Valamios v Demarco
[2007] FMCA 298
•15 March 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| VALAMIOS v DEMARCO | [2007] FMCA 298 |
| BANKRUPTCY – Bankruptcy notice − non-compliance − where the creditor obtained an order for costs on appeal − where the creditor and his solicitor entered into a deed of charge reciting the total debt owing for costs, covenanting to make regular payments and providing security − where the solicitor wrote to the debtor requesting payment to him of the assessed costs and gave notice of the charge − where no payment was made − where the solicitor issued and served a bankruptcy notice upon the debtor in the name of the creditor − where before the time for compliance with the bankruptcy notice expired a deed of release was entered into between the creditor and the debtor in which the debtor agreed to pay a sum in exchange for the withdrawal of the bankruptcy notice − where the deed of charge did not assign the debt owed to the creditor to his solicitor but had the effect of charging the debt in favour of the solicitor − whether the effect of the deed of release or compromise was that the bankruptcy notice had been complied with and no act of bankruptcy had taken place − whether the creditor could receive the funds payed by the debtor and give good discharge of the debt and thereby effect compliance with the notice. |
| Bankruptcy Act 1966, ss.30(1)(b), 41(2) Federal Magistrates Court Bankruptcy Rules 2006 |
| Ex Parte Patience; Makinson v The Minister (1940) 40 SR (NSW) 96 Goff & Jones (1998) The Law of Restitution (Sweet & Maxwell: London) |
| Applicant: | GEORGE VALAMIOS |
| Respondent: | PATRICK DEMARCO |
| File number: | SYG2488 of 2006 |
| Judgment of: | Raphael FM |
| Hearing date: | 9 February 2007 |
| Date of last submission: | 9 February 2007 |
| Delivered at: | Sydney |
| Delivered on: | 15 March 2007 |
REPRESENTATION
| Counsel for the Applicant: | Mr N Cotman SC |
| Solicitors for the Applicant: | Brown & Partners |
| Counsel for the Respondent: | Mr J Johnson |
| Solicitors for the Respondent: | Castagnet Lawyers |
ORDERS
A sequestration order be made against the estate of Patrick Demarco.
The applicant creditor’s costs be taxed in accordance with the Federal Magistrates Court (Bankruptcy) Rules 2006 and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.
Under the Federal Magistrates Court (Bankruptcy) Rules 2006 a copy of this sequestration order be given to the Official Receiver in Sydney within 2 days.
This order be stayed for 21 days.
THE COURT NOTES:
The date of the act of bankruptcy is 5 September 2006.
A consent to act as a trustee has been signed by John Duncan Green of BDO Chartered Accountants and has been lodged with the Official Receiver in Sydney.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG2488 of 2006
| GEORGE VALAMIOS |
Applicant
And
| PATRICK DEMARCO |
Respondent
REASONS FOR JUDGMENT
Introduction
This proceeding, which is the hearing of a notice of objection to a creditor’s petition, raises the interesting question as to whether the recipient of a bankruptcy notice issued in the name of the nominal creditor can comply with the notice by effecting a compromise of the claim with the nominal creditor even though, as between the debtor and the person legally entitled to payment, the debt remains outstanding.
Narrative
In 2002 Patrick Demarco sued George Valamios in the District Court of New South Wales over some dishonoured cheques. He was successful in those proceedings and Judge Delaney ordered judgment for Mr Demarco in the sum of $209,691.04. An appeal was brought against that decision by Mr Valamios which was successful. The Court of Appeal set aside the orders of Judge Delaney and ordered that Mr Demarco pay Mr Valamios’ costs both in the Court of Appeal and in the court below. The solicitor who acted for Mr Valamios in connection with those proceedings and with other proceedings in the Supreme Court of South Australia was David Alexander Brown. As at 7 July 2005 Mr Valamios owed Mr Brown $64,778.68 in respect of Mr Brown’s work for acting for him in respect of those proceedings.
