Turco v Liquor Equity Pty Ltd
[2018] FCCA 1520
•26 October 2018
FEDERAL CIRCUIT COURT OF AUSTRALIA
| TURCO v LIQUOR EQUITY PTY LTD | [2018] FCCA 1520 |
| Catchwords: LIMITATION OF ACTIONS – Whether alleged entitlement to director’s fees statute barred by time limitation. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.6A, 30, 40, 41, 54, 265, 267 Corporations Act 2001 (Cth), s.202A |
| Cases cited: Aborel Nominees Pty Ltd & Ors v Horsburgh (1986) 11 ACLR 138; (1986) 4 ACLC 586 Benjamin v Harding Corporation Pty Ltd (1995) 16 ACSR 376 Brunninghausen v Glavanics [1998] FCA 230 Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346; (1960) 34 ALJR 182; (1960) 19 ABC 236; (1960) ALR 691 |
| Applicant: | MARIO TURCO |
| Respondent: | LIQUOR EQUITY PTY LTD (ACN 009 377 951) |
| File Number: | PEG 289 of 2017 |
| Judgment of: | Judge Antoni Lucev |
| Hearing date: | 31 August 2017 |
| Date of Last Submission: | 31 August 2017 |
| Delivered at: | Perth |
| Delivered on: | 26 October 2018 |
REPRESENTATION
| Counsel for the Applicant: | Mr KG Robson |
| Solicitors for the Applicant: | TGC Lawyers |
| Counsel for the Respondent: | Mr S Meacock |
| Solicitors for the Respondent: | Squire Patton Boggs |
ORDERS
The application filed 1 June 2017 to set aside Bankruptcy Notice BN 213853 be dismissed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT PERTH |
PEG 289 of 2017
| MARIO TURCO |
Applicant
And
| LIQUOR EQUITY PTY LTD (ACN 009 377 951) |
Respondent
REASONS FOR JUDGMENT
Application
This is an application by the applicant, Mario Turco (“Mr Turco”) to set aside a bankruptcy notice. The terms of the application are relevantly as follows:
The Bankruptcy Notice BN 213853, dated 10 May 2017, which was purportedly served on the Applicant by email on Friday 12 May 2017 be set aside on the basis that the Applicant has a counter-claim, set-off or cross demand equal to or greater than the amount claimed in the Bankruptcy Notice, as set out in the accompanying affidavit of the Applicant. A copy of the Bankruptcy Notice accompanies this application.
Bankruptcy Notice
The bankruptcy notice BN 213853 (“Bankruptcy Notice”) is for an amount of $26,926.77, being:
a)$26,681.16 for a final judgment (“Judgment Debt”) against Mr Turco for costs in an action in the Supreme Court of Western Australia (“Supreme Court Action”), in which he was the plaintiff and the present respondent, Liquor Equity Pty Ltd (ACN 009 377 951) (“Liquor Equity”) was the sixth defendant; and
b)interest accrued since judgment in the Supreme Court Action of $245.61.
Notice of grounds of opposition
Liquor Equity filed a Notice of grounds of opposition on 14 June 2017 (“Notice of Opposition”) in the following terms:
1. The applicant debtor has not complied with rule 3.02 of the Federal Circuit Court (Bankruptcy) Rules) 2016 (Cth), in that:
a. his application filed on 6 June 2017 (Application) and supporting affidavit of Mario Turco sworn 1 June 2017 (Applicant's Affidavit) was not served on Liquor Equity within 3 days after the Application was filed; and
b. the Applicant's Affidavit does not state the full details of the counter-claim, set-off or cross demand upon which the applicant debtor relies.
2. There is no evidence in the Applicant's Affidavit upon which the Court could find, on the balance of probabilities, that the applicant debtor:
a. has a prima facie case;
b. has a fair chance of success or is fairly entitled to litigate his claim; or
c. is advancing a genuine or bona fide claim.
3. There is no evidence that, for the period 1991 to 2010, an agreement or other arrangement existed pursuant to which the applicant debtor:
a. was to be paid $3,000.00 per annum on demand in respect of duties undertaken as a director of Liquor Equity;
b. was to be reasonably remunerated; or
c. was to receive financial benefits for occupying the position of a director of the Liquor Equity.
4. Further and in the alternative to grounds 1 to 3 above, a claim for any of the amounts said to be owing by Liquor Equity to the applicant debtor are statute barred, by virtue of:
a. section 38(1)(c)(v) of the Limitation Act 1935(WA); and
b. section 13(1) of the Limitation Act 2005 (WA).
Mr Turco’s affidavit evidence
Mr Turco relies upon affidavits sworn on:
a)1 June 2017 (“First M Turco Affidavit”);
b)20 July 2017 (“Second M Turco Affidavit”); and
c)18 August 2017 (“Third M Turco Affidavit”).
The Third M Turco Affidavit is an affidavit to which objection was taken at hearing. The Court has determined that the Third M Turco Affidavit ought to be admissible as it is essentially responsive to an affidavit of Mr VV Turco which the Court determined to be admissible at hearing, and which was therefore not irrelevant to the issues likely to be argued by the parties in the course of the hearing.
Mr Turco’s evidence can be summarised as follows:
a)that he performed various duties as a director of Liquor Equity: First M Turco Affidavit at [5];
b)that Liquor Equity is indebted to him in the amount of $57,000.00 for unpaid director’s fees (“Director’s Fees Claim”) from 1991 to 2010: First M Turco Affidavit at [4]-[5];
c)that the Director’s Fees Claim is calculated at the rate of $3,000 per year or any part thereof: First M Turco Affidavit at [4];
d)that he has made a formal demand for payment of the Director’s Fees Claim: First M Turco Affidavit at [7], and that the amount demanded has not been paid: First M Turco Affidavit at [8];
e)that he disputes:
i)the extent of the involvement of the directors in the day-to-day management of Liquor Equity: Second M Turco Affidavit at [2.1]; and
ii)the manner in which Liquor Equity's directors receive benefits: Second M Turco Affidavit at [2.4] and [2.7];
f)that he convinced a client of his to buy a parcel of land owned by Liquor Equity which allowed Liquor Equity to obtain finance and facilitated Liquor Equity's acquisition of property: Second M Turco Affidavit at [2.2];
g)that he has been instrumental in getting tenants for some of the properties belonging to Liquor Equity: Second M Turco Affidavit at [2.3];
h)that it was agreed "right from the beginning" that the directors of Liquor Equity would be remunerated, which was discussed at boardroom level: Second M Turco Affidavit at [2.5];
i)that Domenico Maddestra (“Mr Maddestra”), a director of Liquor Equity, wanted Mr Turco, in his capacity as a director, to assist in the management of Liquor Equity: Second M Turco Affidavit at [2.5];
j)that the Statement of Affairs provided by Mr Turco in bankruptcy proceedings in 2010 was “probably incorrect” and that he believes that “there were items missing”: Second M Turco Affidavit at [2.9];
k)that he has almost $82,000 in his personal ANZ bank account: Third M Turco Affidavit at [51];
l)he believes that the directors of Liquor Equity know that he has a successful accounting business and has the ability to pay the amount claimed in the Bankruptcy Notice (but he does not explain the basis for this belief): Third M Turco Affidavit at [6]; and
m)that there are other Liquor Equity records that he has seen which show payments made by Liquor Equity to Mr Maddestra and Mr Hancock during the time that he was a director, but he does not identify the “other company records” that he has seen which allegedly show these payments, and he no longer has access to them: Third M Turco Affidavit at [7].
