Spencer v Neolido Holdings Pty Ltd and Perovich v Neolido Holdings Pty Ltd - [2007] FMCA 1105

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SPENCER v NEOLIDO HOLDINGS PTY LTD
PEROVICH v NEOLIDO HOLDINGS PTY LTD

[2007] FMCA 1105

BANKRUPTCY – Application to set aside bankruptcy notice – counterclaim, set off or cross demand that could not have been set up in the proceeding in which judgment was entered.

Bankruptcy Act1966, s.40(1)(g)

Re Ling; ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129
Christiani & Nielsen Pty Ltd v Goliath Portland Cement Co Ltd (1993) 2 Tas R 122
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353
Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ASCR 285
Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51
Andrew Shelton & Co Pty Ltd v Alpha Healthcare Ltd [2002] 5 VR 565
Pavey & Matthews v Paul (1986) 162 CLR 221

Applicant:

RICHARD WILLIAM SPENCER

Respondent:

NEOLIDO HOLDINGS PTY LTD (RECEIVERS & MANAGERS APPOINTED (IN LIQUIDATION))

File number:

BRG 23 of 2007

Applicant:

SILVANA PEROVICH

Respondent:

NEOLIDO HOLDINGS PTY LTD (RECEIVERS & MANAGERS APPOINTED (IN LIQUIDATION))

File number:

BRG 24 of 2007

Judgment of:

Wilson FM

Hearing date:

9 February 2007

Date of last submission:

9 February 2007

Delivered at:

Brisbane

Delivered on:

13 July 2007

REPRESENTATION

Counsel for the Applicant:

Mr A Nase

Solicitors for the Applicant:

QLD Law Group

Counsel for the Respondent:

Mr J Peden

Solicitors for the Respondent:

Mallesons Stephen Jaques

ORDERS

That the applications filed 12 January 2007 by Richard Spencer and Silvana Perovich are dismissed.
That each applicant pay the respondent’s costs of and incidental to the application, to be agreed or failing agreement to be taxed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BRG 23 of 2007

RICHARD WILLIAM SPENCER

Applicant

And

NEOLIDO HOLDINGS PTY LTD (RECEIVERS & MANAGERS APPOINTED (IN LIQUIDATION))

Respondent

BRG 24 of 2007

SILVANA PEROVICH

Applicant

And

NEOLIDO HOLDINGS PTY LTD (RECEIVERS & MANAGERS APPOINTED (IN LIQUIDATION))

