Zhao v Foong
[2008] FMCA 874
•27 June 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| ZHAO v FOONG | [2008] FMCA 874 |
| BANKRUPTCY – Creditor’s petition – Respondent debtor’s opposition to creditor’s petition – considerations relevant to review – notice stating grounds of opposition to petition dismissed. |
| Acts Interpretation Act 1901 (Cth) ss.36(1), 36(2) Federal Court Rules (Cth) Federal Magistrates Court Rules (Bankruptcy) 2001 |
| Applicant: | LI ZHAO |
| Respondent: | YENA FOONG |
| File number: | SYG 3722 of 2007 |
| Judgment of: | Lloyd-Jones FM |
| Hearing date: | 14 April 2008 |
| Delivered at: | Sydney |
| Delivered on: | 27 June 2008 |
REPRESENTATION
| Solicitors for the Applicant: | Mr G Loupos of George Loupos & Associates |
| Counsel for the Respondent: | Mr F Salama |
| Solicitors for the Respondent: | Jemmeson & Fisher |
ORDERS
The Notice Stating Grounds of Opposition to Petition filed on 1 April 2008 is dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 3722 of 2007
| LI ZHAO |
Applicant
And
| YENA FOONG |
Respondent
REASONS FOR JUDGMENT
The proceedings
This is an application for review by Yena Foong (the respondent debtor) opposing the creditor’s petition filed by Li Zhao on 4 December 2007. The Notice stating Grounds of Opposition to Petition is on the following grounds:
2. The Debtor is a Licensed Real Estate Agent.
3. The Creditor was her Mortgage Broker.
4. The Creditor commenced proceedings on or about August 2007 by way of Statement of Claim (SOC) filed in the District Court of New South Wales against the Debtor for a debt in the sum of $130,000.
5. The Debtor failed to respond to the SOC and the Court by way of default entered Judgment against the Debtor for this amount plus costs on 9 September 2007.
6. The Creditor relies on Default Judgment as a basis for the current bankruptcy proceedings in the Federal Magistrates Court.
7. The Debtor was granted leave in the Federal Magistrates Court to file an application in the District Court for Judgment to be set aside.
8. On 31 January 2008 the Debtor filed a Notice of Motion to Set-aside Default Judgment obtained by the Creditor.
9. The Motion was listed at the District Court on 7 March 2008 for the purposes of a hearing.
10. The matter was adjourned for the 13 March on the basis the Debtor have time to consider an Affidavit served by the Creditor so late in the proceedings.
11. On 13 March 2008, his Honour Boulton J dismissed the application made by the Debtor on the basis, inter alia, that the Debtor had no viable defence. However, His Honour also found that the Debtor’s Cross Claim did have merit and that the Debtor could have the opportunity to make a Cross Claim against the Creditor in an appropriate Court.
12. Irrespective of whether the District Court dismissed the Notice of Motion to set aside Default Judgment, the Bankruptcy Act entitles a Debtor to stay Bankruptcy proceedings on the basis it has a right of set off or a Cross Claim against the Creditor; Section 40(1)(g).
13. On this basis, the Debtor requests that this Honourable Court stay these Bankruptcy proceedings so it may commence on the Cross Claim in the District Court.
14. A sealed Statement of Claim dated 1 April 2008 is annexed to the Debtor’s affidavit dated 1 April 2008 which Annexed hereto and marked “A”.
15. The Statement of Claim is based on the Debtor’s Cross-Claim as tendered in the District Court proceedings.
16. Unless these proceedings are stayed the Debtor, being a bankrupt will be unable to commence proceedings for set off of which she has a bona fide entitlement against the Creditor.
Li Zhao (the applicant creditor) applied to the Court for a sequestration order under s.43 of the Bankruptcy Act 1966 (“the Act”) against the estate of Yena Foong, the claim being:
a)The respondent debtor owes the applicant creditor the amount of one hundred and fifty thousand and thirty eight dollars ($150,038.00);
b)The applicant creditor does not hold security over the property of the respondent debtor;
c)At the time when the act of bankruptcy was committed, the respondent debtor:
i)was personally present in Australia;
ii)was an ordinary resident in Australia;
iii)had a dwelling house or place of business in Australia; and
iv)was carrying on business in Australia either personally or by an agent or manager.
d)The following act of bankruptcy was committed by the respondent debtor within six months before presentation of this petition: Default judgment was entered on 19 September 2007 at the District Court, Sydney pursuant to proceedings No3391 of 2007 for $150,038.00 inclusive of interest and legal fees.
e)The respondent debtor failed to comply on or before 30 October 2007 with the requirements of the bankruptcy notice served on her on 9 October 2007 or to satisfy the Court that she had a counter claim, set off or cross claim equal to or more than the sum claimed in the bankruptcy notice, being a counter claim, set off or cross demand that she could not have set up in the action in which the judgment referred to in the bankruptcy notice was obtained.
The bankruptcy notice NN3938/07 was issued on 2 October 2007. The bankruptcy notice was served on the respondent debtor on 9 October 2007. The respondent debtor was required within 21 days of that date to pay the creditor the amount of the debt or to make arrangement to the creditor’s satisfaction for settlement of the debt.
