A. HISTORY OF THE PROCEEDINGS
In these proceedings the petitioning creditor Raymond Marshall Johnstone ("the petitioning creditor") petitions for a sequestration order against the estate of Joseph Guss ("the judgment debtor") by an amended petition dated 16 June 1997. By notice of motion dated 9 December 1997, Geelong Building Society Pty Ltd (in liquidation) ("the supporting creditor") applies to be substituted as petitioner pursuant to s 49 of the Bankruptcy Act 1966 (Cth) ("the Act"). The judgment debtor opposes the petition and the motion.
The history of these proceedings is lengthy enough. I set out the history in some detail below because, as it turns out, it is relevant to the disposition of the case.
The petitioning creditor issued a bankruptcy notice on 19 September 1996 requiring the judgment debtor, within fourteen days of service of the notice, to pay the sum of $4,989.40, to secure its payment to the satisfaction of the Court or the creditor, or to compound the sum to the creditor's satisfaction. The bankruptcy notice was based on an order for costs obtained in the Supreme Court of Victoria on 22 July 1994 against the judgment debtor in favour of the judgment creditor in the sum of $4,989.40. The circumstances in which that order for costs was made are set out in the judgments of Sundberg J of 30 May 1997 and 1 July 1997. The judgment debtor was unable to satisfy Sundberg J that he had, under s 40(1)(g) of the Act, a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt relied on in the bankruptcy notice. His Honour delivered judgment to that effect on 30 May 1997 and, by operation of s 41(7) of the Act, the judgment debtor committed an act of bankruptcy on that date. The judgment debtor unsuccessfully applied for a stay of Sundberg J's orders. An appeal from the decisions of his Honour was dismissed by the Full Court on 13 November 1997. On 4 December 1997, the judgment debtor filed an application in the High Court of Australia for special leave to appeal against the decision of the Full Court.
In the meantime, on 2 June 1997, the petitioning creditor presented a creditor's petition against the judgment debtor, asserting that the judgment debtor was indebted to him in the sum of $4,989.40 "for costs". The petition was verified by an affidavit sworn by the petitioning creditor on 2 June 1997. On 16 June 1997 the petition was amended, adding a claim that the judgment debtor was also indebted
in the sums of $8,430 plus interest of $817.04 plus $344.50 for costs ordered by the Magistrates' Court of Victoria plus interest at the rate of 13.2% per annum since the 16th June 1993 together with other sums for costs ordered to be paid by the Magistrates' Court of Victoria plus interest thereon together with several or many amounts awarded to the Creditor by way of taxed costs by the Supreme Court of Victoria or by this Honourable Court plus interest thereon.
Also on 16 June 1997, a further affidavit was sworn by the petitioning creditor, verifying paragraph 4 of the amended petition (which asserted that the judgment debtor had committed an act of bankruptcy by failing to comply with the bankruptcy notice of 19 September 1996). In seeking a sequestration order against the judgment debtor, the petitioning creditor relied on the petition, as amended, the affidavits of 2 and 16 June 1997 and affidavits sworn by him on 23 March 1998, 30 March 1998, 27 April 1998, 26 June 1998, 29 September 1998, 11 November 1998 and 12 November 1998 (the last verifying paragraphs 1, 2 and 3 of the amended petition). The petitioning creditor also relied upon two affidavits of the judgment debtor sworn 27 April 1998 and 22 June 1998. No objection was taken to that course by the judgment debtor.
By notice dated 11 June 1997, the judgment debtor indicated that he intended to appear upon the hearing of the amended petition. The amended petition was originally returnable on 15 July 1997, but it was not until 11 and 12 November 1998 that it was finally heard.
On 26 November 1997, North J ordered that the amended petition be referred to mediation. An unsuccessful mediation was conducted in early December 1997. Shortly thereafter, by notice of motion dated 9 December 1997, the supporting creditor made application to be substituted as petitioner in the place of the petitioning creditor. When that motion and the amended petition came before North J on 10 December 1997, his Honour adjourned them both to afford further opportunity for negotiation. Negotiation proved unsuccessful and his Honour gave directions, on 19 December 1997, as to the filing of affidavits and adjourned the further hearing to 13 February 1998.
On 13 February 1998, the judgment debtor made an unsuccessful application, this time to Finn J, to adjourn the hearing of the petition, upon the basis that an application for special leave was pending in the High Court. His Honour refused the application. The hearing of the petition and the motion was adjourned until 19 February 1998. On 19 February 1998, counsel for the petitioning creditor and the judgment debtor informed Finn J that negotiations were in progress and, by the end of the day, his Honour was informed by counsel that a settlement had been reached. An adjournment was sought (until 27 March 1998) to finalise arrangements. His Honour granted the adjournment and declined to hear the supporting creditor's application to be substituted as petitioning creditor.