Respondent

REASONS FOR JUDGMENT

Each applicant seeks in substance the following orders:
a)that a bankruptcy notice served upon him/her be set aside;
b)alternatively, that time for compliance with the bankruptcy notice be extended; and
c)that the respondent pay the costs of each application.
The precise orders sought by each applicant are more elaborate than those I have just stated, but what I have articulated is the substantive relief sought by each applicant. Each application is identical in its terms, and accordingly both applications were heard together. It was not submitted that there is any material difference between them, and both applications either succeed or fail on the same grounds.
On 19 May 2006 Fryberg J, in the Supreme Court of Queensland, gave judgment in favour of the respondent against each of the applicants in the sum of $55,000. In reliance on that judgment, a bankruptcy notice was issued by the respondent, and served upon each of the applicants. No complaint is made by the applicants as to the form of the bankruptcy notice, or any technical deficiencies therein. Nor is any point taken about the adequacy of service of the bankruptcy notices. For its part, the respondent to each application accepts that the present applications have been brought within time.
On each application an order that the bankruptcy notices be set aside, or that time for compliance with them be extended, was based partly on the fact that each applicant had applied for leave to appeal the judgment entered against them. Submissions were made as to whether the appeal was bona fide, and whether it enjoyed reasonable prospects of success.
Those arguments are now redundant. On 1 June 2007, the Queensland Court of Appeal refused each applicant’s application for an extension of time within which to appeal the decision of Fryberg J. In the reasons of the Court, delivered by Keane JA, pertinent observations were made as to the merits of the applicants’ proposed appeal, particularly at paragraphs [34], [37], [38] and [43].
Having regard to the decision of the Queensland Court of Appeal, paragraphs 1(a), 2(a) and 3 of each application cannot succeed.
Each applicant then contends that he/she has a counterclaim, set off or cross demand which could not have been raised in the proceeding which resulted in the judgment against them. This aspect of the application invokes s.40(1)(g) Bankruptcy Act 1966, which provides that a debtor commits an act of bankruptcy:
“40(1)(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i)where the notice is served in Australia – within the time specified in the notice; or
(ii)where the notice was served elsewhere – within the time fixed for the purpose by the other giving leave to effect the service,
comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.”
To “satisfy the court” in terms of s.40(1)(g) of the Act, the relevant test has been expressed in a number of different ways: the applicants must show more than a bona fide claim; they must demonstrate that such a claim has a reasonable probability of success; or a prima facie case; or that it is a claim which it is reasonable and proper to litigate.
Only causes of action the applicants were not entitled, as a matter of law, to plead up to judgment in the relevant proceeding are capable of amounting to counterclaims of the kind referred to in s.40(1)(g) of the Act: Re Ling; ex parte Ling v Commonwealth of Australia (1995) 58 FCR 129; McDonald Henry & Meek, Australian Bankruptcy Law & Practice at para. [40.1.350].
Thus, each applicant has to satisfy the court not only that he or she has the requisite counterclaim, set off or cross demand, but also that such claim could not have been set up in the action or proceeding in which the judgment or order was obtained.
In order to understand the applicants’ contended counterclaim, set off or cross demand, based in unjust enrichment, it is necessary to understand, at least so far as it is disclosed by the evidence, the background to the action in which judgment was entered against the applicants.
In 2002 Kinsella Heights Developments Pty Ltd (“KHD”) by its agent (the respondent, “Neolido”) entered into a contract to purchase a property at Mango Hill with a view to developing it as residential property. The shareholders of KHD were then the applicants; in the case of Richard Spencer, as trustee for the Spencer Family Trust. Each applicant held one half of the issued share capital.
In order to pursue the development of the property, the applicants and KHD sought a joint venture partner. Two subsidiaries of BMD Holdings Pty Ltd were identified.
A number of written agreements were made to give effect to the proposed joint venture, and provide for the release to the applicants of what they describe as the “uplift value of the property following its rezoning”. By a written share sale agreement made on 4 July 2003, each of the applicants agreed to sell one half of their shares in KHD to Mango Boulevard Pty Ltd (“Mango Boulevard”), a subsidiary of BMD Holdings Pty Ltd.
On or about 24 June 2003 Neolido, Mango Boulevard and KHD entered into a Consultancy Services Agreement. By this agreement (clause 3.3) Neolido agreed to undertake various activities to progress the development “when and as required by Mango Boulevard”. Clause 4.1 of the Consultancy Services Agreement provided:
4.1 In consideration for the procurement of the identification and acquisition of the Property, the preparation of the Development Application and the performance of the duties referred to in clause 3.3, Mango Boulevard shall:
(a)reimburse the Consultant for expenses incurred by the Consultant pursuant to clause 5 below;
