caveat”; and

c)        did not annex any further evidence to support its alleged claim but rather referred to “various as previously emailed”.

28.    The estimated value of the security claimed by Soutar is $130,412. This is the same amount as the debt claimed to be owed to Soutar by Mr Gasparre.

29.    The $130,412 debt was attributed as follows;

a)        $111,433.30 - owed by Gasparre Holdings Pty Ltd between 23 September 2015 and 27 April 2017 inclusive;

b)        $9,004.11 – owed by Mr and Mrs Gasparre personally between 8 September 2017 and 21 November 2017 inclusive;

c)        $682 – owed by Gasparre Investments Pty Ltd between 30 June 2016 and 4 July 2017 inclusive;

d)        $6,293.10 – owed by Gasparre Pty Ltd between 20 April 2017 to 11 August 2017 inclusive; and

e)        $3,000 – “legal fees”.

30.    The Trustees complain that there is no evidence to support how the legal fees were incurred nor any agreement for Mr Gasparre to pay those legal fees.

31. A proof of debt lodged by a party claiming to hold security is required to satisfy the requirements of ss.90 to 95 of the Bankruptcy Act.

32.    The Trustees submit that Soutar had not:

a)        established any security otherwise than by reference to the “Caveat”;

b)        established invoices issued to third parties were as a part of a “guarantee” given by Mr Gasparre other than by reference to a document created after the lodgement of the caveat;  and

c)        claimed in the caveat that any guarantee had been given.

Basis for indebtedness

33.    The basis for indebtedness claimed is said to be established on Soutar’s evidence as follows:

a)        the caveat lodged 1 September 2017; and

b)        a document dated 12 December 2017 evincing an “agreement”.

The caveat lodged 1 September 2017

34.    The caveat was lodged less than three months prior to bankruptcy.

35.    The caveat was lodged only over “the interest of Cosimo Gasparre” in the property.

36.    The caveat describes the estate or interest as:

an equitable interest as Chargee for all monies owing to the Chargee from time to time by the registered proprietors and Gasparre Holdings Pty Ltd ACN 003 765 419

37.    The caveat identifies the instrument giving rise to the estate or interest as a “Written Acknowledgment” dated 7 June 2017 between Mr Soutar and Mr Gasparre only.  There is no reference to Mrs Gasparre.

38.    Mr Soutar annexed email correspondence from Mr Gasparre to Mr Soutar dated 7 June 2017 which states:

Hi Ken we are looking at someone making an offer and getting the house sold we are hoping its this week if not the auction is the 17 so the house will be sold. We are looking at paying you with the proceeds so there is no issue and I will keep you informed on the progress of the sale. [Emphasis added]

39.    The caveat further describes the facts in support of the caveat as:

the registered proprietor Cosimo Gasparre advised that monies referred to herein and due to the Chargee would be paid from the proceeds of sale of the land.

40.    It is said to be relevant that the caveat does not refer to any of the other third party entities now disclosed by Soutar as having owed it money other than Gasparre Holdings Pty Ltd.

41.    Further, in relation to the caveat it is said not to be clear whether there was a promise by a single registered proprietor or on behalf of both registered proprietors, Mr and Mrs Gasparre; as appears from other documents.

Document dated 12 December 2017 evidencing the “Agreement”

42.    This document came to existence after the date of the creation of the caveat and after the date of bankruptcy.

43.    This document was signed by Mr Gasparre and Mrs Gasparre in the following terms:

This letter is to confirm that at all material times from the 23rd September, 2015 onwards we have agreed that all tax invoices rendered to us and the Gasparre Group of companies by Soutar Accountants Pty Ltd (attached) would be paid in full from the proceeds of sale of our residence at 29 Woolwich Road, Hunters Hill.

We further confirm that Soutar Accountants Pty Ltd continued to undertake work for us and the Gasparre Group of companies in consideration of this understanding and agreement.

44.    As such, the document sought to be relied upon is a guarantee that purportedly documents a prior arrangement and would provide, at best, past consideration.

45.    The Trustees note that the document does not identify any security interest as previously asserted in the caveat.

46.    In addition, in the email of 31 May 2017, Soutar states that:

The easiest and best option we believe is that the solicitor prepares a personal guarantee for the 80% of the debt for your and Elizabeth's signing and we also register a caveat on the property.

47.    This does not appear to have been carried into effect by any of the documents that have subsequently been lodged despite having been responded to on 7 June 2017 by Mr Gasparre.

48. The caveat was subsequently lodged and, additionally, lodged without any authority, consent or agreement as would be contemplated by the provisions of s.54A of the Conveyancing Act 1919 (NSW).