On 7 July 2005 Mr Valamios and his brother, Chris, entered into a Deed of Charge with Mr Brown. The deed, which is exhibited to the affidavit of DA Brown filed on 30 November 2006, recites the existence of the South Australian proceedings and the New South Wales proceedings brought by Mr Demarco. It recites the fact of the appeal decision and that Mr Brown was at the time continuing to act for George Valamios in relation to the Demarco proceedings. The Deed recites the total debt owing at the time and its makeup as between the Demarco proceedings in the sum of $19,147.90 and the Comit Farm proceedings (South Australia) in the sum of $45,630.78. Under the deed George and Chris covenanted to make regular payments to Mr Brown and gave him security over a property in Guildford, New South Wales. George also gave a separate charge to the solicitor expressed in paragraph 3 as follows:
“Until the unpaid costs have been paid in full to the solicitor, George gives the solicitor exclusively and irrevocably the following rights and powers in respect of the costs order:
(a) to have a Bill of Costs or equivalent document in proper form drawn up;
(b)to file, serve and present such Bill or document on behalf of and in the name of George for taxation or assessment under the Legal Profession Act, 1987 or equivalent legislation on a party and party basis against DeMarco;
(c)to conduct and appear on such taxation or assessment on behalf of George;
(d)To mediate, negotiate settlement and compromise such taxation or assessment;
(e)To obtain and hold the certificate issued by the Assessor and any Court order or Judgment issued in respect of such taxation or assessment;
(f)By way of enforcement of the amount determined to be owing by DeMarco as a result of such taxation or assessment, to take bankruptcy proceedings against him and any other action whatsoever as the solicitor may deem fit in the name of and on behalf of George;
(g)To receive on behalf of George any payment made as a result of such action or by or on behalf of DeMarco in respect of the costs order at any time;
(h)To satisfy and discharge, in whole or in part as the solicitor may deem fit, the unpaid costs from any such payment.”
There was an assessment of the party and party costs between Mr Valamios and Mr Demarco and certificates of determination were issued which are found as exhibits C, D and E to the affidavit of Mr Brown. The first certificate was in the sum of $54,999.19. The second certificate was in the sum of $26,752.09 and the third certificate related to the costs of a costs assessment which totalled $1,828.75. Those latter costs were paid by the solicitor to the Supreme Court in order to have the certificates issued. When the certificates were issued they were registered as judgments of the Local Court in the Downing Centre. On 12 May 2006 Brown and Partners wrote to Messrs Diamond Conway, the solicitors for Mr Demarco, advising that the costs assessments had been registered as judgments of the Local Court and claiming the sum of $83,177.48. Payment was requested within fourteen days. The letter concluded:
“Please note that, by deed dated 7 July 2005 between George and Chris Valamios and our Mr Brown, Mr Brown holds:
(a) a charge over all the moneys owing by Mr Demarco referred to above, and
(b) an irrevocable authority to receive such moneys.
Accordingly could you please ensure that the cheques are made payable to Brown and Partners.”
That letter was responded to on 19 May 2006. The solicitors acknowledged receipt of the first letter and stated:
“Although we have never received the certificates of determination nor reasons for decision we nonetheless shall request our client to forward the amount of costs assessed as soon as possible.”
The money did not arrive.
On 4 July 2006 the Official Receiver for the Bankruptcy District of New South Wales issued a bankruptcy notice against Mr Demarco in which Mr George Valamios was named as the creditor in respect of a debt in the sum of $55,839.91. The supporting judgment or order was an order of the Local Court of New South Wales referring to a judgment entered on 2 May 2006 in the sum of $54,999.19 to which the sum of $840.72 interest was added to make the total. The bankruptcy notice was served on 14 August 2006. According to the affidavit of Mr Brown at the same time he caused a letter to be hand delivered to Mr Demarco. This letter, which is exhibit H to the affidavit of Mr Brown, is in the following form:
“21 July 2006
Mr Patrick DeMarco
Farm 1063
Gum Creek Road
WILLBRIGGIE NSWDear Sir
YOU ats VALAMIOS
We act for George Valamios in relation to a Judgment obtained against you in the recent Court proceedings.