Mr Salama (for Ms Foong) read the following documents:
a)notice stating Grounds of Opposition to Petition (reproduced at [1] above)
b)the affidavit of Danni Robadi sworn 14 April 2008;
c)affidavit of Yena Foong sworn 14 April 2008 which corrects and replaces the affidavit of Yena Foong sworn 1 April 2008;
d)affidavit of Yena Foong sworn 10 April 2008 (an affidavit in reply to affidavit of Li Zhao sworn 4 April 2008).
Mr Loupos for Ms Zhao read the following documents:
a)creditors petition and the formerly attached affidavits; and
b)a notice of opposition in reply to affidavit of Li Zhao sworn 4 April 2008.
Control order
An application in a case was filed by the applicant creditor Li Zhao on 13 December 2007 seeking the following order:
1. That Christopher John Palmer take control of the debtor’s property pursuant to section 50 of the Bankruptcy Act 1966.
A supporting affidavit of Li Zhao sworn 12 December 2007 was filed.
On 18 December 2007 Federal Magistrate Raphael made the following orders:
1. C J Palmer of O’Brien Palmer Chartered Accountants, Level 4, 23 Hunter Street, Sydney 2000 who has provided a Consent to Act be directed to take control of debtor’s property until 24 January 2008 pursuant to s.50 of the Bankruptcy Act 1966 (Cth).
2. Respondent have leave to approach the court to vary or set aside this order upon filing an application and affidavit in support and serving same on the Trustee and the Petitioning Creditor, such application to be returnable on 4 working days notice excluding the period 22 December 2007 – 6 January 2008.
3. Costs reserved.
On 24 January 2008 Registrar Lackenby made the following orders:
1. By consent on the application of the Respondent the Creditor’s Petition be adjourned until 9.45am on Tuesday 26 February 2008.
2. By consent on the application of the Applicant the s.50 control order is extended to Tuesday 26 February 2008.
3. Any request for further adjournment to be supported by an affidavit setting out the grounds and the facts and circumstances to be relied upon.
4. Costs be reserved.
5. The Court notes that the respondent debtor will file a Notice of Motion within 7 days in the District Court Registry made returnable at the first available opportunity to set aside Default Judgment.
On 26 February Registrar Hedge made the following orders:
1. By consent (on the application of the applicant /respondent) the petition be adjourned until 9.45am on 18 March 2008 with control orders to continue.
2. Usual order in respect of notification to [solicitor for] Respondent Debtor(s) Applicant Creditor(s) of details of time, date and place of adjourned hearing and details of any other orders made today. (For usual order see Notice to Practitioners – Bankruptcy matters issued in NSW by District Registrar of the Federal Court and Federal Magistrates Court).
3. Any request for further adjournment to be supported by an affidavit setting out the grounds and the facts and circumstances relied upon.
4. Costs be reserved.
On 18 March 2008, Registrar Hedge made the following orders:
1. By consent (on the application of the applicant / respondent) the petition be adjourned until 9:45am on 25 March 2008.
2. By consent (on the application of applicant) the control orders be extended to 25 March 2008.
3. Costs be reserved.
On 25 March 2008 Registrar Hedge made the following orders:
1. Until further order, dispense with personal service of further documents.
2. A copy of this order and a copy of any affidavit of service of the bankruptcy notice, a copy of any consent of a registered trustee and any further affidavits be served by sending them by prepaid ordinary post addressed to the respondent’s solicitors at Jemmeson &Fisher, 31 Albion Street, SURRY HILLS, NSW 2010.
3. Documents shall be deemed to be served on the respondent 3 days after the service in accordance with order 2.
4. The hearing date of the creditor’s petition be amended to 9.45am on 8 April 2008 at John Maddison Tower, 88 Goulburn Street, Sydney.
5. By consent (on the application of the applicant) the petition be adjourned until 9.45am on 8 April 2008.
6. By consent control orders pursuant to s.50 of the Bankruptcy Act to be continued until further order.
7. Any request for further adjournment to be supported by an affidavit setting out the grounds and the facts and circumstances to be relied upon.
8. Any notice of opposition and affidavits in support to be filed and served by 1 April 2008.
9. Any reply to Notice of Opposition to be filed and served by 4 April 2008.
10. Costs be reserved.
Adjournment application
At the commencement of proceedings before this Court on 14 April 2007 Mr Salama indicated that Ms Zhao commenced proceedings in the District Court of NSW against Ms Foong for a debt in the sum of $130,000. Ms Foong was unrepresented at that time and failed to respond. A judgment was entered against Ms Foong on 9 September 2007. The default judgment is the basis for the current bankruptcy proceedings. Leave was granted by this Court to Ms Foong to file an application in the District Court seeking to have the judgment set aside.
