Commonwealth Bank of Australia v McDonald

· The respondent has a substantial claim against the Bank which he can set off against the debt.

· The bankruptcy notice and the petition contain defects in that the Bank had failed to take into account the realisation of some of the properties over which it had security.

· The Bank has from time to time demanded payment of different and conflicting amounts.

GOING BEHIND THE JUDGMENT 3 Section 52(1) of the Bankruptcy Act 1966 ("the Act") requires the creditor to prove the matters stated in the petition, service of the petition, and that the debt on which the creditor relies is still owing. On proof of those matters the Court "may make a sequestration order". Sub‑section (2) provides: "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." 4 The power of the Court to go behind a judgment giving rise to a judgment debt arises either under s 52(2)(b): In re Beauchamp; Ex parte Beauchamp [1904] 1 KB 572 at 581; Wren v Mahony (1972) 126 CLR 212 at 233, or under s 52(1): Corney v Brien (1951) 84 CLR 343 at 347. 5 The existence of a judgment is prima facie evidence of a debt. However, a judgment is never conclusive in bankruptcy, and the court has a discretion to go behind it to determine whether there is in truth and reality a debt due. Before the court will exercise the discretion, substantial reasons must be shown for questioning whether there is in truth and reality a debt owing to the creditor. The court will not inquire into the validity of a judgment debt as a matter of course. It will, however, be more readily persuaded to do so where there has been no adjudication on the merits, for example where the judgment has been obtained by default, and there exists a bona fide allegation that no real debt lies behind the judgment. See Re Longo; Ex parte Longo (1995) 57 FCR 523 at 527 per Cooper J and the cases there referred to. In Emerson v Wreckair Pty Ltd (1992) 109 ALR 539 at 546‑547 a Full Court held that upon an application to set aside a bankruptcy notice, the court should not go behind a judgment where the challenge to the judgment, if successful, would merely result in a reduction in the amount of the debt and not a finding that there is no debt at all. In Re Riviere; Ex parte Original Mont de Piete Ltd (1919) 20 SR (NSW) 77 at 84 Owen AJ said: "the court will only reconsider the judgment in order to ascertain whether the petitioning creditor's debt, on which the bankruptcy proceedings have been founded, should be struck out altogether. … The court does not reconsider the judgment merely with a view to seeing whether the judgment debt should be reduced, but in order to ascertain whether the creditor has a debt upon which the bankruptcy proceedings can be founded." In Olivieri v Stafford (1989) 91 ALR 91 at 109‑110 Gummow J said that those observations were applicable to the Act. In Emerson, Riviere and Olivieri the court was invited to go behind a judgment on an application to set aside a bankruptcy notice. However, I see no reason why the principle those cases espouse, namely that the examination of the judgment is for the purpose of showing that there is in truth no debt upon which bankruptcy proceedings can be founded, should not apply to an invitation to go behind a judgment in the context of an application for a sequestration order. 6 The respondent wanted the Court to go behind the judgment with a view to establishing that the Bank had debited his accounts and those of his company, McDonald & Co Pty Ltd ("the company"), with more interest on their borrowings than had been agreed, and had imposed bank charges it had agreed not to impose. The excess interest the Bank is said to have debited, and the charges it is said to have imposed, were not particularised. In his affidavit, immediately after setting out what he asserts are the excessive interest rates, the respondent states that in his first year with the Bank interest totalled $277,804.60. Presumably the over‑payments are part of this amount. On the respondent's account the terms agreed between him and the Bank are contained in the Bank's letters of 13 February and 13 March 1989. The second letter contains the interest rates applicable to the various overdrafts and fully drawn loans. All are concessional rates expressed as a percentage reduction on the Bank's reference rate. The reductions range from 5 per cent to 1 per cent. The first letter identifies the security for the loans: a registered equitable mortgage over the company's rent roll, and a joint and several guarantee by the respondent and his wife supported by registered mortgages over five properties - 66 Swan Street Keilor Park, 2/39 Dinah Parade East Keilor, 108 Wheatsheaf Road Glenroy, 60 Bonwick Street Fawkner and 12 Boston Road Torquay. The second letter notes that all interest rates quoted are variable, all the Bank's account keeping fees and charges will be waived, and the Bank will absorb stamp duty and establishment fees for the initial transfer of the group's business from Westpac. The letter concludes: "Future loan transactions during the following 12 months will attract normal establishment fees, with full review of all concessions in April 1990". 