Stavrianos, Theo v Commonwealth Bank of Australia Ltd

[1998] FCA 1117

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY – Bankruptcy Act 1966 (Cth) – whether bankruptcy notice should be set aside - whether time for compliance with bankruptcy notice should be extended – discretionary considerations when extending time for compliance with bankruptcy notice – whether appeal against judgment creating judgment debt is based on “genuine and arguable grounds”

Bankruptcy Act 1966 (Cth) ss 40, 41
Contracts Review Act 1980 (NSW)
Trade Practices Act 1974 (Cth)

Abigroup Limited v Abignano (1992) 39 FCR 74, distinguished
Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572, followed
Ling v Enrobrook Pty Ltd (1997) 74 FCR 19, followed
Bryant v Commonwealth Bank of Australia (unreported, Full Federal Court, 11 November 1994), cited
Thomas Richard Wenkart v Gennaro Abignano (unreported, Federal Court of Australia, 28 August 1998), considered
Walker v Wimborne (1976) 137 CLR 1, cited
Legione v Hateley (1983) 152 CLR 406 at 444, cited
Garcia v National Bank of Australia Limited (unreported, High Court of Australia, 6 August 1998), cited

THEO STAVRIANOS & ORS v COMMONWEALTH BANK OF AUSTRALIA LIMITED (ACN: 123 123 124)
NG 7255 of 1998

BRANSON J
SYDNEY
9 SEPTEMBER 1998

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 7255  of   1998

BETWEEN:

THEO STAVRIANOS
FIRST APPLICANT

EVANGELIA STAVRIANOS
SECOND APPLICANT

RICHARD SAYWELL CRAWFORD-ROSS
THIRD APPLICANT

MARION CRAWFORD-ROSS
FOURTH APPLICANT

AND:

COMMONWEALTH BANK OF AUSTRALIA LIMITED
[ACN 123 123 124]
RESPONDENT

JUDGE(S):

BRANSON J

DATE OF ORDER:

9 SEPTEMBER 1998

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1. The application to set aside the bankruptcy notice be dismissed;

1. The application by the first, second and third applicants for an extension of time for compliance with the bankruptcy notice until the hearing and determination of the appeal against the judgment relied on as the foundation of the bankruptcy notice be dismissed;

1. The application by the fourth applicant for an extension of time for compliance with the bankruptcy notice until the hearing and determination of the appeal against the judgment relied on as the foundation of the bankruptcy notice be granted.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY	NG 7255 of 1998

BETWEEN:

THEO STAVRIANOS
FIRST APPLICANT

EVANGELIA STAVRIANOS
SECOND APPLICANT

RICHARD SAYWELL CRAWFORD-ROSS
THIRD APPLICANT

MARION CRAWFORD-ROSS
FOURTH APPLICANT

AND:

COMMONWEALTH BANK OF AUSTRALIA LIMITED
[ACN 123 123 124]
RESPONDENT

JUDGE(S):	BRANSON J
DATE:	9 SEPTEMBER 1998
PLACE:	SYDNEY

REASONS FOR JUDGMENT

By an application dated 6 March 1998 the applicants claim an order setting aside the bankruptcy notice served on them.  In the alternative they have sought an extension of time within which to comply with the bankruptcy notice.

BACKGROUND FACTS

The following material is taken largely from an affidavit sworn by the solicitor for the applicants.  The first and third applicants are electricians by trade and were, until Rosta Electrical Industries Pty Limited (“Rosta”) went into liquidation, directors of and shareholders in Rosta.  The second and fourth applicants respectively are married to the first and third applicants.

Rosta operated over a number of years as an electrical manufacturer specialising in switchboard and fire equipment and in air-conditioning units.  The respondent acted as banker to Rosta providing financial accommodation for the running of its business.  The applicants provided security to the respondent as follows:

(a)a mortgage over the home of the third and fourth applicants (7 Holmlea Place, North Engadine);

(b)a mortgage over the home of the first and second applicants (32 Endeavour Street, Sans Souci);

(c)a deed of guarantee dated 19 November 1986 between the first and second applicants as guarantors, Rosta as debtor and the respondent; and

(d)a deed of equitable mortgage dated 1 October 1991 executed by Rosta in favour of the respondent.