On 31 January 2008, a Notice of Motion to set aside the default judgment was filed and subsequently distributed on 7 March 2008 for a hearing. On 13 March 2008 his Honour, Boulton J dismissed the application on the basis that Ms Foong had no viable defence. However, it is submitted by Mr Salama that his Honour also indicated that Ms Foong’s cross claim had merit and that it might be opportune for her to make a cross claim against Ms Zhao in an appropriate court. Mr Salama seeks an adjournment to acquire a transcript of the proceedings before his Honour Boulton J as a dispute has arisen between the parties as to the contents of the comments made by his Honour in respect to the cross-claim.
Mr Loupos disputes the fact that his Honour made a statement to the effect that a cross claim may commence on a later occasion irrespective of the fact that judgment had dismissed the application to set aside the default judgment. Mr Salama contends that the transcript would clarify the points raised by his Honour Boulton J. Although the default judgment was not set aside, it was not a bar for Ms Foong to commence a cross-claim and discussion concerning a stay on the execution of the default judgment proceedings pending the outcome of the cross claim.
Mr Loupos acknowledged that his Honour said that Ms Foong may have a right to set off or cross claim and the dismissal of the application to set aside the default judgment did not prevent Ms Foong from bringing proceedings at a later date notwithstanding that she is declared bankrupt.
I have formed the preliminary view that the services supplied by Ms Zhao were to Ms Foong’s companies which are a distinct and separate legal entity to that of Ms Foong. Irrespective of what happens in this Court and in the bankruptcy proceedings, the right of action by the companies provided are still registered and have not been wound up by the creditor companies of Ms Foong. The companies will retain the right to pursue the action of set off. In the circumstances of liquidation, it is for the liquidator to determine whether survivorship of the right of action exists.
The control orders issued on 18 December 2007 and subsequent extension orders placed a restriction over the personal assets of Ms Foong.
In the circumstances, I am not prepared to grant an adjournment to obtain a copy of the transcript of the District Court proceedings. A trust or corporate structure holds a substantial amount of the property. Such bodies are not governed by control orders and therefore the control orders are not applicable to a significant proportion of the property. Ms Zhao’s right of action in these proceedings is only applicable to Ms Foong’s personal assets. The matter should not be further delayed and the objection to the creditor’s petition should proceed. Mr Salama indicated that he would reserve his position on the question of the transcript and would pursue this at some later stage.
History to the proceedings
Ms Li Zhao is a mortgage broker who in her professional capacity sourced funds for Ms Foong who is a real estate agent. The parties had been friends and had known each other for a number of years prior to the business activities that brought them into dispute.
In early 2005 Ms Foong was joint proprietor, or shareholder or director of the companies that owned the following properties:
i)office suite 32/47 Nerida Street Chatswood,
ii)office suite 35/47 Nerida Street Chatswood;
iii)factory complex at 236 Harbord Road, Brookvale;
iv)residential unit 4/54 Epping Road, Lane Cove; and
v)residential home at 16 Federation Place, Frenchs Forest.
In addition to the properties listed above, Ms Foong has entered into a number of purchasers or refinancing arrangements which resulted in a situation where the loaned monies were insufficient to completely satisfy the purchase. As a result Ms Zhao made personal loans to Ms Foong to finance these shortfalls. These loans were:
a)Liverpool purchase - the substantial amount of the funds for this project were obtained from the AMP Bank but there was a shortfall for which Ms Foong borrowed the sum of $70,000 from Ms Zhao.
b)Orix refinancing - which was refinancing for the existing properties [20(i)-(v)] but there was a shortfall in the vicinity of $30,000 which again was borrowed from Ms Zhao in her personal capacity.
c)A further loan in relation to the financing of other debts including credit cards and insurance. A further $30,000 was borrowed from Ms Zhao.
Mr Salama submitted that representations were made regarding the different properties but what is of significance is a claim that Ms Zhao failed to adhere to the specific instructions of Ms Foong. Those specific instructions related to the structure of the loans. Ms Zhao was instructed to acquire separate loans for the separate properties being properties (i), (ii) and (iii) [20] above and the new purchase being the Liverpool property.
What actually happened was that Ms Zhao sought one loan for four properties which was denied by Citibank. This is where the dispute arises. Ms Foong was forced to take out three separate loans from Ms Zhao and was also involved in a dispute with Orix and other financial institutions because she had fallen behind in the servicing of the existing loans. If four separate loans had been applied for rather than one uni collateral loan for all four properties. Ms Foong claims and it has been subsequently suggested by a Citibank employee that the application would have been successful (affidavit of Ms Foong, 14 April, paragraph 31).
On 11 August 2007 Ms Zhao filed a Statement of Claim in the District Court seeking recovery of the loans. Ms Foong contends that it was Ms Zhao’s actions in relation to the applications for the loans for Citibank that caused the lengthy delay in obtaining finance. Meanwhile, Ms Zhao anticipated and indicated to Foong that the application would be successful which forced her into the situation causing her severe financial stress. The nature of this stress was:
a)Being forced to find alternative financing for the Liverpool property which was exchanged on the understanding that the Citibank loan would be forthcoming. When the Citibank loan did not materialise it was not possible to withdraw the purchase.
b)The higher interest rate from the alternative loans caused her to default.
c)The failure to provide the guaranteed loans from Citibank in accordance with her instructions given.