Liquor Equity’s evidence
Liquor Equity relies upon the following affidavits in support of the Notice of Opposition:
a)the affidavit of Vitorio Vincenzo Turco sworn 14 June 2017 (“First VV Turco Affidavit”);
b)the affidavit of Vitorio Vincenzo Turco (“Mr VV Turco”) sworn 8 August 2017 (“Second VV Turco Affidavit”);
c)the affidavit of Mr VV Turco sworn 28 August 2017 (“Third VV Turco Affidavit”);
d)the affidavit of Mr Maddestra sworn 27 July 2017 (“Maddestra Affidavit”); and
e)the affidavit of Ross Russell Hancock (“Mr Hancock”) sworn 28 July 2017 (“Hancock Affidavit”).
The Third VV Turco Affidavit was admitted at hearing over objection on the basis that insofar as there was an objection to certain evidence concerning Mr Turco’s liability to pay land tax, that evidence did not go to the truth per se of that evidence, and more generally the Third VV Turco Affidavit went to the basis for Liquor Equity believing it was entitled to issue the Bankruptcy Notice.
Mr VV Turco’s evidence can be summarised as follows:
a)In the Supreme Court Action Mr Turco had sought orders for discovery from Liquor Equity, and upon the dismissal of Mr Turco’s application for discovery, costs were awarded in favour of Liquor Equity in the sum of $26,681.16 (“Taxed Costs”): First VV Turco Affidavit at [4]-[6];
b)a demand for payment of the Taxed Costs was made on 17 March 2017 to which no response was received: First VV Turco Affidavit at [7]-[8];
c)on 10 May 2017 the Bankruptcy Notice was issued for an amount of $26,926.77: First VV Turco Affidavit at [9]-[10];
d)the Bankruptcy Notice was sent to Mr Turco by Liquor Equity’s lawyers by email on 12 May 2017 at 2.06pm: First VV Turco Affidavit at [11] and Annexure VVT5;
e)receipt of the lawyer’s email and the Bankruptcy Notice sent on 12 May 2017 was acknowledged by Mr Turco in an email sent by him to Liquor Equity’s lawyers which was copied to Mr VV Turco on 26 May 2017: First VV Turco Affidavit at [12];
f)Liquor Equity is the trustee of a trust which owns a parcel of land which it leases to tenants, and it engages a property manager to undertake all of the management functions for the land and the directors of Liquor Equity are not called on and do not participate in the day-to-day management of that business: First VV Turco Affidavit at [14];
g)none of the other directors of Liquor Equity, namely Mr VV Turco, Mr Maddestra and Mr Hancock:
i)have received payment in respect of their positions as a directors of Liquor Equity;
ii)have been entitled to receive payment in respect of their position as directors of Liquor Equity;
iii)have been a party to any agreement or arrangement between Liquor Equity and themselves pursuant to which they were entitled to receive payment in respect of their positions as directors;
iv)have been aware of any agreement or arrangement between Liquor Equity and themselves pursuant to which they were entitled to receive payment in respect of their positions as directors of Liquor Equity; and
v)were not aware of any agreement or arrangement between Liquor Equity and Mr Turco, or any other director of Liquor Equity, to the effect that Mr Turco would receive or be entitled to receive any form of payment in respect of his role as a director of Liquor Equity: First VV Turco Affidavit at [15]-[17] (see also in this respect: Maddestra Affidavit at [10]-[13]; Hancock Affidavit at [9]-[12]);
h)Mr VV Turco has reviewed the books and records of Liquor Equity dating back to 2001 and there is no record or document recording that Mr Turco, or any other director of Liquor Equity, was to receive or received any form of payment in respect of their role as a director of Liquor Equity: First VV Turco Affidavit at [18];
i)Mr Turco was the subject of a sequestration order made in or about March 2010 (as was Mr VV Turco) and Mr Turco’s Statement of Affairs included only two debtors, namely:
i)Dominic Marinelli in the amount of $24,664; and
ii)Sporting Bet Australia in the amount of $95,000: First VV Turco Affidavit at [19] and Annexure VV7;
j)the only purposes for which Liquor Equity made application for the Bankruptcy Notice to be issued were to secure payment of the Judgment Debt and to proceed by way of a creditors petition for sequestration of Mr Turco’s estate if Mr Turco does not comply with the Bankruptcy Notice, and to so proceed if the Court declines to set aside the Bankruptcy Notice: Third VV Turco Affidavit at [4]-[6];
k)he is aware that Mr Turco has an accounting practice that operates under the trading name of “M2 Corporate” but he does not know whether it is a successful accounting practice or whether the business provides the means for Mr Turco to access funds to pay personal debts, including the Judgment Debt: Third VV Turco Affidavit at [7]-[8];
l)Mr Turco is jointly and severally liable (with Mr VV Turco) for a land tax liability in the amount of approximately $59,581.74: Third VV Turco Affidavit at [10];
m)Mr VV Turco, and to the best of his knowledge, information and belief, the other directors of Liquor Equity, did not know whether Mr Turco was solvent, or solvent at the time the Bankruptcy Notice was issued: Third VV Turco Affidavit at [11]-[12]; and
n)Mr VV Turco, and to the best of his knowledge, information and belief, the other directors of Liquor Equity did not know whether Mr Turco had any cash available to pay the Judgment Debt until they received a copy of Mr Turco’s Affidavit: Third VV Turco Affidavit at [13]-[14].
Mr VV Turco’s Second Affidavit annexes various corporate records of Liquor Equity relating to the financial year ending 30 June 1998. There is nothing in those records which indicate an outstanding liability to Mr Turco for director’s fees.
Mr Maddestra’s evidence is as follows:
a)at Maddestra Affidavit at [5]-[9] in relation to the business of Liquor Equity being land development and the leasing of developed land:
5. Liquor Equity acts as the trustee of a unit trust known as the H H Trust.
6. Liquor Equity has always been in the business of land development and leasing of developed land. In 1993 it bought the whole of a parcel of land in Hamilton Hill which is depicted in the sketch attached hereto and marked "DM 1" (Land).
7. Soon after it purchased the Land, Liquor Equity created the 7 lots which are depicted in the attached sketch and subsequently:
a. Lot 7 which Liquor Equity developed as a Red Rooster store; and
b. Lot 4 and Lot 5 both of which were vacant land
were sold to reduce debt.
8. Lot 3 on the attached sketch (which is a service station) was sold in the last few years. The other lots are still owned by Liquor Equity.
9. The statement made in paragraph 2.2 of the Affidavit is not correct because Liquor Equity subdivided the Land after settling on the purchase of the Land. Whether Mario Turco identified a buyer of one of the 7 lots that were created from the Land had nothing to do with Liquor Equity's decision and ability to purchase the Land.
b)at Maddestra Affidavit at [10]-[13] in relation to director’s fees:
10. I was a director of Liquor Equity between about 4 April 1989 and about 16 September 1991 and again since about 12 November 1998. During the time that I have been a director, I have never received, nor was I ever entitled to receive, directors' fees or other payment from Liquor Equity for being a director.