We enclose by way of service a Bankruptcy Notice for $55,839.91 plus interest, continuing to accrue at $13.56 per day from 4 July 2006. This relates to Mr Valamios’ costs in the District Court. The following costs are also payable by you to Mr Valamios:
Court of Appeal proceedings - $26,752.09 plus interest at 9% p.a. from 3 May 2006.
Supreme Court Costs Assessor’s fees - $1,296.20.
We suggest that, to avoid bankruptcy, you make arrangements to pay all these costs without delay.
Please note that, by Deed dated 7 July 2005 between George and Chris Valamios and our Mr Brown, Mr Brown holds:
(a) a charge over all the moneys owing by you referred to above; and
(b) an irrevocable authority to receive such moneys.
Accordingly, could you please ensure that the moneys due are paid to this firm and, if by cheque, that the cheque is made payable to this firm.
Yours faithfully
Graham Raffell
BROWN & PARTNERS”There is no dispute that the bankruptcy notice was issued or that it was served on 14 August 2006 or that there was no application made to set aside the bankruptcy notice or to extend time. What did happen was that on 4 September 2006, before the time for compliance with the bankruptcy notice expired, a deed of release was entered into between Mr Demarco and George Valamios. Under that deed Mr Demarco agreed to pay Mr Valamios the sum of $30,000.00 in full and final settlement of all claims arising out of the proceedings and the appeal proceedings and any claim in relation to costs or interest arising therefrom. Mr Valamios agreed to withdraw the bankruptcy notice and take no further action thereunder. There were mutual releases between Mr Demarco and Mr Valamios and:
“7 Valamios agrees to indemnify Demarco and keep Demarco indemnified against any claim made by Valamios’ former solicitors Brown in relation to any claim that they may make or have in relation to a charge over moneys owing or under any irrevocable authority to receive such moneys that Brown claims it has or is entitled to pursuant to a deed made between it and Valamios dated 7 July 2005.”
On 6 September 2006 Demarco’s solicitors wrote to Brown and Partners:
“Mr Graham L Raffell
Brown & Partners
Solicitors
P O Box 89
HUNTERS HILL NSW 2110Dear Sir
Patrick Demarco and George Valamios
Supreme Court Proceedings 91881 of 2005We act for Mr Demarco and have been handed the Bankruptcy Notice NN2617/06. Following receipt of the Bankruptcy Notice Mr George Valamios contacted us to advise that he is no longer instructing your firm and that he wishes to deal with us direct. As a result of that conversation discussions took place concerning the matter of costs and counter costs and a claim has been reached in respect of same. Monies have been paid to Mr Valamios in full and final settlement of all claims in respect of his costs entitlement. As such we require you to confirm that you will take no further action of the Bankruptcy Notice.
Mr Valamios advises us that he did not authorise the issue of the Bankruptcy Notice. He also advises that he has not signed any documentation relating to the fruits of any costs entitlement that he may recover from Mr Demarco to operate as a charge in favour of your firm and has given no irrevocable direction. We must take Mr Valamios at his word. As part of the settlement Mr Valamios has signed a Deed of Release where he:
1.Releases Mr Demarco from all claims, demands, actions, suits or proceedings arising out of the District Court proceedings, the Appeal proceedings and any claim for costs or interest arising therefrom.
2.Agrees to forthwith withdraw the Bankruptcy Notice and to take no further action.
3.To indemnify Mr Demarco against any claim made by your firm in relation to any claim made by reason of a purported charge or irrevocable Authority.
In the circumstances we require you to confirm that you will take no further action against our client.
Yours faithfully
DIAMOND CONWAY
Geoffrey Adelstein
Partner”Notwithstanding this letter the bankruptcy proceedings went ahead. On 5 September 2006 a petition was issued out of this court and served personally on the respondent on 11 October 2006. On
17 October 2006 the respondent filed a notice of intention to oppose on the grounds that he and the applicant had entered into a deed of release to settle all debts and for the bankruptcy notice to be withdrawn. On 9 November 2006 an amended notice of grounds of opposition was filed. The relevant grounds of opposition for the purposes of the proceedings that were before me are those numbered 1 to 6 in the amended notice set out below:
“1.On 4 September 2006 the Applicant and the Respondent entered into a Deed of Release to settle all debts owing to each other as at the date of the Deed. A copy of such Deed is annexure “A” to the affidavit of Maurice Jocelyn Castagnet sworn 16 October 2006.