Azurite Properties Pty Ltd and Azuritech Pty Ltd
In the affidavit of Yena Foong 1 April 2008 at paragraph 13 she states:
Also, at this time I was already the sole or joint proprietor of the following properties.
Mr Salama indicates that this was a misunderstanding on the part of Ms Foong partly because English is not her native tongue and due to her literacy levels in English, she was mistaken in her description of the property ownership. This has subsequently been changed in her affidavit dated 10 April 2008 and contains the following statements in respect of this earlier error:
5. I refer to paragraph 4 of the Applicant’s Affidavit and state that it was my true belief that I was the owner of the properties as listed at paragraph 13 of my affidavit dated 1 April 2008. My belief is based on the fact that I sought the properties, arranged to purchase the property, engaged solicitors, brokers and real estate agents to affect the purchase and did everything necessary for my agent to effect the purchase of the properties.
6. Further, I always believe that as I had control and possession of the properties and the fact that I was the person making repayments to the banks then I was the owner of those properties. Also, I believe I was the owner of those properties because I was personally purchased by the banks seeking repossession of those properties through the Supreme Court.
8. In relation to Azuritech Pty Ltd, I was a director and shareholder of this company at the time the properties were purchased. Annexed hereto and marked “A” is a copy of the company extract of Azurtiech Pty Ltd.
9. I refer to paragraph 5 of the Applicant’s affidavit and say that I was a secretary and a shareholder of Azurite Properties Pty Ltd. Further, I was the guarantor for the mortgage and that it was I who financed the purchase and was making repayments to the financier on behalf of the registered proprietor. I repeat paragraphs 5 and 6 above. Annexed hereto and marked “B” is a copy of the company extract of Azurite Properties Pty Ltd.
12. I admit the names of the proprietors of the subject properties vary, however, I did not fully understand the commercial structure in which the copies were purchased as I believe I had direct ownership of those properties.
The affidavit of Yena Foong sworn on 14 April 2008 which corrects and replaces the affidavit of Yena Foong sworn on 1 April 2008 has been amended to read:
13. Also, at this time, I was already joint proprietor or shareholder or director of companies that owned the following properties.
Mr Salama submitted that there has been an attempt to gloss over the issue of ownership of the various properties by corporate structure and the misunderstanding on the part of Ms Foong as to the correct ownership of these properties. It has also been put to the Court that the failure of Ms Foong to respond to the initial bankruptcy notice within the time limits set out in that notice was due to the fact that she was unrepresented by a legal practitioner. The Court has been asked to extend a level of sympathy and tolerance because of these apparent impediments. I find this difficult to accept when the licensed commercial agent in his sworn affidavit filed in these proceedings states that Mr Foong destroyed the bankruptcy notice by tearing it up when it was formally served on her at her place of business.
It appears that considerable planning has occurred in the structuring of the corporate vehicles and trusts in the acquisition and management of these various properties. Ms Foong holds a number of directorships and secretarial roles in these vehicles and has also entered the position of guarantor for a number of the financing arrangements. This would require professional advice from either the accounting or legal profession to establish this structure and to arrange the relevant appointments. Ms Foong holds a real estate licence together with a franchise for a well known participant in the real estate industry. Ms Foong has also taken on the responsibility of a director and secretary of a registered company which has ongoing responsibilities to file annual returns and various business statements for the conduct of those businesses.
To support this view I note that the Controller, Mr C J Palmer of O’Brien Palmer Chartered Accountants was appointed on 18 December 2007 pursuant to s.50 of the Bankruptcy Act 1966 (Cth). His report to the Court indicates that an historical personal extract for Ms Foong obtained from the Australia Securities and Investment Commission (ASIC) shows her involvement in the formation, promotion, operation and ownership of nine companies. However, in the case of ZIZ Systems Pty Ltd the extract shows that it was placed into liquidation by an order of the Supreme Court of NSW on 5 February 2004. Mr Anthony Sims of Sims Partners was appointed as the official liquidator. The company was deregistered on 26 November 2007. The Century 21 C-View Realty business commenced on 8 May 2007 and the business name was originally registered in the name of C-View. However, on 29 June 2007, the business name was transferred to a related entity B-Gold Realty Pty Ltd. It appears that Ms Foong is employed as a real estate agent by that business.
Ms Foong is the proprietor of a real estate agency which would require her to hold a real estate licence. She would have to complete a Real Estate Institute NSW licensing course based on national competency standards. A management development training package which must be approved by the NSW Office of Fair Trading is the education requirement for granting a licence. Besides subjects relating directly to the management of a real estate operation, it includes managing effective financial systems, implementing and monitoring financial management schemes and maintaining trust accounts. While Counsel representing Ms Foong suggests that she is at a disadvantage because English is not her first language, her proficiency in English would have to be sufficient for her to understand and complete the educational requirements of the Real Estate Licensing course required by the NSW Fair Trading Department.