When the petition and the supporting creditor's notice of motion came before Tamberlin J on 27 March 1998, the petitioning creditor informed the Court that he was of the view that the settlement was not binding upon him and that he wanted to proceed upon the amended petition. Unsurprisingly, perhaps, the judgment debtor affirmed the terms of settlement and informed the Court by his counsel that as at that date he had been performing his obligations in accordance with the terms. The supporting creditor unsuccessfully renewed his application to be heard upon his notice of motion, all matters being adjourned until 27 April 1998. On 27 April 1998, French J ordered, amongst other things, that the petition be referred to the Registrar for listing for trial; that the question of whether the petition had been compromised be heard and determined at the hearing of the petition; and that, in the event that the petition was found to have been compromised, the application of the supporting creditor to be substituted as petitioning creditor be entertained and, if practical, the hearing of the petition between it and the judgment debtor proceed forthwith.
B. THE GROUNDS OF OPPOSITION TO PETITIONING CREDITOR
I note at the outset that, on the hearing of the amended petition, counsel for the judgment debtor submitted that the petitioning creditor had failed properly to verify by affidavit paragraphs 1, 2 and 3 of the amended petition. That submission must fail, having regard to the petitioning creditor's affidavit of 12 November 1998 and to authorities such as Re Chu; Ex parte RSL Permanent Building Society Ltd (1976) 15 ALR 173 at 176-177 and Daly v Watson (1994) 50 FCR 544 at 552-553.
By a Further Amended Notice of Intention of Debtor to Appear at Hearing of Petition dated 22 June 1998, the judgment debtor claimed, in substance, as follows:
(1) The judgment debt was compromised when the petitioning creditor and the judgment debtor entered into a settlement on 19 February 1998 and, in consequence, the petitioning creditor should not be permitted to rely on the judgment debt.
(2) The time for compliance with the notice of bankruptcy should be extended until the determination of the judgment debtor's special leave application in the High Court; alternatively, there should be a stay or adjournment of the petition or any sequestration order until the determination of the special leave application.
(3) There was "sufficient cause" within the meaning of s 52(2)(b) of the Act for the Court to decline to make a sequestration order, having regard to -
(a) the judgment debtor's special leave application; and
(b) the existence of a set-off, cross demand or counter-claim against the petitioning creditor in favour of the judgment debtor.
(4) The Court should exercise the discretion conferred by s 52(2)(b) of the Act against the petitioning creditor because "in light of the manner in which [he] has conducted legal proceedings against the Judgment Debtor to date, his conduct amounts to malice"; alternatively, the Court should stay or adjourn the hearing of the petition until the determination of the special leave application.
(5) Generally, the Court should stay the operation of any sequestration order until the determination of the special leave application.
On the hearing of the further amended petition, counsel for the judgment debtor did not press the submission that I should extend the time for compliance with the notice of bankruptcy. Having regard to the decision of the Full Court on 13 November 1997, there is plainly no merit in that contention. Nor did counsel rely, to any extent, on the matters specifically claimed in paragraph 3.3, the circumstances having relevantly changed since the Further Amended Notice was drafted. He relied instead on other related matters.
C. THE SPECIAL LEAVE GROUND AND THE CLAIM IN THE COUNTY COURT
Subject to the observations above, I deal first with the grounds set out in paragraphs (2) and (5) above in so far as they were pressed by the judgment debtor and with the alternative basis upon which he sought a stay or adjournment. As mentioned before, the judgment debtor's application for special leave was filed in the High Court on 4 December 1997. At the hearing before me, counsel for the judgment debtor sought
a stay of proceedings upon, alternatively an adjournment of, the Amended Creditor's Petition, until the determination of and by reason of the following:
(a) the determination by the High Court of his application for Special Leave to appeal the decision of the Full Court; and/or
(b) the determination of the County Court Proceedings, which give rise to the set-off against the debt relied upon by Johnstone on the presentation of the Amended Creditor's Petition.
The special leave application has already been relied upon in this Court, in support of an earlier application by the judgment debtor to adjourn the hearing of the petition. The earlier application was refused by Finn J on 13 February 1998.
The proposed grounds of appeal against the decision of the Full Court of 13 November 1997 are described by Finn J at p 4 of his Honour's reasons as follows:
[I]t is said (i) that the act of bankruptcy would not occur until the Full Court itself gave its decision; (ii) the Full Court had jurisdiction to vary or reverse Sundberg J's decision; and (iii) it erred in refusing to decide the question whether or not there was a s 40(1)(g) set-off etc.
For the reasons stated at p 5 of his Honour's reasons, Finn J declined to accept that the first was an arguable ground. I agree and, in doing so, I respectfully adopt his Honour's reasons as my own. As to the other grounds, his Honour said:
I am unable to discern what bearing the special leave application has on the present matter even if leave there was granted, and a prima facie case of set-off, etc was found. … It … would fall to me in any event on the hearing of the petition to determine, if the matter was raised by the debtor, whether there was a set-off etc, as also what would be the significance of that in the circumstances.