2.The obligation upon the Respondent under Clause 1 of the Deed of Release referred to in paragraph 1 above were satisfied on 4 September 2006 as to the sum of $20,000.00 and on 5 September 2006 as to the sum of $10,000.00.
3.The terms of the Deed of Release are such as to satisfy the terms of the Bankruptcy Notice dated 4 July 2006 (No: NN2617/06) according to its terms.
4.There is no available act of bankruptcy upon which the Applicant is able to commence and maintain the Creditors Petition.
5.The Applicant is not a creditor of the Respondent able to commence and maintain the Creditors petition as at the date of presentation of the Creditors Petition.
6.The presentation and maintenance of the Creditors petition in the circumstances set forth in paragraph 1-5 inclusive above constitutes an abuse of the process of the Court.”
The deed between Valamios and Brown did not operate to assign the debt owed by Demarco to Valamios to Mr Brown but it had the effect of charging the debt in favour of Brown. Even if the deed had not been entered into Brown would have had an equitable right to receive the proceeds of the costs judgment; Ex Parte Patience; Makinson v The Minister (1940) 40 SR (NSW) 96 per Jordan CJ; Worrell v Power & Power (1993) 188 ALR 237, Twigg v Keady (1996) FLC 92 -712 per Sydney J at [17], per Kay J at [112], [117 – 129], per Fogarty J at [170].
This right of the solicitor is known as a “fruits of the action” lien. If notice of the existence of the lien is given to the judgment debtor “then only the solicitor, and not the client, can give a good discharge to that person for an amount of the money equivalent to the solicitor’s costs” per Jordan CJ Ex Parte Patience (supra). In Patience the Chief Justice also held at p155-6:
“I am inclined to go still further and hold that if the Attorney gives notice to the defendant not to pay until his bill should be discharged a payment by the defendant after such notice would be in his own wrong and like paying a debt which has been assigned after notice.”
In Twigg Moss J went so far as to say at [129]:
“Once notice of a solicitor’s right to payment is given to the judgment debtor, only the solicitor can give discharge to the judgment debtor for an amount of money equivalent to the solicitor’s costs. If payment is made in disregard of the notice, the judgment debtor or his solicitor become liable to the solicitor giving the notice and must pay again: Ross v Buxton (supra), see also Cordery’s Law Relating to Solicitors (8th Ed, 1988 at p 253).
A collusive arrangement between a client and a judgment debtor which is made with the intention of defeating the solicitors’ claim will be overturned: Brunsdon v Allard (1859) 2 El and El 18, In re Sullivan v Pearson; ex parte Morrison (1868/9) 4 LRQB 153 discussed in Gadens Ridgeway v Paroulakis (1992) FLC 92-311.”
The nature of a solicitor’s “fruits of the action lien” was discussed and described in considerable detail by Campbell J in Firth v Centrelink & Anor [2002] NSWSC 564 where at [38] his Honour said:
“In all these circumstances, it is apparent that the equitable right which a solicitor has to be paid costs and disbursements from the fund which his efforts have recovered, is a kind of proprietary interest in that fund. The fact that the right of the solicitor can survive an insolvency administration of the client, and is (as Sir Frederick Jordan held in Ex parte Patience) assignable, are strong indicia of it being a right of a proprietary nature. In Twigg v Keady (1996) 135 FLR 257 at 259 Fogarty J described it is, “an equitable interest in the fund”. In Color Point Pty Ltd v Markby’s Communication Group Pty Ltd [1998] 1516 FCA (Weinberg J, 27 November 1998, unreported) Weinberg J said that the equitable right, “... confers upon the solicitor an equitable interest in the fruits of that litigation ...”.