I acknowledge that the accountant retained by Ms Foong to prepare various tax returns and who was previously listed as a defendant in an action before the District Court is recently deceased. Consequently, his name has been removed from the Statement of Claim filed in the District Court. There is no evidence before the Court as to this person’s involvement in a corporate advisory capacity other than in the preparation of tax returns. There is no evidence before the Court as to who assisted Ms Foong with the establishment of the corporate structure and whether that person or others were still involved in the administration of these companies. However, it is difficult to accept the submission that Ms Foong is an unsophisticated investor. Similarly, upon the receipt of a bankruptcy notice and the widely understood consequences of such a notice, it is difficult to accept that a person involved in the business community particularly in the area of real estate would not have sought immediate advice in respect of that notice.
I have also formed the view that there has been an attempt to gloss over the important aspects of the contractual relationship, the content of the loan agreement and the personal rights of each party. In the series of transactions are the individuals, Ms Zhao and Ms Foong and the two companies Azurite Properties Pty Ltd (ACN 110 034 172) and Azuritech Pty Ltd (ACN 106 524 501). In the transactions Ms Zhao and Ms Foong have entered into a contractual relationship being a loan agreement which results in personal rights between the two individuals but no other party. If Ms Foong fails to pay back the loan to Ms Zhao then Ms Zhao has a right against Ms Foong and no other party has a right to claim a set off.
In this particular dispute Ms Zhao was approved by Ms Foong to arrange finance facilities for Azurite Properties and Azuritech Pty Ltd. Ms Foong alleges that her instructions were not followed and that failure resulted in a loss to Azuritech and Azurite Properties. The only right established in respect of the failure to abide by instructions is Azurite Properties and Azuritech in an action against Ms Zhao. There is no right of action or cause of action arising out of this arrangement for Ms Foong to take action whether by claim, cross claim or set off against Ms Zhao. The only party who has legal rights in this situation are companies Azurite Properties and Azuritech. Ms Foong does not have a right in her personal capacity. This right of action is supported by the affidavit material filed in the proceedings.
In the affidavit of Ms Zhao sworn 4 April 2008 contains the following loan documents:
a)Annexure “A” dated 23 January 2006 for $70,000;
b)Annexure “B” dated 16 October 2006 for $30,000; and
c)Annexure “C” dated 11 December 2006 for $30,000.
These three documents are between Li Zhao and Yena Susan Foong with no reference or mention of any intervening party, Azurite Properties Pty Ltd or Azuritech Pty Ltd. Ms Zhao’s rights to recover the debt are solely against Ms Foong and any right of set-off is between Ms Foong and Ms Zhao.
Annexure “A” concerns the shortfall to cover the purchase of the property at 16 Charles St, Liverpool by Azurite Properties Pty Ltd. Ms Foong in her affidavit indicates that she approached Ms Zhao to arrange a finance facility for $70,000 to complete the purchase of this property in December 2005. Annexure “D”, the affidavit of Ms Zhao sworn 14 April 2008 contains a copy of the front page of a contract for purchase of the Liverpool property by Azurite Properties Pty Ltd. The date of contract is 23 June 2005 with a completion date 35 days from the date of exchange.
In the affidavit of Yena Foong sworn 14 April 2008 at paragraph 54 it states:
In or about December 2005 the Plaintiff offered to lend me $70,000 at 10% interest per annum, to cover the remaining amount of a purchase price of the Liverpool property. I accepted the loan.
Mr Loupos disputes this claim because before the Court is uncontested evidence to show that the Liverpool property was purchased on 23 June 2005 by a company called Azurite Properties which is a trust company for Ms Foong. Despite the claim for the alleged cross-claim by Yena Foong, the Liverpool property is owned by Azurite Properties Pty Ltd which is a family trust company owned by or controlled by Ms Foong up until the time that there was a resignation of directorship by her which was after the commencement of these proceedings. I note the discrepancy in the affidavit which deposes that the loan of $70,000 was a loan from Ms Zhao to Ms Foong to facilitate the completion of that transaction. However, the uncontested document in evidence is that the purchase is in the name of Azurite Properties Pty Ltd.
The significance of this loan transaction is that if Ms Foong approached Ms Zhao to arrange a financial facility for Azurite Properties Pty Ltd to be able to settle the purchase and that loan is not arranged or facilitated in accordance with Ms Foong’s instructions then there arises a cross claim because of some negligent act by Ms Zhao. A right of set off and right of cross claim arises between Azurite Properties Pty Ltd and Ms Zhao and not between Ms Foong and Ms Zhao.
The second loan for $30,000 dated 16 October 2006 and recorded in Annexure “B”, in the affidavit of Ms Zhao sworn on 4 April 2008, identifies the relevant parities as:
…by Yena Foong borrowed from Li Zhao…
There is no reference in this loan agreement to Azurite Properties or Azuritech.
The affidavit of Yena Foong, sworn 14 April 2008 explains the circumstances of that loan in the following paragraphs:
56. In or about April 2006 I engaged the plaintiff to refinance the commercial properties on my behalf (as stated at paragraph 39). The plaintiff took some time in attempting to obtain finance.