7 I accept the evidence of Mr Woods, one of the Bank's Managers, that at the expiration of the first year of the banking relationship the Bank was at liberty to review all the concessions applicable to the accounts. A letter from the Bank to the respondent dated 12 April 1990 discloses that the Bank had varied the concessional interest rates. The concession on most accounts had been reduced but not cancelled. In the case of nine accounts, the new rate involved a concession of 2.25 per cent on the Bank's standard rate. In other cases concessions of 1.25 per cent and 1 per cent were granted. In two cases there was no concession. The Bank had also reinstated the standard fees that had earlier been waived. The letter sets out the interest paid in the first year of the arrangement. It totals $277,804.60. Although the matter was not explored before me, I infer from the Bank's letter of 13 March 1989, in which it reserved the right to review all concessions in April 1990, and its letter of 12 April setting out new rates and charges, that it had charged the agreed rates for the first year, and that the sum of $277,804.60 was the amount paid in that year at those rates. 8 The Bank contends that the agreed terms are contained in its letter of 30 March 1989. This is in substantially the same terms as the earlier letters save that it states that the concessional interest rate applicable to the overdrafts applies only up to the approved overdraft limits, and that any excess will attract the excess rate, which was then 23.5 per cent. The respondent contended that he had never agreed to this, and that the Bank had sought to introduce it after agreement had been concluded in terms of the earlier letters. However, nothing turns on this disagreement, at least so far as the first year is concerned, because in its letter of 12 April 1990 the Bank said it had waived the excess rate and had applied only the reference rate. 9 In another part of his affidavit the respondent estimates that as at 8 July 1991 he had incurred $612,839.66 in "interest charges as well as further bank charges" since transferring to the Bank. He then says that had the Bank charged interest at the agreed rates and imposed no bank charges, the McDonald Group would have been solvent and would have been able to trade out of its apparent financial difficulties. The basis for the estimate is not given. But more importantly, it is not an estimate of the amount the Bank charged the respondent over and above the amount that on the respondent's account it was entitled to charge. The implicit claim that the $612,839.66 includes some interest the Bank was not entitled to charge ignores the fact that at the expiration of the first year the Bank was at liberty to review the concessions it had granted, and that it did review them. On the respondent's account the concessions included a waiver of the excess rate that would otherwise have been payable on the overdrafts that were over the agreed limit. But the Bank was free to review that concession, and appears to have done so after the expiration of the first year. It was also entitled to reinstate the waived charges at the end of the first year. 10 Even if, contrary to my view, the respondent could establish that the Bank overcharged interest and imposed bank charges it had agreed not to charge, I would not on that account have gone behind the judgment. The respondent did not attempt to split the $612,839.66 into its legitimate and illegitimate parts. But the bulk of it would represent interest that, on the respondent's account, the Bank was entitled to charge. If the respondent were to establish overcharging of, say, $200,000, that would result in but a small reduction of the amount of the judgment debt ($1,964,609.25 instead of $2,164,609.25), and not in its extinguishment. There would be no point in going behind the judgment. The bank charges the respondent says should not have been imposed were not quantified. While they would inflate the amount overcharged, the amount due under the "adjusted" judgment would still be in the order of $1,900,000.

