World Pacific Timbers Pty Ltd v Konstandellos
[2003] FMCA 84
•17 March 2003
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| WORLD PACIFIC TIMBERS PTY LTD v KONSTANDELLOS | [2003] FMCA 84 |
| BANKRUPTCY – Review of decision of Registrar substituting petitioning creditor and making sequestration order – where debtor contends he had no liability to pay judgment debt and/or the amount of the debt was less than $2,000 or at the time of particulars of the petition; whether Court will exercise its discretion to go behind debt where another petitioner seeks to be substituted. Bankruptcy Act1966, ss.44(1), 49, 52(1)(c) Makhoul v Barnes (1995) 60 FCR 572 |
| Applicant: | WORLD PACIFIC TIMBERS PTY LTD |
| Respondent: | NICK KONSTANDELLOS |
| File No: | MZ 792 of 2001 |
| Delivered on: | 17 March 2003 |
| Delivered at: | Melbourne |
| Hearing Date: | 11 June 2002 |
| Judgment of: | Bryant CFM |
REPRESENTATION
| Counsel for the Applicant: | Mr Peter Fary |
| Solicitors for the Applicant: | Lewis Walker |
| Counsel for the Respondent: | Mr Henry Aizen |
| Solicitors for the Respondent: | Paul Egan & Associates |
ORDERS
The application for review filed 16 May be dismissed.
The substituted creditors costs of and incidental to the application for review be fixed in accordance with the Bankruptcy Act 1966 and paid out of the bankrupt’s estate.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MZ 792 of 2001
| NICK KONSTANDELLOS |
Applicant
And
| WORLD PACIFIC TIMBERS PTY LTD |
Respondent
REASONS FOR JUDGMENT
Introduction
This is an Application by Nick Konstandellos, the Debtor, filed on the 16th day of May 2002 to review a decision of the orders made by Registrar Connard on the 1st day of May 2002. The Orders made by the Registrar on that day were as follows:
(1)The title of the proceedings be amended to show WORLD PACIFIC TIMBERS PTY LTD as applicant;
(2)A sequestration order be made against the estate of NICK KONSTANDELLOS;
(3)The substituted applicant’s costs of and incidental to the petition (including reserved costs) be paid in accordance with statute.
The Orders sought by the Applicant are:
(1)That the sequestration Order made by Registrar Connard on the 1st day of May 2002 be set aside;
(2)In lieu of the Order made by Registrar Connard on the 1st day of May 2002 there be an Order that the petition issued on the 12th day of October 2001 be dismissed together with an Order for costs to be paid by the petitioner.
At the hearing, an alternative Orders to Order (3) was sought that, alternatively the Application be adjourned to the conclusion of the proceedings in the Melbourne Magistrates Court brought by the Debtor to set aside the relevant judgment.
The substituted Creditor seeks that the Application for review be dismissed and the substituted Creditor’s costs of and incidental to the Application be paid out of the Bankrupt Estate in accordance with statute.
Background
On the 18th day of October 2000 the Solicitors for Ugazio Pty Ltd (ACN 080 368 298) (Ugazio), Messrs Lewis Walker, issued a complaint in the Magistrates Court of Victoria on it’s behalf claiming from the Debtor the sum of $3,225.00 for the installation of an air conditioning system at the request of the Debtor.
On the 21st of February 2001 Ugazio obtained a default judgment in the Melbourne Magistrates Court against the Debtor for the sum of $3,225.00 together with the interest of $139.11 and costs of $466.50, making a total of $3,830.61 (“the judgment debt”).
On the 28th of April 2001, the Debtor was served with a Bankruptcy Notice issued by Lewis Walker on behalf of Ugazio dated on the 12th of April 2001. The substance of the Bankruptcy Notice was the unpaid judgment debt.
On the 23rd of August 2001, a third party, Ritchies Supermarket (“Ritchies”) drew and sent a cheque to Ugazio’s solicitors Lewis Walker, for the amount of the debt of $3,225.00. That sum was deposited in their trust account and the terms of the acceptance of the funds are the subject of dispute.