57. In or about October 2006 the plaintiff obtained an offer for finance from Liberty, a finance company.
58. The plaintiff had informed me that the only thing stopping Liberty from providing finance for the subject properties was a default on my Credit Card.
59. The plaintiff offered to lend me a further $30,000 to cover my credit card debts to clear the default. I accepted this amount.
Annexure “C” of the affidavit of Ms Zhao sworn on 4 April 2008 is evidence of a third transaction which was a request made to Ms Zhao to lend money to Ms Foong. The purpose of this was so that she could clear her credit cards, insurance and other small expenses to satisfy the lending body.
In the affidavit of Yena Foong sworn 10 April 2008, Annexure “A” is an ASIC extract which indicates that Azuritech Pty Ltd was under external administration and / or controller appointed as of 7 February 2007. The controller that was appointed pursuant to s.50 of the Act (see [6] to [11] above.
In the affidavit of Yena Foong sworn 14 April 2008 states at paragraph 13 and 14 the following:
13. Also, at this time I was already the joint proprietor or shareholder or director of companies that own the following properties. (I have included the estimated values of these properties at the time I own them):
i) office suite 32/47 Nerida St, Chatswood, NSW value $460,000
ii) office suite 35/47 Nerida St, Chatswood, NSW value $350,000
iii) factory complex at 236 Harbord Rd, Brookvale, NSW value $1.6 million
iv) …
v)…
14. At or about 2005 I requested the plaintiff to locate and obtain finance on my behalf for the first three properties listed at paragraph 13 above.
The affidavit of Li Zhao sworn 4 April 2008 contains in annex ures “E”, “F” and “G”, “Transfer of the Power of Sale” forms which identify these properties and their respective ownership:
a) Lot 32 in Strata plan 21982 (32/47 Nerida St, Chatswood)
Registered proprietor Azuritech Pty Ltd
Mortgagee Orix Australia Corporation Ltd
Date 10/8/07
b) Folio identifier 35/SP21982 (35/47 Nerida St, Chatswood)
Registered Proprietor Azuritech Pty Ltd
Mortgagee Orix Australia Corporation Ltd
Date 20/06/07
c) 13/9504 (236 Harbord Rd, Warringah)
Registered proprietor Azuritech Pty Ltd
Mortgagee Rylande Pty Ltd
Date 22/05/07
After Ms Zhao was unsuccessful in arranging finance for Azuritech, Ms Foong then proceeded on her behest and organised this finance with Orix. The subsequent default under the facility resulted in a mortgagee power of sale and therefore Ms Foong seeks to blame Ms Zhao.
The annex ures to Ms Zhao’s affidavit indicate the party that has a cross claim for set off against Ms Zhao is Azuritech in relation to the two strata units in Nerida St and the factory unit at Harbord. In the case of the Liverpool property, the cross-claim for set off right against Ms Zhao is held by Azurite Pty Ltd.
In the case of loan (i) (see [42] above), the entity of Azuritech Pty Ltd has a cross claim or set off against Ms Zhao in respect of that loan. In the case of the Liverpool property, entity of Azurite Properties Pty Ltd has a right of set off or cross claim against Ms Zhao for that sale. Consequently, any problem that arises due to the failure to adhere to instructions or any alleged failure to follow those instructions merely creates a right to set off or a right to cross claim between Ms Foong in her personal capacity against Ms Zhao in her personal capacity or against her company which was the brokerage business.
Mr Salama’s submissions contend that if the statement of claim filed in the District Court contained the wrong plaintiff then ss. 64 and 65 of the Civil Procedure Act 2005 (NSW) would allow the amendment or addition of parties. The issue is whether the appropriate plaintiff was Ms Foong in her personal capacity or alternatively as a director of Azurite Properties and Azuritech. Mr Salama contends that if the incorrect plaintiff was contained in the statement of claim and that prejudiced his client then a motion could be filed to either change the plaintiff or add further plaintiffs. Mr Salama argues that any defect in the pleadings could be remedied and that there would be no prejudice suffered by the other side in the District Court proceedings that could not be remedied by way of a costs order which the opposing party would be entitled.
In the case of the loans (ii) and (ii) (see [41]) above, the evidence before the Court is that these were strictly personal loans between Ms Zhao and Ms Foong to meet credit card debts and various other commitments that had to be addressed in order to establish her own credit worthiness within the eyes of the lending institutions that were being approached for finance. There has been no attempt to adequately explain how these debts had arisen from a failure to follow instructions when raising finance to complete the purchase of a new building or to re-finance existing loans. Consequently, I am not satisfied that the proposed cross-claim or set-of being pursued in the District Court will be successful in relation to these two loans.