SET‑OFF/CROSS CLAIM 11 The existence of a set‑off, cross‑demand or counter‑claim may be a "sufficient cause" within s 52(2)(b) for declining to make a sequestration order: Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25. It is for the debtor to establish the existence of "sufficient cause": Cain v Whyte (1933) 48 CLR 639 at 645‑646; Ling at 24. He must establish that he has a real claim against the creditor that is likely to succeed. If the Court is satisfied that there is such a claim, and that it is likely to equal or exceed the creditor's claim, it will not make a sequestration order. If the claim is likely to be less than the creditor's claim, it will require the debtor, if he is to avoid a sequestration order, to pay the difference between the judgment debt and the amount he is likely to recover on his claim. See Re Player (1962) 19 ABC 277 at 282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115‑116; Ling at 25‑26.

Realisation of freehold securities 12 The respondent claims that the Bank was in a number of respects in breach of its duty to him and the company, of whose accounts he was a guarantor. One complaint is that it had sold secured realty at far below its true value. Section 77(1) of the Transfer of Land Act 1958 empowers a mortgagee who has satisfied certain conditions, "in good faith and having regard to the interests of the mortgagor" to sell the mortgaged land by public auction or by private contract. In Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309 at 312‑313 Lush J said:

"In my opinion s 77 must be regarded as containing a statement of the obligation of the mortgagee in effecting a sale. It sets out as a matter of language two requirements cumulatively, a requirement of good faith and a requirement that regard shall be had to the interests of the mortgagor ….

A mortgagee in exercising his powers is entitled to give first consideration to his own interests, a concept which is consistent with having regard to the interests of others or with taking reasonable care to protect the interests of others, what is reasonable being assessed in the light of the fact that not only is the mortgagee entitled to give his own interests first consideration, but also that the reason for the existence of the power is to protect those interests.

The words of the section do not, as I have said, require the mortgagee to place the interests of others on the same level as his own, but do require that he shall have regard to those interests. The section does not detract from the general law that the mortgagee is entitled to sell at the time of his choice and without waiting for a time which a selling owner might consider more propitious …. He is not, however, entitled to sell without advertising so as to bring the property to the notice of persons likely to be interested and so as to bring to the notice of possible buyers the potentiality of the property to be sold …. He is not entitled to adopt or accept any arrangement or price merely because it will see him paid out. He is bound to take reasonable steps to ascertain the value before selling …."

