Clapham v Commonwealth Bank of Australia

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1456 of 2012

JUDGES: NORTH, BARKER AND NICHOLAS JJ DATE: 7 august 2013 PLACE: SYDNEY

INTRODUCTION 1 This is an appeal by the appellants (Mr and Mrs Clapham) against a sequestration order made against their estates on 28 August 2012 by a judge of this Court (Emmett J). The sequestration order was made on the application of the respondent (the Bank) and based upon acts of bankruptcy which were committed by Mr and Mrs Clapham as a result of their failure to comply with bankruptcy notices served on them on 21 February 2012. 2 In their appeal, Mr and Mrs Clapham contended that the primary judge erred in failing to find that there was "other sufficient cause" why the sequestration order should not have been made for the purposes of s 52(2)(b) of the Bankruptcy Act 1966 (Cth) (the Act). Mr and Mrs Clapham argued that the primary judge should not have made the sequestration order because they had cross-claims against the Bank based upon what they alleged were false or misleading representations made to them by an employee of the Bank (Mr Chapman) upon whose advice they allegedly relied. 3 At the commencement of the hearing of the appeal, counsel for Mr and Mrs Clapham acknowledged that the primary judge's decision to make the sequestration order against them or, more particularly, not to decline to do so on the ground that they had claims of their own against the Bank based upon their reliance on Mr Chapman's alleged representations, constituted a discretionary judgment the correctness of which had to be evaluated in accordance with the principles discussed by the High Court in House v The King (1936) 55 CLR 499 at 505. This concession was properly made. We shall return to consider the relevant principles later in these reasons. But we begin our consideration of the issues that arise in the appeal with an account of the relevant factual background.

FACTUAL BACKGROUND 4 The bankruptcy notices served upon Mr and Mrs Clapham on 21 February 2012 were founded upon a judgment entered against them in favour of the Bank for $1,396,115.16 by McDougall J in the Supreme Court of New South Wales on 31 January 2012. The Bank obtained its judgment against Mr and Mrs Clapham in the following circumstances. 5 From late 2005 the Bank advanced funds to Yarralumla Holdings Pty Ltd (Yarralumla), a company with which Mr and Mrs Clapham were associated, to finance Yarralumla's acquisition of two properties to be used to farm macadamia nuts. As security for its advance to Yarralumla, the Bank obtained registered mortgages over these properties and another property owned by Mr and Mrs Clapham at MacMasters Beach, together with guarantees and indemnities which each of them signed in favour of the Bank. 6 In 2007, the market price of macadamia nuts fell significantly and in time Yarralumla defaulted. On 29 December 2008, the Bank, Mr and Mrs Clapham and Yarralumla entered into a written agreement (the 29 December Agreement). 7 The 29 December Agreement provided (inter alia) that the Bank would allow Yarralumla and Mr and Mrs Clapham time within which to re-finance the debt owed to the Bank. The 29 December Agreement also provided that if the debt was not re-financed within that time, then the Bank would be at liberty to enforce its securities, including the guarantees, without further notice. The Agreement further provided that Yarralumla and Mr and Mrs Clapham would consent to the entry of judgment in any legal proceedings brought against them by the Bank for a specified amount. 8 Mr and Mrs Clapham's attempts to re-finance the debt were unsuccessful and the Bank took steps to enforce its securities. The mortgaged properties were sold either by the Bank or a receiver appointed by the Bank. On 2 November 2010, the Bank commenced legal proceedings against Mr and Mrs Clapham in the Commercial List of the Equity Division of the Supreme Court (the Supreme Court). 9 Mr and Mrs Clapham were legally represented in an early period of the Supreme Court proceedings by solicitors and counsel. During this period a cross-claim and a supporting affidavit affirmed by Mr Clapham on 3 June 2011 were filed and served on their behalf. However, on 12 June 2011 the lawyers acting for Mr and Mrs Clapham ceased to act. According to Mr Clapham's evidence, this was because he and Mrs Clapham could not pay the lawyers' fees. 10 Mr Clapham then attempted to obtain new legal representation for himself and his wife. On 19 October 2011 he applied for legal aid but this application was refused. On 6 December 2011 he lodged an appeal against the refusal of legal aid pursuant to s 56 of the Legal Aid Commission Act 1979 (NSW) (the LAC Act). By this time the proceedings between Mr and Mrs Clapham and the Bank had already been fixed for hearing commencing 31 January 2012. 