(b)pay to the Consultant a Development Facilitation Fee pursuant to clause 6; and
assuming that Mango Boulevard acquires the Shares, Mango Boulevard shall also:
(c)pay to the Consultant a Development Management Fees pursuant to clause 7.
Clause 7.1 of the Consultancy Services Agreement provided:
7.1 Mango Boulevard shall pay to the Consultant a Monthly Development Management Fee of $25,000.00 (plus GST) monthly in advance for each month or part thereof commencing from the date of this Agreement to:
(a)the date of settlement of the Contract; or
(b)the date on which the Preliminary Approval authorising the Material Change of Use of the Property is granted;
whichever is last to occur.
The applicants allege, and there is no evidence to the contrary before me, that in fact they personally performed all of the duties required of Neolido under the Consultancy Services Agreement. This was recognized by Keane JA in the Court of Appeal at [36], a passage I refer to below. In the affidavits filed in support of the present applications, it is said:
a)at paragraph 12(f)(vii) – we decided to take some of the uplift value ($2.0 mill) ‘upfront’ as a consulting fee under the CSA (rather than the SSA);
b)at paragraph 12(f)(viii) – contemporaneously we would take a monthly consulting fee of $25,000 under the CSA until the rezoning of the property was achieved.
The language used in these subparagraphs, and elsewhere in the applicants’ affidavits shows a failure to distinguish between the corporate entities involved in the various transactions and themselves. For example, the obligation to perform the various services under the Consultancy Services Agreement was that of Neolido, and it was that company, rather than the applicants personally, that was entitled to payment of the monthly development management fee.
Following concerns as to the solvency of Neolido, and because they were performing all of the work themselves, the applicants say that in June 2005, an agreement was made so that they would receive the monthly development management fees rather than Neolido.
An Assignment and Financial Support Deed dated 5 June 2005 was made between Neolido and the applicants, pursuant to which Neolido purportedly assigned the balance of money payable under clause 7.1 of the Consultancy Services Agreement. Clause 1 of the Deed provided:
1. Assignment
In consideration of the matters and considerations outlined in Recitals B and C above the Assignor assigns to the Assignee:
(i)the balance of money payable under clause 7.1 of the CSA; and
(ii)by way of security all of the Assignor’s right title and interest in and to the money payable under clause 6 of the CSA.
Recitals B and C provided:
B.The services required of the Assignor as Consultant under the CSA, particularly the balance due pursuant to clause 7.1, will be delivered through and earned by the personal exertion of Silvana Perovich and Richard William Spencer the directors (“Directors”) of the Assignor
C.The Assignees and the Directors have provided security and funding for the support of the Assignor by inter alia entering into guarantees and assignments by way of security of certain valuable and negotiable bank and corporate guarantees provided to them by BMD Holdings Pty Ltd ACN 010 093 348
The applicants then prepared invoices and had monies paid by Mango Boulevard to themselves, rather than to Neolido. Between 7 June 2005 and 22 November 2005 the applicants issued invoices to Mango Boulevard for consultancy fees to which they claimed to be entitled by reason of the assignment deed. They received $137,500. Of this sum, $55,000 was in respect of services provided before the date of the assignment deed.
On 8 June 2005 receivers were appointed to Neolido. On 30 January 2006 the receivers of Neolido and Neolido commenced proceedings against, inter alia, the applicants for recovery of monies paid to them by Mango Boulevard. Mango Boulevard was also joined as a party to the action.
Although not explained in the material put before me, it appears that Mango Boulevard filed an interpleader application, presumably stating that it did not know whether to pay the ongoing monthly development management fees to the applicants or to Neolido. On 19 April 2006, Dutney J, in the Supreme Court of Queensland, ordered that Mango Boulevard pay such monies into court.
Neolido then brought an application for summary judgment against the present applicants in respect of the $137,500 that they had received.
Fryberg held, in his reasons for judgment, that pursuant to the Consultancy Services Agreement, properly construed, Mango Boulevard was obliged to pay the monthly development management fee, whether or not any services were provided, and that it was not necessary to demonstrate the actual performance of any work.
His Honour preferred a construction of the assignment deed that it only assigned the balance of money then presently payable to Neolido. This amounted to $55,000, for the two invoices issued for the monthly development management fees prior to the date of alleged assignment. His Honour accepted that the assignment deed was executed in breach of a mortgage debenture executed by Neolido, and that it disposed of company property to the directors of Neolido (the applicants) and that therefore the applicants had no right to retain the money as against the company.
Each of these findings operates as an issue estoppel between the present parties.
As a consequence of these findings, Fryberg J gave judgment against each applicant in the sum of $55,000. His Honour refused to give judgment for the balance monies received by the applicants, $82,500, but ordered them to pay the monies into court, describing their defence in relation to their receipt as “shadowy”.