His honour went on to say at [41]:
“With respect, it seems to me that the solicitor’s right concerning the fruits of his effort includes a right closely analogous to the right to trace funds into the hands of a third party. It is the nature of the right which the solicitor has, that he does not have the full title to the asset which has been recovered (save in the circumstance where his claim exceeds the value of the asset), but rather a right to be paid out of the asset. If that is a right which can prevail against an assignee of the asset who is not a bona fide purchaser for value without notice, that is the equivalent, in the context where the solicitor does not have full title to the fund, of being able to trace the funds into the hands of a third party.”
In the instant case the applicant does not proceed under a “fruits of the action lien” but under a deed of charge of which notice has been given. He argues that this provides an even stronger basis for the assertion that Mr Valamios could not enter into a private arrangement with Mr Demarco because he, Valamios, was unable to give a good discharge for the debt. Those representing Mr Valamios accept, on his behalf, that he cannot give a good discharge. They accept that Mr Brown can sue Mr Demarco in the name of Mr Valamios to recover the debt. But they argue that the present proceedings are not debt recovery proceedings, they are bankruptcy proceedings. Mr Demarco argues that as the bankruptcy notice was not signed by Mr Brown as a person who had a security interest in the fund i.e. as attorney for the legal creditor, but as his solicitor, and as the bankruptcy notice indicated that Mr Valamios was the creditor and by paragraph 3 required that the debt be paid to him within twenty one days or an arrangement to his satisfaction for settlement be made, the effect of the deed of compromise was that the bankruptcy notice had been complied with and no act of bankruptcy had taken place. Mr Brown had signed the bankruptcy notice as the creditor’s authorised agent and he delivered with the bankruptcy notice a letter indicating that he had an irrevocable authority to receive the moneys. He says that if Mr Demarco was in any doubt as to the identity of the person to whom the money should be paid he should have commenced interpleader proceedings under Part 56 of the New South Wales Supreme Court Rules 1970.
Discussion
Compliance with a bankruptcy notice does not necessarily equate with the extinction of a debt. In many cases, possibly due to the status of the law prior to the decision of the High Court in Adams v Lambert [2006] 225 ALR 396, interest to which a creditor was entitled was not claimed in the bankruptcy notice (Re Mullavey; Ex parte Australia and New Zealand Banking Group Ltd (1978) 20 ALR 276 per Sweeney J at (p.282-284), cited by Deane J in Kleinwort Benson Asutralia v Crown & Ors (1988) 79 ALR 161; Re Farrugia; ex parte Deputy Commissioner of Taxation (NSW) (1988) 80 ALR 651 per Woodward, Davies and Burchett JJ (at p.658), cited by Enfield J in Re Whittet (Unreported, 12 July 1990, 3746 of 1989) and Goldberg J in Shaddock v Commonweatlh Bank of Australia (1998) (Unreported, 9 April 1998, VG 7800 of 1997)). But this did not mean that the creditor was required to abandon any claim for such interest if the amount claimed under the bankruptcy notice was paid. All it meant was that the debtor had not committed an act of bankruptcy. The bankruptcy notice sets out what is required in order to effect compliance. In this case the debtor was required within 21 days after service upon him of the notice:
a)To pay to the creditor the amount of the debt; or
b)To make an arrangement to the creditor’s satisfaction for settlement of the debt.
Paragraph 4 of the notice which states that:
“Payment of the debt can be made to:
Brown and Partners Solicitors of 98 Woolwich Road, Woolwich, NSW, 2110”
is not a requirement of the notice, it is an option made available for the convenience of the debtor; Nugent v Brialkim Pty Ltd & Anor (1985) 61 ALR 725 per Northrop, Lockhart and Beaumont JJ at (p.726)).
The creditor is named in the document and he is given an address which is not the address of the solicitor. It is the place where the creditor can be found. It is not disputed that Mr Brown being merely a chargee of the fund was required to issue the notice in the name of the legal owner. But although under s.41(2) of the Bankruptcy Act 1966 (the “Act”) the notice must be in accordance with the form prescribed in the Regulations and under Regulation 4.02 Form 1 is the prescribed form, Regulation 4.02(3) does not exclude s.25C of the Acts Interpretation Act 1901 which allows a substantial compliance. Section 30(1)(b) of the Act provides that:
“The Court
(a) …
(b) may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.”