11. I was never involved in any discussions with Mario Turco regarding the payment of directors' fees or other payment to him or any other director of Liquor Equity for them occupying that position.
12. I do not recall any meeting of the directors of Liquor Equity where payment of directors' fees was raised, considered or approved by the Board.
13. I am not aware of any agreement between any other director of Liquor Equity and Mario Turco in relation to the payment of directors' fees.
c)that he, and entities associated with him, which hold 40% of the units in the HH Trust, have received benefits indirectly by way of profit distributions made to unit holders of that trust, but those payments are not related to the fact that he is a director of Liquor Equity: Maddestra Affidavit at [14]-[15].
Mr Hancock’s evidence is as follows:
a)he has been a director of Liquor Equity since 13 February 1992 and is the only person who has been a director of Liquor Equity for the entire time since its incorporation: Hancock Affidavit at [4];
b)at Hancock Affidavit at [5]-[7] in relation to the business of Liquor Equity, namely land development and leasing of developed land:
5. Liquor Equity has always been in the business of land development and leasing of developed land. Liquor Equity acts as the trustee of a unit trust known as the H H Trust which owns a parcel of land in Hamilton Hill.
6. In 1993, Liquor Equity purchased a parcel of land in Hamilton Hill on the corner of Winterfeld Road and Carrington Street which included a hotel which was already leased at that time (Land).
7. All of the directors of Liquor Equity have contributed to development and leasing of the Land from time to time. During my time as a director, my contributions to Liquor Equity's business have included negotiating leases with tenants, finding builders to construct retail units on the Land, coordinating with the lessee of the hotel situated on the Land and performing all work related to liquor licensing in respect of the premises located on the Land.
c)his wife undertakes administrative duties as part of the property management functions for Liquor Equity, including preparing invoices and letters to tenants of the five tenancies and Liquor Equity pays her $500 a month for her work, but is reimbursed approximately $360 a month by the tenants for this expense: Hancock Affidavit at [8];
d)at Hancock Affidavit at [9]-[12] in relation to director’s fees:
9. I have never received directors' fees or remuneration in respect of being a director of Liquor Equity. I am not aware that I am or was ever entitled to receive or demand directors' fees or remuneration in respect of being a director of Liquor Equity.
10. I have never been involved in any discussions with Mario Turco regarding the payment of directors' fees or other remuneration to him for occupying the position as a director of Liquor Equity.
11. I have never been involved in any discussions with any other director of Liquor Equity regarding the payment of directors' fees or other remuneration in respect of occupying the position as a director of Liquor Equity.
12. I am not aware of any agreement between Mario Turco and any other director of Liquor Equity in relation to the payment of directors' fees or other remuneration in respect of occupying the position as a director of Liquor Equity.
e)entities associated with him own 40% of the units in the HH Trust and that he received benefits indirectly from Liquor Equity by way of profit distributions made to unit holders of the HH Trust, and that those are the only form of benefits that he receives from Liquor Equity, but they not arise because he is a director of Liquor Equity: Hancock Affidavit at [13]-[15].
Submissions
Mr Turco’s submissions
Mr Turco’s submissions are divided into two parts, the first being styled the “non-abuse grounds”, and the second the “abuse of process” grounds.
The non-abuse grounds of opposition are as follows:
a)Mr Turco has not been paid director's fees for many years;
b)the amount of the director’s fees is not important;
c)Mr Turco’s case is that the other directors were paid;
d)Mr Turco is claiming on something like a quantum meruit basis;
e)the other directors say they were not paid but that is incorrect: they admit one of their wives was paid: Hancock Affidavit at [8], and she is a related party of that director;
f)the assertions by Mr VV Turco that the directors did not take part in the day to day management of Liquor Equity are beside the point: VV Turco Affidavit at [14], because:
i)it is highly likely that the directors would meet regularly to review the operations and performance of the property manager; and
ii)Mr VV Turco did not inform the Court of the other functions of Liquor Equity, namely property development;
g)Liquor Equity’s submission that Mr Turco did not raise this offsetting claim in the Supreme Court Action is misconceived. The point is that a counter-claim, set off or cross-demand must be a dispute that could not be raised in the Supreme Court Action: Bankruptcy Act, s.40(1)(g);
h)Liquor Equity’s submissions on the question of a term being implied into some agreement are misconceived as this is not a question about business efficacy or anything similar, but a question about whether or not directors were to be paid for their efforts and the risk they ran in being directors: Second M Turco Affidavit at [2.5];
i)it is unsurprising that the directors would be paid, and it would be surprising if they were not to be paid, and at least one of them admits his wife was paid: Hancock Affidavit at [8];
j)Liquor Equity’s submissions on the question of the agreement not being recorded are misconceived. If Mr Turco is believed, then the board of Liquor Equity reached an agreement in the nature of the unanimous assent principle: if the directors agree on a course of action, then it is not necessary that there be a formally held meeting for that course of action to bind the company: Swiss Screens (Aust) Pty Ltd v Burgess (1987) 11 ACLR 756; (1987) 5 ACLC 1076, ACLR at 758 per Bryson J; Benjamin v Harding Corporation Pty Ltd (1995) 16 ACSR 376. The smaller the company, the less formality is required: Roden v International Gas Applications & Ors (1995) 125 FLR 396; (1995) 18 ACSR 454; (1995) 13 ACLC 1,817. This is based on the so called “Duomatic principle”: Re Duomatic Ltd (1969) 2 Ch 365; [1969] 2 WLR 114; (1969) 1 All ER 161 at 373 (“Duomatic”), which was approved by the High Court in MYT Engineering Pty Ltd v Mulcon Pty Ltd (1999) 195 CLR 636; (1999) 73 ALJR 823; (1999) 162 ALR 441; (1999) 30 ACSR 705; (1999) 17 ACLC 861 (“MYT Engineering”);
k)Mr Turco’s assertion of his entitlement to director's fees is plausible;
l)Mr Turco’s delay in claiming payment until recently is entirely explicable by reference to the common ground fact that the directors have now fallen out badly; and
m)there was no waiver of any entitlement to director’s fees, and the other directors do not allege Mr Turco waived his right to director’s fees. No doubt:
i)Mr Turco was prepared to wait; and
ii)the directors have claims against each other now they have fallen out.
The abuse of process submissions are as follows:
a)the Court has jurisdiction to set aside a notice as an abuse of its process: Marino v Versatile Homes Pty Ltd [2017] FCCA 1830 at [19] and [20] per Judge Jarrett;
b)this is a situation where brothers and friends have very obviously had a bad falling out. The circumstances are similar to Rankine v Lord [2011] FCA 478; (2011) 9 ABC(NS) 142; (2011) 121 ALD 258 (“Rankine”) at [20]-[28 per Marshall J;
c)the amount on the Bankruptcy Notice is an almost triflingly small amount, and there is no suggestion Mr Turco is unable to pay his debts as and when they fall due, and therefore the Bankruptcy Notice is not an effort to prevent Mr Turco from incurring further obligations that he will not be able to meet, but is being used entirely for the private ends of Liquor Equity; and
d)Liquor Equity is clearly attempting to embarrass Mr Turco by invoking the Official Receiver.