49.    The Trustees refer to a subsequent communication under the name of Cosimo and Elizabeth Gasparre to “Ken Soutar” dated 13 June 2018, being after the date of bankruptcy, in which it states:

I Cosimo Gasparre confirm that in or around April 2017 the ANZ Bank as part of the debt management for my companies loans, were requesting additional numerous cash flows and projections etc. I requested that Ken Soutar from our external accountants, Soutar Accountants Pty Limited prepare these reports.

Ken Soutar contacted me and said he could not do any more work for me or my companies as this practice was owed in total approx $111,000.

I advised Ken that Elizabeth and I will put our house at 29 Woolwich Rd Hunters Hill on the market to pay the $111,000 and all subsequent accounting fees from that date. I always kept Ken up to date with sale of property.

50.    The communication referred above is said to be conspicuous in that it is a document brought into existence for the purpose of the proceedings, purportedly to support the existence of some prior agreement and/or to show that these are transactions which Mrs Gasparre supported.

51.    No explanation has been given for Mrs Gasparre’s failure to be called, as she is clearly in the “camp” of the applicant.

A secured creditor?

52.    Upon the date of bankruptcy relating back to the date of commencement of bankruptcy  any relevant estate or interest in the real estate registered in the names of the bankrupt and Mrs Gasparre became vested in their respective Trustees in bankruptcy.

53.    There is no assertion or evidence of any promise having been made by Mrs Gasparre, also a bankrupt, except the promise otherwise unsupported contained in the letter of 12 December 2017, post-bankruptcy.

54.    The Trustees contend that it was not possible after the date of bankruptcy to create in favour of Soutar any interest in the real estate or the proceeds of sale of the real estate.

55.    They submit that there is no proper evidence which would establish that there was any agreement for consideration to create any interest in the land.

56.    They submit that there is no proper evidence which would establish that there was any agreement for consideration to create any valid caveatable interest and that no caveat should have been lodged by Soutar over the property.

57. They submit that any interest was an unsecured interest in the proceeds of sale of the land which at all times was in the future and which occurred after the respective dates of bankruptcy when title to the land vested, by operation of s.58 of the Bankruptcy Act, in the Trustees, subject to existing equities.

58.    The Trustees rejected the proof of debt dated 11 January 2018 to the extent that it claimed to be a secured creditor with a security stated as “caveat”.  They submit that such rejection was proper in terms of the proof of debt as lodged.

Resolution

Nature of s.104 review

59. Section 84 of the Bankruptcy Act provides for the manner in which a creditor may prove a debt in a bankruptcy. The section requires such a creditor to lodge a “proof of debt” which sets out particulars of the debt and requires that the proof be in accordance with the approved form.

60. The decision to accept or reject a proof of debt is a decision entrusted to the discretion of the trustee. Section 102 provides for the admission or rejection by the trustee of each proof of debt sought to be proved.

61. Section 104 of the Bankruptcy Act relevantly provides:

Appeal against decision of trustee in respect of proof

(1)      A creditor, or the bankrupt, may apply to the Court for review of a decision of the trustee under subsection 102(1), (3) or (4) in respect of a proof of debt.

(2)      The Court may, upon the application, confirm, reverse or vary the decision of the trustee.

(3)      Subject to the power of the Court to extend the time, an application under this section to review a decision shall not be heard by the Court unless it was made within 21 days from the date on which the decision was made.

62. While s.104 speaks of a “review”, the function of the Court on such an application is not to consider the correctness or otherwise of the trustee’s decision in the light of the material before the trustee. Rather, it is to determine, in the light of the material before the Court, whether the applicant has a debt that should be admitted to proof.

Nature of Soutar’s claim for a secured interest

63.    Soutar submits that the Trustees proceed on the misapprehension that in order to succeed in this application, Soutar must establish that it was entitled to a caveatable interest in the Hunters Hill property.  The Hunters Hill property has now been sold and the Trustees are holding the net proceeds of that sale. 

64.    I accept that submission.  The issue is therefore whether Soutar is entitled to a proprietary interest by way of a charge over the proceeds of the sale of the Hunters Hill property. 

65.    The distinction emerges in the judgment of White J in Luxury Homes Pty Ltd v Danieli at [22]-[23]:

… the agreement contemplates that the defendants, as owners, will sell the townhouses to purchasers nominated by the plaintiff. The agreement then provides for the distribution of the net proceeds of sale. The plaintiff's interest is an interest in the net proceeds of sale, and not in the land.

In Epple v Wilson [1972] VR 440, it was held that an interest in the proceeds of the sale of land does not necessarily involve an interest in the land itself, even where there is a trust for sale. In Simons v David Benge Motors Pty Limited [1974] VR 585, it was held, following Epple v Wilson, that an agreement to share the profits of resale of land, did not confer on the lender of the moneys an interest sufficient to support a caveat. The position may be different if the plaintiff has a right to have the land sold and to have the proceeds divided, being a right which the plaintiff could enforce by an order for specific performance (Davies v Uratoriu (1995) 6 BPR 13,917 at 13,923).

