Commonwealth Bank of Australia v Clapham

REASONS FOR JUDGMENT 1 By creditor's petition filed on 10 May 2012, the Commonwealth Bank of Australia (the Bank) seeks a sequestration order in respect of the estates of Mr Ian Clapham and Mrs Ellen Clapham. The petition is based upon an act of bankruptcy consisting of failure to comply with a bankruptcy notice served on Mr and Mrs Clapham on 21 February 2012. The act of bankruptcy occurred by their failure to comply with the bankruptcy notice by 23 April 2012. The bankruptcy notice is based on a judgment in favour of the Bank against Mr and Mrs Clapham in the Supreme Court of New South Wales. 2 Mr and Mrs Clapham accept that they are indebted to the Bank. The only basis upon which they resist the making of orders as sought in the petition is that they have filed a cross-claim in the Supreme Court proceedings seeking damages against the Bank. 3 Section 52 of the Bankruptcy Act 1966 (Cth) provides that, at the hearing of a creditor's petition, the Court shall require proof of the matters stated in the petition, service of the petition and the fact that the debt or debts on which the petitioning creditor relies is or are still owing. If the Court is satisfied with the proof of those matters, the Court may make a sequestration order against the estate of the debtor. However, under s 52(2) if the Court is satisfied by the debtor that he or she is able to pay his or her debts or, for other sufficient cause, a sequestration order ought not to be made, the Court may dismiss the petition. Alternatively, the Court may adjourn the hearing of the petition. 4 Mr and Mrs Clapham claim that the existence of the cross-claim in the Supreme Court of New South Wales is sufficient cause for the Court to dismiss the present petition or at least to adjourn it to enable the further progress of the cross-claim. I am satisfied as to the matters referred to in s 52(1). Accordingly, the question is whether or not there is sufficient cause for either dismissing or adjourning the petition. 5 In their cross-claim, Mr and Mrs Clapham assert that, in reliance on certain representations made and advice given by the Bank, they entered and caused their family company, which was trustee of their family trust, to enter into various agreements with the Bank, including facility agreements for loans by the Bank to the trustee company and mortgages and individual personal guarantees to secure those facilities. They say that the representations and advice related to, among other things, the prices that would be achieved for macadamia nut sales, the advisability of purchasing a second larger farm, the commercial soundness of the farm business and the advisability of entering into the financial arrangements. They also assert that the Bank failed to disclose to them several matters relevant to the transactions, including the likelihood that the farms would not provide sufficient income to enable servicing of the facilities. 6 The relief that they claim against the Bank is in respect of alleged misleading or deceptive conduct and unconscionable conduct in contravention of the Australian Securities and Investments Commission Act 2001 (Cth) and the Competition and Consumer Act 2010 (Cth), as it is now called. They also assert that the Bank provided negligent advice to them and that they are entitled to relief under the Contracts Review Act 1980 (NSW). The evidence relied on by Mr and Mrs Clapham consists principally of an affidavit affirmed by Mr Clapham on 3 June 2011 and filed in the Supreme Court proceeding as well as the cross-claim that has been filed in the proceeding, which was amended recently pursuant to leave granted by a judge of the Supreme Court. 7 I shall summarise the claims made in the cross-claim. In paragraph 10, Mr and Mrs Clapham assert that in early 2005, they made a decision to consider investing and operating a macadamia nut farm. They viewed several properties that may have been suitable for that purpose. They say that, on 6 June 2005, Mr Paul Chapman, an officer of the Bank telephoned Mr Clapham and represented that he was an employee or agent of the Bank. Mr Clapham told Mr Chapman that he and Mrs Clapham wanted to find a farm with between 7,000 and 12,000 trees and that they could afford to spend up to $2 million or possibly a bit more for a really profitable farm. 8 In paragraph 14, they allege that, between June 2005 and approximately January 2006, Mr Clapham had a series of communications with Mr Chapman, during which Mr Chapman made certain representations and agreed to provide advice and did provide advice to Mr Clapham. Paragraph 45 alleges that, in the period from June 2005 to September 2005, the Bank, through Mr Chapman, represented to Mr Clapham, in response to a question of Mr Clapham, as to what prices he should use to prepare a financial plan for a proposed farm, that Mr Clapham should use specified prices, that