Tran v Tran
[2009] FMCA 472
•14 July 2009
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| TRAN v TRAN | [2009] FMCA 472 |
| BANKRUPTCY – Disputed bankruptcy notice – whether the applicant has an offsetting claim pursuant to s.41(7) of the Bankruptcy Act 1966 (Cth) considered. |
| Bankruptcy Act 1966, s.41 Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) |
| Ebert v The Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 Gomez v State Bank of NSW Ltd [2002] FCAFC 101 Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135; (1980) 30 ALR 433-436 Re Capsanis; Capsanis v The Owners – Strata Plan 11727 [2000] FCA 1262 Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers [2003] FCA 373; (2003) 198 ALR 331 Re Gould; Gould v Day [1999] FCA 1650 |
| Applicant: | MINH CHANH TRAN |
| Respondent: | MINH DAT TRAN |
| File Number: | SYG 3326 of 2008 |
| Judgment of: | Driver FM |
| Hearing date: | 18 May 2009 |
| Delivered at: | Sydney |
| Delivered on: | 14 July 2009 |
REPRESENTATION
| Counsel for the Applicant: | Mr S Golledge |
| Solicitors for the Applicant: | Metrop Lawyers |
| Counsel for the Respondent: | Mr G George |
| Solicitors for the Respondent: | Pateman Legal Solicitors |
ORDERS
The application filed on 16 December 2008 is dismissed with costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 3326 of 2008
| MINH CHANH TRAN |
Applicant
And
| MINH DAT TRAN |
Respondent
REASONS FOR JUDGMENT
Introduction and background
By an application filed on 16 December 2008 Mr Minh Chanh Tran seeks to set aside bankruptcy notice number NN4201/2008 which was served on him on 25 November 2008. The grounds of the application are contained in the notice filed in support of it on 5 February 2009. The application is brought pursuant to s.41(7) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) on the basis that the applicant has a cross-claim, set off or cross demand of equal or greater value than the debt claimed under the bankruptcy notice which could not have been set up in the proceedings leading to the bankruptcy notice.
The respondent, Minh Dat Tran, opposes the application on the grounds that the cross-claim, set off or cross demand could have and should have been set up in Supreme Court of New South Wales proceedings 5604/2006. Alternatively, the respondent asserts that even if the cross-claim, set off or cross demand could not have been set up in those proceedings, it is not of equal or greater value than the sum specified in the bankruptcy notice.
The following statement of background facts is derived from the parties’ outlines of submissions filed in court at the trial of the matter on 18 May 2009.
The parties are former business partners. In 2002, they agreed to go into the property development business together. It was a term of their partnership agreement that each would contribute equally to partnership costs and would each share, equally, in its profits or losses.
Their relationship was formalised in a deed made on 28 May 2002.
The applicant was a builder. He also had a building company: Sennrate Pty Ltd (“Sennrate”).
The partnership purchased two properties to develop, one in North Parramatta and one in Pennant Hills. The former project involved the construction of 13 townhouse units.
Funds to purchase the properties came from the partners, loans made to the partners by a third party and the National Australia Bank.
The North Parramatta property was the first property to be purchased and developed. However, the project was unsuccessful and Sennrate failed, or was unable, to build the units and townhouses proposed on the site.
In 2005, the parties agreed that the applicant would purchase any interest the respondent had in the North Parramatta property. They executed a deed on 22 February 2005, which set out the terms of their agreement. It was a term of this agreement that the applicant would pay the respondent $1,938,638 within six months. The deed also provided that the applicant would indemnify the respondent for any liabilities whatsoever concerning the North Parramatta property. The apparent intention and effect of the deed was to bring an end to the partnership as regards the North Parramatta project. After the date of the deed it appears that it was the parties’ intention that Minh Chanh Tran was the beneficial owner of the North Parramatta project although unless and until a refinancing of the partnership liabilities took place Minh Dat Tran remained jointly liable to the bank in respect of funds advanced in respect of that project.
The applicant failed to honour the commitments he made in the deed.
A valuation report obtained in late 2006 certified the value of the North Parramatta property on an “as is” basis at well over $3 million and on a “completed basis” at in excess of $5 million.