66.    In this case, Soutar’s claim is that it has a proprietary interest in the proceeds of sale.  It may also have held a caveatable interest in the Hunters Hill property prior to sale (as outlined by White J above), but it is not necessary for this Court to resolve that issue.

67.    Soutar’s proprietary interest in the proceeds of sale arises from the promise from Mr Gasparre to Mr Soutar that he would pay the amounts outstanding to Soutar from the proceeds of the sale of the Hunters Hill property, set out above.  That promise was in my view capable of providing the foundation for a declaration of trust or equitable charge over the fund when it came into existence. 

68.    In reliance on that promise, Soutar performed further work for Mr and Mrs Gasparre and the Gasparre companies.  Indeed, reliance on that promise is the only sensible explanation as to why Soutar would have performed further work in circumstances where there were significant amounts outstanding and the Gasparre companies were imminently to go into administration.

69.    The promise given by Mr Gasparre, and Soutar’s reliance upon it to its detriment, gives rise to a proprietary interest by way of a charge over the proceeds of the sale of the property. 

70.    Had Mr Gasparre not been made bankrupt, that proprietary interest would have entitled Soutar to seek a declaration that any proceeds of sale of the property are charged with repayment of the amount claimed by Soutar and to seek an injunction to restrain Mr Gasparre from dealing with that amount of the proceeds of sale.

71.    In this case, because Mr Gasparre had been made bankrupt by the time the property was sold, Soutar’s remedy was to lodge a proof of debt with the Trustees claiming a secured interest in respect of the proceeds of sale.  It may have had other causes of action against the Trustees but it is not necessary to explore them.

72.    The issue of the caveat is ultimately a distraction. Mr Soutar may not have held a caveatable interest in the property being the real estate which was sold. The only clear interest Mr Soutar had was in the proceeds of the sale of that property, based upon his informal agreement with Mr Gasparre. I found the evidence of both Mr Soutar and Mr Gasparre concerning the relationship and the agreement reached to be frank, honest and compelling. I accept it. It follows that I accept that the arrangements they entered into gave rise to an equitable interest in favour of Mr Soutar through his company in the proceeds of the sale of the property at Hunters Hill which otherwise vested in the trustee. The effect of the equitable interest was to charge the proceeds of the sale once they came into existence.

73.    While the bankrupt’s property vested in the Trustees, it did so subject to encumbrances.  In my view, it does not matter that the property in question only came into existence after the bankruptcy when the property was sold.  It was then that the proceeds of the sale were created and the equitable interest of Soutar attached to those proceeds.  In the circumstances, Soutar was right to seek to prove in the bankruptcy as a secured creditor.  It follows that the Trustees were wrong to reject that proof of debt and Soutar should receive the relief it seeks, subject to an important qualification.

74.    That qualification is that, prior to the bankruptcy, there was a joint tenancy in the Hunters Hill property and the proceeds of the sale would not have distinguished between the interests of Mr Soutar and his wife who was the other joint tenant.  Upon the bankruptcy of Mr Gasparre, however, that joint tenancy was severed and Mr and Mrs Gasparre (who was also made bankrupt) became tenants in common in equal shares with their separate interests vesting in the Trustees.  There are two bankrupt estates for the Trustees to administer.  While an amount is held in trust by the Trustees being the remaining net proceeds of the sale of the Hunters Hill property, that is reflective of the former interests of both Mr Gasparre and his wife.  Soutar has no claim against the estate of Mrs Gasparre and its counsel conceded as much during the trial on 25 June 2019.  Assuming the funds held in trust represent the net proceeds referable to both bankrupt estates, only 50 per cent of the available funds are claimable by Soutar.  Because the total funds held are slightly less than $200,000 there are insufficient funds held in trust to satisfy in full the claim of Soutar against the estate of Mr Gasparre. 

75.    It follows that while Soutar is entitled to prove in the bankrupt estate of Mr Gasparre as a secured creditor for the full amount of its claim, the Trustees are only liable to pay that claim out of the funds referable to the bankrupt estate of Mr Gasparre. In the absence of any evidence that anything more than 50 per cent of those funds are referable to the estate of Mr Gasparre, the amount due to Soutar will be 50 per cent of those funds.

Conclusion

76.    I will make the orders sought by Soutar subject to that qualification. 

77.    I will hear the parties as to costs.

I certify that the preceding seventy-seven (77) paragraphs are a true copy of the reasons for judgment of Judge Driver

Associate: 

Date:  26 August 2019