There was nothing therefore to prevent the solicitor applying to the court prior to the service of the bankruptcy notice to permit the form to be altered so that it required payment to the equitable owner of the debt as opposed to the legal owner. That was not done.
In Adams the High Court at [16] confirmed that:
“Bearing in mind the consequences which the Act attaches to such a notice, the courts have long insisted upon “strict compliance with the requisites of a bankruptcy notice.” James v FCT (1955) 93 CLR 631 at [644].
In Adams the court also confirmed the view expressed in Kleinwort Benson Australia Ltd v Crowl (supra) where at [79] it said:
“The authorities show that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act or if it could reasonably mislead a debtor as to what is necessary to comply with the notice.”
But I do not recall Mr Johnson arguing that the notice was misleading because a compromise with the named creditor would not constitute compliance. It would have been hard to make that argument from the same mouth that was propounding that the compromise in fact constituted compliance.
Whilst compliance with a bankruptcy notice is not intended to discharge all debts due from a debtor to a creditor it is intended to discharge the particular debt upon which the bankruptcy notice is based. Two ways of discharge are suggested – payment in full or a compromise.
Any deed of release or contractual promise of discharge can only be valid if the debtor pays the creditor to whom the debt is actually owed. In Powell v Brodhurst [1901] 2 Ch. 160 Farwell J held that payment of a separate debt due to a partner of a legal firm could not be discharged by paying the legal firm itself. The case concerned a mortgage debt which was transferred to two partners of a legal firm as joint tenants, the transferees were considered to be trustees of the settlement. The defendant continued to send instalment payments to the law firm. Upon payment of the third instalment following the transfer and upon which the action in question was based, one of the partners of the firm acknowledged receipt in part discharge of the mortgage debt. Following the death of the partner the executors of his estate sought to recover the debt owed, the defendant arguing such debt was discharged by the payment to the legal firm. Neither trustee had expressly authorised the firm to accept the payments in discharge of the mortgage, no such authority could be implied on the basis that such an implication would have resulted in a breach of trust. The payment to the firm was held to be an invalid discharge of the debt. Farwell J stated at [164]-]165]:
“But the joint debt in this case was not paid to either of the joint creditors, but to the firm of which one of them was a member. Now, payment of a private debt due to a member of a firm to the firm of which the creditor is a member will not, in my opinion, support a plea of payment in the absence of evidence, expres or implied, that the creditor has authorised the receipt of the money by the firm as his agents. The mere fact that the person who has made the payment would have a good cause of action against the firm to recover the money if the sum is not accepted in payment does not make it payment. The defendants to such an action must be all the partners, and there is no set-off either in law or in equity of the private debt of one defendant against the joint debt of the firm…”
The issue of two parties attempting to pay and discharge a debt owed by a third party has frequently been discussed at common law:
“It is not easy to discharge another’s debt in English law. This will occur only if the debtor authorised, or subsequently ratified the payment.[3]
3…it is probably now settled that if A, a stranger, pays B’s debt to C, such payment will not of itself discharge B’s liability to C, unless it has been made on B’s behalf and had been subsequently ratified by him: see James v Isaacs (1852) 12 CB 791; Simpson v Eggington (1855) 10 Ex. 845…” Goff & Jones The Law of Restitution at (p.16)
In some cases discharge of another’s debt has been upheld. In James v Commonwealth Bank of Australia (Unreported, 5 October 1995, 2744 of 1993) Young J notes:
“There are cases, of which one instance is Re Stevens (1929) 1 ABC 90, where a debtor sells property and causes the purchaser to pay the price for the property directly to the creditor. There is no doubt at all that in that situation the payment to the creditor is made by the debtor.”