Liquor Equity’s submissions
Liquor Equity’s submissions can be summarised as follows:
a)none of the directors has ever received payment in respect of their position as directors: First VV Turco Affidavit at [15(a)]; Maddestra Affidavit at [10]; Hancock Affidavit at [9];
b)none of the directors has ever been entitled to receive payment in respect of their position as directors: First VV Turco Affidavit at [15(b)]; Maddestra Affidavit at [10]; Hancock Affidavit at [9];
c)none of the directors has ever been a party to any agreement with Liquor Equity pursuant to which they were entitled to receive payment as directors: First VV Turco Affidavit at [15(c)]; or
d)none of the directors has ever been aware of any agreement with Liquor Equity and any other director to the effect that any director would receive or be entitled to receive any form of payment in respect of their position as a director of Liquor Equity: First VV Turco Affidavit at [16]; Maddestra Affidavit at [11] and [13]; Hancock Affidavit at [10] and [12];
e)the books and records of Liquor Equity dating back to 2001 do not contain any record or document which records that Mr Turco was to receive, or received, any form of payment in respect of his role as a director: First VV Turco Affidavit at [18];
f)the question of payment of directors’ fees was never raised, considered or approved by the board of Liquor Equity: Maddestra Affidavit at [12]; and
g)the financial statements and company records for Liquor Equity for the financial year ended 30 June 1998 do not record any contingent liability relating to any entitlement to directors’ fees: Second VV Turco Affidavit at [4] and Annexures VVT1-3.
Consideration
Legislative provisions and elements required to be satisfied
Sections 40(1)(g) and 41(7) of the Bankruptcy Act are the provisions most immediately relevant to Mr Turco’s application to set aside the Bankruptcy Notice.
Section 40(1)(g) of the Bankruptcy Act provides as follows:
(1) A debtor commits an act of bankruptcy in each of the following cases:
…
(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 was served in Australia--within the time specified in the notice; or
(ii) …
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;
….
Section 41(7) of the Bankruptcy Act provides as follows:
(7) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter-claim, set-off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter-claim, set-off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.
Section 41(7) of the Bankruptcy Act requires the Court to be “satisfied that the debtor has … a counter-claim, set-off or cross demand” of the kind set forth in s.40(1)(g) of the Bankruptcy Act.
Rule 3.02 of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) (“FCC (Bankruptcy) Rules”) provides as follows:
(1) An application to set aside a bankruptcy notice must be accompanied by:
(a) a copy of the bankruptcy notice; and
(b) an affidavit stating:
(i) the grounds in support of the application; and
(ii) the date when the bankruptcy notice was served on the applicant; and
(c) a copy of any application to set aside the judgment or order in relation to which the bankruptcy notice was issued and any material in support of that application.
(2) If the application is based on the ground that the debtor has a counter-claim, set-off or cross demand mentioned in paragraph 40(1)(g) of the Bankruptcy Act, the affidavit must also state:
(a) the full details of the counter-claim, set-off or cross demand; and
(b) the amount of the counter-claim, set-off or cross demand and the amount by which it exceeds the amount claimed in the bankruptcy notice; and
(c) why the counter-claim, set-off or cross demand was not raised in the proceeding that resulted in the judgment or order in relation to which the bankruptcy notice was issued.
(3) The application and supporting documents must be served on the respondent creditor within 3 days after the application is filed.
The nature of the exercise in which the Court is involved is set out in Guss v Johnstone [2000] HCA 26; (2000) 74 ALJR 884; (2000) 171 ALR 598 at [39]-[40] per Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ where the High Court said:
39 In Vogwell v Vogwell, Latham CJ said, in relation to a corresponding provision:
[T]he authorities show that the matter to which the court looks is this, – whether it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue; in other words, whether it is a claim which it is proper and reasonable to litigate.
40 The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.
In Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346; (1960) 34 ALJR 182; (1960) 19 ABC 236; (1960) ALR 691, CLR at 350 per Dixon CJ, McTiernan and Windeyer JJ the High Court said:
Section 52 (j) makes it necessary that a debtor served with a bankruptcy notice, if he does not comply with its requirements, should satisfy the Court of Bankruptcy that he has a counter-claim, set-off or cross demand which equals or exceeds the amount of the judgment debt. The debtor clearly must satisfy the Court that there exists in him a counter-claim, set-off or cross demand. “Cross demand” is the word relied upon here. The appellant cannot satisfy the Court that a cross demand exists by showing no more than that she propounds one and states how she suggests that she can make it out … Perhaps the standard may be expressed by saying that the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand.
In James v Abrahams (1981) 51 FLR 16; (1981) 34 ALR 657 (“James”) the majority of the Full Court of the Federal Court observed that a counter-claim, set-off or cross-demand “if ultimately established, will result in an order for the payment of a sum of money by the judgment creditor to the judgment debtor”: James, FLR at 24 per Deanne and Lockhart JJ.
In order for the Court to be satisfied that there is a counter-claim, set off or cross-demand equal to or exceeding the judgment debt there must be some evidentiary basis for arriving at that state of satisfaction, and that requires that the Court be able to quantify the amount of the alleged counter-claim, set-off or cross-demand: Patane v Asteron Life Ltd (formerly Royal & Sun Alliance Financial Services Ltd) (ACN 001 698 228) [2004] FCA 232; (2004) 2 ABC(NS) 85 at [72]-[75] per Lander J. In Re Jocumsen (1929) 1 ABC 82 at 85 per Henchman J the Supreme Court of Queensland observed that a counter-claim, set-off or cross-demand “must be … measurable in amount. An amount must have reference to money”, a view which was approved by the majority of the Full Court of the Federal Court in James, FLR at 24-25 per Deanne and Lockhart JJ. Mr Turco is required to demonstrate more than a mere assertion in alleging a counter-claim, set-off or cross-demand. As was observed in Garrett v Cahill [2015] FCA 314 (“Garrett”) at [35] per Beach J, Mr Turco is required to establish that he has a bona fide claim with sufficient prospects such that he has a prima facie case or one with a fair chance of success, or one of “sufficient substance”: Garrett at [38] per Beach J. Rule 3.02 of the FCC (Bankruptcy) Rules provides that where a debtor alleges a counter-claim, set-off or cross-demand the mandatory affidavit in support of the application to set aside the bankruptcy notice: FCC (Bankruptcy) Rules, r.3.02(1)(b), “must also state … the amount of the … set-off … and the amount by which it exceeds the amount claimed in the bankruptcy notice”: FCC (Bankruptcy) Rules, r.3.02(2)(b).
Before the Court can set aside the Bankruptcy Notice there are three elements required to be established, as follows:
a)the Court must be satisfied that there is a counter-claim, set-off or cross-demand available;
b)the Court must be satisfied that the amount of the counter-claim, set-off or cross-demand is equal to, or in excess of, the sum of the judgment debt; and
c)the Court must be satisfied that the counter-claim, set-off or cross-demand could not have been set up in the Supreme Court Action.
Was there a counter-claim, set-off or cross-demand available?
Directors are officers of a company and owe fiduciary duties to the company: Hutton v West Cork Railway Co (1883) 23 Ch D 654. In light of these fiduciary duties, directors have not ordinarily been entitled to be paid for their services unless remuneration is provided for in the company constitution, or a resolution providing for payment of director’s remuneration has passed at a convened meeting of the company: Supercar International Holdings Ltd v Sommers [2011] NSWSC 336; (2011) 84 ACSR 466 at [109] per White J, citing Re George Newman & Co [1895] 1 Ch 674 at 686 per Lord Halsbury and Lindley and Smith LJJ.