Subsequently, on 22 September 2006 Fryberg J ordered that $225,000 which had by then been paid into court by Mango Boulevard be paid out to Neolido. It was further declared that any moneys which may thereafter become owing by Mango Boulevard pursuant to clause 7.1 of the Consultancy Services Agreement were payable to Neolido.
The applicants argue that Neolido has been unjustly enriched by its receipt of the monthly development management fees. It is said that Neolido has not done any work, and yet has received payment. The applicants say that they have done all the work, and have not received payment.
By amended counterclaim filed in the Supreme Court proceedings, the applicants plead:
a)Neolido failed to carry out its duties under the Consultancy Services Agreement (paragraph 55);
b)The receivers of Neolido have known since their appointment that the applicants have been performing the obligations of Neolido under the Consultancy Services Agreement (paragraph 56);
c)Whenever the applicants have performed those services, they have done so at the request or with the knowledge and agreement of Mango Boulevard and KHD, and under a separate agreement between themselves and Mango Boulevard and KHD (paragraph 57);
d)The entire benefit of $307,500 (comprised of the $225,000 paid by Mango Boulevard; the judgment sum of $55,000, and a payment of $27,500 paid to Neolido) was conferred on Neolido without it having carried out any of the duties required of it under the Consultancy Services Agreement (paragraphs 63 – 66);
e)In those circumstances Neolido has been unjustly enriched in the sum of $307,500 (paragraph 67).
The applicants seek an order that the sum of $307,500 be paid to them. They base their claim on unjust enrichment.
In Christiani & Nielsen Pty Ltd v Goliath Portland Cement Co Ltd (1993) 2 Tas R 122, the Full Court relied on the decision of the High Court of Australia in David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353 to conclude, at 131, that unjust enrichment based on subjective criteria of fairness and reasonableness is not a cause of action in Australia.
In Spangaro v Corporate Investment Australia Funds Management Ltd (2003) 47 ASCR 285 Finkelstein J adopted the explanation of the doctrine of unjust enrichment of Mason CJ in Commissioner of State Revenue (Vic) v Royal Insurance Australia Ltd (1994) 182 CLR 51 at 75:
“Restitutionary relief, as it has developed to this point in our law, does not seek to provide compensation for loss. Instead, it operates to restore to the plaintiff what has been transferred from the plaintiff to the defendant whereby the defendant has been unjustly enriched. As in the action for money had and received, the defendant comes under an obligation to account to the plaintiff”.
In Andrew Shelton & Co Pty Ltd v Alpha Healthcare Ltd [2002] 5 VR 565, the principle is expressed in the following terms. The law of restitution provides a remedy in circumstances where there was free acceptance by a defendant of services from which it had benefited, and for which it should reasonably have known that the person who rendered the services expected to be paid, and yet which, despite reasonable opportunity to do so, it did not reject. In a claim for restitutionary damages based on unjust enrichment, free acceptance functioned both as the measure of the enrichment and as the ground for restitutionary relief.
In Pavey & Matthews v Paul (1986) 162 CLR 221 at 227 Mason and Wilson JJ accepted Deane J’s conclusion that the builder in that case was entitled to bring an action on a quantum meruit, and said:
“Once the true basis of the action on a quantum meruit is established, namely execution of work for which the unenforceable contract provided, and its acceptance by the defendant . . .
However, when success in a quantum meruit depends, not only on the plaintiff proving that he did the work, but also on the defendant’s acceptance of the work without paying the agreed remuneration, it is evident that the court is enforcing against the defendant an obligation that differs in character from the contractual obligation had it been enforceable”
When one has regard to these statements of principle, it is evident that there are considerable difficulties with the applicants’ asserted counterclaim.
First, the contractual obligation imposed by the Consultancy Services Agreement was for Mango Boulevard to pay Neolido. Fryberg J has found that the entitlement to receipt of the payment was unconnected to any obligation to perform any services. Therefore, it is difficult to see why it is unjust for Neolido to retain the money, notwithstanding that the applicants may well have performed the work.
Secondly, even if his Honour’s finding could be challenged, it was always the intention of the parties (at least until the execution of the assignment deed) that the applicants would perform the work, and Neolido would receive the monies. No doubt there was some revenue benefit in so structuring the arrangement.
In the Court of Appeal, Keane JA observed at [36], in response to the submission that the assignment was valid because the applicants alone have provided the consultancy services:
“. . . there is no suggestion in any of the material that the duties required of [Neolido] under the Consultancy Services Agreement would ever be actually performed by anyone other than [the applicants] from the inception of that agreement. The consideration that the relevant services were actually performed by [the applicants] is, therefore, entirely irrelevant to the question whether the subsequent diversion of moneys agreed to be paid to [Neolido] was in its best interests.”

