Aquamore Credit Equity Pty Ltd v Maroon

order made by: STEWART J DATE OF ORDER: 13 NOVEMBER 2023

1. The estate of Michael John Maroon be sequestrated under the Bankruptcy Act 1966 (Cth).
2. The applicant creditor's costs be paid from Michael John Maroon's bankrupt estate in accordance with the Bankruptcy Act 1966 (Cth).
3. The applicant provide a copy of these orders to the Official Receiver within two business days.

1. The date of commission of the act of bankruptcy is 17 December 2021.
2. A consent to act as trustee signed by Sean Magnus Wengel has been filed under s 156A of the Bankruptcy Act 1966 (Cth). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Introduction and background 1 Before the Court are two creditor's petitions for the sequestration of the estates of three debtors. 2 In proceeding NSD 23 of 2022, Aquamore Accredited Equity Pty Ltd as trustee of the Spring Park Unit Trust seeks the sequestration of the estates of Christopher Arthur Maroon and Allan John Maroon. In proceeding NSD 31 of 2022, Aquamore seeks the sequestration of the estate of Michael John Maroon. There is an additional respondent to the creditor's petition in that case, namely Nadia Maroon, but no order is sought against her at this time. 3 Intending them no disrespect in doing so, it is convenient to refer to all four respondents as the Maroons and to each of them by their first names. Christopher, Allan and Michael are brothers, and Nadia is their mother. 4 An order was made that the evidence in the one proceeding is also evidence in the other, and the two proceedings were heard together. 5 At the times relevant to these proceedings, each of the Maroons was a shareholder in Waterview Developments Pty Ltd, and each of Christopher and Allan was a director of Waterview. 6 On 9 March 2018, Aquamore as lender, Waterview as borrower and each of the Maroons as guarantors entered into a first facility agreement with a limit of $1,086,746.99 and a loan term of four months. Security for the first facility agreement included an unregistered mortgage on a property at Point Fredrick owned by Christopher and Allan. 7 On 11 April 2018, Aquamore as lender, Waterview as borrower and each of the Maroons as guarantors entered into a second facility agreement with a facility limit of $2,459,893.05 and a loan term of one month. Security for the second facility agreement included a registered mortgage over the Point Fredrick property. 8 Waterview failed to repay the loan pursuant to the terms of the second facility agreement by 11 May 2018. That was an event of default under both facility agreements. 9 On 26 July 2018, Aquamore filed a statement of claim in proceedings in the Supreme Court of New South Wales against Waterview and each of the Maroons seeking, amongst other relief, monetary judgment in the sum of $4,001,360.40 and possession of the Point Fredrick property. I will refer to this as the 2018 Supreme Court proceeding. 10 No defence was filed in that proceeding. As a consequence, on 25 October 2018, Aquamore filed a notice of motion seeking summary judgment against the five defendants. On 1 November 2018, judgment was entered by Registrar Bradford against the five defendants in the sum of $4,682,115.45, as well as for possession of the Point Fredrick property and for indemnity costs. There was also an order that the judgment be stayed until 1 December 2018. That was to enable Waterview to refinance the debt with another lender. The judgment is recorded to have been by consent. 11 The costs order in the 2018 judgment was subsequently the subject of assessment. On 29 September 2020, judgment was entered in the Supreme Court in favour of Aquamore in the sum of $29,088.49. 12 On 26 March 2021, Aquamore as vendor and mortgagee in possession exchanged contracts for the sale of the Point Fredrick property for a sale price of $4,100,000. Following settlement on 30 August 2021, Aquamore received a total of $4,021,376.83 in proceeds. 13 On 22 September 2021, the Official Receiver issued bankruptcy notice BN 254214 to the Maroons. The sum of the judgment debts was recorded as $4,711,203.94, against which there was a credit of the sale proceeds in the sum of $4,021,376.83 leaving a total remaining debt of $689,827.11. 14 It is not in dispute that the bankruptcy notice was served on each of the Maroons. 