Again, I agree (save that it now falls to me to determine the last-mentioned matter). Accordingly, I reject the judgment debtor's submission that the hearing of the petition should be stayed or adjourned until the determination by the High Court of his special leave application. In reaching this conclusion, I have not overlooked the authorities to which I was referred, including Lipov v Alexander Fraser & Son Ltd (1978) 36 FLR 126, Ahern v Deputy Commissioner of Taxation(Qld) (1987) 76 ALR 137, and Adamopoulos v Olympic Airways SA (1990) 95 ALR 525. They too were brought to Finn J's attention.
I turn now to the second matter relied on in support of the judgment debtor's application for a stay or adjournment.
Shortly before Sundberg J delivered judgment on 30 May 1997, a company called Casual Life Furniture Pty Ltd (formerly Tropitone Furniture Co International Pty Ltd) instituted proceedings in the County Court of Victoria against the petitioning creditor and the judgment debtor, claiming some $185,494 in damages for (amongst other things) negligence. According to affidavits sworn by the petitioning creditor on 18 February 1998 and 26 June 1998, the plaintiff company is a Guss family company of which the judgment creditor is a director and secretary. (The last statement has not been denied by the judgment debtor.) When the legal representatives of the Legal Practitioners' Liability Committee failed to file a notice of contribution on behalf of the judgment debtor against the petitioning creditor, the judgment debtor instituted, on 11 February 1998, his own County Court proceeding against the petitioning creditor, being a proceeding in the nature of a contribution proceeding. The existence of that proceeding provides the basis for the judgment debtor's assertion that he has a "counter-claim, set-off or cross demand" within the meaning of s 40(1)(g) and s 41(7) of the Act.
The existence of the County Court proceedings is not, in my opinion, a sufficient basis upon which to grant a stay or adjournment. It was open to the judgment debtor to rely (as in fact he has done) upon those proceedings as constituting a "sufficient cause" within the meaning of s 52(2)(b) of the Act for not making a sequestration order. I therefore reject the judgment debtor's application for a stay or adjournment based on the above-mentioned matters.
D. THE TERMS OF SETTLEMENT
(i) Did the terms of settlement constitute a concluded agreement?
The case for the judgment debtor raises the question whether there is "sufficient cause" within the meaning of s 52(2)(b) not to make a sequestration order. The judgment debtor relied on (i) the terms of settlement of 19 February 1998; (ii) the existence of a set-off etc (as evidenced by the County Court proceedings mentioned above); (iii) the special leave application pending in the High Court (also mentioned above); and (iv) the manner in which the petitioning creditor had conducted proceedings against him.
I note at the outset that counsel for the judgment debtor did not place much weight on the last matter, stating that it derived much of its force from the first. As it turns out, in view of what appears below, it is unnecessary to say anything more of that matter, the claimed set-off, or the special leave application.
The judgment debtor submitted that the judgment debt had been compromised by the parties' entry into terms of settlement on 19 February 1998 and their part performance up until April 1998. According to his counsel, the judgment debtor remained ready and willing to perform his obligations under the terms of settlement.
It was not disputed that,pursuant to the terms of settlement, the parties had consented to orders in this Court (in matter VN 2525 of 1993) that certain moneys in Court (amounting to $11,000) be paid out of Court to the petitioning creditor and that the bankruptcy notice relied upon in that matter be set aside. It was also not disputed that other sums (amounting to $10,000) had been paid by the judgment debtor under the terms of settlement and that the judgment debtor had ceased making payments thereunder by April 1998.
The judgment debtor explained why he ceased performing his undertakings under the terms of settlement in an affidavit sworn 22 June 1998. He deposed that:
(a) On or about Monday, 27 April 1998 in view of a mention in this proceeding on that day and the Judgment Creditor's contentions in respect to the said Terms of Settlement Mr Tony Naughton of Morley and Naughton the Judgment Creditor's solicitors herein agreed with me that the instalment due on 26 April 1998 could be paid subsequent to the mention date.
(b) However in view of the Judgment Creditor's contentions at the mention in relation to the said Terms of Settlement … I have not continued to perform the obligations on my part thereunder until his challenge thereto is resolved.
(c) I contend that the said Terms of Settlement are valid and binding on the Judgment Creditor and intend to perform the obligations on my part thereunder and am ready and willing to do so upon the challenge by the Judgment Creditor thereto being dismissed.
Whilst the petitioning creditor, in an affidavit sworn 26 June 1998, denied that his solicitor had agreed to late payment, he did not deny his repudiation of the terms of settlement. In an affidavit sworn 23 March 1998, the petitioning creditor deposed:
I was in Court on 19th February 1998 when Finn J adjourned the Petition herein to 27th March 1998. This was as a result of a tentative agreement reached between Richard Cook of Counsel for me and Paul Hayes of Counsel for the abovenamed Judgment Debtor. The said agreement was without prejudice and confidential. It was not binding nor enforceable, I believe.