Mr Chapman represented there was no sign of those prices reducing in the foreseeable future, that the prices specified by Mr Clapham appeared fine, that the macadamia nut industry had continued to grow over the past years with no sign of abating and that there was no reason to expect macadamia prices to fall. 9 Mr Clapham says in his affidavit that, on 9 September 2005, he attended a farming exposition at the TAFE campus at Alstonville in New South Wales with Mr Chapman. Mr Clapham says that they walked around for a few minutes looking at equipment and then sat down to discuss his financial plans. Mr Clapham recounts the conversation that he says he had. In particular, he says that Mr Chapman told him that his expenses might prove to be a bit low and that the financial plan spreadsheet highlighted the problem of the lack of scale of a small farm. Mr Clapham said that Mr Chapman told him 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. 10 Mr Clapham said that his wife and he were keen to purchase the 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 him there was no problem with lending to purchase Brooklet Farm because he 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 much more detail and would most likely need to add his property at MacMasters Beach as security before he could lend for a second larger property. 11 Mr Clapham said that his calculations appeared to show that the farm would be making a loss in the first year. Mr Chapman said that, so that he could get the most out of his assets, he would really consider, if he were Mr Clapham, investing in another property in order to achieve economies of scale. Mr Clapham says that Mr Chapman raised two different strategies, saying he could either purchase Brooklet Farm and focus on his consulting and investments, or he could purchase Brooklet Farm and another farm, such as the property known as Clan Macadam, to achieve economies of scale. Mr Clapham said that he said that he was very uneasy about the second option, of purchasing a second farm. Mr Clapham says that Mr Chapman was very persuasive about encouraging the second option and that virtually all of the comments made by Mr Chapman were about the benefits of scale derived from owning two farms. Mr Clapham asserts, in his affidavit, that he did not consider buying two farms until Mr Chapman suggested it. 12 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. 13 In relation to the question of advice concerning the price of nuts, 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. As early as 10 March 2005, Mr Clapham asked Mr Graham Smith, an accountant, for a sensitivity analysis in relation to the macadamia nut market. He asked Mr Smith for a copy of a sensitivity analysis that had been prepared for a farm in Dunoon and said that he would like to use that analysis for evaluating other properties. That suggests some degree of expertise on the part of Mr Clapham in the preparation of such analyses. 14 On 7 September 2005, two days before the meeting to which I have referred, Mr Clapham sent to Mr Chapman a financial analysis that he had prepared for a property he referred to as the Jorgensens Lane Property. In his email of 7 September 2005, he apologised to Mr Chapman for not getting the financial analysis to him earlier on in the day, because he wanted to run it by Graham Smith before sending it on to Mr Chapman. That again indicates reliance by Mr Clapham on Mr Smith for the financial analysis, rather than on the Bank or Mr Chapman. 15 On 13 September 2005, Mr Clapham sent another email to Mr Chapman saying that he had added another step in checking his financial plan for Clan Macadam, prior sending it to Mr Chapman. He refers to Mr Albert Hilton as being a chartered accountant by trade, having previously been with KPMG and who had been the managing partner of the farm for some time. 16 Mr Clapham said that he had asked Mr Hilton to check over his plan for obvious shortcomings or oversights. As the vendor, Mr Hilton had an obvious bias but Mr Clapham said he had been forthright in the past, helping him understand the operations and nuances of the farm. Again, he said he would send the figures to Graham Smith while he awaited a more comprehensive review from Mr Hilton. Once again, the communication indicates reliance by Mr Clapham on his own consultants, rather than on the Bank. He had said, in his email of 11 September 2005, that he would send the financial analysis to Graham Smith for review and, after taking on his comments, would send it on to Mr Chapman. 