Extrapolating on what fell from his Honour, it is difficult to see how the performance of services by the applicants after the execution of assignment deed means that it is unjust that Neolido keeps the monthly management development fees.
Thirdly, Keane JA said at [37]:
“While it may be that an assignment of company property in favour of directors of the company will not always be susceptible of avoidance by reason of the directors’ breach of the fiduciary prohibition on self-interested dealing with the company’s assets, there is no reason in this case to doubt that the circumstances of the directors’ receipt of the $55,000 were such as to give rise to a clear obligation on their part to account to [Neolido] for the benefit intercepted by them in accordance with their fiduciary obligations as directors of [Neolido].”
Both Fryberg J and the Court of Appeal accepted that by executing the assignment deed the applicants breached their obligations as directors of Neolido, and were liable to account to the company for any benefit received by them consequent upon that breach. In those circumstances, it is difficult to see that it is unjust, as between the applicants and Neolido, for Neolido to keep the fees.
Fourthly, there has been no transfer of a benefit from the applicants to Neolido or the provision of services by the applicants to Neolido, a requirement of the cause of action identified by Mason CJ above. Rather, there has been a performance of work by the applicants for Mango Boulevard, and a transfer of money from Mango Boulevard to Neolido.
Fifthly, it is not at all clear that Neolido, after the appointment of the receivers, freely accepted the alleged benefit, in the knowledge that it had to pay the applicants for it. Indeed, the evidence is to the contrary. Neolido alleges that any payment to the applicants is in breach of their duties as directors, and should be disgorged to the company. It is significant to note that in the amended defence and counterclaim, it is not alleged that the applicants did the work at the request of, or with the knowledge and approval of Neolido.
Sixthly, if the applicants’ claim is viewed as a quantum meruit (which is how they put their claim in their letter dated 17 October 2006), then the applicants are only entitled to recover the reasonable value of their services. There is no evidence, properly particularized, of what services were provided, and what a reasonable fee for them would be. One cannot equate a quantum meruit claim, with an obligation to make a contractual payment. That is particularly so in the present case where the applicants themselves assert that the monthly development management fee was not a commercially based payment, but rather was structured to release some of the “uplift value” to the applicants.
Consequently, however the test of satisfaction, under s.40(1)(g) of the Act is put, I am not satisfied that the applicants have a counterclaim, set off or cross demand against Neolido.
There is a more fundamental obstacle to the applicants seeking to rely on the counterclaim to set aside the bankruptcy notice. They must establish that the claim they now wish to pursue could not, as a matter of law, have been raised in the proceedings at the time of the summary judgment application. In my view, they cannot do this.
The applicants submitted that their cause of action for unjust enrichment did not arise until Neolido accepted the benefit of the payments at their expense. It was argued that as the payments of $225,000, and the obligation created by the judgment, were not in existence at the time of the summary judgment application, the applicants could not have raised the argument that they now seek to pursue.
This argument misses the point that by its action Neolido was obviously asserting an entitlement not only to the $137,500 already paid to the applicants, but also to any further monthly development management fees to be paid by Mango Boulevard. All of the facts necessary to plead the claim in unjust enrichment were known before the application for summary judgment. There was, in my view, no lawful impediment to the applicants relying on the counterclaim they now seek to agitate at the time judgment was sought against them.
Indeed, the unjust enrichment argument was raised during the summary judgment application by the applicants’ counsel (at T74.30-40). The applicants’ counsel said that a counterclaim should have been filed. The fact that it wasn’t, or that the point hadn’t been properly considered up until that point in time does not mean that the applicants could not have legally raised the argument that judgment should not be given against them, because they would in turn be entitled to sue Neolido for its receipt of the fees, by reason of Neolido’s unjust enrichment.
In those circumstances, I conclude that the counterclaim now sought to be raised by the applicants could have been raised at the time the summary judgment application was made against them. Accordingly, s. 40(1)(g) of the Act is not engaged.
Each application must be dismissed, with costs.

I certify that the preceding fifty-four (54) paragraphs are a true copy of the reasons for judgment of Wilson FM

Associate: Lynnette Chin

Date: 13 July 2007