11 On 25 January 2012 Mr Clapham provided written notice to the Registrar of the Supreme Court that he and his wife had appealed against the refusal of legal aid. As is apparent from McDougall J's reasons for judgment, his Honour was made aware of this fact when the proceedings came before him on 31 January 2012. Neither Mr or Mrs Clapham, nor any lawyer acting on their behalf, appeared before his Honour. Mr and Mrs Clapham evidently believed that the hearing of the proceedings would be adjourned until some time after their appeal against the refusal of legal aid had been determined. 12 As is also apparent from his Honour's reasons for judgment, McDougall J was required, in the circumstances where Mr Clapham's appeal against the refusal of legal aid had not been determined, to consider the application of s 57 of the LAC Act. Section 57 provides: Where it appears to a court or tribunal, on any information before it: (a) that a party to any proceedings before the court or tribunal: (i) has appealed, in accordance with section 56, to a Legal Aid Review Committee and that the appeal has not been determined, or (ii) intends to appeal, in accordance with section 56, to a Legal Aid Review Committee and that such an appeal is competent, (b) that the appeal or intention to appeal is bona fide and not frivolous or vexatious or otherwise intended to improperly hinder or improperly delay the conduct of the proceedings, and (c) that there are no special circumstances that prevent it from doing so, the court or tribunal shall adjourn the proceedings to such date on such terms and conditions as it thinks fit. 13 Counsel for the Bank informed McDougall J that no reliance was placed by it upon subs (b) of s 57. In light of that concession it was only necessary for his Honour to consider whether subs (c) applied. 14 After considering the meaning of subs (c), his Honour concluded that s 57 did not require him to grant an adjournment if there were special circumstances that justified not doing so. Although McDougall J concluded that no adjournment of the Bank's claim against Mr and Mrs Clapham should be granted, he considered that the hearing of Mr and Mrs Clapham's cross-claim against the Bank should be adjourned. 15 In reaching this conclusion it is apparent that McDougall J was influenced by the absence of any claim to relief in the cross-claim filed by Mr and Mrs Clapham to set aside the 29 December Agreement. His Honour reasoned that while Mr and Mrs Clapham may have a cross-claim for a substantial sum to maintain against the Bank based on their reliance upon Mr Chapman's alleged representations, they had no defence, given the terms of the 29 December Agreement, to a claim for $4,589,791.74 plus accrued interest, less payments received in reduction of such indebtedness. The judgment entered by his Honour took account of substantial adjustments following receipt by the Bank of proceeds of sale of the mortgaged properties. 16 McDougall J noted in his reasons for judgment that the Bank undertook that if Mr and Mrs Clapham's cross-claim was pressed, the Bank would not seek to defend it on the basis of any estoppel that might arise out of the judgment entered in favour of the Bank. On this basis McDougall J entered judgment in favour of the Bank for $1,396,115.16 and ordered that the cross-claim be adjourned until after Mr and Mrs Clapham's appeal against the refusal of legal aid had been considered. His Honour stood the cross-claim over for directions to 24 February 2012. 17 Be that as it may, on 7 February 2012, the Bank caused bankruptcy notices to be issued based upon the judgment entered on 31 January 2012. The bankruptcy notices were served on Mr and Mrs Clapham on 21 February 2012. On 10 March 2012 Mr and Mrs Clapham filed an application to set aside the bankruptcy notices in what was then known as the Federal Magistrates Court. Their application was dismissed by Barnes FM (as her Honour then was) not because she did not consider Mr and Mrs Clapham's cross-claim to have merit, but because the cross-claim was one that it was open to Mr and Mrs Clapham to raise at the time the judgment relied upon by the Bank was entered against them (see Clapham v Commonwealth Bank of Australia [2012] FMCA 498). 18 The Bank filed the Creditor's Petition on 10 May 2012. In the meantime, Mr and Mrs Clapham secured legal representation. On 24 August 2012 a Judge of the Supreme Court granted Mr and Mrs Clapham leave to amend their cross-claim. 19 The Creditor's Petition came before the primary judge on 28 August 2012 for hearing. Mr and Mrs Clapham were represented at the hearing by counsel. A transcript of the hearing before the primary judge is included in the appeal book. 20 There were a number of affidavits in evidence before the primary judge made by Mr Clapham including his affidavit of 3 June 2011 which had been filed in the Supreme Court proceedings. Also in evidence before the primary judge was the amended cross-claim (Ex 1) that Mr and Mrs Clapham had been given leave to file in the Supreme Court proceedings. All of this material was received into evidence without objection. Counsel for the Bank did not seek to cross-examine Mr Clapham but merely tendered a number of documents (Ex 2) some of which are referred to in the primary judge's reasons for judgment as "contemporaneous communications".

