Application by Westpac Banking Corporation - Charara v Konneh; Konneh v Charara; Cellnet Group Limited v Aravanis - [2015] NSWSC 1084 - NSWSC 2014 case summary

Supreme Court of NSW|2014-08-13|Before: McCallum J

Judgment

HER HONOUR: These proceedings concern the distribution of money paid into Court by Westpac Banking Corporation, being surplus funds following the sale of a mortgaged property.
Lyndon Konneh was the registered proprietor of land at Bangor. On 27 August 2013, Westpac obtained judgment for possession of the land: Westpac Banking Corporation v Konneh [2013] NSWSC 1176. The property was sold in March 2014. The surplus, after the discharge of the debt to Westpac, was $82,861.35. Pursuant to s 58 of the Real Property Act 1900 (NSW), that sum was held on trust by Westpac for the payment of any subsequent mortgages, charges or covenant charges in the order of their priority with the surplus (if any) payable to the mortgagor. On 6 May 2014, there being disagreement as to the application of those provisions, the surplus was paid into Court pursuant to s 95 of the Trustee Act 1925 (NSW).
Three competing claims are made on the fund. It is convenient to describe them in the order in which the relevant applications were filed with the Court.
The first is the claim of Mr Jamal Cherara. By notice of motion filed 7 May 2014, Mr Cherara seeks an order that the registrar release to him the sum of $30,000 and an order for costs. The notice of motion does not specify the precise terms of the order sought as to costs; it is not clear whether payment is sought out of the fund paid into Court or from one of the respondents to his motion. The respondents to the motion are Mr Konneh (the mortgagor), Cellnet Group Ltd (another debtor which has also made a claim on the fund) and Mr Andrew Aravanis (Mr Konneh's former trustee in bankruptcy). Mr Charara contends that Cellnet is entitled to no distribution or at most $16,000.
The second claimant is the mortgagor, Mr Konneh. He acknowledges Mr Charara's debt but disputes Cellnet's. By notice of motion filed 27 May 2014, he seeks an order that the registrar pay the whole of the balance of the fund to him after payment of the amount of $30,000 sought by Mr Charara. The respondents to Mr Konneh's motion are Mr Charara, Cellnet and Mr Aravanis.

Circumstances in which the claims arise

Mr Konneh purchased the land in July 2003. On 2 May 2005, a company of which Mr Konneh was the sole director, Varkon Office Solutions Pty Ltd, entered into a credit agreement with Cellnet. Varkon's liability to Cellnet was secured by a personal guarantee provided by Mr Konneh (executed on 11 May 2005). Clause 7 of the guarantee provided: Each Guarantor charges with payment of the monies and the compliance with all obligations secured by the Guarantee and Indemnity all beneficial interests (freeholder and leasehold) in land and personal property held now or in the future by a Guarantor. Each Guarantor agrees that if demand is made upon him or her by Cellnet, that Guarantor will immediately execute a mortgage or other instrument of security, or consent to a caveat, as required by Cellnet and against the event that he or she fails to do so within a reasonable time from being so requested, that Guarantor hereby irrevocably and by way of security appoints any Cellnet credit manager or solicitor engaged by Cellnet to be his or her true and lawfully attorney [sic] to execute and register instrument.
Throughout 2006 and early 2007, Cellnet supplied goods to Varkon pursuant to the agreement.
On 1 July 2007, Mr Charara lent Mr Konneh $30,000 for payment to Westpac. The terms of the loan are recorded in a document headed "Deed of Debt", dated 1 July 2007 but not stamped for duty until 31 July 2013.
Varkon fell into default of payments due under its credit agreement with Cellnet. On 14 December 2007, Cellnet lodged a caveat on the title of the property owned by Mr Konneh, claiming an equitable interest based on the charge securing the guarantee (pp 1-3 of exhibit A). That is the first caveat on the title.
On 27 February 2008, Cellnet commenced proceedings against Mr Konneh in the District Court of Queensland seeking payment pursuant to the guarantee.
On 18 June 2008, Varkon went into voluntary administration pursuant to s 436A of the Corporations Act 2001 (Cth). On 18 July 2008, Varkon went into liquidation.
On 1 October 2008, default judgment was entered against Mr Konneh in favour of Cellnet in the sum of $64,798.04 including interest and costs.
In July 2009, after Mr Konneh had failed to comply with a bankruptcy notice based on the judgment debt, a creditor's petition was served by Cellnet. Mr Konneh then brought an application to set aside the default judgment. That application was dismissed: Cellnet Group Ltd v Konneh [2009] QDC 325 (reproduced at pp 30-36 of exhibit A).
On 2 November 2009, Mr Konneh filed an appeal against that judgment and sought a stay of the orders of the District Court. The following day, however, he presented a debtor's petition (with the result that Cellnet's creditor's petition was dismissed). Mr Aravanis was appointed as Mr Konneh's trustee in banktuptcy. The judgment debt, together with interest calculated up to a date shortly before the filing of Cellnet's application in these proceedings, now exceeds $100,000 (affidavit of Joel Hunter Pittman sworn 27 May 2014 at par 32). Cellnet's costs are also secured by the charge on the property. However, since the debt plainly exceeds the sum paid into Court, Cellnet has not proceeded to have those costs assessed.
On 8 July 2013, Mr Charara lodged a caveat on the title of the property, describing his interest in the land in the following terms: $30,000 plus interest of $500 per month of debt borrowed by Mr Konneh and deed entered into for the caveator to hold interest over $30,000 and interest over the land.
That is the second caveat on the title. A third caveat was registered by the trustee, Mr Aravanis, but he claims no interest in the fund.
It is common ground that the surplus from the mortgagee sale, upon payment into Court, remained subject to any equitable interest. However, each of the debtor applicants (Mr Charara and Cellnet) disputes the existence and priority of the interest claimed by the other.