In late 2006, the National Australia Bank appointed receivers to take control of the North Parramatta and Pennant Hills properties and sell them. The sale repaid the bank’s debt and produced a surplus of approximately $1.2 million which was paid into the Supreme Court.
Also in 2006, the applicant commenced the proceedings in the Supreme Court. By them, he alleged he was not obliged to pay the respondent the sum of $1,938,638 by the February 2006 deed. He was unsuccessful in this action and as a consequence, the order for judgment was made. In February 2007, court receivers were appointed to the partnership.
Justice Palmer determined that the deed was enforceable according to its terms and it created the obligations referred to. He then made orders for the further conduct of the proceedings including for the taking of the accounts.
In the taking of accounts, Minh Chanh Tran seeks to surcharge Minh Dat Tran with a claim for breach of the partnership agreement – insofar as it applied to the Pennant Hills project. The claim is that Minh Dat Tran failed to make payments to the partnership to meet his share of the accruing expenses.
Surcharges were prepared and filed to that effect. The applicant has sought to have that matter heard but the Court recently directed delivery of pleadings and further directions in the matter may still be required. In a points of claim document which was subsequently served Minh Chanh Tran articulates a claim for breach of damages.
The judgment debt was reduced as part of the funds paid into court were paid to the respondent. As a consequence, approximately $325,000 remains in court. The parties continue to argue about entitlements to these funds in further steps being undertaken in the proceedings.
The North Parramatta units have been subsequently sold for approximately $4.9 million – and this excluding two townhouses which had not been sold by the time of the applicant’s evidence.
There is evidence that the North Parramatta project – had it been completed – would have produced a level of return sufficient to enable the applicant to pay the amount due under the deed of separation.
The evidence
The applicant relies upon his own affidavit affirmed on 15 December 2008. The respondent relies on his affidavit sworn on 4 February 2009. Mr Minh Chanh Tran was cross-examined on his affidavit. He deposes as to the history of the parties’ dealings, the basis for his claimed cross-claim, set off or cross demand and an asserted entitlement to damages. In his affidavit the respondent disputes the applicant’s claims of moneys paid by him which are said to be recoverable and the detriment he claims to have suffered by the intervention of the financier following non payment of moneys due on loan funds advanced. The respondent objected to the applicant’s affidavit, however I received the evidence.
The respondent also relies upon the affidavit of Stephen Mark Pateman sworn on 4 February 2009. Mr Pateman is the solicitor with the conduct of these proceedings and proceedings 5604/2006 in the Supreme Court on behalf of the respondent. His affidavit introduces a bundle of documents relating to the Supreme Court proceedings including transcripts of the hearings in that matter.
I also received as exhibits the parties’ pleadings in the Supreme Court proceedings and a record of the orders made in the Supreme Court on 2 February 2007, a valuation report on the then partly completed partnership development at 14 Hunt Street, North Parramatta dated 8 August 2006 and a summary of receipts and payments of the partnership between 25 February 2007 and 31 August 2007, prepared by the receivers and managers of the partnership.
Submissions
The applicant contends that he needs to prove that he has a claim that is bona fide, which exceeds the debt due under the bankruptcy notice and which could not have been set up in the legal proceedings supporting the bankruptcy notice. He claims to have met that standard. The applicant also contends that the bankruptcy proceedings should not be pursued further until the outcome of the Supreme Court proceedings which are continuing[1].
[1] See Re Brink; ex parte Commercial Banking Company of Sydney (1980) 30 ALR 433-436
The respondent concedes that the standard of proof on the applicant in relation to the asserted set-off, cross demand or cross claim is not great[2]. However, the respondent contends that the applicant has not met that standard because there is a deficiency of evidence of contributions said to have been made in relation to the Pennant Hills project. The respondent further contends that the applicant’s contributions were less than those of the respondent and that in the Supreme Court proceedings the applicant had said that the contributions of the parties to the Pennant Hills project were equal. In any event, the respondent contends that the entitlements of the parties in relation to the Pennant Hills project are limited to the balance of the funds held in the Supreme Court. Further, the respondent contends that the asserted claim could have and should have been set up in the Supreme Court proceedings. Even if the applicant’s cross-demand is proven in full, the respondent says it does not reduce the respondent’s net claim below the statutory limit.