17 Then, on 15 September 2005, Mr Clapham sent another email to Mr Chapman saying that Graham Smith had reviewed the financial plan and suggested, as a way of being ultra conservative, including an amount in the expenses for contingency and to increase the wages component. Mr Clapham said that, following that advice, he had added a sum of "$2,400 [sic] annually ($2,000 per month) for contingency", which suggests that Mr Clapham intended to add $24,000 annually. Mr Clapham also said that he had increased the wages for each year by 20 per cent over what he had been advised by Mr Hilton as the existing wages bill. 18 The other significant matter is that, in that email of 15 September 2005, Mr Clapham told Mr Chapman that Graham Smith's other comment was that "it is feasible that nut prices will fall after three years". He said, in his email, that he had already accommodated this in his "Summary and Assumptions sheet". He said 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. He invited feedback from Mr Chapman after he had studied the financial plan and Mr Chapman's visit to Clan Macadam. 19 There is no evidence of any written communication from the Bank or Mr Chapman to Mr Clapham concerning the matters about which Mr and Mrs Clapham complain. In their cross-claim, Mr and Mrs Clapham complain that the transactions that they were induced to enter into in reliance upon representations alleged to have been made by the Bank were highly leveraged, imprudent and high risk for them. They assert that the transactions were entered into by them in circumstances where they were in a position of special disadvantage, vis-à-vis the Bank, by reason of Mr Clapham's lack of macadamia industry experience and knowledge and their lack of knowledge and understanding of the basis of the financial structure underlying the transactions. They refer specifically to Mrs Clapham's lack of knowledge, experience and understanding in respect of matters of business and matters of finance. 20 They also assert, in paragraph 121 of their cross-claim, that the Bank was negligent in failing to advise them against entering the highly leveraged, imprudent and high risk "Better Business Facilities" that they entered into, that the Bank failed to take proper account of their financial circumstances and failed to inform them, adequately or at all, about the risk factors entailed in the investments, purchase and loans obtained and securities being granted. In that regard, it is significant that, on 28 September 2005, Mr Clapham sent to Mr Chapman a statement of assets and liabilities. That showed that the trustee company, Yarralumla Holdings Pty Limited (Yarralumla), had a net asset position of $1,913,320 and that Mr and Mrs Clapham jointly had a net asset position of $5,172,375. 21 In addition, a statement of assets and liabilities of Active Optics Pty Limited, of which Mr and Mrs Clapham are apparently shareholders, had a net position of $321,724. Mr Clapham had apparently been successful as a consultant in relation to the business of Active Optics Pty Limited. It appears he had assistance and advice from Mr Graham Smith, a qualified accountant. 22 The macadamia project did not meet with success. It appears that macadamia nut prices fell sharply in 2007 and there was subsequently a default on the facilities granted by the Bank. The facilities were entered into in December and January 2005. On 16 November 2005, Mr and Mrs Clapham caused Yarralumla to exchange contracts for the purchase of Clan Macadam for $3,700,000 and caused Yarralumla to enter into agreements with the Bank for a better business loan of $1,600,000 and a better business bill facility in the sum of $3,750,000. On 3 December 2005, they caused Yarralumla to give a mortgage over a Brooklet farm to the Bank as security for the better business facility and caused Yarralumla to give a mortgage over the Clan Macadam property as security for the two business facilities. 23 On 7 December 2005, Mr Clapham executed a guarantee in favour of the Bank to a maximum sum of $5,350,000 and Mrs Clapham executed a guarantee limited to the same amount. On 3 December 2005, Mr Clapham granted a first mortgage over the Macmasters Beach property as security for his obligations to the Bank. In addition, on 9 December 2005 Mr and Mrs Clapham caused funds of $774,920 to be drawn from the facilities granted by the Bank and applied those proceeds to complete the purchase of the Brooklet farm by Yarralumla. 24 Subsequently, the Brooklet farm and Clan Macadam properties were sold and the proceeds of sale applied in reducing the indebtedness to the Bank. In addition, the MacMasters Beach property was sold and the proceeds of sale, after discharging prior secured loans, were applied in satisfaction of the moneys owing to the Bank under the guarantee. 25 Mr and Mrs Clapham claim that, in the circumstances, they have suffered loss by reason of having given the guarantees, including the mortgage over the MacMasters Beach property, in reliance upon the representations said to have been made by the Bank through Mr Chapman. They claim that their loss is the amount that has been paid from the proceeds of the sale of the MacMasters Beach property, plus the amount of the liability under the judgment debt on the guarantee in favour of the Bank. They also claim, as further loss, the costs and expenses that they paid directly on behalf of Yarralumla to carry on its business prior to the sale of the two farming properties. That is said to come to a figure of about $240,000. The proceeds from the sale of the MacMasters Beach property, after paying the secured liability, was some $1,500,000. 