13 Because the respondent bears the onus under s 52(2)(b) of the Act, he must satisfy the Court that he has a real claim, which is likely to succeed, that the Bank did not sell "in good faith and having regard to" his interests. Despite the respondent's claim that the Bank sold properties at "far below value", the only property the sale of which was the subject of specific criticism is 66 Swan Street, Keilor Park. The evidence in relation to Swan Street is unsatisfactory. It was owned by the applicant and his former wife. It was acquired as vacant land, though at what cost does not appear. The respondent and his wife built a house on it at a cost of $128,221.34. The respondent claimed it was worth $200,000 at the date of sale. It was sold to the wife for $50,000 "plus the granting of certain other securities pursuant to [confidential] terms of settlement between her and the Bank". The terms were not in evidence. The explanation for the sale at $50,000, which is approximately half the amount that on the respondent's opinion as to value the wife should have paid, may be that suggested by Mr Nolan, who appeared for the Bank. The Moonee Ponds property, one of the other properties sold by the Bank, was jointly owned by the respondent and his wife. The Bank's mortgage was over the respondent's interest only. Nevertheless, the whole of the net proceeds of sale went in reduction of the respondent's indebtedness. In those circumstances, it may be proper to draw the inference that allowance was made for this in the former wife's favour on the sale of Swan Street. However, I need not decide this point. Although the respondent is an experienced real estate agent, it does not appear that he has any qualifications as a valuer, and accordingly his opinion as to the value of the property is not admissible. The information available in relation to this sale is unfortunately sparse, due in part to the confidential settlement between the Bank and the former wife. But the paucity of relevant material, in particular as to the value of the land, does not assist the respondent in discharging the onus of showing he has a real claim against the Bank, which is likely to succeed, that it acted in bad faith or failed to have regard to his interests in effecting the sale. Even if he were able to discharge that onus, the most he could establish would be a loss in the order of $50,000. That makes no appreciable inroad into the amount owing to the Bank. It was common ground that the respondent could not pay anything approaching that amount, and it would be a hollow gesture to afford him the opportunity to pay that amount less $50,000 if he wished to avoid a sequestration order. However, on the view I have taken this issue does not arise. 14 The respondent points out that in 1993, 1994 and 1995 five of the other properties were sold for less than the values placed on them in July 1991 by a valuer retained by him. He does not assert that the Bank failed to prepare for or carry out the sales in a proper fashion. For example, he does not claim that it failed properly to advertise the properties or neglected to ascertain their value before selling. He fastens solely on the disparity between the 1991 valuations and the prices obtained between two and four years later. While a sale at a gross undervalue is capable in itself of being evidence of fraud: Warner v Jacob (1882) 20 Ch D 220 at 224, and thus of bad faith or failure to have regard to the interests of the mortgagor, the 1991 valuations are not sufficiently proximate to the dates of the sales to form the basis for such a contention in the present case. The respondent was not legally represented. But he is an experienced real estate agent, and if there was anything in the way in which the Bank prepared for or conducted the sales that suggested that it had behaved recklessly or without proper care in arranging them, he would have been able to identify the deficiencies and draw attention to them. 15 The respondent made the general claim that the Bank was under a duty to reach a proper arrangement with him so he could trade out of his financial difficulties and realise assets at proper values in a managed sale program. The law does not impose such a duty on a mortgagee. A mortgagee is not obliged to defer realising its securities in order to suit the convenience of the mortgagor in the manner suggested. See, for example, Henry Roach (Petroleum) at 313.

Variation of interest rates 16 As part of his set‑off/cross‑claim contentions the respondent repeated the claim that the Bank had, without authority, varied the terms originally agreed with him as to the charging of interest and imposition of bank charges. For the reasons I have given under the previous heading, the respondent does not have a real claim, which is likely to succeed, in relation to these items. If, contrary to my view, he does have a viable claim, it is for a comparatively small amount, and stands in the same position as the $50,000 referred to under the preceding sub‑heading.

Company charge 17 The respondent complains that although the Bank initially stipulated for a charge over the company's rent roll, the charge in fact executed was over its assets generally. The respondent says he executed the document believing it to be a charge over the rent roll only. Then he says that in reliance on the charge the Bank appointed agents in possession and sold assets other than the rent roll. I have some doubt about the respondent's claim that he was not aware that he was executing a charge over the whole of the company's assets. He printed his name on, and affixed his signature to, the page on which the words of charge appear. The first line of the charge discloses that it is over "the assets of the business of the Mortgagor whatsoever …". Even if the respondent was not aware that the document was a charge over all the company's property, the requirements for the defence of non est factum are not established. See Saunders v Anglia Building Society [1971] AC 1004 at 1019 and Petelin v Cullen (1975) 132 CLR 355 at 359‑360. In any event, the respondent has not established that any loss was suffered as a result of the unauthorised sale. The other assets were sold for $58,057.74, and there is no evidence that they were worth more than this. 18 The respondent claims that the agents were in breach of duty in their sale of the company's Ford LTD. The only evidence about the car is that it was purchased in 1988 for $45,000, and was sold by the agents at auction in January 1991 for $19,772.31. There was no evidence that the vehicle was worth more than this when it was sold. The respondent did not explain wherein the breach of duty lay.