[2] see Ebert v Union Trustee Co of Australia Pty Ltd (1960) 104 CLR 346
The applicant also contends that he has a claim for damages because of an opportunity foregone to make a substantial profit from the development and sale of the North Parramatta project. That opportunity was said to be lost when the National Australia Bank appointed receivers to control and sell the property. The respondent contends that the damages claim is fanciful because it assumes (incorrectly) that it was the respondent’s fault that receivers were appointed and the evidence does not support the claim. The damages claim could also have been set up in the Supreme Court proceedings.
Reasoning
It is unfortunate that the parties have been unable to resolve their differences arising out of their business relationship and have engaged in protracted and costly proceedings in the Supreme Court and now proceedings over the bankruptcy notice in this Court. Substantial sums are in dispute but, notwithstanding their difficulties, the parties would, in my view, have been better off if they had recognised that the partnership was unsustainable and had divided what was realisable from the partnership assets. That is, essentially, what was intended to occur as a result of the orders of the Supreme Court in proceeding 5604/2006 made on 2 February 2007. Those orders were:
THE COURT DECLARES THAT:
1. The partnership entered into between Minh Chanh Tran and Minh Dat Tran on 28 May 2002 (“Partnership”) was dissolved on 16 October 2006.
THE COURT ORDERS THAT:
2. William James Hamilton and Pino Fiorentino be appointed joint and several Receivers of the Partnership.
3. The Receivers have the power to carry on the Partnership business and be given powers in relation to the business as are given to a liquidator pursuant to the provisions of .477 of the Corporations Act.
4. The Receivers be authorised in addition to the powers they may have apart from these orders to:
a. collect, get in and receive the debts now due and outstanding and other assets, property or effects belonging to the Partnership;
b. manage the same and pay and discharge all expenses properly incurred in respect of such management;
c. sell the Partnership property or business, other than the land comprised in:
i. Auto Consol 6263-120 situate at 106 Yarrara Road, Pennant Hills; and
ii. Folio Identifier 1/1044975, situate at 14 Hunt Street, North Parramatta,
upon the terms and conditions as they see fit; and
d. invest the proceeds of any sale of the Partnership property or business in any mode of investment permitted by law for the investment of trust funds pending the determination of the parties’ entitlement to such proceeds.
5. The Plaintiff and the Defendant be at liberty to purchase any Partnership property or business from the Receivers.
6. Each of the Plaintiff and the Defendant:
a. deliver all assets of the Partnership in his custody, possession, control or power to the Receivers within 24 hours of the making of this order;
b. deliver all Partnership books and records including all credit card payment slips, batches, receipts, purchase orders, bills or other evidence of any monies paid to or on behalf of the Partnership and all invoices in respect of the Partnership business both paid and unpaid, that are in his or her custody, possession, control or power, to the Receivers within 5 days of the making this order; and
c. co-operate with the Receivers in the care and disposal of any asset of the Partnership and do all such acts and things and sign all such documents as may be necessary to transfer any bank account authority and any licence or other authority relating to the Partnership business or Partnership Property to the Receivers or his or her nominee within such time as the Receivers request.
7. An account be taken and an inquiry be held as to:
a. all aspects of all the dealings and transactions of the Partnership with any party including the Plaintiff and the Defendant;
b. all aspects of all the dealings and transactions between the Plaintiff and the Defendant in relation to the said Partnership;
c. the contributions to the Partnership made by the partners and where those contributions are non-financial, the proper and fair value attributable thereto;
d. what the assets and liabilities of the Partnership are; and
e. what the respective interests of the said partners in the Partnership assets are.
8. The Receivers receive such remuneration as is agreed between the Plaintiff and the Defendant and the Receivers and in default thereof by an Associate Justice in the Equity Division.
9. The Plaintiff to file and serve all affidavit evidence upon which it relies on or before 23 February 2007.
10. The Defendant to file and serve all affidavit evidence upon which it relies on or before 16 March 2007.
11. The proceedings be adjourned to 23 March 2007.
12. The parties and the Receivers be granted liberty to apply on three days’ notice.
13. The Costs of all parties are to come out of the Partnership assets to date.
The parties are still in the process of taking the account called for by order 7 made by the Supreme Court which will resolve the issues concerning the entitlement to the funds still held in court. The accounting process should resolve the issues in dispute between the parties in relation to the asserted contributions to the Pennant Hills project. However, even if the applicant were to be wholly successful in relation to the alleged shortfall in the respondent’s contributions, the outcome would not achieve a result that provides him with a debt of equal or greater value than the judgment debt against him. The success of this application, therefore, depends upon the damages claim.