In Kelly v Federal Commissioner of Taxation [2013] FCAFC 88; (2013) 213 FCR 460; (2013) 94 ATR 411 (“Kelly”) at [114]-[116] per Lander, Siopis and Gilmour JJ the Full Court of the Federal Court observed that:
114 The common law has long considered that a director, as a fiduciary, is not entitled to remuneration, unless and until authorised “by the instrument which regulates the company or by the shareholders at a properly convened meeting” (Re George Newman & Company [1895] 1 Ch 674 at 686; Hutton v West Cork Railway Company (1883) 23 Ch D 654 at 672 per Bowen LJ). Further, the constitution of a company operates as a contract between the director and the company (s 140 of the Corporations Act). It was by reference to 351 Pty Ltd’s constitution, that the primary judge, correctly considered, at [27], whether Mr Kelly, as a director of the company, was entitled to payment: Kelly v Federal Commissioner of Taxation (No 2) (2012) 2012 ATC 20-329 (Kelly (No 2)).
115 The primary judge correctly found, at [27], that, absent a company resolution, there was no entitlement to payment. It is not to the point whether payments were actually made or not made. The issue is one of entitlement to payment whether paid or not.
116 Further, the existence of the contract, as the primary judge found, ruled out any possibility of a quantum meruit claim by a director (see for example, Pavey & Matthews Pty Ltd v Paul (1987) 162 CLR 221 at 256 per Deane J (Mason and Wilson JJ agreeing at 227)).
In addition to the common law position set out above, s.202A(1) of the Corporations Act 2001 (Cth) (“Corporations Act”), in effect from 15 July 2001, provides that:
The directors of a company are to be paid the remuneration that the company determines by resolution.
The quantum of director’s fees is determined by the terms of the constitution, or what was resolved at a company meeting. Should the constitution or the resolution require certain conditions or targets to be met for the director to be entitled to any fees, the payment of the fees will not arise until those conditions are met: Kelly at [114]-[116] per Lander, Siopis and Gilmour JJ. A commercial expectation of payment is not sufficient, rather there must be some legal liability for the fees to be paid: Merrill Lynch International (Australia) Ltd & Ors v Commissioner of Taxation [2001] FCA 1127; (2001) 113 FCR 79; (2001) 47 ATR 611; (2001) 191 ALR 420 at [80]-[81] and [99] per Lindgren J.
The effect of s.202A(1) of the Corporations Act is that, from 15 July 2001, Mr Turco was not entitled to payment for services unless it was specifically provided for in the constitution of Liquor Equity or was approved by a resolution by shareholders.
Director’s fees are deemed income assessable in the year of income in which the income is paid: Income Taxation Assessment Act 1997 (Cth), s.6-5. As income, there ought to be some record included in the company’s payroll or financial records in respect of the month the amount was paid, or in which it became payable, albeit that in Manzi & Ors v Smith & Anor (1975) 132 CLR 671; (1975) 49 ALJR 376; (1975) 7 ALR 685 at 674 per Barwick CJ it was observed that the mere making of an entry in the books of a company without the assent of the shareholder does not establish a payment to the shareholder.
In Re Rural & Veterinary Requisites Pty Ltd (in liq) (1978) 3 ACLR 597; [1977-78] CLC 40-459 (“Rural & Veterinary Requisites”); ACLR at 602 per WB Campbell J the Queensland Supreme Court held that a director was entitled to arrears of director’s fees where there was evidence of:
a)those fees having been referred to in the company’s annual accounts; and
b)the company accounts having been agreed to and approved by the company at an annual general meeting.
In Aborel Nominees Pty Ltd & Ors v Horsburgh (1986) 11 ACLR 138; (1986) 4 ACLC 586 (“Aborel Nominees”) the Victorian Supreme Court dealt with an appeal against a liquidator’s rejection of proofs of debt for dividends recorded in the company books as paid into the current accounts of the shareholders. Applying Rural & Veterinary Requisites the Victorian Supreme Court held that taking into account the whole course of dealings relating to the current accounts, and the lesser degree of formality one expects in small family companies (an application of Duomatic), there was clear evidence of an understanding that the dividends were to be treated as loans and to bear interest, and that this complied with entries in the books of the company that gave effect to this understanding, whereby the dividends were shown as income received by the shareholders in the year of declaration of dividend and interest on those amounts was also shown in the individual income tax returns: Aborel Nominees, ACLR at 140-141 per Gobbo J.
In Hooper v Lock [2016] FCA 298 at [183] and [197]-[200] per McKerracher J the Federal Court made the following observations in upholding a rejection of claims for allegedly unpaid director’s fees where a company had gone into liquidation:
183 In relation to director's fees, there is no evidence of a director's fee agreement, referred to by Mrs Hooper and no adequate evidence as to the terms of any such agreement. Nor is there any evidence that Mrs Hooper performed the duties required of her under the supposed agreement, nor any indication as to what duties were required…
197 In relation to the unpaid director's fees, Mr Hooper faces the same difficulty as Mrs Hooper. There needs to be adequate evidence that he performed his duties in accordance with the management contract and was therefore entitled to be paid the director's fees claimed or some director's fees.
198 The minutes of the meeting purportedly authorising payment to which he refers were subject to various preconditions, including the payment of all operating expenses of the Company. There is no evidence of satisfaction of those preconditions.
199 Mr Hooper acknowledges that he has been partly paid director's fees owed in the amount of $1,153,976.04, but acknowledges that he has not been so paid pursuant to any particular company resolution.
200 The evidence in respect of those payments, the circumstances in which they were paid is all gravely deficient. It is impossible to be satisfied to the level necessary on an application of this nature as to the state of the account between Mr Hooper and the Company. It is by no means clear that such payments would not be statute barred.
In this case, there is no evidence of any entry in the books of Liquor Equity recording any entitlement to, or payment of, director’s fees to Mr Turco, or anyone else.
The filing of a Statement of Affairs pursuant to s.54 of the Bankruptcy Act is a mandatory statutory requirement imposed upon a bankrupt. The policy and purpose behind s.54 of the Bankruptcy Act was described by the Federal Court in Nilant v Macchia [2000] FCA 1528; (2000) 104 FCR 238; (2000) 178 ALR 371 (“Nilant”); FCR at 245 per Hill J as follows:
Given the penal nature of the obligation created by s 54, it is difficult to see that breach of the section, no matter how inadvertent, could be categorised as merely formal. The policy behind s 54 is clear. The obligation to file a statement of affairs in a public register is intended to make information concerning the bankrupt's affairs available to creditors and, for that matter, members of the public. The former may inspect without payment of a fee, the latter only on payment of a fee. But it is in the interests of the public in the encouragement of morality in trading that the financial situation of a bankrupt debtor be open to inspection. Because, ordinarily, the administration of the estate and ultimate distribution of dividends from the estate, will be dependent upon the trustee having full details of the trade dealings and debts of a debtor, the statement is to be made available as well to the trustee in bankruptcy. Given the scheme of the legislation and the important role that the statement of affairs plays in it, there is considerable difficulty in seeing that Parliament would have intended that the Court, through s 306, have the ability to treat non-compliance with the statutory obligation as merely formal.