Rent roll 19 The respondent claims that the Bank's agents (Mr Dunner and Mr Harrison) were in two respects in breach of duty in connection with the sale of the rent roll. The first was that they sold it at far below the proper price. The second was that they provided confidential information about the rent roll to other estate agents, thus diminishing its value. Mr Dunner swore an affidavit dealing with the sale of the rent roll. He and Mr Harrison obtained a valuation at $106,000. The best offer received after advertisement was from Mr Di Carlo, who offered $185,000. Before a contract could be prepared the offer was withdrawn and was replaced by one for $120,000. Later the offer was increased to $135,000. The offer was accepted, but was reduced to $120,000 on the ground that two conditions attached to it had not been satisfied. The first was that the respondent agree not to practise as an estate agent in the area. The respondent had refused to accept such a restraint, as a result of which, according to Di Carlo, the value of the rent roll was reduced. The second condition was that the roll was understood to have generated some $10,000 per month, whereas it was in fact only generating $8,200 per month. After further negotiations Di Carlo agreed to pay $127,500 on condition that the respondent and his then wife grant him a lease of the property upon which the East Keilor business was conducted. The respondent did not agree to the condition, and Di Carlo declined to proceed. The agents obtained a further valuation of the company's business at $95,403. Di Carlo made another offer of $110,000 - $95,000 for the rent roll and $15,000 for the furniture and fittings. The agents accepted this offer, and settlement took place. 20 The only admissible evidence of the value of the rent roll and business is that obtained by the agents from Mr Peter Newton of Newton Business Pty Ltd, a specialist in providing valuations for real estate businesses. Although the respondent is a real estate agent, he does not claim to have valuation qualifications or expertise. For that reason I do not accept his evidence that the rent roll was worth in the order of $500,000 in mid‑1991. I am satisfied that the rent roll was sold for the best price available, and above valuation, and that but for the refusal by the respondent to grant Di Carlo a lease of the business premises, a better price would have been obtained. I do not accept that the agents breached any duty they may have owed the company by disclosing details of the rent roll to interested purchasers. The respondent's assertions in this respect are entirely unparticularised. He claimed that this disclosure of confidential information greatly damaged the value of the business because the interested parties were "able to approach the landlords and bid for their work". The persons to whom the information was disclosed are not identified. The subject‑matter of the disclosure does not appear. It is not asserted that anyone in fact approached the landlords and bid. The reduction in value of the business incident upon the disclosure is not even estimated. In those circumstances, I am unable to find that any loss was occasioned to the company by the conduct of the sale. The respondent has not established that he has a real claim, which is likely to succeed, arising out of these rent roll issues. Another rent roll issue is dealt with under a later sub‑heading.

Extending further credit 21 The next complaint is that the Bank was in breach of its duty to the respondent as its customer in extending further credit to the company. The respondent deposed that he could not understand how the company's overdrafts had increased so far beyond their agreed limits. Mr Woods produced from the Bank's file on the McDonald Group a memorandum dated 20 September 1990 which showed that the balances of the overdraft accounts for the Glenroy and East Keilor offices were permitted to exceed their limits as a result of requests by the respondent. The excesses were permitted on the basis of an undertaking by the respondent that certain properties would be realised and the proceeds used to reduce the debt. That was not done and the funds were used to acquire speculative property investments. Mr Woods was cross‑examined, but not about the file note or his interpretation of it. I accept his account. In particular I find that the increases in the overdraft limits were made at the respondent's request. The respondent has not established that he or the company has a real claim, which is likely to succeed, in relation to the extension of further credit to the company.