…
Since 19th February 1998 I have asked the abovenamed Judgment Debtor to pay me monies but he has refused.
In a further affidavit sworn 30 March 1998 the petitioning creditor said further:
I would not normally go against an agreement attempted to be reached by Counsel on my behalf but I seek to do so in this case because the tentative agreement was not an agreement in my opinion. Apart from anything else any final agreement in or after the form of what I call the tentative agreement of Richard Cook and Paul Hayes would be void for illegality. I am grateful to Richard Cook that he was able to ensure that the tentative agreement was not binding or enforceable and was without prejudice and confidential.
Did the terms of settlement constitute a concluded agreement with regard to the judgment debt as the judgment debtor submitted? The petitioning creditor submitted that it was not open to the judgment debtor to rely on the terms of settlement because they were expressed to be "entered into … without prejudice" and "to remain confidential between the parties". In relation to that submission, the petitioning creditor referred me to Gowans, The Victorian Bar, professional conduct, practice and etiquette (Sydney 1979) and the judgment debtor, to S Hoffnung & Co Ltd v Hesky [1977] 2 NSWLR 669.
One cannot sensibly decide whether by the terms of settlement the parties had concluded an agreement unless one looks at the terms of settlement themselves: cf Tomlin v Standard Telephones & Cables Ltd [1969] 1 WLR 1378 at 1382, 1385 and 1386. The terms of settlement are necessarily admissible for that purpose. Further, the rule as to a "without prejudice" communication "cannot be permitted to put a party into the position of being able to cause a court to be deceived as to the facts by shutting out evidence which would rebut inferences upon which the party seeks to rely": Pitts v Adney (1961) 78 WN (NSW) 886 at 889 per Walsh J; also Quad Consulting Pty Ltd v David R Bleakley& Associates Pty Ltd (1991) 27 FCR 86 at 93.
It is unnecessary to say much of the terms of settlement themselves. The undisputed evidence was that, on 19 February 1998, an (undated) document embodying the terms was signed by counsel representing the petitioning creditor and the judgment debtor. The terms purported to settle all bankruptcy proceedings as between the petitioning creditor and the judgment debtor as well as other proceedings relating to certain bankruptcy notices. They provided for the making of certain monetary payments by the judgment debtor to the petitioning creditor.
As previously noted, pursuant to the terms of settlement, an order was made, with the consent of both parties, as to payment of moneys in Court to the petitioning creditor; and the judgment debtor made and the petitioning creditor accepted certain other payments. I reject the petitioning creditor's submission that, in the circumstances, I should find that the parties had not concluded an agreement when, by their counsel, they entered into the terms of settlement in February 1998. The terms of settlement made it clear that the parties intended to compromise the judgment debt, the subject of the notice of bankruptcy founding the act of bankruptcy relied on in the amended petition.
The petitioning creditor further submitted, however, that the terms of settlement were frustrated by a default judgment entered on 23 March 1998 in proceeding No. 8244 of 1997 in the Supreme Court; that the judgment debtor must be taken to regard the terms of settlement as ended, because he had not made any payments pursuant to the terms since the end of March 1998; and that the terms of settlement were void as being illegal as conferring preferences under s 122 of the Act.
(ii) Were the terms of settlement frustrated?
I turn to the first of these submissions. On 15 December 1997 the petitioning creditor instituted a proceeding in the Supreme Court against Casual Life Furniture Pty Ltd, the judgment debtor and Anthony Guss, the judgment debtor's son. In that proceeding, the petitioning creditor claimed damages, including exemplary damages, in the sum of $770,925.60 for, amongst other things, negligence. On 23 March 1998, he obtained a judgment in default of defence against the judgment debtor and his son. On 19 June 1998, however, a Master of the Supreme Court set aside the default judgment and made other orders which left little of the petitioning creditor's original statement of claim on foot. The petitioning creditor submitted that the default judgment "caused frustration of the Terms of Settlement". He referred to Aurel Forras Pty Ltd v Graham Karp Developments Pty Ltd [1975] VR 202 and Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149 CLR 337 at 360, 378 and 407. It is enough to say that the default judgment was obtained in a proceeding which was expressly excluded (by paragraph 2) from the compromise effected by the terms of settlement. The default judgment did not affect performance of the terms. The doctrine of frustration has no application.
(iii) Did the judgment debtor abandon the terms of settlement?