THE PRIMARY JUDGE'S REASONS FOR DECISION 21 The primary judge delivered ex tempore reasons for judgment. His Honour recounted the background to the Creditor's Petition, noting that Mr and Mrs Clapham accepted that they were indebted to the Bank, and that the only basis upon which they sought to resist the making of a sequestration order was that they had filed a cross-claim in the Supreme Court seeking damages against the Bank. His Honour noted that the cross-claim relied upon by Mr and Mrs Clapham alleged misleading or deceptive conduct and unconscionable conduct in contravention of the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act) and the Competition and Consumer Act 2010 (Cth), and also included claims for negligent advice, and relief under the Contracts Review Act 1980 (NSW). His Honour further noted that Mr and Mrs Clapham's cross-claim had been amended pursuant to leave granted by a Judge of the Supreme Court, and that the evidence relied upon by them at the hearing of the Creditor's Petition consisted principally of the affidavit made by Mr Clapham on 3 June 2011 that had been filed in the Supreme Court proceedings. 22 His Honour then summarised the claims made in Mr and Mrs Clapham's cross-claim. As his Honour explained, Mr and Mrs Clapham asserted that between about June 2005 and January 2006 Mr Chapman, on behalf of the Bank, made certain representations to Mr Clapham, and that he also agreed to provide, and did provide, advice to Mr Clapham concerning financial planning for a proposed macadamia nut farm. 23 Referring to the evidence contained in Mr Clapham's affidavit, the primary judge summarised Mr Clapham's account of his contact with Mr Chapman as follows: On 9 September 2005, Mr Clapham attended a farming exposition at the TAFE campus at Alstonville in New South Wales with Mr Chapman. They walked around for a few minutes looking at equipment and then sat down to discuss his financial plans. Mr Chapman told Mr Clapham that his expenses might prove to be a bit low and that the financial plan prepared by Mr Clapham highlighted the problem of the lack of scale of a small farm. Mr Chapman told Mr Clapham that he would probably find that he would be doing a lot of work for little return and that a second larger property would create the scale to afford a much greater profitability and a better lifestyle. Mr and Mrs Clapham were keen to purchase a property known as Brooklet Farm for up to $1.6 million, but needed to know if the Bank was willing to lend the necessary money. Mr Chapman told Mr Clapham there was no problem with the Bank lending to purchase Brooklet Farm because Mr Clapham had an outstanding record in business and a long track record of earning significant income and solid assets. Mr Chapman said that he would need to review Mr Clapham's financial plans in greater detail, and that Mr Clapham would most likely need to add his property at MacMasters Beach as security before he could lend for a second larger property. Mr Chapman raised two different strategies with Mr Clapham, saying that he could either purchase Brooklet Farm and focus on his consulting and investments, or purchase Brooklet Farm and another farm, such as the property known as Clan Macadam, to achieve economies of scale. Mr Clapham told Mr Chapman that he was very uneasy about the second option. Mr Chapman was very persuasive about encouraging the second option and virtually all of the comments made by him were about the benefits of scale derived from owning two farms. 24 The primary judge noted that, in his affidavit, Mr Clapham asserted that he did not consider buying two farms until Mr Chapman suggested it. Having made that observation, the primary judge then turned to an email from Mr Clapham to Mr Chapman dated 11 September 2005 which his Honour considered to be inconsistent with Mr and Mrs Clapham's case. For present purposes, it is sufficient to refer to what the primary judge said of this email at [12] of his reasons for judgment: On 11 September 2005, Mr Clapham sent to Mr Chapman an email dealing with Brooklet Farm. In it, he said relevantly that he really enjoyed meeting Mr Chapman on 9 September 2005 and thanked him for dedicating so much of his afternoon to the discussion. He said that, as outlined in a voicemail to Mr Chapman the previous day, he and Mrs Clapham were successful at the auction for the Brooklet Farm. In the email, Mr Clapham said that he wished to change his bank accounts, including the existing loan and mortgage on the MacMasters Beach property, to the Bank. He also said that he would then like to set up the facility that they had discussed on 9 September 2005 to facilitate the purchase of the Brooklet Farm property and to cover some of the working capital. He then went on to say that, as they discussed, Mr Clapham had negotiated an arrangement for the purchase of Clan Macadam. He said that the purchase price was $3.7 million, with settlement on 20 January 2006, and that the farm costs were to be met by the vendor until settlement. He told Mr Chapman, in the email, that he had done some extensive financial modelling for Clan Macadam and believed it would provide a considerable positive cash flow. He also said that, in an effort to reduce the need to borrow for working capital, he would explore forward purchasing of a portion of the 2006 crop to coincide with the settlement in January 2006. He said he believed a number of processors were prepared to do that and, with in excess of 200 tonnes from both properties, he would be in a strong negotiating position. It is impossible to reconcile that email with the version of events deposed to by Mr Clapham in his affidavit. (emphasis added) 25 We should point out that a copy of the email of 11 September 2005 was exhibited to Mr Clapham's affidavit. Mr Clapham explained in his affidavit that on 10 September 2005 he and his wife were the highest bidders at an auction of Brooklet Farm. Contracts for the purchase of that property were exchanged on that date at a price of $1,625,000. According to Mr Clapham's affidavit, he called Mr Chapman from Brooklet Farm shortly after the auction. Mr Chapman deposed that they then had a conversation to the following effect: Mr Clapham: Hi Paul, well I've got some good news, Ellen and I were successful with the auction to purchase Brooklet Farm so we're really excited. However, we paid $1,625,000, which was a bit more than we had expected. Now that that's over, we need to organise bank guarantees for the deposit as the vendor was steadfast about his demand for a 10% deposit and we only had funds for a 5% deposit. Mr Chapman: Congratulations is in order Ian. You have purchased a beautiful property in the dress circle of the area. I'll get straight onto arranging the bank guarantees and loans on Monday. It would make it a lot easier for all parties if we were to quickly conclude the purchase of Clan Macadam so that we include it as part of our Application with the Bank. According to Mr Clapham's evidence, the email of 11 September 2005 was sent after this conversation occurred. 