Cellnet's claim

Cellnet submitted (uncontroversially) that the surplus funds should be paid to the claimant who can establish the equitable claim (a charge or mortgage on the land) that is earlier in time, provided that there has been no "postponing conduct" to deny the priority which arises on that basis.
Cellnet's interest was created first in time. The charge was granted in May 2005. Mr Charara's "deed of debt" is dated 1 July 2007. Cellnet's caveat warning of its alleged interest was lodged after that date. However, Mr Charara does not allege that there was any "postponing conduct" that would deny Cellnet first priority to the money paid into Court. On the contrary, in the circumstances explained below, Mr Charara appeared to acknowledge that, subject to his arguments concerning Cellnet's debt, Cellnet has first priority to the sum of $16,000 (T5.45; T35.15-35.21).
Cellnet claims that it has a charge on the land which secures the amount determined by the District Court of Queensland and, accordingly, that it has first claim to the whole amount paid into court.

Mr Charara's and Mr Konneh's claims

Mr Charara represented himself in the proceedings. So far as the material before me reveals, he is not admitted to practice as a legal practitioner in this jurisdiction but he describes himself as a "very experienced litigant". Mr Charara noted that Brereton J had once described his submissions as "skillful and courteous" (see ACES Sogutlu Holdings Pty Ltd ACN 122 192 509 [2014] NSWSC 140 at [10]). He stated (in his written submissions in reply) that he sought to use that ability to assist the Court in these proceedings.
Mr Konneh also represented himself but was content to adopt the submissions put by Mr Charara.
No argument was directed by Mr Charara as to the operation of the guarantee and indemnity to create a charge on the land. Mr Charara cited four reasons for resisting Cellnet's claim to priority over the whole sum paid into court: 1. that the judgment debt is liable to be set aside on the grounds of fraud; 2. that the debt was proved in the bankruptcy and can no longer be pursued; 3. that Cellnet's interest in the money paid into Court is limited to $16,000, being the amount in respect of which stamp duty was paid when Cellnet's caveat was lodged; 4. the fact that Cellnet made an insurance claim against the debt and a claim against its profit in its tax returns in respect of the debt.
A fifth reason was raised in oral submissions; namely, that the judgment debt was obtained in contravention of s 440J of the Corporations Act 2001 (Cth).