Operation of s.40(1)(g)
Mr Loupos contends that Mr Zhao commenced these recovery proceedings in August 2007 by way of a Statement of Claim filed in the District Court of New South Wales against Ms Foong for a debt in the sum of $130,000. The affidavit of Kassin Germanos, commercial agent, states an oath that the Summons and Statement of Claim was served on Ms Foong. Ms Foong failed to respond to those proceedings and the District Court by way of default entered judgment against Ms Foong for the sum claimed plus costs on 9 September 2007. A bankruptcy notice (NN3938/07) was issued on 2 October 2007 and subsequently served by Kassin Germanos on Ms Foong on 9 October 2007. There was no application to contest the bankruptcy notice and have it set aside. Section 40(1)(g) of the Act entitles a debtor to make an application to set aside the notice in certain circumstances if the debtor has a cross-claim or right of set off. In the absence of any cross-claim or right of set off the debtor, Ms Foong, committed an act of bankruptcy by failing to comply with the bankruptcy notice by paying the amount of the judgment debt. That entitled Ms Zhao to issue a creditor’s petition based on that act of bankruptcy.
The bankruptcy notice which was served on Ms Yena Foong at her office, Century 21, 335 Penshurst St, Willoughby NSW on 9 October 2007 at 1:55pm clearly states the following:
3. You are required, within 21 days after service on you of this bankruptcy notice:
a) to pay the creditor the amount of the debt; or
b) to make an arrangement to the creditor’s satisfaction for settlement of the debt.
5. Bankruptcy proceedings may be taken against you if, within that time stated in paragraph 3, above:
a) you do not comply with the requirements of either paragraph 3(a) or paragraph 3(b) above; and
b) the Court (that is, the Federal Court of Australia or the Federal Magistrates Court) does not extend, or is not deemed to have extended, the time for compliance within this bankruptcy notice (see paragraph 6, below).
6. The Court may extend the time for compliance with this bankruptcy notice, if, within the time stated in paragraph 3 above, you apply to the Court on one or both of the following grounds:
a) that you have instituted proceedings to set aside the judgment or orders in respect of which the bankruptcy notice has been issued;
b) that you have filed within the Court an application (on one or more grounds, apart from the grounds mentioned in paragraph 7), below, to set aside this bankruptcy notice.
7. In addition, within the time specified in paragraph 3 above you may file an application to the Court for an order to set aside this bankruptcy notice on the specific grounds that:
a) you have a counter claim, set off or cross demand equal to or exceeding the sum specified in this bankruptcy notice as owing to the creditor; and
b) in the action or proceeding in which the judgments or orders mentioned in paragraph 2 of this bankruptcy notice was obtained, you could not have set up that counter claim, set off or cross demand.
The time for compliance with the bankruptcy notice expired at close of business on 30 October 2007 in accordance with the following principles. If the time for compliance with the bankruptcy notice expires on a weekend, public holiday or a bank holiday, then time for compliance is the next day that is not a weekend, a public holiday or a bank holiday: Acts Interpretation Act 1901 (Cth) s.36(2). Time is calculated exclusive of the day upon which the notice was served: Acts Interpretation Act s.36(1). The provision for ‘reckoning of time’ in the Federal Court Rules and the Federal Magistrates Court Rules has no application to the time fixed for compliance with a bankruptcy notice. Neither party raised any issue regarding the service of the bankruptcy notice. I am satisfied that the provision of the Act and Court Rules have been complied with.
The affidavit of Kassin Germanos, Commercial Agent, sworn on 11 December 2007 states that the creditor’s petition that was filed in these proceedings on 4 December 2007 was served on Yena Foong at her office at Century 21 Real Estate, 335 Penshurst, Willoughby NSW on 11 December 2007 at 11am.
The creditor’s petition contains the following:
4. The following act of bankruptcy was committed by the respondent debtor within 6 months before presentation of this petition:
Default judgment was entered on 19/09/07 at the District Court Sydney pursuant to proceedings No 3391/07 for $150,038.00 inclusive of interest and legal fees.
The respondent debtor failed to comply on or before 30th October 2007 with the requirements of a bankruptcy notice served on her on 9th October 2007 or to satisfy the Court that she had a counter-claim, set-ff or cross demand equal to or more than the sum claimed in the bankruptcy notice, being a counter-claim, set-off or cross demand that she could not have set up in the action in which the judgment referred to in the bankruptcy notice was obtained.
The ‘Notice Stating Grounds of Opposition to Petition’ filed on 1 April 2008 indicates that Ms Yena Foong intends to oppose the petition on the following grounds:
12. Irrespective of whether the District Court dismissed the Notice of Motion to set aside Default Judgment, the Bankruptcy Act entitles a debtor to stay bankruptcy proceedings on the basis it has a right of set off or a cross claim against the creditor: s.40(1)(g).
Section 40(1)(g) of the Bankruptcy Act 1966 (Cth) states:
(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) where the notice was served elsewhere--within the time fixed for the purpose by the order giving leave to effect the service;
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;
Mr Loupos contends that s.40(1)(g) of the Act only entitles Ms Foong to seek to set aside the bankruptcy notice if the application is brought in a timely fashion after the bankruptcy notice was served. It is noted that there has been a number of applications for adjournment so that proceedings could be launched in the District Court to have the default judgment set aside.