26 It will be necessary for us to return to [12] of his Honour's reasons later in this judgment, but it is important to note at this point that the primary judge does not explain in his reasons why he considered the email of 11 September 2005 to be impossible to reconcile with the version of events deposed to by Mr Clapham in his affidavit. However, in our view, this observation of his Honour can be related back to the matter contained in the immediately preceding paragraph of his Honour's reasons in which his Honour referred to Mr Clapham's assertion that he did not consider buying two farms until Mr Chapman suggested it. This is "the version of events" that we understand the primary judge to be referring to in [12] of his reasons, and which he considered could not be reconciled with the email of 11 September 2005. 27 The primary judge then turned to consider other aspects of Mr Clapham's evidence relevant to the issue of advice concerning the price of nuts. On this issue the primary judge stated that the "contemporaneous communications indicate the difficulties that Mr and Mrs Clapham will have in any cross-claim in establishing that they relied upon advice from the Bank as to the market for macadamia nuts." The following summary of the matters referred to by the primary judge in connection with this issue is drawn from his Honour's reasons for judgment: In March 2005, Mr Clapham requested that Mr Graham Smith, an accountant, provide him with a sensitivity analysis in relation to the macadamia nut market. According to the primary judge, Mr Clapham asked Mr Smith for a copy of such an analysis, which apparently related to a farm at Dunoon, and Mr Clapham told Mr Smith that he would like to use it for the purposes of evaluating other properties. His Honour observed at [13] that this "suggests some degree of expertise on the part of Mr Clapham in the preparation of such analyses." On 7 September 2005, two days before the first meeting between them, Mr Clapham sent to Mr Chapman a financial analysis that Mr Clapham had prepared for a property referred to as the Jorgensens Lane Property. In the email attaching this financial analysis Mr Clapham apologised for the delay in getting it to Mr Chapman and explained that he wanted to run it by Mr Smith first. His Honour observed at [14] that this "again indicates reliance by Mr Clapham on Mr Smith for the financial analysis, rather than on the Bank or Mr Chapman." On 13 September 2005, Mr Clapham sent another email to Mr Chapman. The email suggested that Mr Clapham had sent his financial plan for Clan Macadam to another accountant, Mr Albert Hilton, for review by him. Mr Clapham asked Mr Hilton to check over the plan for "obvious shortcomings or oversights." As it happened, Mr Hilton was the vendor of Clan Macadam so he had an "obvious bias". However, according to the primary judge, these communications indicated reliance by Mr Clapham on his own consultants rather than the Bank. On 15 September 2005, Mr Clapham sent another email to Mr Chapman saying that Mr Smith had reviewed the financial plan and suggested some adjustments including provision for contingencies and an increase in the provision for wages. 28 Another matter the primary judge considered significant was that, in his email of 15 September 2005, Mr Clapham told Mr Chapman that Mr Smith also observed that "it is feasible that nut prices will fall after three years". According to his Honour, Mr Clapham also said, in the same email, that he had already accommodated this in his calculations and that his "vertical integration strategy would be well in place within three years and that that strategy would largely shield them from large increases in supply and any downward price pressure due to financial difficulties faced by the processors." 29 The primary judge also referred to the absence of evidence of any written communication from the Bank or Mr Chapman to Mr Clapham concerning the matters about which Mr and Mrs Clapham later complained. 30 The primary judge then went on to describe the background to, and content of, the 29 December Agreement. In view of the issues that arise in the appeal it is not necessary to refer in detail to this aspect of his Honour's reasons. 31 We have already referred to [12] of the primary judge's reasons for judgment in which his Honour expressed the view that the version of events deposed to in Mr Clapham's affidavit was "impossible" to reconcile with the contents of Mr Clapham's email to Mr Chapman of 11 September 2005. This and other factors were drawn together by the primary judge at [37]-[39] of his reasons for judgment where his Honour said: [37] It is against the background of that material that it is necessary to consider whether or not there is sufficient cause for dismissing or adjourning the petition. A debtor, in order to rely on s 52(2), must establish that he has a real claim against the creditor that is likely to succeed. A likelihood of success may justify a refusal of a sequestration order. Alternatively, if the circumstances reveal a claim of a character and nature such that the likelihood of success cannot be predicted with accuracy, then the petition should be dismissed or an adjournment of the petition should be granted. [38] If the claim is one in which the credit of witnesses will be involved and a debtor sets out the nature and detail of the case and all his or her evidence, the debtor may