I also reject the petitioning creditor's submission that the judgment debtor is to be taken as having abandoned (or agreed to the discharge of) the terms of settlement. By his affidavits of 23 March and 30 March 1998 and his statements in this Court on 27 March 1997 and thereafter, the petitioning creditor made it plain that he did not regard himself as bound by the terms of settlement and that he was not intending to honour them. In that circumstance, the petitioning creditor might have chosen to treat the judgment debtor's repudiation (for that is what it was) as bringing the agreement to an end, but he did not do so and, subject to any other occasion for termination, the agreement remained on foot. By his affidavits and statements in Court, however, the petitioning creditor has made it manifest that, at least until the Court rules on the matter, it was useless for the judgment debtor to attempt to discharge his obligations under the terms of settlement and, so far as the petitioning creditor was concerned, he need not trouble to do so. It is tolerably clear that it is for this reason that the judgment debtor has not, since the end of March, made any tender of further performance. In circumstances such as these, equity prevents the petitioning creditor from relying on the judgment debtor's non-performance as justifying the petitioning creditor's assertion that the agreement represented by the terms of settlement is at an end. See Foran v Wight (1989) 168 CLR 385 at 397-398, 410-411 per Mason CJ, 420, 422 and 426 per Brennan J, 434 per Deane J, 442 per Dawson J and 456 per Gaudron J; Jones v Barkley (1781) 2 Dougl 684 at 694, 99 ER 434 at 440; Ripley v M'Clure (1849) 4 Ex 345 at 359-360, 154 ER 1245 at 1251; and Peter Turnbull & Co Pty Ltd v Mundus Trading Co (Australasia) Pty Ltd (1954) 90 CLR 235 at 246-7. Until the petitioning creditor saw fit to repudiate the terms of settlement, the judgment debtor was discharging his obligations thereunder. He has stated, on oath, that for his part he remains ready and willing to perform those obligations. Nothing has been shown to justify me in rejecting that statement.
For the same reasons, I reject the petitioning creditor's submissions that, by reason of his failure to continue performance of the terms of settlement, the judgment debtor has committed a breach, fundamental or anticipatory, which entitled the petitioning creditor to rescind.
(iv) Were the terms of settlement illegal?
Further, I reject the petitioning creditor's submission that the terms of settlement were unenforceable, being illegal. After referring to Goodinson v Goodinson [1954] 2 QB 118 at 120-1, the petitioning creditor submitted that the terms of settlement were illegal because they required the judgment debtor to make payments to which s 122 of the Act may later be found to apply. Allowing that payments under the terms of settlement may well be found to give the petitioning creditor "a preference, priority or advantage over other creditors" within the period referred to in s 122(1), it by no means follows that the terms of settlement or the payments thereunder were unlawful. A transfer of property made within that period which constitutes "a preference, priority or advantage" for the purposes of s 122(1) is not void for all purposes, but it is merely voidable at the election of the trustee in bankruptcy: see Re Hart; Ex parte Green [1912] 3 KB 6 at 9 and 12; and Re Carter and Kenderdine's Contract [1897] 1 Ch 776 at 781. The payments under the terms of settlement would not be illegal (in the sense for which the petitioning creditor contends) simply because they fell within s 122. Instead, the payments would be liable to be set aside at the instance of any trustee in bankruptcy appointed to administer the judgment debtor's estate within the relevant period.
As already indicated, counsel for the judgment debtor contended that the existence of the terms of settlement was relevant to the question whether there is "sufficient cause", within the meaning of s 52(2)(b) of the Act, not to make a sequestration order. But for the application made by the supporting creditor, I may well have accepted that submission. Counsel also submitted that, by reason of the compromise effected by the terms of settlement, the petitioning creditor was estopped from relying on the act of bankruptcy. He referred, generally, to The Commonwealth of Australia v Verwayen (1990) 170 CLR 394. Again, however, I do not find it necessary to deal with that submission. It is enough to say that, in the circumstances of the case (including the entry into and part-performance of the terms of settlement by the petitioning creditor and the judgment debtor) the petitioning creditor should give way, as petitioner, to the supporting creditor. I set out in more detail below my reasons for reaching that conclusion.
E. SUPPORTING CREDITOR AS PETITIONER
The supporting creditor applies to be substituted as petitioner under s 49 of the Act which provides:
Where a creditor's petition is not prosecuted with due diligence or where for any other reason the Court considers it proper to do so, the Court may permit to be substituted as petitioner or petitioners another creditor or other creditors to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor, and the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor.
The amount referred to in s 49 is $2000: see s 44(1) of the Act.
A creditor cannot be substituted as petitioner unless the debtor owed a debt of the kind referred to in s 44(1) to the creditor as at the date of the commission of the act of bankruptcy relied on in the petition (here, 30 May 1997): McNamara v Langford (1931) 45 CLR 267. The fact that more than six months have elapsed since that act of bankruptcy does not prevent the substitution of the creditor as petitioner: Re Amos; Ex parte Australian Factors (Queensland) Ltd (1965) 7 FLR 86 and Dean v QUF Industries Ltd (1981) 51 FLR 317.
(i) The debt owed to the supporting creditor
The affidavit of Gregory Meredith sworn 9 December 1997 established the existence of a debt owing by the judgment debtor to the supporting creditor as at 30 May 1997 and as at the date of the presentation of the creditor's petition: see Re Hughes; Ex parte Westpac Banking Corporation (unreported, Merkel J, 28 November 1997), p 4.