The judgment debt

The contentions in respect of the judgment debt are addressed in an affidavit sworn by Mr Konneh on 2 June 2014. In that affidavit, Mr Konneh stated that he was "denied natural justice" in the determination of his application to have the default judgment set aside. However, the affidavit does not specify any alleged failure to afford procedural fairness. The reference to a denial of natural justice does not appear to have been used in the sense in which a lawyer would comprehend that term. Rather, the contention appears to be that the decision refusing to set aside the default judgment was wrong. Mr Konneh asserted that he "could not carry on the appeal" because Cellnet's solicitor kept pursuing him and telling him that he would make Mr Konneh's life "hell".
The detail of the contention that the judgment debt was obtained by fraud is sparse. In his first affidavit sworn 27 May 2014, Mr Konneh made a bare denial of any liability to Cellnet, stating "they are not entitled to make any claim against my surplus". The affidavit provides no further detail but concludes "I intend to give further evidence in respect to this my affidavit and my application".
In his second affidavit sworn 2 June 2014, Mr Konneh quoted that statement and said "I am making this my affidavit as some of the further evidence I intended to give". However, there was still no detail as to the basis on which Cellnet's underlying claim is disputed.
In his third affidavit sworn 24 June 2014, Mr Konneh said (at pars 2 and 3, as written): I have never ever give Cellnet any beneficial interests in any land and personal property held by me, I did not authorised Cellnet Group Ltd to lodged any caveat over my then property [details included]. I have always denied and I deny the alleged debt that Cellnet claim against me, and I have dealt with those issues in my other affidavits. I have never ever given security to Cellnet, a personal guarantee is not a security or mortgage.
Even if those contentions established a cogent basis for doubting the correctness of the judgment of the District Court of Queenland (which they do not), the fact remains that there is a judgment debt which has not been set aside or overturned. Mr Konneh's liability pursuant to the guarantee has accordingly merged in that judgment. It would not be appropriate for this Court to go behind it.
Mr Charara submitted that there is no debt because the default judgment arises from "a personal unsecured guarantee". However, no argument was put as to why cl 7 of the guarantee (set out above) should not be construed according to its terms so as to create an equitable charge on the land, as contended by Cellnet.

Alleged proof in the bankruptcy

In his written submissions, Mr Charara said (pars 14 and 15, as written): Cellnet bankrupted Mr Konneh for the default judgment when it lodged with the official receiver bankruptcy notice on 14 January 2009 before Mr Konneh declared himself bankrupt on 3 November 2009. Where person 1 bankrupt person 2 for a specify debt that is owed to person 1, person 1 cannot continue to pursue person 2 who was bankrupted for the same debt, in addition to what I have said, Cellnet was also barred on 3 November 2009 by the Australian Government Insolvency and Trustee Services in pursuing the alleged debt further.
There is a factual misconception in that submission. Cellnet did not "bankrupt" Mr Konneh. He ultimately went into bankruptcy on his own petition. In any event, the submission overlooks the operation of s 58 of the Bankruptcy Act 1966 (Cth). As submitted on behalf of Cellnet, the effect of the "general rule" created by that section is that a provable debt is converted from being a right of action against the bankrupt to a right to share in the distribution of the bankrupt's estate vested in the trustee. However, a "secured creditor" retains the right to realise his or her security: s 58(5) of the Act. The term "secured creditor" is defined in s 5(1) of the Act. It includes a person holding a mortgage, charge or lien on property of the debtor as security for a debt due to him or her from the debtor. Cellnet's entitlement to proceed to realise its security was recognised by the trustee in his administration of the estate (see letter dated 17 April 2004 from Mr Aravanis to Westpac's solicitor at p 41 of exhibit A).