only be able to persuade the Bankruptcy Court that, if relevant witnesses are believed, he or she has good prospects of success. What should be proved and what is sufficient to be proved in any given case will depend upon the circumstances. The discretion is a broad one, but it is informed by public interest considerations concerning the activity of persons who are insolvent. Quite clearly, Mr and Mrs Clapham are insolvent and cannot meet the debts presently owing to them [sic], quite apart from the debt owing to the Bank. [39] The contemporaneous communications to which I have referred suggest to me that it is quite unlikely that Mr and Mrs Clapham will be able to establish that representations were made as alleged, such that Mr Clapham was induced in reliance upon them to cause Yarralumla to enter into the transactions and for him to give the guarantee. It may be that Mrs Clapham was not involved to the extent that Mr Clapham was. However, it is clear enough that she left to Mr Clapham the business arrangements from which she stood to benefit. (emphasis added) 32 The last of these paragraphs is not entirely clear in a number of respects. First there is the reference to "[t]he contemporaneous communications". The Bank submitted that this referred not only to the email correspondence in which Mr Clapham engaged in 2005, but also correspondence exchanged between Mr and Mrs Clapham and the Bank in February and March 2008, correspondence between Mr and Mrs Clapham's lawyers and the Bank in June 2008 and, in addition, the 29 December Agreement. 33 Paragraph 39 of his Honour's reasons is also unclear in that it is not entirely apparent whether his Honour was satisfied that it was unlikely that Mr and Mrs Clapham would be able to establish that any of the alleged representations were made, or whether his Honour's negative assessment of the strength of their case turned upon problems in proving reliance. 34 The primary judge then commented upon what he seems to have regarded as a failure on the part of Mr and Mrs Clapham to explain "the contemporaneous communications". His Honour said at [40]: It has not been suggested that an adjournment would enable Mr and Mrs Clapham to explain the contemporaneous communications to which I have been taken. As I have said, the evidence that is put forward consists of an affidavit filed in the Supreme Court proceeding some 14 months ago. There has been ample opportunity for any evidence to be put on to explain the communications to which I have referred. As I understand the position, that material was put before the Supreme Court and it cannot be suggested that Mr and Mrs Clapham have been taken by surprise by reason of the tender of the material on the hearing of this petition. In all of the circumstances, I am not persuaded that there is sufficient cause for either dismissing or adjourning the present petition. It follows that there should be orders as claimed in the petition.

THE GROUNDS OF APPEAL 35 Mr and Mrs Clapham's notice of appeal specifies the following errors which the primary judge is said to have made in declining to find that there was "other sufficient cause" why a sequestration order should not have been made for the purposes of s 52(2)(b) of the Act: His Honour erred in finding that it was unlikely that the appellants would be able to establish that representations were made as alleged in their cross-claim. (Ground 2) His Honour erred in that in considering the question whether the appellants' cross-claim against the respondent constituted "other sufficient cause" why a sequestration order should not have been made for the purposes of s 52(2)(b) of the Act, and whether the appellants' cross-claim was a real claim that was likely to succeed: (a) his Honour failed to take into account or have regard to the fact that Mr Clapham's evidence of his conversations with Mr Chapman, and his reliance upon representations made by Mr Chapman was supported by contemporaneous notes; (b) his Honour failed to acknowledge or have regard to the proposition that damages for misleading and deceptive conduct pursuant to the ASIC Act or the Trade Practices Act 1974 (Cth) are not restricted to loss of which the contravening conduct was the sole cause; (c) his Honour failed to take into account or have regard to the fact that critical representations upon which the appellants relied were made on 23 September 2005 which was after the communications held by his Honour to be inconsistent with the appellants' case; (d) his Honour concluded without foundation that the "contemporaneous communications" required explanation and that the appellants would not be able to explain them, and erroneously concluded that the appellants had had an opportunity to explain the documents. (Ground 3) To the extent his Honour determined that documents dating from 2008 suggested that it was unlikely that the appellants would be able to establish that representations were made as alleged, his Honour erred in that those documents did include references to critical representations. In particular, his Honour erred in finding (at [30] of his judgment) that the letter of 18 March 2008 was "hardly the letter of someone who had been induced by the misrepresentations now alleged to enter into the transactions in question", in failing to acknowledge or take into account the statement in the letter that the first appellant recalled "querying Paul on the likelihood of such a low price and his assurance it was entirely unlikely." (Ground 3A)