15 On 18 October 2021, the Maroons commenced proceeding NSD 1091 of 2021 in this Court seeking an order setting aside the bankruptcy notice. That proceeding was dismissed on 17 December 2021. 16 The present proceedings on the creditor's petitions were commenced by Aquamore on 14 January 2022 (NSD 23 of 2022) and 18 January 2022 (NSD 31 of 2022) respectively. On 7 October 2022, Markovic J ordered that pursuant to s 52(5) of the Bankruptcy Act 1966 (Cth) the period at the expiration of which the creditor's petitions would lapse be extended by 24 months. That is to say, the creditor's petitions will lapse on 14 January 2024 and 18 January 2024 respectively. 17 In the meanwhile, on 15 October 2021, the Maroons filed a statement of claim commencing a proceeding in the Supreme Court of New South Wales. The defendants in that proceeding, which I will refer to as the 2021 Supreme Court proceeding, in numerical order, are Aquamore, Berhero Pty Ltd t/a Acuity Finance, Juris Australia Lawyers Pty Ltd, Ejaz Ur Rehman Khan and Baltej Kaur. Acuity is a finance broker previously retained by Christopher, Allan and Waterview. Juris, Khan and Kaur (who may conveniently be referred to as the Juris parties) ostensibly represented the Maroons in the 2018 Supreme Court proceeding and on their behalf consented to the 1 November 2018 judgment against them that is identified at [10] above. 18 The following claims were alleged against Aquamore: (1) First, it was alleged that the 1 November 2018 judgment was procured in bad faith and ought to be set aside. (2) Secondly, it was alleged that Aquamore had breached its duties as mortgagee exercising power of sale over the Point Fredrick property in respect of which damages were claimed. (3) Thirdly, it was alleged that Nadia and Michael were entitled to have the first and second facility agreements set aside as unjust within the meaning of the Contracts Review Act 1980 (NSW) or on the basis that those agreements were unconscionable. (4) Fourthly, it was alleged that the default interest provisions in the first and second facility agreements operate as a penalty and ought to be set aside. 19 On 27 May 2022, Kunc J made orders in the 2021 Supreme Court proceeding including that the second of the above-mentioned claims, namely the breach of duty claim, be stayed. That stay remains in place. Its basis is that contractual terms in the guarantees prohibit such a claim until such time as the outstanding debt has been paid. 20 On 23 February 2023, the expedited hearing of the first, third and fourth of the claims identified above, ie including the claim to set aside the 1 November 2018 judgment, took place before Parker J. Following delay between the parties to finalise orders giving effect to oral reasons given that day, on 28 April 2023 Parker J made orders that had the effect of striking out the breach of duty claim against Aquamore (ie the claim that was in any event stayed) and, save with respect to Nadia, dismissing the remaining claims. The Maroons were given leave to file a fifth further amended statement of claim to replead certain claims. 21 On 18 July 2023, the Maroons filed a fifth further amended statement of claim in the 2021 Supreme Court proceeding. The following claims are pleaded against Aquamore in that document: (1) a claim by Christopher and Allan for equitable compensation or damages for breach of a mortgagee's duties; (2) a claim by Nadia to set aside the facility agreements; (3) interest and costs. 22 As mentioned, the claim against Aquamore for breach of the duties of a mortgagee is stayed under the orders referred to at [19] above. The result is that although I was advised from the Bar table that subject to any cross-claims and several of the defendants filing evidence, the 2021 Supreme Court proceeding is "ready for hearing", for the present at least there will be no hearing of the claim by Christopher and Allan against Aquamore on the breach of mortgagee's duties claim. 23 The claim against the Juris parties is asserted by Michael and Nadia, and not by Christopher and Allan. It is that the Juris parties were negligent in failing to explain the facility agreements before they were signed, or in the advice they gave in that regard, or that they breached their retainer. That includes on the basis that the consent orders which resulted in the first judgment in the 2018 Supreme Court proceeding were agreed to by the Juris parties without the consent of Michael and Nadia.