The Statement of Affairs is required to contain a declaration by the debtor that so far as the debtor is aware, the particulars in the Statement of Affairs are correct: Bankruptcy Act, s.6A. The penal nature of the obligation to which the Federal Court refers in Nilant is apparent from a penalty of up to 12 months imprisonment for making a declaration that a person knows to be false: Bankruptcy Act, s.267(2). It is essential that the information in the Statement of Affairs be “full and correct”: Re Segal; Lensworth Finance Ltd v Segal & Anor (1975) 45 FLR 85; (1975) 9 ALR 154, ALR at 157 per Riley J, applied in Policy Nominees Pty Ltd (Provisional Liquidator Appointed) & Anor v McDougall & Anor (Unreported, VG 147 of 1997, Full Court of the Federal Court of Australia, Ryan, Whitlam and Marshall JJ, 16 October 1997).
There is evidence that in bankruptcy proceedings in 2010 Mr Turco filed a Statement of Affairs on 31 March 2010: First VV Turco Affidavit at Annexure VVT7 (“2010 Statement of Affairs”). The 2010 Statement of Affairs runs to more than 50 pages and indicates that Mr Turco was paying child support, involved in family law proceedings, and the subject of at least two separate legal actions: Statement of Affairs at page 4. Mr Turco disclosed real estate interests in six properties with an estimated re-sale value of $4.485 million, and a further sum in excess of $119,000 owed to him, as well as liabilities of $6.81 million to a secured creditor, and liabilities in excess of $8.288 million to 31 unsecured creditors: Statement of Affairs at pages 11-15. Mr Turco indicated that he had a solicitor, being Mr Galic (who appeared for Mr Turco in these proceedings): Statement of Affairs at page 3. Mr Turco disclosed that he had been a director or had a management role in some 27 companies over the previous five years: Statement of Affairs at page 18. Mr Turco disclosed that he was employed as an accountant at one of those companies, namely Turco & Co Pty Ltd, and that he was paid $250 per fortnight, or $6,500 per year, and that he had income of $1,500 a year from rental properties for a total income of $8,000 a year: Statement of Affairs at pages 5-6.
In relation to 12 of the companies in respect of which Mr Turco had been a director or had a management role in the five years prior to 2010, he disclosed that he owned, or had owned during the previous five years, shares in 12 of those companies, and in respect of each of those companies indicated the number of shares held, which for all but two of those companies was one share, and in respect of one company was 10 shares, and in respect of another company was one ordinary share and 150,000 B Class shares.
One of the companies in respect of which Mr Turco disclosed that he was a director or had had a management role over the previous five years was Liquor Equity: Statement of Affairs at page 18 (First VV Turco Affidavit at page 83). Mr Turco disclosed that he had been a director who had resigned on 26 March 2010, and that he was not expecting a dividend or distribution from Liquor Equity, that Liquor Equity did not owe him any wages, loans or other money, and that he did not own, and had not owned at any time during the previous five years, any shares in Liquor Equity, and that no assets of Liquor Equity had been transferred to him in the previous five years: Statement of Affairs at page 18.
Mr Turco completed a declaration of correctness of the particulars set out in the 2010 Statement of Affairs, which declaration immediately precedes the signature and date blocks signed and completed respectively by Mr Turco on 31 March 2010. The declaration is in the following terms:
DECLARATION
Note: S267(2) of the Bankruptcy Act provides that a person must not sign a declaration that the person knows to be false. Penalty: Imprisonment for 12 months.
I declare that the particulars set out in this statement are correct.
First VV Turco Affidavit, Annexure VVT7.
In these proceedings Mr Turco asserts that the Statement of Affairs was “probably incorrect” and he believes that “there were items missing”: Second M Turco Affidavit at [2.9]. That assertion strains credulity. Firstly, nothing was missing per se from the Statement of Affairs. Rather, what Mr Turco, an experienced accountant, and clearly an experienced company director did, was to make not one, but multiple assertions in respect of multiple companies in which he had been a director or had a management role in the five years prior to 2010. In respect of every company for which he had had a director or management role in the last five years he indicated that he was not expecting a dividend or distribution and that the company did not owe him any wages, loans or other money. It strains credulity to think that an experienced accountant, and company director, and one with assets and liabilities as set out above: see [39] above, would simply forget or make a mistake with respect to 19 years’ worth of director’s fees totalling $57,000 in a company in which he says he had an entitlement to director’s fees “from the beginning”, and in a document declared just five days after he ceased to be a director of Liquor Equity in March 2010.
Insofar as the entitlement to director’s fees derives from a corporation’s constitution and is a matter of contract, any contractual entitlement must have regard to the relevant period of limitation in respect of the bringing of actions in respect of that contract. The limitation period for an action in contract in Western Australia is six years: Limitation Act (WA) 1935, s.38(1)(c)(v); Limitation Act (WA) 2005, s.13(1) (effective from 15 November 2005).
The claim of entitlement to director’s fees was first made in these proceedings in the First M Turco Affidavit sworn on 1 June 2017. Otherwise, there is no evidence of any action taken or proceedings instituted by Mr Turco in relation to the alleged entitlement to director’s fees. The dates of the alleged entitlement lack precision or particularisation, merely being put as “from 1991 to 2010”: First M Turco Affidavit at [5], although the Court notes that in the 2010 Statement of Affairs Mr Turco disclosed that he had resigned as a director of Liquor Equity on 26 March 2010: Statement of Affairs at page 18; (First VV Turco Affidavit at page 83). Thus, the claim for director’s fees cannot succeed in any event as it falls outside of the relevant limitation period for the bringing of an action or proceedings for recovery of those alleged director’s fees. Any quantum meruit claim if, indeed, a quantum meruit claim can be made at all: compare Kelly at [116] per Lander, Siopis and Gilmour JJ, must fail for the same reason, namely that the period in which such an action or proceeding must be brought has expired.
It follows, therefore, from the fact that Mr Turco is outside of the relevant limitation period for bringing an action with respect to any alleged entitlement to director’s fees that he cannot establish a counter-claim, set-off or cross-demand in aid of his application to set aside the Bankruptcy Notice in these proceedings. The application to set aside the Bankruptcy Notice must therefore fail for that reason. That is sufficient to warrant an order that the application to set aside the Bankruptcy Notice be dismissed.
Even if Mr Turco were within the relevant period of limitation for bringing an action or proceedings in relation to the alleged entitlement to director’s fees, the claim for director’s fees would fail for reasons which are set out hereunder.
The evidence of Mr Turco in support of the assertion that he is entitled to the director’s fees constitutes the barest of assertions unsupported by any corroborative evidence of any kind. It is also unsupported by any evidence capable of supporting any inference to the effect that Mr Turco is entitled to payment of director’s fees as he asserts. In that regard, there is no evidence, or no sufficient evidence of any substance:
a)that there is any provision in the constitution of Liquor Equity (the constitution not being in evidence in any event) as to any entitlement to director’s fees on the part of any director of Liquor Equity at any time between 1991 and 2010;
b)that there was ever any resolution by Liquor Equity to pay director’s fees to Mr Turco, or to any other director;
c)of any agreement to pay director’s fees to Mr Turco, or to any other director (irrespective of whether there was any resolution by Liquor Equity to pay director’s fees to Mr Turco, or to any other director);
d)that there was ever any intention on the part of Liquor Equity, or its directors, to pay director’s fees to Mr Turco, or to any other director;
e)of a course of dealing or understanding that director’s fees would be paid to Mr Turco, or to any other director;
f)that director’s fees were ever paid to Mr Turco, or to any other director; and
g)that provision was ever made in the books and accounts of Liquor Equity for any liability, or the setting aside of any amounts, in respect of director’s fees, to Mr Turco or any other director.