THE PARTIES' SUBMISSIONS 36 Counsel for Mr and Mrs Clapham submitted that the primary judge's assessment of the 11 September 2005 email, which the primary judge considered to be inconsistent with Mr and Mrs Clapham's case, was fundamental to his Honour's ultimate decision. It was further submitted that the primary judge overlooked important parts of the evidence in evaluating the strength of Mr and Mrs Clapham's case that, in deciding to cause Yarralumla to purchase Clan Macadam, they relied upon representations by Mr Chapman to the effect that they would do best to adopt a two farm business strategy. 37 It was submitted by counsel for Mr and Mrs Clapham that the primary judge focused upon the meeting between Mr Clapham and Mr Chapman that took place on 9 September 2005, which his Honour appears to have viewed as the first occasion Mr Chapman is alleged to have advised Mr Clapham to acquire a second farm. On this basis, counsel argued, his Honour appears to have concluded that Mr Clapham's version of events was unlikely to be accepted because, according to the email of 11 September 2005 written by Mr Clapham only a few days after the meeting at which this advice was said to have been given, Mr Clapham had already negotiated the terms upon which Clan Macadam would be purchased. 38 Counsel for Mr and Mrs Clapham challenged the primary judge's assessment of Mr Clapham's evidence concerning the "two farm strategy" in three specific respects. First, he submitted that his Honour overlooked the fact that, according to Mr Clapham's affidavit, Mr Chapman first advised Mr Clapham to buy two farms on 14 June 2005 during their second telephone conversation. Secondly, counsel submitted that his Honour failed to take into account the fact that the arrangement to purchase Clan Macadam outlined in the email of 11 September 2005 was non-binding in that it was not the subject of any concluded contract of sale, and was dependent, in any event, upon the Bank agreeing to lend Yarralumla the money required to purchase the property. Thirdly, counsel submitted that the primary judge also overlooked Mr Clapham's evidence of a further meeting between himself and Mr Chapman that took place on 23 September 2005 which was, once again, before any contract of sale for the purchase of Clan Macadam was entered into. According to Mr Clapham's affidavit "[t]he purpose of the meeting was to review the business and conduct a sensitivity analysis on the financial models of the Clan Macadam property to determine if we should or should not purchase that as a second macadamia farm." His Honour's reasons for judgment make no reference to Mr Clapham's evidence concerning that meeting. 39 Counsel for the Bank answered these submissions in a number of different ways. First, he submitted that the primary judge had not overlooked Mr Clapham's evidence of the 14 June 2005 conversation, and that his Honour's focus upon the meeting of 9 September 2005 merely reflected the fact that, as pleaded in Mr and Mrs Clapham's cross-claim, the conversation of 14 June 2005 was not one alleged to have been relied upon by Mr and Mrs Clapham. In support of this submission counsel for the Bank relied not only on the terms of the cross-claim but also on the account of the relevant conversation appearing in Mr Clapham's affidavit which indicates that Mr Clapham reacted negatively to Mr Chapman's suggestion that Mr and Mrs Clapham buy two farms. Secondly, it was submitted that no argument was put to the primary judge below concerning the 23 September 2005 meeting, and that it "cannot therefore be said to be a material matter to which the primary judge failed to have regard." Thirdly, and in any event, the Bank submitted: By 11 September 2005 the appellants had purchased Brooklet Farm and had negotiated an arrangement for the purchase of Clan Macadam … Therefore as a matter of causation it is highly unlikely that any representation made by a Bank officer on 23 September 2005 after Mr Clapham had decided to purchase the properties could be operative to give rise to a cause of action based on misleading and deceptive conduct.

CONSIDERATION 40 There was no dispute as to the relevant principles that are applicable in this appeal. As we have mentioned, counsel for Mr and Mrs Clapham accepted that in refusing to either adjourn or dismiss the creditor's petition on account of Mr and Mrs Clapham's extant cross-claim against the Bank, the primary judge was required to exercise a judicial discretion. As the High Court explained in House v The King (1936) 55 CLR 499 at 504-505: The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. 41 In our view the primary judge has exercised his discretion in the present case upon a mistaken view of the facts. We say this because it appears to us that his Honour concluded that Mr Clapham's evidence that he did not consider purchasing a second property until Mr Chapman suggested that he do so was not credible given that Mr Clapham had negotiated terms for the purchase of Clan Macadam by the time he sent his email of 11 September 2005 to Mr Chapman. However, this view of the facts assumes that on Mr Clapham's own evidence, Mr Chapman first suggested that Mr and Mrs Clapham buy a second farm only a few days before this email was sent. In fact, as counsel for Mr and Mrs Clapham pointed out, Mr Clapham's affidavit clearly indicates that the idea that Mr and Mrs Clapham should buy two farms was first suggested by Mr Chapman in a telephone conversation with Mr Clapham on 14 June 2005. 42 In approaching Mr Clapham's evidence in this way, the primary judge was essentially accepting a submission put to him by counsel for the Bank. In this regard, it was submitted to his Honour that Mr Clapham's evidence of the conversation he claimed to have had with Mr Chapman on 9 September 2005, and the proposition that it was Mr Chapman who first suggested the "two farm strategy" to Mr Clapham, could not stand given the contents of the email of 11 September 2005. 43 It is correct, as counsel for the Bank submitted on the appeal, that, according to the case pleaded in Mr and Mrs Clapham's cross-claim, the representations relating to the "two farm strategy" alleged to have been made by Mr Chapman and upon which Mr and Mrs Clapham claim to have relied, were made on and after 9 September 2005. However, we do not think this really answers Mr and Mrs Clapham's argument. Nor do we think their argument is answered by the fact that Mr Clapham reacted negatively to the idea of buying two farms when it was first raised by Mr Chapman on 14 June 2005. 44 It is clear to us that the primary judge found that Mr Clapham's evidence that it was Mr Chapman who first raised the "two farm strategy" was impossible to reconcile with Mr Clapham's own email. This was a very significant finding in circumstances where, as his Honour appreciated, there was no evidence of any written communications from the Bank or Mr Chapman concerning the matters about which Mr and Mrs Clapham later complained. In our view, the primary judge's confidence in the correctness of Mr Clapham's version of events was undermined by what we consider was a mistaken view of Mr Clapham's affidavit evidence. 