In 1991, Rosta lost about $200,000 when a building company which owed it money went into liquidation.  In 1993, Rosta became involved in disputes with two of its customers concerning receivables with a combined book value of $270,000.  As a consequence of these incidents Rosta experienced cash-flow difficulties during 1993.

On or about 7 October 1993, a series of financial transactions (“the round-robin transactions”) was entered into by Rosta and certain other companies controlled by the applicants.  The effect of these transactions was that a secured debt in the sum of $552,126 owed by Sohena Pty Limited to Rosta became an unsecured debt owed to Rosta in part by Sohena Pty Limited, in part by Assett Holdings Pty Ltd and in part by the respective trustees of the Theo Stavrianos Family Trust and the Richard Ross Family Trust.

The first and third applicants have commenced proceedings in the Supreme Court of New South Wales against the administrator of Rosta alleging that he negligently failed to advise them that the appointment of an administrator of Rosta might be a breach of the deed of equitable mortgage executed by Rosta in favour of the respondent.

On 13 September 1994, the respondent commenced proceedings in the Supreme Court of New South Wales to enforce its securities in respect of Rosta’s indebtedness to it.  The proceedings were heard by Acting Justice Graham.  The applicants represented themselves, although they had some legal assistance in the preparation of their case.  On 17 October 1997, his Honour gave judgment for the respondent against the applicants in the sum of $1,866,192.54 and for possession of 7 Holmlea Place, North Engadine and 32 Endeavour Street, Sans Souci (“the family homes”).  His Honour granted leave to the respondent to issue writs of possession in respect of the family homes.  However, he stayed execution of such writs until 17 April 1998.  On 13 November 1997 the applicants filed a notice of appeal (without appointment) in respect of the judgment of Acting Justice Graham, and on 13 February 1998 they filed a notice of appeal (with appointment).

Meanwhile a bankruptcy notice dated 29 January 1998 had been issued by the Official Receiver on the application of the respondents to each of the applicants.  The bankruptcy notice was served on the respective applicants on dates between 16 and 22 February 1998.  On 6 March 1998 the present application was filed.

CONSIDERATION

The only basis upon which the applicants contend that the bankruptcy notice should be set aside is that, at the time of the issue of the bankruptcy notice, there was in existence a stay on the execution of the writs of possession which Acting Justice Graham had given the respondent leave to issue in respect of the family homes.

The applicants assert that their only assets are the family homes. They further assert that as the respondent was not free, as at the date of the issue of the bankruptcy notice, to execute writs of possession in respect of the family homes, the respondent had not obtained against them a final judgment “the execution of which had not been stayed” within the meaning of s 40(1)(g) of the Bankruptcy Act 1966 (Cth) (“the Act”).

The applicants place reliance on the decision of the Full Federal Court in Abigroup Limited v Abignano (1992) 39 FCR 74. That decision was concerned with circumstances quite different from those which I am required to consider. The Abigroup case was concerned with the rights of a judgment creditor against a guarantor of the judgment debt.  Even if, as is far from clear, the orders of Acting Justice Graham had the effect of restraining the applicants from selling or mortgaging the family homes, the affidavit evidence of the applicants discloses that such orders did not have the practical effect of preventing them from paying the judgment debt.  Even if they had been free to sell or mortgage the family homes, the amount thereby raised would have fallen significantly short of the judgment debt (see Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572 at 585-587; Ling v Enrobrook Pty Ltd (1997) 74 FCR 19 at 28-29).

The application to set aside the bankruptcy notice is, in my view, without merit.  Acting Justice Graham imposed no stay on the judgment debt of $1,866,192.54.  The respondent has at all times been free to enforce the judgment debt.

The applicants’ claim for an extension of the time for compliance with the bankruptcy notice is made pursuant to s 41(6A) of the Act.

Section 41(6A) provides:

“(6A)Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

(a)proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or

(b)an application has been made to the Court to set aside the bankruptcy notice;

the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.”

Section 41(6C) provides:

“(6C)  Where:

(a)a debtor applies to the Court for an extension of time for complying with a bankruptcy notice on the ground that proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and

(b)the Court is of the opinion that the proceedings to set aside the judgment or order:

(i)have not been instituted bona fide; or

(ii)are not being prosecuted with due diligence;

the Court shall not extend the time for compliance with the bankruptcy notice.”