Meredith, a chartered accountant and partner of the firm Ferrier Hodgson, deposed that the judgment debtor was indebted to the supporting creditor in a taxation of costs in respect of two proceedings in the Victorian Supreme Court, namely, proceeding No. 11639 of 1991 and proceeding No. 12893 of 1991. The judgment debtor was a defendant in both. The debt derived from consent orders for costs made in both proceedings on 28 November 1994 by a judge of the Supreme Court, to the effect that the defendants pay the plaintiff's costs, to be taxed on a solicitor and own client basis. On 11 September 1995, a Master of the Supreme Court ordered, by way of interim order, that the plaintiff's costs be taxed and allowed in the sum of $70,000. On 14 February 1996, the Master further ordered, by way of interim order, that the plaintiff's costs be taxed and allowed in the sum of $60,000. On 1 August 1996, the Master ordered, by way of final order, that the plaintiff's costs be taxed and allowed in the sum $231,783.30, a sum which included costs taxed and allowed by the two earlier interim orders. Following a review of the taxation, on 1 October 1997 the Master varied his order of 1 August 1996 "to allow the sum of $236,051.50 in lieu of the sum of $231,783.30 in respect of the Plaintiff's costs …". By notice of review dated 15 October 1997, the judgment debtor applied to a Judge of the Supreme Court for a review of the Master's taxation of 1 October 1997. On review by a judge, the Master's orders were confirmed by a decision made on 25 February 1998. Furthermore, on 17 March 1998, the costs of the review were ordered to be paid to the supporting creditor. According to the affidavit of Nicole Wendy Hogg sworn 26 March 1998, as at 26 March 1998, the debt owed by the judgment debtor was $187,556.02 plus costs to be taxed. According to the further affidavit of Gregory Meredith sworn 11 November 1998, as at that date, the judgment debtor owed $201,305.91 to the supporting creditor. There are also untaxed orders for costs against the judgment debtor in favour of the supporting creditor.
The two last-mentioned figures were arrived at by taking into account the net proceeds of the sale of a property at Portsea ("the Portsea property") over which the supporting creditor held security and which, pursuant to a deed of settlement, was sold by the supporting creditor (as mortgagee) on 5 February 1995 for $1,650,000. At settlement on 5 April 1995, the supporting creditor received $1,335,724.50 (less $10,144.60 by way of conveyancing fees). After applying the sum of $59,471.91, which constituted the net proceeds of the sale of the property over which the supporting creditor had security, the amount, including interest, owed by the judgment debtor at 5 December 1997 was $180,730.41. The increases in the sum owing as at March and November 1998 represent interest and costs.
(ii) Was the debt a liquidated sum within s44(1)(b)?
Counsel for the judgment debtor submitted that the debt upon which the supporting creditor relied did not become "a liquidated sum due at law or in equity" within the meaning of s 44(1)(b) of the Act until (at least) 1 October 1997 when the Master made his final order. In so submitting, counsel referred to Hyams v Elder Smith Goldsborough Mort Limited (1976) 133 CLR 686; McNamara v Langford (1931) 45 CLR 267; Re Mendonca; Ex parte Commissioner of Taxation (1969) 15 FLR 256; Re Fabricius; Ex parte Morgan and Associates (unreported, O'Loughlin J, 15 March 1991) and Taylor v Commissioner of Taxation (1987) 16 FCR 212. I reject that submission.
Pursuant to the Supreme Court's rules, "costs which a party is required to pay under … an order of the Court shall, unless the Court otherwise orders, be paid forthwith": r. 63.03(2). The function of the Taxing Master is to "fix or assess" the amount: see r. 63.56(1). In so doing, the Taxing Master "may make separate and interim orders in respect of any item in a bill": r. 63.56(3). The Taxing Master "may, after the conclusion of the taxation of any bill, make a final order with respect to the amount at which he allows the costs or of his disallowance of the costs": r. 63.56(2). Both interim and final orders are required to be "authenticated and filed in accordance with Order 60": r. 63.56(4) and (6). There is provision, in r. 63.56.1, for review of an order of the Taxing Master "allowing or disallowing … any item in a bill" and provision, in r. 63.57, for review of the order made upon review by a judge. In relation to review by a judge, r. 63.57(8) provides that, except as otherwise ordered, a review by a judge "shall not operate as a stay of execution or of proceedings under the order of the Taxing Master …". Whilst there is no equivalent provision in relation to a review by a Master, it does not follow from this that a review by a Master operates as a stay. There is nothing in the Rules of the Supreme Court to warrant that conclusion. cf Re Stubberfield; Ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169 at 176-177 per Drummond J.