On the 11th of October 2001, a creditors petition was presented by Ugazio for the judgment debt. On the 4th of December 2001, Ugazio and the Debtor settled matters between them and on the 29th of January 2002, an Order substituting World Pacific Timbers Pty Ltd (“World Pacific Timbers”) as petitioning creditor was made. The petition was opposed and heard by Registrar Connard on the 1st day of May 2002. The Debtors grounds of opposition as amended are as follows:
(1)The amount of the debt owing to the petitioning creditor Ugazio Pty Ltd as at the date of the issue of the petition herein, namely the 21st day of September 2001 (the date of signing) or the 11th day of October 2001 (the date of presentation) was less than the amount specified in s.44(1) of the Bankruptcy Act 1966 (“the Act”), namely $2,000.00;
(2)The Debtor has a counter claim, set off or cross demand equal to and/or exceeding the judgment obtained by the substituted creditor;
(3)The Debtor is able to pay his debts as and when they fall due;
(4)The Applicant failed to make full and frank disclosure of the fact that it was holding funds on account of the judgment Debtor at the time the petition was presented.
Counsel for the respondent did not press grounds (2) and (3) before Registrar Connard, nor were they argued before me.
The gravamen of the arguments put on behalf of the Debtor are as follows:
(1)That the Court should go behind the judgment obtained by Ugazio and find that there was never a debt owed by the Debtor to Ugazio;
(2)In the event that the Court was to find that there was a debt owed to Ugazio to the Debtor, it had been discharged by payment prior to the issuing of the creditors petition when all that remained outstanding were interest and costs in a sum less than $2,000.00;
(3)That the petition was an abuse of process in that the original creditor Ugazio had breached its duty of disclosure to the Court by not disclosing that it held funds on behalf of the respondent at the time the petition was issued.
Concessions made
It was conceded that World Pacific Timbers’debt was in existence and known at the time of commission of the Act of Bankruptcy alleged in the petition. It was conceded by the Debtor that although this matter must proceed as a hearing de novo, the requirements of section 52 of the Bankruptcy Act1966 (“the Act”)had been met.
Going behind the original judgment
The enquiry involved is a two stage process enquiring first as to whether there is sufficient reason to question the existence of a real debt behind the judgment, and then if there is, determining that issue. These two steps may be determined together or independently, Makhoul v Barnes (1995) 60 FCR 572 at page 584, and Wolff v Donovan (1991) 29 FCR 480. In the event that the Court determined to go behind the judgment, World Pacific Timbers sought an adjournment so that further evidence could be adduced.
A Court exercising jurisdiction in Bankruptcy may, in an appropriate case “go behind” a judgment and enquire whether it was founded on a “real debt” Corney v Bryan (1951) 84 CLR 343 at 347, Wren v Mahoney (1971) 126 CLR 212. The existence of a debt is only prima facie evidence and is not conclusive evidence of it. However, before a Court will exercise its discretion to go behind a judgment debt it must be established there are substantial reasons for questioning whether there is a debt owed to the creditor (ex parte Longo (1995) 57 FCR 523). It is clear from the authorities referred to that if the judgment is obtained by fraud or collusion or there has been some miscarriage of justice, the Court can enquire whether the judgment debt is a good debt. If the judgment has been obtained without any adjudication on the merits, for example in the case of a default judgment the Court will more readily go behind that judgment to enquire whether there is a good debt Harrison v Charalambous (1999) FCA 902, per Finklestein J.
The Debtor’s case
The Debtor relied upon three Affidavits sworn by him. The first on the 13th day of November 2001 (“the first Affidavit”), the second on the 1st day of March 2002 (“the second Affidavit”) and the third on the 21st day of May 2002 (“the third Affidavit”). He relied upon two Affidavits of Jared Swain sworn respectively on the 15th day of November 2001 and the 3rd day of March 2002, and an Affidavit of Fotino Konstandellos (his Wife), dated the 24th day of May 2002.
In summary, the Debtors evidence is that at all relevant times he was employed by Aspendale Gardens Holdings Pty Ltd (“Aspendale”) as a consultant. The sole director and sole shareholder of that company is his Wife. Aspendale was incorporated to purchase a shopping centre in Aspendale Gardens, which has an area set aside for a supermarket. Initially, another company for which the Debtor was a consultant, GNA Investment Pty Ltd was going to occupy the area in the shopping centre for the supermarket. GNA did not in fact occupy the shopping centre and Ritchies, a chain of supermarkets, approached Aspendale with a view to becoming a tenant of the shopping centre and did in fact become a tenant.