Importantly, the sequence of events were:
a)19 September 2007 – Default judgment made in District Court
b)2 October 2007 – Bankruptcy Notice filed in this Court
c)9 October 2007 – Ms Foong served with Bankruptcy Notice
d)11 December 2007 – Ms Foong served with Creditor’s Petition
e)18 December 2007 – Order pursuant to s.50
f)24 January 2007 – This Court grants leave for Ms Foong to file Notice of Motion in District Court to set aside default judgment
g)31 January 2007 – Notice of Motion filed in District Court
h)7 March 2007 – Return date for Notice of Motion
i)13 March 2007 – Notice of Motion dismissed.
As this approach failed, Mr Loupos submits that Ms Foong should be precluded from initiating these proceedings under s.40(1)(g) of the Act and that the application now before this Court should be struck out.
Mr Salama submitted that this Court had the power under the principle of nunc pro tunc to grant leave to extend the time limits. The Court has this power in r.3.05 of the Federal Magistrates Court Rules 2001 which states:
(1)The Court may extend or shorten a time fixed by these Rules or by a judgment, decree or order.
(2) A Registrar may extend or shorten a time fixed by these Rules.
(3) The time fixed may be extended even if the time fixed has passed.
(4) A time fixed by these Rules or by a judgment, decree or order for service, filing or amendment of a document may be extended by consent without an order.
Mr Salama submits that the Court has jurisdiction to grant an extension of time to comply with the bankruptcy notice having regard to the fact that his client was not legally represented at the time. In addition, Mr Salama submits that it is too late in the proceedings to make an application to extend time to comply with the bankruptcy notice because it was not until the creditor’s petition was served that his clients first sought legal advice.
Mr Salama also relied on r.13.03 of the Federal Magistrates Court Rules 2001 which states:
Default in taking required step etc
(1) This rule applies if a party fails to take a step required by these Rules or to comply with an order of the Court.
(2) Subject to any other order or transfer the Court may, on the application of another party in the proceeding or of its own motion, make an order:
(a) that the step be taken within a stated time; or
(b) to end the proceeding or dismiss a response.
(3) The Court may make the order sought or another order that it considers appropriate.
Mr Salama submits that Ms Foong would have the remedy available to her under r.13.03. Mr Salama argues however, that at that time Ms Foong could have taken the step as described in r.13.03, she did not have the benefit of legal advice. Mr Salama submits that r.13.03 operates in circumstances when there has been a default in taking a required step, being an application to set aside the bankruptcy notice or alternatively making an application to extend the time for compliance with the notice. Under the rule the Court can extend the time for compliance with leave being granted nunc pro tunc.
Mr Salama indicated that as a matter of completeness he also relied on the rules in respect to a cross claim against an application which allows a respondent to launch a cross claim in a proceeding. The Court was referred to the following rule:
28.10 Stay of claim
The Court may stay the enforcement of a judgment given against a respondent until a cross-claim by the respondent is decided.
The Court is being requested to make the above orders because Ms Foong is an unsophisticated investor who was not legally represented at the time. The failure of Ms Foong to adequately and appropriately respond to the bankruptcy notice was due to her business naivety and the difficulty that she faced because English was her second language as discussed above in paragraphs [27]-[32] is nothing more than an attempt to gloss over the responsibilities of her business liabilities while operating in a complex and purposely constructed corporate structure with the benefits that flow from those arrangements.
A significant issue against this business naivety claim is the fact that Ms Foong had previously been a director and secretary of the company ZIZ Systems Pty Ltd (in liquidation), placed in liquidation by an order of the Supreme Court of NSW dated 5 February 2004. Mr Anthony Simms of Simms Partners was appointed as official liquidator. Although this was a corporate insolvency as opposed to a personal insolvency in the matter currently before the Court the significance of an insolvency claim should have been immediately apparent to Ms Foong on this service of the bankruptcy notice. The service of that notice had been previously foreshadowed by the service of the statement of claim filed in the District Court. If Ms Foong had legitimately completed and obtained her registration as a Real Estate Agent, although not making her conversant with the intricacies of insolvency, it should have immediately placed her on notice that this was an issue to be addressed requiring assistance from a legal practitioner. The contents of the bankruptcy notice make that abundantly clear.
In submissions made by Mr Salama in respect to the impact of s.60(2) of the Act submits that Ms Foong is a director, secretary and share holder of Azurite and Azuritech and in that role is the backbone of those companies. It is submitted that she is a person who makes the decisions and calls the shots and as deposed in her affidavit filed in these proceedings is a person who produced, acquired the funds, paid the mortgages and had the day to day carriage of those companies. However, on the other hand it is claimed that she failed to respond to the earlier steps in these proceedings because of her business naivety and lack of sophistication in the English language. It is also submitted that s.64 and s.65 of the Civil Procedures Act would permit the amendment to the new pleadings filed in the District Court. It should be noted that Ms Foong ceased to be a Director of that company on 5 September 2007 although she does remain as the Secretary and Share Holder.
In the circumstances I am not prepared to grant leave to extend the time limits to enable a further application to the District Court to pursue a proposed cross-claim by two companies that are associated with Ms Foong in an attempt to off-set a claim of personal insolvency against her.
I certify that the preceding sixty-seven (67) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM
Associate:
27 June 2008
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