It is extraordinary that, if, as asserted by Mr Turco, there was, “from the beginning”, an agreement amongst the directors to pay director’s fees, that there is no evidence that director’s fees have ever been paid to anyone:
a)regularly; or
b)periodically; or
c)at all.
There is also evidence in the form of a sworn contemporaneous declaration, made within a week of Mr Turco ceasing to be a director of Liquor Equity, that Liquor Equity owed him no wages, loans or any other money: see Statement of Affairs at page 18 (First VV Turco Affidavit at page 83). The attempt by Mr Turco in these proceedings to explain away that sworn declaration is wholly insufficient.
The only evidence apart from his bare assertion that Mr Turco points to support his claims is, firstly, evidence that a payment is being made to Mr Hancock’s wife, and, secondly, an assertion by Mr Turco that he has seen books of Liquor Equity which make reference to payments to other directors. The payment to Mr Hancock’s wife is explicable by Mr Hancock’s evidence that she is employed to undertake administrative duties for Liquor Equity, and the payment to her, in any event, provides no basis for an assertion of entitlement to director’s fees by Mr Turco. The assertion with respect to having seen company records recording payments to directors is, in the Court’s view, not only self-serving, but so vague as to be insufficient to establish, either on its own, or in conjunction with any other evidence, that Mr Turco has a claim with respect to the director’s fees which is of sufficient substance to warrant this Court halting the bankruptcy process at this stage.
Mr Turco’s submissions placed some emphasis on the principle in Duomatic. Plainly the principle in Duomatic applies in these proceedings: MYT Engineering. The difficult in actually applying the Duomatic principles in these proceedings, is, however, that for reasons set out above there is no, or no sufficient, evidence, or evidence of sufficient substance: Garrett at [38] per Beach J, upon which the Duomatic principle can be applied, and hence no proper basis for saying that there is, or may be, a resolution entitling Mr Turco to director’s fees sufficient to warrant, either on its own or in combination with other evidence, the setting aside of the Bankruptcy Notice.
In short, Mr Turco’s claim to director’s fees is, on the evidence, not capable of satisfying the Court that it is of sufficient substance to indicate the availability of a counter-claim, set-off or cross-demand for the director’s fees, even if the claim was within a relevant limitation period, which it is not for reasons set out above.
It follows from the conclusions set out above that Mr Turco does not have an available counter-claim, set-off or cross-demand available to him in these proceedings, and in those circumstances his application to set aside the Bankruptcy Notice must fail, and be dismissed.
Satisfaction as to whether the amount of any counter-claim, set-off or cross-demand equals or exceeds the sum of the Judgment Debt
Could the counter-claim, set-off or cross-demand have been set up in the Supreme Court Action?
Because the Court is not satisfied that there was a counter-claim, set-off or cross-demand available it is unnecessary to consider whether:
a)the amount of any counter-claim, set-off or cross-demand equals or exceeds the sum of the Judgment Debt; and
b)Mr Turco could have set up the alleged counter-claim, set-off or cross-demand in the Supreme Court Action.
The abuse of process claim
This Court has jurisdiction to determine whether the Bankruptcy Notice ought to be set aside on the basis of an abuse of process: Bankruptcy Act, ss.30 and 41(6A); Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125; (1980) 30 ALR 77, ALR at 82-83 per Lockhart J.
In considering whether the issuance of a bankruptcy notice is an abuse of process it must be borne in mind that an express object of a bankruptcy notice is to persuade the debtor to pay the debt the subject of the bankruptcy notice, and it is unarguable to say that issuing the bankruptcy notice as a means to secure payment, or with an intention or hope that the debt would be paid, is an abuse of process where sequestration proceedings are intended to be invoked upon noncompliance: Slack v Bottoms English Solicitors [2002] FCA 1445 at [20]-[21] per Spender J. If the purpose of a bankruptcy notice is to put pressure on a debtor to pay a debt rather than to invoke a court's jurisdiction in relation to insolvency, then the filing of a bankruptcy notice is an abuse of process: Brunninghausen v Glavanics [1998] FCA 230. In Young v Cooke [2017] FCA 26 at [104] per Gleeson J the Federal Court observed that “…. it is not an abuse of process if a creditor genuinely intends to pursue the matter if there is default in complying with the notice and there is no evidence of collateral purpose or undue pressure”: see also Killoran v Duncan [1999] FCA 1574 (“Killoran”) at [12]-[13] per Gyles J. The relevant time to judge abuse of process is the time at which a bankruptcy notice is issued, and subsequent events generally have less relevance: Killoran at [13] and [15] per Gyles J.
The onus of proving the existence of a collateral purpose lies on the debtor: Cavoli v Etl [2007] FCA 1191; (2007) 5 ABC(NS) 363 at [17] per Heerey J, and more than mere assertion is required: Watts v Adelaide Bank Limited [2009] FCA 420.
In order to make out an abuse of process a party must establish more than:
a)the mere obtaining of a judgment;
b)the issuance of a bankruptcy notice; and
c)the existence of a proceeding challenging the judgment: Seller v Deputy Commissioner of Taxation [2011] FCA 865; (2011) 84 ATR 501; (2011) 282 ALR 80; (2011) 9 ABC(NS) 195 (“Seller”) at [25] per Flick J; Lavan Legal v Kenyon [2017] FCCA 2529; (2017) 326 FLR 20 at [125] per Judge Lucev.
In HWY Rent Pty Ltd v HWY Rentals (in liq) (No 2)[2014] FCA 449 Perry J set aside a bankruptcy notice finding that its issue was part of a systematic abuse of process. At [74] her Honour said:
74 The categories of abuse of process are not closed. However, certain categories are well-established. As Justice McHugh observed in Rogers v R(1994) 181 CLR 251 at 286:
‘ … abuses of procedure usually fall into one of three categories: (1) the court's procedures are invoked for an illegitimate purpose; (2) the use of the court's procedures is unjustifiably oppressive to one of the parties; or (3) the use of the court's procedures would bring the administration of justice into disrepute. Many, perhaps the majority of, cases of abuse of procedure arise from the institution of proceedings. But any procedural step in the course of proceedings that have been properly instituted is capable of being an abuse of the court's process. In Walton v Gardiner, Mason CJ, Deane and Dawson JJ said that the jurisdiction to stay proceedings that are an abuse of process “extends to all those cases in which the processes and procedures of the court, which exist to administer justice with fairness and impartiality, may be converted into instruments of injustice or unfairness”.
Reliance was placed by Mr Turco on the Federal Court judgment in Rankine, where, at [20]-[28] per Marshall J, the Federal Court observed as follows:
20. The federal magistrate found at [26] that the request to issue the notice against the respondents “was not so much to secure payment from recalcitrant debtors but to embarrass them”.