I accept that the standard of proof in relation to that claim is as set out in Re Glew; Glew v Harrowell of Hunt & Hunt Lawyers [2003] FCA 373; (2003) 198 ALR 331 per Lindgren J at [9]:
There are authorities suggesting that Glew and Tresidder must satisfy me of the following interrelated and sometimes overlapping matters:
*that they have a "prima facie case", even if they do not adduce evidence which would be admissible on a final hearing making out that case (Ebert v The Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 ("Ebert") at 350; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 ("Brink") at 141; Gomez v State Bank of NSW Ltd [2002] FCAFC 101 at [17], [18]);
*that they have "a fair chance of success" or are "fairly entitled to litigate" the claim: Brink at 141; Re Gould; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v The Owners - Strata Plan 11727 [2000] FCA 1262 at [11]); and
*that they are advancing a "genuine" or "bona fide" claim (Re Capsanis; Capsanis v The Owners - Strata Plan 11727 [2000] FCA 1262 at [11]).
It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at 141) the reference to a "prima facie case" in Ebert as a reference to "a fair chance of success".
In order to succeed in the damages claim, Mr Minh Chanh Tran would need to do better than he did under cross-examination before me. He presented as an honest but unreliable witness. The commercial arrangements between him and Minh Dat Tran were arrangements about which he had an unrealistic view, in hindsight. The applicant was frustrated that the respondent was not, in his view, keeping up his end of the arrangements between them but conceded that there were also delays in construction. He blamed those delays on the respondent. Yet, in spite of his frustration he agreed to pay the respondent $1.983 million pursuant to the deed of separation between them. The applicant could not explain to my satisfaction why he agreed to pay that money. He claimed that he did so in order to induce the respondent to make payments he considered were due pursuant to the arrangements between them but the amount he expected to receive was only about half the amount he agreed to pay. His evidence lacked credibility. The applicant also claimed (incorrectly) that he had been bankrupted three times and appeared to have an unclear understanding of what bankruptcy meant in any legal sense.
The applicant did not advance a convincing case that it was the respondent’s fault that receivers were appointed who sold the partnership property, thereby preventing the applicant from obtaining a substantial profit. The facts appear to be that construction work slowed or stopped due to funding difficulties for which the respondent is no doubt partly responsible, but it also appears that the applicant sat on his hands for an extended period rather than acting in his own interests. The unchallenged evidence of the respondent in his affidavit was that after execution of the separation deed the parties agreed, in effect, to start with a clean slate in relation to the Pennant Hills property and that he had made contributions in relation to both projects up to 2005. However, the parties were unable to overcome differences remaining after the deed of separation. The respondent also deposes that he withheld partnership payments after 20 September 2004 because of the poor progress of construction of the North Parramatta project, for which the applicant was responsible. The respondent also deposes that the applicant was at fault in failing to refinance the North Parramatta property development as was his responsibility when he took over that development pursuant to the settlement deed. He further asserts that the applicant sought to depart from the terms of the settlement. I accept that evidence.
It is, in my view, significant that the respondent was successful in enforcing the settlement deed in the proceedings in the Supreme Court.
In my view, the prospects of success of the damages claim are at best uncertain. Further, I am not persuaded that the claim could not have been set up in the Supreme Court proceedings leading to the enforcement of the deed. Indeed, the respondent intends to raise an estoppel against the claim now being advanced in the ongoing proceedings.
I conclude that the applicant has failed to establish that he has a counter-claim, set off or cross demand of equal or greater value than the amount due on the bankruptcy notice that could not have been set up in the proceedings leading to the judgment supporting the bankruptcy notice. The challenge to the bankruptcy notice made pursuant to s.41(7) of the Bankruptcy Act therefore fails.
I will order that the application be dismissed with costs.
That result does not necessarily carry any implication for any subsequent bankruptcy proceedings. It may well be that if a creditor’s petition is presented before the outcome of the ongoing proceedings in the Supreme Court, that that would provide a sufficient reason for the Court to refrain from making a sequestration order.
I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 14 July 2009
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