The requirements for a sequestration order 24 There is no dispute that the various formal requirements that enliven the power to order the sequestration of the estates of Christopher, Allan and Michael have been met. In that regard: (1) The bankruptcy notice was obtained in respect of final judgments that taken together, in each case, amount to at least the statutory minimum of $5,000 (s 41(1)); (2) The bankruptcy notice was in the form prescribed by the regulations (s 41(2)); (3) When the bankruptcy notice was issued, a period of more than six years had not elapsed since each of the judgments (s 41(3)); (4) The bankruptcy notice had attached to it copies of the two judgments (Bankruptcy Regulations 1996 (Cth), r 4.01); (5) The bankruptcy notice was served on each of the Maroons within six months of it being issued (Bankruptcy Regulations, r 4.02A); (6) The debtors committed an act of bankruptcy for the purposes of s 40 by failing to comply with the bankruptcy notice by 17 December 2021; (7) Each creditor's petition was presented within six months of the date of the act of bankruptcy and relates to a debt exceeding $5,000 (s 44(1)(a) and (c)); (8) Each petition is accompanied by an affidavit of search (Federal Court (Bankruptcy Rules) 2016 (Cth), r 4.04(1)(a)); (9) Affidavits of final search and final debt fulfilling the requirements of r 4.06 of the Federal Court (Bankruptcy Rules) 2016 were tendered. 25 The requirements of s 52(1) are accordingly established, and the Court can therefore exercise its power to make sequestration orders against each of Christopher, Allan and Michael. 26 I gratefully adopt the summary of the applicable principles by Burley J in Toyota Finance Australia Ltd v Youssef Berro [2022] FCA 497: 33 The petitioning creditor has a prima facie right to a sequestration order once proof of the matters required by s 52(1) has been satisfied: Cain v Whyte [1933] HCA 6; 48 CLR 639 at 646 and 648 (Rich J, Starke, Dixon, Evatt and McTiernan JJ agreeing); Rozenbes v Kronhill [1956] HCA 65; 95 CLR 407 at 414 (Dixon CJ, Webb and Fullagar JJ). 34 Nevertheless, the Court retains a discretion to refuse such an order if the debtor is able to pay their debts (s 52(2)(a)) or for "other sufficient cause" (s 52(2)(b)). The onus is on the debtor, …, to establish either or both of the preconditions. The circumstances which may constitute "other sufficient cause" are variable, and it is inappropriate to catalogue or circumscribe them: Clyne v Deputy Commissioner of Taxation [1985] FCA 4; 5 FCR 1 at 5 (Fisher, Morling and Wilcox JJ); Liang v LV Property Investments Pty Ltd [2015] FCA 1057 at [52] (Beach J). 35 The requirement that the creditor prove that the debt relied upon is still owing will ordinarily be easier to fulfil in respect of a judgment debt, the judgment being prima facie evidence of the debt: Wolff v Donovan [1991] FCA 222; 29 FCR 480 at 487 (Davies J). 36 One relevant matter is that the Court has power to go "round the judgment", to enquire into its subject matter, so as to satisfy itself that the creditor's petition is founded on a "good debt": Shaw v Yarranova Pty Ltd [2017] FCAFC 88; 252 FCR 267 at [16] (North, Perry and Charlesworth JJ). The scrutiny required by s 52, which includes consideration of "whether there is, in truth and reality, a debt owing to the petitioning creditor[,] serves to protect the interests of third parties, particularly other creditors of the debtor": Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28; 261 CLR 132 at [55] (Kiefel CJ, Keane and Nettle JJ). 37 Even if "other sufficient cause" has been shown, that merely enlivens the court's discretion to refuse to make a sequestration order. "The power in s 52(2) is permissive, not mandatory. Even if a debtor can bring himself or herself within s 52(2)(b), that does not entitle him or her to have a sequestration order refused": Endresz v Australian Securities and Investments Commission (No 2) [2015] FCAFC 33; 228 FCR 334 at [37] (Edmonds, Gordon and Beach JJ); Russell v Polites Investments Pty Ltd [2012] FCA 11 at [24] (Flick J); Liang at [53] (Beach J).