Duress 22 The respondent asserts that the Bank applied duress to him in order to obtain additional securities. He says that in November 1990 Bank officers made clear to him that unless he provided additional security the Bank would not continue its credit facilities. Faced with the threat of withdrawal of the facilities, he reluctantly executed two mortgages. He did not obtain or have the opportunity to seek legal advice. There is nothing to show that the Bank was not entitled to discontinue its facilities, or that its threat to do so was in breach of contract or otherwise wrongful. Cf Cope, Duress, Undue Influence and Unconscientious Bargains (1985) par 125. The case is not within the principle illustrated by Commercial Bank of Australia v Amadio (1982) 151 CLR 447. The respondent was not under a special disability when he executed the mortgages. He was an estate agent of many years experience. His affidavit discloses his familiarity with the acquisition of investment and other properties, and with land transactions, mortgages and other securities. He was capable of negotiating better terms with the Bank than those he was enjoying with Westpac. He presented in court as an acute and able businessman, who understood the proceedings and the issues involved, and indeed asserted that he well understood them. Although he did not have a lawyer with him when he signed the additional securities, one was available to him. At meetings with the Bank he was often accompanied by his solicitor, Mr Christopher Dale, a senior and experienced member of the firm Clayton Utz. Had he felt the need for assistance in connection with the additional security, and I do not think he did, he could have called on Mr Dale. I am not persuaded that he suffered any disadvantage in his dealings with the Bank in connection with the additional mortgages. 23 The respondent also contended that he was subjected to duress in relation to the appointment of the agents for the mortgagee in possession. He deposed that in August 1991 he was telephoned by a Bank officer and asked to send the Bank a letter consenting to the appointment of Mr Dunner and Mr Harrison as agents for the mortgagee in possession. He said that "under pressure" from the officer he sent the Bank a letter the contents of which the officer had dictated over the phone. The respondent says he did not understand what was in the letter or its ramifications. He simply did what he was told without having legal advice. The four line letter was a "request that Andrew Leonard Dunner and Geoffrey Ormond Harrison be appointed as the agent for mortgagee in possession". I do not accept that there was any duress applied to the respondent. He does not disclose the nature of the pressure that was applied to him. Presumably it was that the Bank would not continue to support him unless he agreed to the appointment of the agents. There is nothing to show that the Bank was not entitled to take the course it did, or that that involved a breach of contract or other unlawful action. After the respondent had taken down the verbiage that had been dictated to him, he could have shown it to Mr Dale and asked him whether he should provide the Bank with the letter it wanted. He did not approach Mr Dale. The respondent was not at any special disadvantage in relation to the transaction. I refer to what I have said in the preceding paragraph. I do not accept that the respondent was easily prevailed upon or that he did not understand what he was signing. He has spent twenty three years as an estate agent, and the concept of agency would be known to him. He could not have failed to understand that the mortgagee in possession was the Bank, that Messrs Dunner and Harrison were the Bank's agents, and that as its agents they could do on its behalf what the Bank itself could have done had it gone into possession. 24 There is no substance to the claim that the Bank was in breach of its duty to the respondent in appointing Mr Dunner as agent in possession on the ground that he had previously acted for the respondent. The basis of the claim is that in early 1991 the respondent became concerned about the financial position of the McDonald Group, and engaged Mr Dunner to advise him. It was not explained why the Bank's appointment of Mr Dunner, who as a result of his earlier retainer was familiar with the affairs of the Group, was a breach of duty. I do not think it was. 25 The respondent has not established that he has a real claim, which is likely to succeed, arising out of the issues examined under this sub‑heading.

Other complaints 26 There is no evidence to support the respondent's claim that the agents and the Bank were in breach of duty in that they overpaid Mr Dunner, presumably for his services as agent. The complaint that the Bank failed properly to account to the respondent and his company for the securities it had realised is fully answered by Mr Woods in his affidavit. The contention that in earlier proceedings the Bank had claimed amounts different from those in the bankruptcy notice and petition does not constitute grounds for not making a sequestration order. The amounts in the petition have been verified as required by s 52 of the Act.

CONCLUSION 27 I am satisfied with the proofs required by s 52(1). The respondent has not satisfied me that there is a sufficient cause for not making a sequestration order. Accordingly, I will order that the estate of the respondent be sequestrated. I certify that the preceding twenty‑ seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sundberg.

Solicitors for the Applicant: Lander & Rogers