Limitation of the debt to $16,000

The contention that Cellnet's claim is limited to $16,000 is made in Mr Konneh's affidavit sworn 27 May 2014 at par 5 and in Mr Charara's written submissions at par 13.
As already noted, Cellnet's caveat was lodged on 14 December 2007. The caveat is stamped for duty of $5 in respect of an amount stated to be $16,000. The submissions made by Mr Charara and Mr Konneh misconceive the significance of that fact. The amount in respect of which duty was paid does not crystallise or quantify Mr Konneh's liability to Cellnet under the guarantee. The only relevant quantification of that debt is the judgment of the District Court of Queensland.
Mr Charara submitted that the Court does not have "the jurisdiction to hear anything" by reason of the operation of s 304(1) of the Duties Act 1997 (NSW). That section provides: (1) An instrument that effects a dutiable transaction or is chargeable with duty under this Act is not available for use in law or equity for any purpose and may not be presented in evidence in a court or tribunal exercising civil jurisdiction unless: (a) it is duly stamped, or (b) it is stamped by the Chief Commissioner or in a manner approved by the Chief Commissioner.
That section does not go to the Court's jurisdiction but operates as an evidentiary provision calculated to exclude evidence of the instrument until the duty payable has been paid. By the time of the hearing, the caveat had been duly stamped (T8.33). The explanation for originally having the caveat stamped in an amount of duty of $5 in respect of an amount secured specified as $16,000 is to be found in s 210(2) of the Duties Act combined with the fact that the charge in the present case was an "all monies" charge. Section 210(2) relevantly provides: 210 How is mortgage duty charged? ... (2) The amount of duty is: (a) $5.00, if no amount is secured by the mortgage or the amount secured by the mortgage is not more than $16,000, or (b) if the amount secured by the mortgage is more than $16,000-$5.00, plus a further $4.00 for every $1,000, or part, by which the amount secured exceeds $16,000.
Cellnet evidently took the approach that, since the amount secured by the charge was not fixed, it could not know, at the time of lodgment of the caveat, the amount of duty chargeable for the purpose of having the instrument "duly stamped" for the purpose of s 304(1).
Mr Charara submitted that the way in which s 210 operates is that, upon payment of the amount of duty of $5, the mortgagee is entitled to claim a limit of $16,000. I do not think that is the proper construction of the section.

Insurance claim

Mr Charara submitted that the judgment debt was obtained by fraud because the claim includes an amount in respect of which Cellnet has recovered a payment under an insurance policy. That submission is misconceived. The receipt of an insurance payout by Cellnet did not extinguish any part of the debt owed to Cellnet by Mr Konneh.

Relevance of the administration of Varkon

In his oral submissions, Mr Charara sought to impugn the default judgment entered against Mr Konneh on an additional ground based on s 440J of the Corporations Act. He submitted that, at the time Cellnet "proceeded into court" it could not do so without the leave of the court, which was never obtained (T21.3). Section 440J(1) provides: Administration not to trigger liability of director or relative under guarantee of company's liability (1) During the administration of a company: (a) a guarantee of a liability of the company cannot be enforced, as against: (i) a director of the company who is a natural person; or (ii) a spouse or relative of such a director; and (b) without limiting paragraph (a), a proceeding in relation to such a guarantee cannot be begun against such a director, spouse or relative; except with the leave of the Court and in accordance with such terms (if any) as the Court imposes.
It was submitted that the judgment debt was obtained in contravention of that section and could be impugned on that further basis.
Since the issue was raised for the first time in oral submissions at the hearing (notwithstanding a direction as to written submissions), counsel for Cellnet sought leave to provide further submissions on that issue. I granted leave to Cellnet to put on a short further submission of no more than two pages limited to responding to the s 440J point (and a question of costs reserved by Hamill J on an earlier occasion). The submissions were to be filed within two days. They were received on time but, contrary to the terms of the direction, extended to five pages.
Mr Charara wrote to the Court complaining of the breach and asking the Court to order Cellnet to resubmit its further written submissions. A two-page submission was provided within the further time allowed. In the circumstances, I have disregarded the five-page document and considered only the two-page document.
Under the discipline of a page limit, the further submissions provided on behalf of Cellnet provide a succinct answer to the point taken by Mr Charara.
The operation of s 440J was considered by Barrett J in Coates Hire Operations Pty Ltd v McNaughton [2006] NSWSC 841. In that judgment (at [3]) his Honour characterised the operation of the section as an "embargo" which operates only during the administration of the company, as stated in the opening words of the section.
The effect of the section is that a guarantee cannot be enforced while the administration subsists but the prohibition ceases once the administration has ended. Justice Barrett referred to the explanatory memorandum which reveals that the vice to which the section was directed was that directors who had personally guaranteed the obligations of a company would be discouraged from appointing an administrator if the appointment would trigger their liability under the guarantee. The section aimed to remove that "perceived impediment to the early appointment of an administrator to a company in financial difficulties".
In Bank of Western Australia v Clift [2010] QSC 366; 80 ACSR 163, Margaret Wilson J held that leave was not required to proceed to judgment during the currency of an administration where proceedings had been commenced before the commencement of the administration.
Varkon went into administration on 18 June 2008. The administration ended on 18 July 2008 when the company was placed into liquidation (annexure LVK5 to the affidavit of Mr Konneh sworn 27 May 2014).
The proceedings in the District Court of Queensland were commenced before the commencement of the administration on 27 February 2008. The default judgment was entered after its conclusion on 1 October 2008. It is clear that the judgment was not entered "during the administration".
Mr Charara does not suggest that any particular step was taken to enforce the guarantee during the period of the administration. Indeed, his written submissions in reply expressly eschew any such argument (at par 7). Rather, the submission was that the section operates as an automatic stay which renders the originating process "defective in law". Mr Charara submitted "the statement of claim or summons cannot be used again to reopen the proceedings without the leave of the court".
That is not the way in which the section has been construed in the authorities cited by Cellnet. I would respectfully adopt the analysis preferred by Barrett J; that the prohibition on enforcement automatically ceases (by force of the statute) once the administration has ended. The stay or embargo imposed during the period of an administration does not vitiate the originating process or nullify any proceedings commenced prior to the commencement of the administration. It simply operates to put the proceedings on hold for so long as the administration subsists, following which the position is status quo ante bellum.