26 The liabilities owed by Mr and Mrs Clapham, other than to the Bank, amount to some $145,000. Those liabilities include some $60,000 on credit card liabilities, as well as a sum of $55,000 owing to Mrs Ann Clapham, who I would assume is a relative of Mr Clapham. 27 When the Bank called up the guarantees, there was an exchange of correspondence between Mr and Mrs Clapham and the Bank on 28 February 2008. Mr Clapham wrote to the Bank expressing disappointment with the Bank's decision to discontinue support for his business, in what he described as "these difficult times". He said that, given the analysis he performed with Mr Chapman in the days immediately prior to being informed of the decision, he was at odds to understand how the Bank had reached its conclusion. 28 Mr Clapham then went on to say that Mr Chapman was a person who was immersed in the macadamia industry as an advisor and regular presenter for the Australian Macadamia Society. Mr Clapham asserted that he depended on Mr Chapman to perform an extensive review of his financial plan as he entered into the industry. He said that, given Mr Chapman's standing with the Bank and the industry, his due diligence constituted a reassurance to Mr Clapham. Mr Clapham asserted that it was perplexing that at no time did Mr Chapman foreshadow the industry downturn that commenced within only a couple of months of Mr Clapham entering the industry. He said that Mr Chapman, on the contrary, presented a very positive outlook for the industry. Mr Clapham said that he had a long term commitment to the macadamia industry and that, given his direct marketing activities and recent positive signs in the industry, it was his considered view that recovery would continue with increased momentum during the next harvest and then accelerate as his own marketing activities, particularly in India and South Korea, produced results. 29 The Bank responded to that letter on 13 March 2008, by an email which said that Mr Chapman's response was that his due diligence in testing the servicing of the application by Mr Clapham was performed for the Bank only and any reassurance gained by Mr Clapham was not intended. Mr Chapman said that at no time did he imply that he was conducting due diligence for Mr Clapham and that an approval decision was not meant to imply that the Bank had concurred with Mr Clapham's budget basis. The email said that Mr Chapman directed Mr Clapham to industry information sources and that Mr Clapham subsequently engaged a horticultural consultant for "inspection/operation" of both farms. Mr Chapman also said, according to the email, that the Bank had initially suggested that the sale of the MacMasters Beach property would be preferable prior to the purchasing of the farms and that Mr Clapham had provided additional "support/comfort" to the Bank in relation to the ready saleability of the MacMasters Beach property, together with off-farm consulting income potential, as well as the potential for the sale of his share in the intellectual property for certain digital camera software, being Active Optics Pty Limited. 30 Mr Clapham responded on 18 March 2008, saying that, in hindsight, it was evident that he had allowed himself to be influenced by Mr Chapman's standing in the industry and perceived expertise. He accepted that he had engaged horticultural consultants to inspect and report upon both properties prior to purchase and that those reports were available to the Bank also. He denied that selling the MacMasters Beach property prior to purchasing the farms had been canvassed. He said that, notwithstanding those matters, it was evident that the real issue was the dramatic unforeseen changes in the price currently being paid to growers for macadamia. He said, simply put, the situation in 2007 was not anticipated in any real sense by industry commentators. He said that, given the Bank's position in relation to the existing facility, it was in their mutual interests that it progress in a positive and decisive fashion. He said he looked forward to settling his current negotiations with interested re-financiers and moving on. That is hardly the letter of someone who had been induced, by the misrepresentations now alleged, to enter into the transactions in question. 