To my mind, it is clear that, by 30 May 1997, the Taxing Master had quantified an amount owing by the judgment debtor to the supporting creditor under the costs order made on 28 November 1994. The effect of provision for review by the Master did not prevent the order as to costs made by him on 1 August 1996 from being an order giving rise to a liquidated sum for the purposes of s 44(1)(b). Whilst it is probably unnecessary to say so, I also accept, as counsel for the supporting creditor submitted, that each interim order gave rise to a "liquidated sum" for those purposes.
(iii) Substitution of the supporting creditor as petitioner
Counsel for the supporting creditor submitted that the application for substitution as petitioner ought to be granted on the basis that the amended petition had not been prosecuted with due diligence, alternatively that the history of the proceeding to date, including entry into and subsequent contest about terms of settlement, constituted sufficient reason to permit the supporting creditor to be substituted as a petitioner. I accept that submission. As mentioned earlier, proceedings on the petition commenced almost 18 months ago, in June 1997. There have been many adjournments. There was no hearing of the petition until November 1998, although the petition had originally been returnable in July 1997. Then there is the matter of the terms of settlement. In the circumstances of the case, entry into those terms by the petitioning creditor might well be said to show a want of due diligence in prosecuting the petition - all the more so as the petitioning creditor has subsequently passed most of his time in Court contesting the terms. Even if the matter of the terms of settlement does not of itself establish a want of due diligence on the petitioning creditor's part, the history of the proceedings to date, including the circumstances attending the terms of settlement, provides sufficient reason to grant the supporting creditor's application.
There has, in these proceedings, been ample opportunity afforded to the judgment debtor to set his house in order, but it seems that he has not done so. In the course of the hearing before me, a representative of the National Australia Bank appeared to state its support for the making of a sequestration order against the judgment debtor. The Court was also informed that there were other creditors with an interest in the matter. They were said to include the Mount Buller Alpine Resorts Management Board (claiming at least $70,000 pursuant to orders made in the Supreme Court) and a member of the Victorian Bar (claiming $8,500 (plus interest) pursuant to a judgment said to have been obtained in 1994). The judgment debtor denied none of those statements. It is, in these circumstances, relevant to consider the interests of the judgment debtor's creditors generally and how those interests may best be served: see Re Kathleen Conomo (1959) 18 ABC 174 at 176; Dean v QUF Industries Ltd (1981) 51 FLR 317 at 321 and Re Hughes; Ex parte Westpac Banking Corporation at p 6. There is nothing in any of the affidavits on which the judgment debtor relies to show that he may be solvent. The judgment debtor has already engaged in numerous (and largely unsuccessful) Court proceedings. He continues to be engaged in litigation in more that one Court, thereby continuing to put his financial position at risk. Further, it may be doubted whether the arrangements made under the terms of settlement with the petitioning creditor were in the interests of the judgment debtor's other creditors and whether payments thereunder would fall outside s 122 of the Act: cf Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303 at 310 and Re Kathleen Conomo at 178. Finally, the petitioning creditor has not, I think, put forward any justifiable countervailing reason why the substitution of the supporting creditor as petitioner should not be permitted. (I note that the supporting creditor has made nothing of the fact that the judgment debtor has at no stage filed a notice of opposition to his motion, as required by Order 77 rule 11(2) of the Bankruptcy Rules.)
F. WHETHER A SEQUESTRATION ORDER SHOULD BE MADE
In seeking to resist the supporting creditor's application for a sequestration order, the judgment debtor submitted that he had shown "sufficient cause", within the meaning of s 52(2)(b) of the Act, for such an order not to be made. In so submitting, he relied on a claim for unliquidated damages made by him and his daughter, Marilla Suzanne Guss, in proceedings in the Supreme Court. In those proceedings, the judgment debtor alleged that the supporting creditor as mortgagee was in breach of the duty of care owed to him as mortgagor to obtain the best possible price for the Portsea property. In a writ issued on 14 September 1998 against the supporting creditor, the judgment debtor and his daughter alleged that the supporting creditor owed them "a duty of care to act reasonably, fairly and in good faith in respect of the sale" and that, in breach of that duty of care, the supporting creditor "acted negligently in respect of the conduct of the sale". The following particulars were given.
(a) failing to market, or properly consider marketing the property for sale as two allotments (in respect of each separate title), rather than as one allotment;
(b) failing to hold the auction on a date most advantageous to the Plaintiffs. (It is contended that 22 January 1998, was a date at which a higher price could have been realised for the property, due to other sales which were to be held that day (ie: "Mandura") and a greater concentration of interested purchasers being in the area at such time);
(c) failing to postpone the auction on 5 February 1995, to a subsequent suitable date, due to the inclement weather prevailing at such time;
(d) continuing to proceed with the auction of the property at a delayed time on 5 February 1995, which was later than such time which was advertised to prospective purchasers in the days leading up to the auction;
(e) continuing to proceed with the auction of the property amidst the then prevailing inclement weather conditions, with only a small number of interested persons present, relative to what would have been a greater attendance had the auction been postponed and conducted in better weather conditions and/or held at the earlier time of 22 January 1995;
(f) failing to offer prospective purchasers terms other than cash
on settlement and/or flexibility in respect of those terms relating to completion of the relevant contract of sale; and
(g) concluding the sale of the property at auction for a price which was significantly and/or unreasonably less than its true market value at around the time of such sale. (The true market value of the property at around the time of such sale was in the vicinity of $2,000,000.00 to $2,500,000.00).