21. At [27], his Honour referred to other methods to enforce a judgment and specifically to a “garnishee order.”
22. His Honour said at [27]:
The applicants [current respondents] are partners in a firm of accountants. It would have been simple for a garnishee to be issued against that firm in respect of any drawings or profits payable to the debtors. There has been no suggestion that the ... [current respondents] are personally insolvent, it is acknowledged that notwithstanding their personal liability for the costs, they were acting in their capacity as special liquidators and court officers .....
23. The federal magistrate went on (also at [27]) to refer to unassessed costs orders which have been made in Supreme Court in favour of the current respondents with respect to their litigation with the first and second appellants. His Honour then said:
In circumstances like this where the relationship between the parties has become severely strained, as it clearly is, the Court should look very carefully at the way in which [the notice]...is sought to be used. A misuse of the processes at the Court constituted an abuse of process.
24. His Honour referred to various authorities at [27] and [28] and then said at [29]:
The proper purpose of seeking a sequestration order against the estate of a debtor is so that a debtor, who is unable to pay his debts as and when they fall due, should have his affairs controlled for the benefit of all his creditors and not just specific ones. Allied to this purpose is the prevention of the debtor incurring further obligations which he will not be able to meet. It is a public purpose. The bankruptcy process is not to be used for private ends.
25. The federal magistrate referred to the “course of dealings” between the parties and in particular to the events of 18 May 2010 referred to at [16] above. His Honour then said (at [29]):
... this course of dealings and the failure of the respondents to take any other steps to execute upon their judgment is indicative of an intention to utilise the bankruptcy process for reasons other than securing the orderly distribution of the debtor's estates.
26. His Honour noted that the respondents are partners in an established insolvency practice and are officers of the Court with a right of indemnity over the assets of Nielsen.
27. Taking all of the foregoing considerations into account, the Federal Magistrate concluded that “the issuance of this notice constitutes an abuse of process and it should be set aside on that ground”.
28. The finding of the Court below that the issuing of the notice was an abuse of process is a finding of fact. I consider that it was a finding which was open to his Honour on the evidence before him and a correct and appropriate finding in all the circumstances.
The judgment in Rankine is distinguishable from the present case because:
a)in Rankine the debtors were liquidators who, in the course of acting in their capacity as officers of the Court, had been ordered to pay the creditors' costs in the sum of $24,995.25. The liquidators were engaged in ongoing litigation against the creditors, had informed the creditors of their obvious solvency, including by virtue of their right of indemnity from the assets of the company in liquidation, and had an unassessed costs order in their favour against the creditors;
b)the Federal Court in Rankine found that in the circumstances, those matters, considered as a whole, constituted sufficient evidence to find that there was no error in the finding by the Federal Magistrates Court that the bankruptcy notice was an abuse of the process: Rankine at [33]-[34] per Marshall J. The Federal Magistrates Court at first instance also found, on reading the history and the correspondence in evidence that the creditors were intent on resisting the actions of the liquidators as officers of the Court, and that the request for the issue of the bankruptcy notice was to embarrass the liquidators: Lord v Rankine [2010] FMCA 668 at [26] per Raphael FM; and
c)in the present case:
i)save for the proceedings in the Supreme Court Action, and these proceedings there is no evidence before the Court as to these parties engaging in litigation against each other; and
ii)Mr Turco is not an officer of the Court, and as a consequence of the Supreme Court Action presently owes Liquor Equity the amount of $29,926.77, and whilst that is not a “substantial amount” (contrast with the “substantial amount of $904,649.61” referred to at [34(c)(iii)] in Turco v Mortgage Ezy Australia Pty Ltd [2018] FCCA 1519 per Judge Lucev), the amount is also not a trifling one: see [65] below.
Rankine is a different case on the facts, and plainly distinguishable from the existing circumstances involving Mr Turco and Liquor Equity. There is no analogy between Mr Turco’s position and that of the liquidators in Rankine. The mere fact that Mr Turco is an accountant does not mean that his position can be equated to that of accountants acting as liquidators and officers of the Court with a right of indemnity from the assets of the company in liquidation, and otherwise patent solvency. As was observed in Seller at [20] per Flick J there is no general principle of fairness necessitating a bankruptcy notice to be set aside merely because it is in some way unfair to the debtor (citing Re Briggs; Ex parte Briggs v Deputy Commissioner of Taxation (WA) (1986) 12 FCR 310; (1986) 18 ATR 663; (1986) 86 ATC 4779; (1986) 75 ALR 554; FCR at 312 per Toohey J).
In relation to the allegation that this is a case about a falling out between brothers, namely Mr Turco and Mr VV Turco, there is no, or no sufficient, evidence to sustain the assertion that the issuance of the Bankruptcy Notice arises from any falling out between the brothers. If the allegation be that Mr VV Turco is pursuing Mr Turco then it needs to be remembered that the Judgment Debt arising from the Supreme Court Action arises in litigation seemingly initiated by Mr Turco against a corporate entity, Liquor Equity, of which his brother, Mr VV Turco, is but one of at least three directors. The implication that a familial falling out is the foundation for the issuance of the Bankruptcy Notice is, in all the circumstances, simply not made out.
Insofar as Mr Turco asserts that the amount of the Judgment Debt is a trifling one, it suffices to observe that the Parliament has established a minimum requirement that there be a debt of $5,000 before a bankruptcy notice can be issued: Bankruptcy Act, s.41(1). It suffices to observe that the amount of the Judgment Debt is more than five times that minimum amount, and the Judgment Debt cannot be described, in those circumstances, or otherwise, as a trifling amount.
There is no, or at least no sufficient, evidence that, in serving the Bankruptcy Notice on Mr Turco, Liquor Equity seeks to do anything other than genuinely invoke the sequestration jurisdiction of this Court should Mr Turco fail to comply with the Bankruptcy Notice. There is no, or at least no sufficient, evidence of Liquor Equity:
a)having any collateral purpose; or
b)having applied any undue pressure to, or in relation to, the alleged debt owed by Mr Turco.
It follows from the foregoing that to the extent Mr Turco submits that the Bankruptcy Notice ought to be set aside as an abuse of process, that submission must fail.
Solvency
To the extent that the issue of solvency was raised by Mr Turco in support of his application to set aside the Bankruptcy Notice it is relevant to observe that the solvency of a debtor is not ordinarily a ground on which to set aside a bankruptcy notice properly obtained: Re Athans; Ex parte Athans (1991) 29 FCR 302 (“Athans”) at 310 per Hill J; La Pegna & Anor v Commissioner of Taxation [2006] FMCA 1643; (2006) 204 FLR 364 (“La Pegna”) at [26] per Lucev FM, and if Mr Turco is solvent then that is a matter upon which a court may refuse to grant a sequestration order, if a sequestration order is ultimately sought by Liquor Equity: Athans at 310 per Hill J; La Pegna at [26] per Lucev FM.
Conclusion and orders
The Court has concluded that Mr Turco has failed to establish that he has an available counter-claim, set-off or cross-demand, or that the issuance of the Bankruptcy Notice was an abuse of process. It follows that there will be an order that the application to set aside the Bankruptcy Notice be dismissed.
The Court will hear the parties as to costs.
I certify that the preceding seventy (70) paragraphs are a true copy of the reasons for judgment of Judge Antoni Lucev
Date: 26 October 2018
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