An appeal against the judgment creating the judgment debt is a proceeding “to set aside the judgment in respect of which the bankruptcy notice was issued” within the meaning of s 41(6A) of the Act (Bryant v Commonwealth Bank of Australia unreported, Full Federal Court, 11 November 1994).  Both the appeal against the decision of Acting Justice Graham, and this application, were initiated before the expiration of the time fixed for compliance with the requirements of the bankruptcy notice.  I thus have a discretion to extend time for compliance with the bankruptcy notice unless I am of the opinion that the appeal has not been initiated bona fide or has not been prosecuted with due diligence.

I am not satisfied that the appeal has not been initiated bona fide: the notice of appeal has been drawn by solicitors and it is not apparently frivolous.  There is no reason for me to conclude that such solicitors are either not aware of their responsibilities as officers of the Supreme Court of New South Wales, or have in this case acted in disregard of their responsibilities.

Although the applicants have taken full advantage of the time limits allowed by rules of court in respect of the initiation of the appeal, and in respect of the present application, I am not satisfied that the appeal has not been prosecuted with due diligence within the meaning of s 41(6C) of the Act. I recognise that this may be a borderline case, but the impecuniosity of the applicants may provide some explanation for their failure to prosecute their appeal more expeditiously. I do not consider that s 41(6C) places the applicants under an obligation to apply for an expedited hearing of their appeal. I presume that it is open to the respondent, should it be so advised, to make an application for the appeal to be expedited.

Ought the Court’s discretion under s 41(6C) of the Act be exercised in favour of the applicants? In Thomas Richard Wenkart v Gennaro Abignano & Anor (unreported, Federal Court of Australia, 28 August 1998) Hill J observed:

“Whether or not the power to extend time be exercised depends upon discretionary considerations. There seems to be some dispute (although the dispute could be said to be more apparent than real and turn upon factual difference) in the Court as to the manner that discretion ought to be exercised. At the one extreme are to be found comments by Kiefel J in Re Baker; ex parte Baker v Staples (unreported, FCA, 4 September 1995), to the effect that where there is a genuine and arguable appeal it is ordinarily desirable, having regard to the consequences of bankruptcy to extend time for compliance. At the other end of the spectrum is a judgment of Sheppard J in Re Geard; Ex parte Reid (unreported, FCA, 11 February 1994), in which his Honour suggested that where a judgment debtor had made no application for a stay of the judgment it would require special circumstances before the extension of time should be granted. In between is the view expressed by Lehane J in Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264 that like all discretions the discretion to extend time for compliance should be exercised having regard to all relevant factors including both the impact upon the debtor of what constitutes a change of status if an act of bankruptcy occurs and the impact upon creditors. I must say, with respect, I prefer the approach suggested by Lehane J to either of the other approaches to the extent that they intended to suggest some general principle.”

Like Hill J, I am inclined to prefer the approach suggested by Lehane J. On this approach, an important consideration is whether the applicants’ appeal against the decision of Acting Justice Graham is based on “genuine and arguable grounds”.

It was not disputed before Acting Justice Graham that the respondent is owed the sum claimed by the respondent and that the principal debtor, Rosta, is in liquidation.

I am satisfied that the applicants’ challenge to Acting Justice Graham’s finding that the respondent was justified in appointing a receiver of the property of Rosta is not reasonably arguable.  His Honour found that the appointment was justified on a number of bases.  To succeed on this aspect of their appeal, the applicants must establish that his Honour erred in respect of each of the bases identified.  In my view, his Honour was probably correct as to each of the bases. However, as to one of the bases, namely that Rosta failed to carry on and conduct its business in a proper and efficient manner and with due diligence, his Honour was, in my view, plainly correct having regard to the round-robin transactions (Walker v Wimborne (1976) 137 CLR 1).

The applicants’ cross-claims before Acting Justice Graham under the Contracts Review Act 1980 (NSW), the Trade Practices Act 1974 (Cth) and at common law for negligence failed. They did so principally because of his Honour’s findings on credibility and as a result of exercises of his Honour’s discretion.