45 Also relevant in the primary judge's assessment of the strength of Mr and Mrs Clapham's case was what his Honour appears to have regarded as their failure to explain the contemporaneous communications, which obviously included the email of 11 September 2005. It is important to recognise, however, that the email of 11 September 2005, as well as other relevant written communications between Mr Clapham and Mr Smith, were exhibited to Mr Clapham's affidavit. And when the email of 11 September 2005 is read in the context of Mr Clapham's evidence of his meeting with Mr Chapman on 23 September 2005 (evidence which was not referred to by the primary judge) it seems to us that the better view of Mr Clapham's evidence was that he was not committed in any sense - legally or otherwise - to proceed with the purchase of Clan Macadam. Indeed, according to Mr Clapham's evidence, the purpose of the meeting held on 23 September 2005 was to review the business case for purchasing the second property. The fact that Mr Clapham had by that time negotiated the terms upon which he would purchase Clan Macadam was not inconsistent with him not yet making a final decision as to whether or not to proceed with a purchase. We therefore do not accept the Bank's submission that it was highly unlikely that any representation made by Mr Chapman on 23 September 2005 could have induced Mr Clapham to proceed with the purchase of the second property. 46 As we have mentioned, the Bank submitted that no argument was put to the primary judge in relation to the 23 September 2005 meeting. However, a review of the transcript of the hearing before the primary judge indicates that he was referred to various paragraphs in Mr Clapham's affidavit that recounted what was said and done at the 23 September 2005 meeting. These included paragraphs 66 to 70, 73, 74 and 77 of Mr Clapham's affidavit. It is not necessary for us to refer to all of the evidence included in these paragraphs. But they include detailed accounts of conversations in which Mr Chapman said that "there is absolutely no reason to expect [macadamia nut] prices to fall because even during the record crops of the past two years demand continues to outstrip supply" (para 69) and that he (Mr Chapman) was "strongly of the opinion that buying the two properties is the best option" (para 74). His Honour's reasons make no reference to any of the evidence referred to in these paragraphs of Mr Clapham's affidavit. While we are mindful that his Honour's reasons for judgment were given ex tempore, it appears to us that he has most likely overlooked the evidence to which we have referred and to which his attention was drawn by counsel for Mr and Mrs Clapham. 47 In the circumstances we are satisfied that the primary judge's exercise of discretion miscarried in that it was based upon a mistaken and incomplete view of the evidence relied upon by Mr and Mrs Clapham. 48 We should also indicate that we do not agree with the primary judge's characterisation of Mr Clapham's letter to the Bank dated 18 March 2008 as "hardly the letter of someone who had been induced, by the misrepresentations now alleged, to enter into the transactions in question." There are several reasons why we say this. 49 First, as noted in the primary judge's reasons, Mr Clapham's letter of 18 March 2008 stated that, in hindsight, he should not have allowed himself to be influenced by Mr Chapman's "standing in the industry and perceived expertise". If, as the Bank submitted, this is one of the contemporaneous communications referred to by his Honour, it is one that we think is consistent with Mr Clapham having relied upon Mr Chapman's expert advice. 50 Secondly, Mr Clapham's letter of 18 March 2008 makes reference to an analysis done by Mr Clapham based upon a "worst case" price of $2.45/kg. In his letter Mr Clapham stated that he "recall[ed] querying [Mr Chapman] on the likelihood of such a low price and [Mr Chapman's] assurance that it was entirely unlikely." In the same paragraph of his letter, Mr Clapham referred to an earlier letter written by him to the Bank dated 28 February 2008 in which Mr Clapham also referred to his reliance upon Mr Chapman's review of Mr Clapham's financial plan. Again, this seems to us to be consistent with Mr Clapham having relied upon Mr Chapman's expert advice. 51 Thirdly, Mr Clapham's letter of 18 March 2008 must be read having regard to the fact that Mr and Mrs Clapham were at the time seeking to extricate themselves from a looming financial calamity by refinancing with another lender. The Bank held mortgages over MacMasters Beach, Clan Macadam, Brooklet Farm properties and guarantees given by Mr and Mrs Clapham. It appears that it had either called up, or was about to call up, all moneys that had been advanced and which were secured by these mortgages and guarantees. It is clear from the letter that Mr and Mrs Clapham were at that time hoping to reach some commercial accommodation with the Bank. Whatever one may say with hindsight about the tone of Mr Clapham's letter, we think his Honour's characterisation of it ignores the commercial realities of the situation Mr and Mrs Clapham found themselves in at the time. 52 In the circumstances, it is necessary for this Court to exercise the discretion arising under s 52(2)(b) of the Act afresh. The principles that should guide the exercise of the discretion were not in dispute before us. 53 Sections 52(1) and (2) of the Act provide: (1) At the hearing of a creditor's petition, the Court shall require proof of: (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b) service of the petition; and (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. … (2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition. (emphasis added) 54 The discretion conferred by s 52(2)(b) is wide. For the purposes of this case, where the claims relied upon by Mr and Mrs Clapham are claims against the petitioning creditor, the relevant principles governing the exercise of the discretion may be briefly summarised as follows: 1. A petitioning creditor who has satisfied the requirement of s 52(1) of the Act is prima facie entitled to a sequestration order (Cain v Whyte (1933) 48 CLR 639 at 645-646; Rozenbes v Kronhill (1956) 95 CLR 407 at 414. But if the debtor satisfies the Court that he or she has a real claim against the petitioning creditor that is likely to succeed for an amount that is equal to or in excess of the amount owing to the creditor then the Court may decline to make a sequestration order, and make an order adjourning or dismissing the creditor's petition (Re Schmidt; Ex Parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116 (Gibbs J)). 