It is not the case here that the debtor seeks to have a debt discharged on the basis of a third party payment. The debtor himself has made the payment. If the payment to Valamios cannot be validly received by him the debtor could not be said to have discharged the debt owed to a creditor who is not a party to the deed of release. This conclusion finds support in general principles of privity of contract governing third party rights, which apply to prove that not only can two contracting parties fail to discharge a debt owed by a third party but also in purporting to do so the parties cannot extinguish the right of a third party to bring an action to recover the debt.
Agreements of discharge are commonly discussed in terms of the agreement being a ‘contract’ discharging contractual obligations:
“To the formation of the contract of abandonment, the ordinary principles of the English law of contract apply. To create a contract by exchange of promises between two parties where the promise of each party constitutes the consideration for the promise of the other what is necessary is that the intention of each as it has been communicated to and understood by the other…should coincide.
…
Thus if A (the offeror) makes a communication to B (the offeree), whether in writing, orally or by conduct, which, in the circumstances at the time the communication was received, (1) B, if he were a reasonable man, would understand as stating A’s intention to act or refrain from acting in some specified manner if B will promise on his part to act or refrain from acting in some manner also specified in the offer, and (2) B does in fact understand A’s communication to mean this, and in his turn makes to A a communication conveying his willingness so to act or to refrain from acting which mutatis mutandis satisfied the same two conditions as respects A, the consensus ad idem essential to the formation of a contract in English law is complete.” As per Lord Diplock in Paal Wilson & Co A/S v Blumenthal [1983] 1All ER 34 at [48]-[49].
Any discharge of a contractual obligation will therefore be required to be agreed as between the parties affected by it.
Further, in privity where A pays B in an attempt to discharge a debt owed by B to C, C prima facie maintains an action to sue B for that debt: Lucas v Wilkinson (1856) 1 H & N 420. The principle in Lucas is now well settled in Australian law. In Vikery v JJP Custodians Pty Ltd [2002] NSWSC 782 Austin J stated at [76]:
“If, unbeknown to the borrower, a third party makes a payment to the lender and the lender treats the payment as discharging or reducing the loan, the lender can still sue the borrower on the loan agreement despite that payment, in the absence of the borrower's assent to the payment: City Bank of Sydney v McLaughlin (1989) 9 CLR 615, 633; Lucas v Wilkinson (1856) 1 H & N 420 [156 ER 1265]; Re Rowe [1984] 2 KB 483; Smith v Cox [1940] 2 KB 558; Guardian Ocean Cargoes Ltd v Banco do Brazil [1991] 2 Lloyd's R 68, 87-8; cf Hirachand Punamchand v Temple [1911] 2 KB 330; see Mason & Carter at paragraph [846].”
In this case the deed purports to exclude the rights of the third party to whom the debt is owed, and purports to create a contract releasing a debt where payment cannot be validly received given the actual creditor is not a party to the contract of discharge. Such a proposition cannot stand in law and therefore the deed cannot constitute compliance with the bankruptcy notice issued by the creditor because it does not have the effect of compromising the creditor’s claim. It seems to me that the debtor recognises this in the indemnity clause extracted at [7] of these reasons. Given the fact of the letters putting the debtor on notice of the solicitor’s claim and the indemnity required it is possible to say that the Deed of Discharge was a sham, something that was intended to be mistaken for something else or not really what it purports to be: Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449; 82 ALR 530 at [537]. A sham cannot constitute a compromise with a creditor for the purposes of establishing compliance with a bankruptcy notice. This deed and the payment made thereunder do not satisfy the notice.
The applicant has provided the court with the required affidavits of search and debt. I am satisfied of the matters required by s.52 of the Act. There is a consent to act as Trustee from John Duncan Green of BDO Chartered Accountants.
I make a sequestration order against the estate of Patrick Demarco. I order that John Duncan Green be appointed Trustee in Bankruptcy. I note that the date of the act of bankruptcy is 5 September 2006. I order that the costs of the petitioning creditor be paid from the estate of the bankrupt and taxed according to the Federal Magistrates Court Bankruptcy Rules 2006.
The debtor has requested that if I make this order I should stay it for 28 days. I cannot do that: s.52(3) of the Act. I will stay the order for 21 days.
I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Raphael FM.
Associate:
Date:
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