In the course of acting as a consultant the Debtor asserts he obtained, on behalf of Aspendale, quotations for air conditioning to various parts of the shopping centre which included 25 shops. Part of the area for which air conditioning quotes were obtained were for the liquor section of the supermarket which was to be occupied by Ritchies. The Debtor obtained quotations for air conditioning from Ugazio. After Ritchies had agreed to lease the supermarket and liquor store from Aspendale the Debtor provided Jared Swain with a quotation showing the total cost of installation of the air conditioning to the liquor store of the supermarket to be $8,325.00. The Debtor asserts that after he gave the quotation to Ritchies he spoke to Mr Ugazio informing him that he had given the quotation to Ritchies and that Ritchies had agreed to pay him in two instalments. The original quote and the confirmation was sent to the Debtor.
The Debtor asserts that Jared Swain of Ritchies asked him to instruct Ugazio to install the air conditioning to the liquor area in accordance with the quotation and to invoice Ritchies for any work which Ugazio did with respect to the liquor store. He asserts that Mr Ugazio on behalf of Ugazio Pty Ltd agreed to accept payment from Ritchies in two instalments. It is conceded that the sum of $6,100.00 was paid (‘the first payment’). The original account was forwarded to Aspendale and subsequently altered to show Ritchies as the Debtor.
A facsimile transmission dated 8th June 2000 from Ugazio for the attention of the Debtor at Aspendale Holdings says:
“I have now received payment from Ritchies, thank you for following up.”
I would appreciate it if you could call and arrange a time I could pick up payment of $3,225.00 if not already posted.”
It is conceded that the payment referred to as having been made was $6,100.00. An invoice was made out to Ritchies supermarket for $6,100.00 upon which it appears the payment was made. A final payment of $3,225.00 (‘the second payment’) was sought in a facsimile transmission dated the 4th of July 2000 by Ugazio to Aspendale asking Aspendale to forward payment as agreed.
On the 18th of October 2000, a complaint was issued by Ugazio in the Magistrates Court of Victoria against the debtor for this sum. After the complaint was issued, but before judgment was entered, the Debtor asserts that he spoke to Ugazio and told him that he had not been paid. He says that he brought to the attention of Ugazio and his solicitors that Ritchies had agreed to pay Ugazio and he had heard nothing further. He says that he assumed that because of the failure to hear further, the matter had been resolved and the Ritchies had paid Ugazio direct. He asserts that at the same time he spoke to Jared Swain of Ritchies and told him that Ugazio had sued him. Jared Swain says that he contacted Ugazio and asked him for an invoice for amounts outstanding and said that Ritchies would pay that invoice as they were responsible for that work and had paid Ugazio earlier.
The Debtor asserts that he did not defend the proceedings in the Magistrates Court because he was of the belief that they had been resolved between Ugazio and Ritchies. He says that had he been aware that the proceedings were continuing he would have instructed his solicitors to defend the proceedings. He did not want to incur legal expenses because he believed the matter had been resolved.
The evidence of Jared Swain is that despite repeated requests to Ugazio, no invoice in the name of Ritchies was forthcoming, and in fact, it was not until August 2001 after communicating with solicitors acting for Ugazio, that he received an invoice which was backdated to the 28th of April 2000. Upon receipt of that account he arranged for payment of the amount of $3225.00 to be made immediately.
He says that repeated requests were made to Ritchies to enable payment to be made, but until August 2001 no invoice made out to Ritchies was forthcoming.
There is then a dispute as to the application of the payment of $3225.00. Jared Swain says the amount was paid by Ritchies unconditionally in satisfaction of the debt. He says that there was no agreement other than that. He disputes the assertions of Ugazio’s solicitors in a letter dated the 17th of August 2001, that:
“We understand that you have agreed to tender payment of this invoice in part settlement of Mr Konstandellos liability to our client.
Our client is prepared to allow any money tendered by you to be held in our trust account pending the outcome of recovery action being taken against Mr Konstandellos. If our client is unsuccessful in eliciting payment from Mr Konstandellos, we are proposing that money from you in trust be released to our client in exchange for a final invoice in similar terms to the draft enclosure. We will deem receipt of your cheque to be an acceptance of our clients terms as set out in this letter.”