31 It appears that there was some mediation between the Bank and Mr and Mrs Clapham on 3 June 2008. As a result of that mediation, draft heads of agreement were provided by the Bank to Mr and Mrs Clapham on 5 June 2008. In a letter of 19 June 2008, solicitors then acting for Mr and Mrs Clapham said that no resolution was achieved at the mediation for the purposes of the Farm Debt Mediation Act 1994 (NSW) and that they therefore assumed that the Bank would not make an application under the section 11 of that Act until the heads of agreement had been signed or 1 July 2008, whichever first occurred. 32 The letter then made complaints about the circumstances surrounding the initial provision of finance and the structuring of later facilities that Mr Clapham canvassed at the mediation and which, it was asserted, had not been adequately dealt with by the Bank. The letter asserted that the advice by Mr Chapman had been given negligently and in breach of the Bank's duty of care; that the Bank, when offering additional working capital, chose to refuse an extension of the bill facility and instead offered an overdraft facility with a prohibitively high interest rate; and that the Bank effectively prevented Mr and Mrs Clapham from obtaining disaster relief funding from the Rural Assistance Authority (RAA) by issuing a letter to the RAA consenting to a second mortgage only on the basis that funding be used to reduce debt permanently. 33 The letter from the solicitors enclosed an amended form of heads of agreement. It is noteworthy that that form of agreement contained a reservation, on the part of Mr and Mrs Clapham, of claims against the Bank. However, the circumstances concerning that proposed agreement are not before me. The only agreement that was entered into by the parties was an agreement of 29 December 2008. The parties were the Bank, Yarralumla and Mr and Mrs Clapham. A solicitor's certificate attached to the agreement states that, prior to signing the agreement, the solicitor explained to Yarralumla and to Mr and Mrs Clapham the meaning and effect of the proposed agreement and the legal consequences flowing from their signing the document. The solicitor certified that she was of the opinion that each understood the explanation and that they were entering into the terms voluntarily and of their free will. 34 By that stage, it appears, the MacMasters Beach property had been sold and the proceeds of sale, after discharging the secured indebtedness, had been applied in reduction of the liability of Mr and Mrs Clapham to the Bank. The agreement of 29 December 2008 recited that the total indebtedness at 10 December 2008, under the facilities that were the subject of the guarantees, was $4,589,791. The agreement recited that the facilities were secured by the mortgages over the Clan Macadam property and the Brooklet Farm property, as well as the guarantees from Mr and Mrs Clapham. The agreement also recited the fact that the Bank had served demands on Mr and Mrs Clapham as guarantors and that the parties had reached agreement, as set out in the instrument. 35 The operative provision of the agreement was that, in consideration of the Bank agreeing not to take any further steps to enforce the securities, Yarralumla and Mr and Mrs Clapham acknowledged the validity of the securities and that they secured the business facilities in the amounts stated. They also acknowledged that Yarralumla was in default and that the Bank was entitled to enforce the securities and that all rights and remedies available to the Bank, pursuant to the existing events of default, had not been waived and remain fully reserved. The agreement contained a warranty by Yarralumla and Mr and Mrs Clapham that each had sought and obtained legal advice in relation to the contents of the agreement. 36 By clause 5, Yarralumla and Mr and Mrs Clapham irrevocably consented to all or any of the following actions by the Bank and agreed not to defend or resist any such action: orders for possession being made in relation to Clan Macadam and/or Brooklet Farm; monetary judgments being entered against them in a sum calculated having regard to the indebtedness set out in the recital; and the appointment of receivers and managers to Yarralumla or receivers or agents of the Bank in relation to Clan Macadam and/or Brooklet Farm. As I have said, there is no reservation of any right to claim that the transactions in question had been entered into as a result of misrepresentation or negligent advice on the part of the Bank through Mr Chapman. 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, 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. 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. 41 I am satisfied that the matters stated in the petition are established by reason of the affidavit verifying the petition. It is common ground that the petition was served on both Mr and Mrs Clapham and there is evidence of service on the file. I am also satisfied that Mr and Mrs Clapham are indebted to the Bank in the sum of $1,396,115.16 under the judgment obtained in the Supreme Court of New South Wales on 31 January 2012. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.