The grounds of opposition 27 In their grounds of opposition, as clarified or supplemented in oral submissions, Christopher, Allan and Michael rely on the following contentions to persuade the Court to exercise its discretion under s 52(1) not to make sequestration orders: (1) each of them is solvent; (2) each of them has an offsetting claim in the 2021 Supreme Court proceeding that exceeds the amount owed to Aquamore; and (3) the Court should go behind each of the judgments on which Aquamore relies and consider the claim in the 2021 Supreme Court proceeding that there is no debt owed to Aquamore. 28 It is convenient to consider each of those matters in turn.

Solvency 29 On the authorities, an act of insolvency under s 40(1)(g) as has occurred in this case is an act which prima facie demonstrates insolvency. Everyone is under an obligation to comply with final judgments or final orders. Failure to do so, especially after having been placed on notice by way of a bankruptcy notice, may be assumed to indicate an inability to do so. That is to say, it indicates insolvency. See Australian Securities and Investments Commission v Forge [2003] FCAFC 274; 133 FCR 487 at [15] per Branson and Stone JJ. 30 However, under s 52(2)(a), if the Court is satisfied by the debtor that they are able to pay their debts the Court may dismiss the petition. A person is solvent if, and only if, they are able to pay all their debts as and when they become due and payable (s 5(2)). 31 As I previously identified in The Owners - Strata Plan No. 20347 v Saha [2021] FCA 961 at [45]: The onus lies on the debtor to prove their solvency. To do so, the following principles apply (with reference to Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44], approved in Expile Pty Ltd v Jabb's Excavations Pty Ltd [2003] NSWCA 163; 45 ACSR 711 at [16] per Santow J, Meagher and Handley JJA agreeing, in an analogous context): (1) In order to discharge that onus the court should ordinarily be presented with the "fullest and best" evidence of the financial position of the respondent: Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081. (2) Unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency. (3) There is a distinction between solvency and a surplus of assets. A person may be at the same time insolvent and wealthy. The nature of a person's assets, and their ability to convert those assets into cash within a relatively short time, at least to the extent of meeting all their debts as and when they fall due, must be considered in determining solvency. 32 The evidence of Christopher, Allan and Michael with regard to solvency is sparse, to say the least. 33 In his affidavit, Christopher stated that in the 2020-2021 financial year he earned approximately $150,000, that his personal living expenses are about $300 per week and that he has savings of about $2,000. He also says that he assists in paying the mortgage on the family home at 30 Glebe Street, Parramatta, in the sum of about $2,000 per month. 34 Allan stated that his income is about $52,000 per annum and that his personal living expenses are about $280 per week. He has savings of about $1,300. He also contributes to the mortgage on the Parramatta property, but how much he contributes seems to vary depending on the extent to which his assistance is required. 35 Michael stated that his income is $105,000 per annum and that his personal living expenses are about $500 per week. He has savings of about $5,000. He also assists in the mortgage payments on the Parramatta property, usually in the amount of about $2,320 per month. He says that he otherwise has no debts owed or owing by him. 36 That evidence does not come close to stating the "fullest and best" evidence on each of Christopher, Allan and Michael's financial position. They have failed to prove that they have assets which exceed their liabilities or that any such assets are capable of ready realisation. Moreover, the evidence is that Christopher and Allan have an unsatisfied judgment debt of $278,156.86 plus interest and costs outstanding to a Mr Corke since October 2021. That seriously undermines their contentions as to solvency. 37 In those circumstances I am not even close to being satisfied that any of Christopher, Allan or Michael is solvent. In respect of Michael, there is also a matter to be considered in relation to a claim that he asserts against the Juris parties to which I will return shortly.