Jared Swain asserts that the cheque drawn by Ritchies for payment of this account was paid by Ritchies bank on or about the 4th day of September 2001 having been forwarded to Lewis Walker on or about the 23rd day of August 2001.
What is clear from the chronology is that although the Bankruptcy notice was issued prior to the payment by Ritchies of the final invoice, the creditors petition was issued subsequently. If, therefore, the payment of $3,225.00 was a payment by (or on behalf of) the Debtor, then at the time of the issue of the Creditors petition the only amounts outstanding were interest and costs on the judgment debt and that sum was less than $2,000.00. Thus, the petition would have been defective.
World Pacific Timbers has chosen not to give any evidence and seeks to lead evidence in the event that the Court determines that it should go behind the judgment. It however, relies upon two Affidavits, both from members of the firm of Lewis Walker, it’s solicitors. Mr Edwards, the solicitor responsible for the matter on behalf of Ugazio has indicated in his Affidavit that Ugazio was not prepared to agree that the judgment debt was the responsibility of any person other than the Debtor, and therefore when Ritchies were given a fresh invoice and paid the amount outstanding (but not the interest or costs) the solicitors wrote a letter to which I have referred indicating that they would hold the money on trust pending the outcome of recovery action against the Debtor. There is no explanation proffered as to why they would not accept that the sum was not payable by Ritchies, and I speculate that they were concerned about the interest and costs incurred. Their non acceptance of the funds is inconsistent with their previous acceptance of $6,100.00 from Ritchies in respect of the same transaction and there is no response from Ugazio to Mr Swains evidence that invoices to Ritchies had been requested on numerous occasions by Ritchies.
The Debtor thus contends that he was never liable for the debt and that he was at all times acting as agent for Ritchies. He points to the earlier payment by Ritchies of an invoice sent to them as clear evidence of the agency and of the fact that the Applicant had knowledge of it. Alternatively, if the Court does not find that the relationship of principal and agent is established, then he contends that the judgment or part thereof has been paid by a third party on account of the Debtor, and in either case at the time of the issue of the creditors petition the amount owing to the Creditor was less than $2,000.00.
The creditors case
There are two parts to the creditors case in opposition to the Application. The first is that this matter now involves a substituted creditor. Section 49 of the Act provides the following in relation to substitution:
“The petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditors”.
The creditor contends that all a substituted creditor must prove at the hearing of the petition is that its own debt was in existence at the time of the Act of Bankruptcy alleged in the petition (McNamara & Langford (1931) 45 CLR 267) and at the time of its presentation, and is still owing (Section 52)(1)(c)). The question of whether the original petitioning creditor’s debt was owing at the date of presentation of the petition is irrelevant.
Substitution may be ordered where the Creditors petition has not been prosecuted whether for due diligence or for any other reason (see Section 49). The substituted creditor contends that an order may be made even though the original creditor was not entitled to present a petition.
The second matter relied upon by the creditor is that there are no special circumstances existing which would cause the Court to go behind the judgment.
I will deal with the second point first. The Creditor contends that the Debtor needs to establish that the Debtor was acting for a disclosed principal and that the evidence does not support the contention that he was acting as agent for Ritchies, nor indeed is it clear from his own evidence, who he contended was his principal. He points to a number of conflicts in the evidence of the Debtor. He contends this in the Affidavit sworn by Kostandellos there are several versions as to whom the relationship of principal and agent was between. At various times Kostandellos has said that he believed he was acting as agent for the Lessor (Aspendale), Ritchies and Aspendale and GNA.
As far as GNA are concerned it seems clear that Ritchies were in a sense substituted for them as the Lessor and no confusion in this respect appears to have arisen. Having reviewed the material it appears that the only confusion might have been as to whether the Debtor was acting on behalf of Aspendale or Ritchies. However, this point appears to have been clarified to the apparent satisfaction of the Creditor, because the first invoice for the first payment of $6,100.00 was at the request of the Debtor sent to Ritchies and paid by them. By that time at least, even if the creditor were not satisfied that a relationship of principal and agent had as a matter of law been established, they were aware that:
(a)The Debtor was claiming that Ritchies were responsible for the debt;
(b)Invoices made out to Ritchies were requested and received;
(c)Upon an invoice being made out to Ritchies by the Creditor it was paid;
(d)The first payment was accepted unconditionally by Ugazio.