Acting Justice Graham set aside the registration of the mortgage of the property at 7 Holmlea Place, North Engadine but held that it was a valid equitable mortgage.  He upheld the registration of the mortgage of the property at 32 Endeavour Street, Sans Souci.  His Honour noted that Mr and Mrs Stavrianos and Mr and Mrs Crawford-Ross had signed other security documents from time to time in relation to borrowings by them on the security of their respect homes.  As to the first and third applicants, Acting Justice Graham found:

“There can be no doubt that each of Mr Stavrianos and Mr Crawford-Ross knew what it was that they were signing from time to time and understood the effect thereof.  They fully intended to pledge their family homes as security for Rosta’s and Omega Duplication’s indebtedness to the Bank”.

As to the second applicant, his Honour considered that she understood the documents that she signed and “by her signature she was prepared to commit her interest in her home as security for the company’s debts to the Bank”.  It was not suggested before Acting Justice Graham that the second applicant’s signature had been obtained as a result of the undue influence of her husband.  I am satisfied that none of the first, second or third applicants has an arguable appeal in respect of the dismissal of his or her cross-claims, or in respect of the conclusion of Acting Justice Graham that the issues raised by the cross-claims did not provide a defence to the respondent’s claims against him or her.

As to the fourth applicant, Acting Justice Graham found that “significant procedural injustice” attended her signing of the mortgage of her family home.  Nonetheless his Honour upheld the validity of the mortgage as an equitable mortgage and found that the fourth applicant subsequently became aware “of what was going on and assented to it”.  His Honour concluded that subsequent events had made it “quite unjust” to grant to the fourth applicant any relief in respect of the mortgage.  Before Acting Justice Graham, the fourth applicant placed reliance on the circumstances which attended her signing the mortgage of her family home.  She sought a declaration that the mortgage was void in whole or in part.  Whilst I cannot be satisfied that the fourth applicant’s appeal against the decision of Acting Justice Graham will succeed, I find that it is based on genuine and arguable grounds.  In particular, it may be arguable that enforcement of the mortgage against the fourth applicant would be unconscionable.  I am not persuaded by the contention of the respondent that the manner in which the case of the applicants has been conducted in the Supreme Court will prevent the fourth applicant from placing reliance on the “fundamental principle according to which equity acts, namely that a party having a legal right shall not be permitted to exercise it in such a way that the exercise amounts to unconscionable conduct” Legione v Hateley (1983) 152 CLR 406 per Mason and Deane JJ at 444; see also Garcia v National Australia Bank Limited (unreported, High Court of Australia, 6 August 1998 pars 31,32)

The litigation commenced by the applicants against the former administrator of Rosta does not provide a basis upon which the time to comply with the bankruptcy notice should be extended.  As was pointed out by the Full Court of this Court in Ling v Enrobrook at 26:

“… the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally.  They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of short duration.”

No evidence was placed before me which suggests that the litigation against the former administrator will be brought to completion shortly, or that such litigation will bring to an end the insolvency of the applicants or any of them.

Having regard to all of the circumstances, including the impact on each of the applicants if he or she commits an act of bankruptcy, and the impact on the respondent and potential creditors of the applicants respectively, if the extension of time is granted, I conclude that the result of the application should be as is set out below.  It is appropriate to record that in reaching this conclusion I have had regard to the fact, as I understand it, that there is no longer in operation any order of the Supreme Court of New South Wales staying the execution of the writs of possession, or either of them, which Acting Justice Graham gave leave to the respondents to issue.

CONCLUSION

The result of the application should be as follows:

a)the application to set aside the bankruptcy notice be dismissed;

b)the application by the first, second and third applicants for an extension of time for compliance with the bankruptcy notice until the hearing and determination of the appeal against the judgment relied on as the foundation of the bankruptcy notice be dismissed;

c)the application by the fourth applicant for such an extension of time be granted.

I will hear counsel as to costs.

I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Branson

Associate:

Dated:             9 September 1998

Counsel for the Applicant:	Mr P Newton
Solicitor for the Applicant:	Boskovitz & Associates
Counsel for the Respondent:	Mr M Aldridge
Solicitor for the Respondent:	Shaw McDonald
Date of Hearing:	16 June 1998
Date of Judgment:	9 September 1998