Offsetting claim 38 Christopher, Allan and Michael rely on their claim against Aquamore in the 2021 Supreme Court proceeding for breach of its obligations as mortgagee in possession of the Point Fredrick property. However, as demonstrated above, only Christopher and Allan still have such a claim in the Supreme Court proceeding - as Michael was not an owner of that property he has no claim - and that claim is stayed. There is also no apparent prospect that the stay will be lifted. 39 In any event, a breach of duty by a mortgagee will not be established merely because the sale in question does not achieve market value. Rather, it requires a failure by the mortgagee to "take all reasonable care to sell the property for not less than market value … having regard to the circumstances existing when the property is sold": Florgale Uniforms Pty Ltd v Orders [2004] VSC 65; 11 VR 54 at [410] per Dodds-Streeton J. 40 The allegations of breach of duty made against Aquamore in the fifth further amended statement of claim in the 2021 Supreme Court proceeding are that Aquamore did not act promptly to sell the Point Fredrick property, refused to allow Christopher and Allan to sell the property themselves, failed to take reasonable care to obtain a sale of the property at not less than the fair market value, failed to take care when negotiating a private sale to obtain a sale price at not less than fair market value and did not organise to auction the property prior to entering into a private treaty for sale. 41 There is precious little evidence in the present proceeding to support those allegations, and Aquamore's evidence in the affidavit of Allen Hsu is to the contrary. Mr Hsu sets out the process adopted by Aquamore with regard to its possession and sale of the property in exhaustive detail. From that evidence, it is far from apparent that Aquamore was in breach of any duty. There is also no evidence that the property sold for less than its fair market value. 42 It is explained in Liang v LV Property Investments Pty Ltd [2015] FCA 1057 at [58]-[60] by Beach J that an important distinction is to be made between a cross-claim which is likely to succeed and a cross-claim which is a bona fide and reasonably arguable claim, but where it is not established by the judgment debtor that it is likely to succeed. The former case may warrant the refusal of a sequestration order, but the latter case would only be a basis for adjourning the creditor's petition without the ultimate refusal of a sequestration order being justified. 43 The problem in the present case is that, as mentioned, Michael has no such claim and Christopher and Allan's claim has been indefinitely stayed. It is certainly not established that the claim is likely to succeed, and there is no basis to adjourn the present proceeding in circumstances where the claim is stayed. 44 In the circumstances, reliance on the breach of duty claim does not provide "sufficient cause" within s 52(2)(b) to refuse the creditor's petition. 45 Some reliance is also placed on the claim against the Juris parties. In that regard, it is submitted on behalf of Michael that he "has a bona fide negligence claim against the Juris parties which if successful will result in no liability to the applicant." It is not clear in the submissions on behalf of Michael whether the claim against the Juris parties is said to independently constitute "sufficient cause" in resisting a sequestration order, or whether it is said to amount to an asset in Michael's estate and therefore supports his submission that he is solvent. In either event, there is no way in which the claim against the Juris parties, even if successful, can cause there to be no liability to Aquamore as submitted, save possibly in the sense that it would allow Michael to pay his indebtedness to Aquamore. 46 The test of solvency is not limited to the debtor's "cash resources immediately available" and extends to "money he can procure … within a relatively short time": Sandell v Porter [1966] HCA 28; 115 CLR 666 at 670. At best, Michael's claim against the Juris parties, as a chose in action, is not a readily realisable asset of his. The litigation of his claim is an inherently uncertain exercise. Even assuming that he achieves a measure of success, it will be a long time before the litigation is capable of delivering any financial benefit. See In the matter of Vitamin Co Pty Ltd [2019] VSC 540 at [31] per Hetyey JR; Carr v Swart [2008] FCA 1495 at [12]-[15] per Foster J. 47 The prospects of a judgment in Michael's favour against the Juris parties is, on the evidence before me, too uncertain and, more particularly, it is too far off to be able to be play a significant role in the assessment of his solvency. It also cannot stand on its own, for the same reasons, as "sufficient cause" to resist a sequestration order.

Going behind the judgments 48 In order to justify going "behind" or "round" the judgments on which the creditor's petition is based, there must be substantial reasons for doubting whether there is in truth and reality a debt due to the petitioning creditor: Ramsay Health Australia Pty Ltd v Compton [2017] HCA 28; 261 CLR 132 at [20], [37]-[38], [47], [54], [65] and [111]-[112]. 49 As explained at [20] above, the claims to set aside the judgments in the 2018 Supreme Court proceedings were dismissed by Parker J in April. There is no suggestion that there has been any appeal from that dismissal. On that basis, there does not appear to be any prospect of the judgments being set aside. As any basis for such a set-aside has been litigated between the parties in the appropriate court, namely the Supreme Court, and rejected, there is no basis on which this Court might now go behind those judgments. In short, I am not satisfied that there is any substantial reason for doubting that those judgments reflect debts that are in truth and reality owing by Christopher, Allan and Michael to Aquamore.

Prejudice to the debtors 50 An additional submission is made on behalf of Michael, and adopted, I think, by Christopher and Allan. It is that Michael should not suffer the prejudice of the sequestration of his estate as compared to the prejudice occasioned to Aquamore which, it is said, is only a time delay. He submits that such a result would shut him out of his claims against the Juris parties (as a consequence of the operation of ss 58(1)(a) and 60(2) of the Act), and that would not be a just result. 51 That submission is in effect merely another way of putting the point that there is "sufficient cause" to exercise the discretion not to make the sequestration order because of the existence of the claim against the Juris parties. I have already rejected that submission. In any event, that such a claim, or chose in action, vests in the trustee after a sequestration order is made is simply the consequence of s 58(1)(a) of the Act; it is part of the design of the legislative scheme for personal bankruptcy and cannot be a reason not to make a sequestration order.

Conclusion 52 For the above reasons I am satisfied that sequestration orders should be made against the estates of each of Christopher, Allan and Michael, and I am not satisfied that my discretion to not make such orders should be exercised. 53 Aquamore has tendered consents from the proposed trustee, Sean Magnus Wengel. I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Stewart.