Thus by the time the first invoice was paid the Debtor was asserting that Ritchies were responsible and that Ritchies were prepared to pay. It is also clear that had Ugazio accepted the second payment from Ritchies unconditionally, as they had with the first, that there would not have been sufficient outstanding to found the Creditors petition.
Had the second payment from Ritchies been accepted unconditionally, as the first had then the Creditors Petition would have been defective and the substituting Creditor could not have relied upon it.
I turn then to the question of whether even if the relationship of principal and agent was not established, a third party payment (by Richies) on behalf of the Debtor fulfilled his obligations.
At Common Law it is not easy to discharge another’s debt. However it will occur if the debtor has authorised, or subsequently ratified, the payment (see Goff & Jones, Law of Restitution 5th ed, p17). I am satisfied in this case that the Debtor did ratify the payment and Ugazio were aware of it.
Is the original petitioning creditors debt relevant where a creditor has been substituted?
The creditor has not given evidence but seeks to do so if the court sets aside the sequestration Order and goes behind the Ugazio judgment.
Were it not for the substituting creditor I would be satisfied that the debtor has established a prima facie case to go behind the judgment for the reasons set out in paragraph 34, 35 and 36.
However, I accept the submissions of World Pacific Timbers that the application is misconceived.
Section 49 of the Act says:
“Where a creditor's petition is not prosecuted with due diligence or where for any other reason the Court considers it proper to do so, the Court may permit to be substituted as petitioner or petitioners another creditor or other creditors to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor, and the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor.”
The petitioning creditor who seeks a sequestration order must prove that his debt existed not only at the date of bankruptcy but also at the time of presentation of the Petition and at the time of the making of the sequestration order. Re Parks & Anor Ex Parte Campbell (1961) QWN 35, Re Makie, Ex Parte Goldsborough Mont & Company (1958) QWN 31.
However even thought the petitioning creditor is not entitled to a sequestration order, it does not follow that the petition should be dismissed. The Act reposes a discretion in the Court to enable it to consider whether any other creditor desires to be substituted as petitioning creditor and whether he should be permitted to be substituted.
In Re Hayes; Ex Parte Thomas Bonthwick & Sons (Australasia) Ltd
18 FLC 216 it was held that any creditor able to prove another debt of sufficient amounts may prosecute a creditors debtor upon or out of bankruptcy not withstanding the judgment upon which it had been based was subsequently set aside, and the debtor allowed to defend the creditor’s action. This case was approved and applied by Merkel J in Re: Hughes; ex parte Westpac Banking Corporation (unreported) (VG 7279 of 1997) judgment delivered 28 November 1997.In 2000 Olympic Games Pty Ltd vDally (unreported (2000) FCA 1286) Bunchett J dealt with an agreement by the debtor that where the existing petition is opposed on the ground that there is no debt or no debts falling within s.44(1) of the Act, an order for substitution should not be made without requiring proof that the petitioning creditor was at least at the time of institution of the proceeding, entitled to such a debt.
His Honour said, (at paragraph 4):
“I think the authorities are clear that it cannot be right to say the substitution can only be made where there is such a debt, because in numerous cases courts have made orders substituting a petitioner after the petitionary creditor had accepted payments”.
In Johnstone v Guss (unreported FCA 21/12/98, per Kenny J at page 10 said.
“As already indicated, counsel for the judgment debtor contended that the existence of the terms of settlement was relevant to the question whether there is “sufficient cause” within the meaning of s52(2)(b) of the Act, not to make a sequestration order. But for the application made by the supporting creditor, I may well have accepted that submissions. Again, however, I do not feel it necessary to deal with that submission. It is enough to say that, in the circumstances of the case the petitioning creditor should give way as petitioner to the supporting creditor”.
The question of whether to dismiss a petition and/or to substitute a petitioning creditor is discretionary and can be exercised even where the original judgment debt has been set aside.
Given the fact that there was no dispute as to the substituting creditors debt and no evidence of solvency on the part of the debtor, I consider the order of the Registrar was correctly made and I dismiss the application for review.
I certify that the preceding forty-nine (49) paragraphs are a true copy of the reasons for judgment of Bryant CFM
Associate: Angela Patterson
Date: 17 March 2003
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