Conclusion

I have concluded that Mr Charara's submissions (skillful and courteous as they were) are not legally correct. I am satisfied that the guarantee and indemnity created an equitable charge on the land enforceable in the sum determined by the District Court of Queensland which, following the payment into Court, attaches to that fund.

Costs of motion to set aside subpoena

Mr Charara served a subpoena to produce and a notice to produce on Cellnet apparently directed to obtaining documents relating to his argument as to the insurance payment. Cellnet's solicitor queried the relevance of the documents sought. Mr Charara stated that he was not required to identify their relevance.
On 12 June 2014, Cellnet filed a notice of motion seeking orders that the subpoena and part of the notice to produce be set aside.
On 6 August 2014, without admissions as to the relevance of the documents, Cellnet provided two documents to Mr Charara in response to part of the subpoena. The notice of motion came before Hamill J as duty judge. His Honour made orders (apparently by consent) disposing of the notice of motion. His Honour reserved the costs of the day and the motion to be determined by the judge hearing the case.
Mr Charara submits that he was the successful party on the notice of motion and that he should be awarded costs. As already noted, the material before me suggests that Mr Charara is not admitted as a legal practitioner in this jurisdiction and accordingly those costs would be confined to expenses or disbursements. Cellnet submits that the documents sought did not relate to any issue that had to be determined in the proceedings and that it was justified in resisting production. Cellnet submits that, although a self-represented litigant, Mr Charara "has been at pains to inform the Court during the proceedings that he is a senior counsel in another jurisdiction (Liberia) and his letterhead states, inter alia, that he is a highly experienced litigant in the Supreme Court and other courts". Cellnet submits that Mr Charara ought to have been aware of the consequences of issuing the subpoena and that he ignored Cellnet's overtures to resolve the matter. On that basis, Cellnet submitted that Mr Charara should meet Cellnet's costs of and incidental to the notice of motion.
Where an application is resolved by agreement without the need for any determination of the court, it is always difficult for the court to assess the strength of any argument as to who would have won had the matter proceeded. Although the insurance argument has failed, it does not necessarily follow that there was no legitimate forensic purpose for the subpoena. The parties' agreement obviated the need for Hamill J to determine that issue. Parties should not be discouraged from seeking to reach agreement to resolve interlocutory applications. In my view, the appropriate course is to make no order as to the costs of Cellnet's notice of motion.

Orders

For those reasons, the orders are: 1. That Mr Charara's application by notice of motion filed 7 May 2014 be dismissed. 2. That Mr Konneh's application by notice of motion filed 27 May 2014 be dismissed. 3. Pursuant to s 98 of the Trustee Act 1925, that the money paid into court by Westpac Banking Corporation be paid to Cellnet Group Ltd.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 August 2015

Application by Westpac Banking Corporation - Charara v Konneh; Konneh v Charara; Cellnet Group Limited v Aravanis

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