2. If the claim relied upon by the debtor as providing sufficient cause to adjourn or dismiss the petition is for unliquidated damages then it will usually be appropriate to consider whether the debtor's claim has sufficient merit to justify either the adjournment or the dismissal of the creditor's petition (Re Schmidt, ibid). If the Court is satisfied that the debtor has a real claim, but is unable to be satisfied that the claim is one likely to succeed, then it may be more appropriate to adjourn the creditor's petition in order to give the debtor an opportunity to fully litigate his or her claim (Re James; Ex Parte Carter Holt Harvey Roofing (Aust) Pty Ltd (No 2) (1994) 51 FCR 14 at 22 (Olney J)). But there may be cases in which the Court may still decide to dismiss the creditor's petition even though it is not satisfied that the debtor's claim will most likely succeed. 3. When considering the merit of the debtor's claim, the Court does not usually do so as it would at trial. This is especially so if the claim is likely to give rise to issues of credit. The Court instead assesses the merit of the debtor's claim, both in relation to liability and quantum, in light of the available material and the progress that the claim has made, if any, toward a trial. 4. Apart from the interests of the petitioning creditor and the debtor, the Court should also consider the interests of any other creditors, and the public generally, arising out of the debtor's insolvency (Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314 at 317 (Burchett J)). However, it may not be in the creditor's interest or, more generally, the public interest, to make a sequestration order in circumstances where the debtor's insolvency is likely to be of only short duration (Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 26 (Davies, Wilcox and Branson JJ)). 55 Mr and Mrs Clapham may well face difficulties not only when it comes to satisfying a judge that the conversations which they allege Mr Clapham had with Mr Chapman occurred, but also in relation to the issue of reliance. Of course, the fact that Mr and Mrs Clapham may have relied upon Mr Clapham's own investigations as well as those of other persons in addition to Mr Chapman's advice is not fatal to their case (see, for example, Henville v Walker (2001) 206 CLR 459 at [59]-[61] per Gaudron J and [106]-[109] per McHugh J). In the present case we are satisfied that Mr and Mrs Clapham have real claims against the Bank that are reasonably arguable. 56 With great respect to the primary judge, we cannot agree that the evidence indicates that Mr and Mrs Clapham's claim against the Bank is unlikely to succeed. The evidence does not include any affidavit or statement from Mr Chapman indicating what he says in response to Mr and Mrs Clapham's allegations or any part of Mr Clapham's lengthy affidavit. Further, the evidence relied upon by Mr and Mrs Clapham and, in particular, Mr Clapham's detailed account of the conversations he claims to have had with Mr Chapman suggests, assuming that it is accepted as truthful, that Mr Clapham is likely to have relied upon advice given to him by Mr Chapman. 57 While we are not persuaded that Mr and Mrs Clapham's claim is likely to succeed, we are satisfied that it is sufficiently strong to justify us allowing Mr and Mrs Clapham's appeal and adjourning the creditor's petition to give them an opportunity to have their claim against the Bank determined by the Supreme Court. This is the course that was followed by the Full Court in Ling v Commonwealth (1996) 68 FCR 180, and we think it is the preferable course to take in this case. 58 It was not suggested by the Bank that the interests of other creditors justified us declining to exercise the discretion under s 52(2)(b) in Mr and Mrs Clapham's favour. In the scheme of things, the total amount owed by Mr and Mrs Clapham to all other creditors appears to be relatively modest, and is totally overshadowed by the amount owing to the Bank. 59 It is not necessary for us to consider the other errors which are claimed in the notice of appeal to have been made by the primary judge. But we would say that the absence of any reference to what was referred to in the notice of appeal as Mr Clapham's "contemporaneous notes" in the primary judge's reasons is hardly surprising. Although Mr Clapham said in his affidavit that he made contemporaneous notes, none was in evidence. Further, counsel who appeared for Mr and Mrs Clapham before the primary judge did not make any submission to his Honour to the effect that his Honour should take such notes into account for the purpose of assessing the strength of Mr and Mrs Clapham's case. In any event, any such submission would be unlikely to have carried any weight given that none of Mr Clapham's contemporaneous notes, including any said to relate to the conversation that took place on 9 September 2005, was in evidence. 60 The appeal will be allowed. The orders made by the primary judge on 28 August 2012 will be set aside and, in lieu thereof, the Court will order that the Creditor's Petition be adjourned until the determination of Mr and Mrs Clapham's cross-claim by the Supreme Court or until such earlier date as may be determined by a judge of the Court. The Bank must pay Mr and Mrs Clapham's costs of the hearing of the Creditor's Petition and of the appeal. 61 The Court expresses its appreciation to Mr Robertson of counsel who appeared on behalf of Mr and Mrs Clapham pursuant to a referral under r 4.12 of the Federal Court Rules 2011 (Cth). I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices North, Barker and Nicholas.