In affidavits sworn 22 June 1998 and 21 October 1998, the judgment debtor set out the basis of his claim against the supporting creditor. In summary, he deposed that:
(1) another property three doors down from the Portsea property was sold at auction in the Spring of 1994 for $1,650,000;
(2) a proposal and advice from a Mr Anderson of RT Edgar that the property be auctioned on 22 January was rejected by the supporting creditor and/or Sutherlands;
(3) the day of the auction was "very wet" and there was only a small attendance at the auction;
(4) Mr Anderson of RT Edgar had informed him that the price for a ˝ acre allotment of a property in a similar position to the Portsea property was between $1,000,000 and $1,250,000;
(5) no attempt had been made by the supporting creditor to sell the Portsea property by sub-division;
(6) he believed that the price of the Portsea property should have been in the vicinity of $2,000,000 to $2,500,000;
(7) the delay in instituting a proceeding against the supporting creditor was attributable to finalisation of the Supreme Court proceeding, including the taxation of costs; and
(8) the supporting creditor paid excessive amounts in rates, taxes and conveyancing costs.
The judgment debtor also relied on an affidavit sworn on 25 October 1998 by David Gilder, a licensed real estate agent and property valuer, who deposed that "the most ideal time and date for the conduct of the … auction would have been on 22 January 1995", immediately following the auction of a property known as "Mandurah" which would have "appealed to a similar range of buyers"; that the "Mandurah" auction had been on a "beautiful day with a large crowd and several bidders"; the Portsea property was held "on a day of inclement weather" before a much smaller crowd; and that he had assessed the value of the Portsea property as between $2,000,000 and $2,500,000 in January-February 1995, if it were sold as two allotments.
In support of the contention that the amended petition brought by the supporting creditor as substituted petitioner should either be dismissed or adjourned on account of the Supreme Court proceeding, counsel for the judgment debtor referred to Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 30 ALR 433; Ebert v The Union Trustee Company of Australia Limited (1960) 104 CLR 346; Eastick v Australia and New Zealand Banking Group Ltd (1981) 53 FLR 91; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111; and Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 384.
In a proceeding such as this, the Court must, I think, be satisfied that there is sufficient validity in the debtor's claim to justify dismissing or adjourning the petition upon which the sequestration order is sought: cf Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116. For the reasons set out below, I am not satisfied that the debtor's claim justifies dismissing the amended petition.
In resisting the judgment debtor, the supporting creditor relied on affidavits sworn on 3 July 1998 by Geoffrey Sutherland and by Warwick Anderson, licensed real estate agents whose agencies had acted as conjunctional agents for the sale of the Portsea property. Both deposed that there was no reason why 22 January would have been a better auction date than 5 February 1995 and that there had been good reason for the choice of the later date, taking into account the date upon which the supporting creditor took possession of the property. Sutherland, who was the auctioneer on 5 February, deposed that the weather was fine during the auction, which was held outside and attended by around sixty people. He and Anderson deposed as to the reasons that had led them to decide not to sell the property as two allotments, a possibility which, according to them, had been thoroughly explored. One reason was, they said, that a sale of the property as two allotments would have required the total or partial demolition of the house on the property. David Ellis, licensed real estate agent and property valuer, deposed to having considerable experience as a property valuer, including twelve years' experience in valuing cliff-top properties in the Portsea area. A report and valuation dated 27 January 1995 was exhibited to the affidavit sworn by him in this proceeding. He deposed, as the exhibited report confirmed, that in January 1995 he had considered the Portsea property to have a current market value of $1.65 million and a realisable value of $1.5 million. The basis for that valuation appears from the report.
The duty of a mortgagee who exercises a power of sale over land in Victoria (as the supporting creditor did) is regulated by s 77(1) of the Transfer of Land Act 1958 (Vic). That sub-section provides that the mortgagee may "in good faith and having regard to the interests of the mortgagor … or other persons, sell … the mortgaged … land". In Goldcel Nominees Pty Ltd v Network Finance Ltd [1983] 2 VR 257 at 261-2, Murphy J said that, in the circumstances of that case:
Section 77(1) requires that the mortgagee, on selling, must take reasonable steps to ensure that, at the time of sale, he is getting the best price then available for the mortgaged property, and reasonable steps to obtain the best price must be taken, irrespective of the amount of the mortgaged debt. The "interests of the mortgagor" must in my opinion include at least his interest to see that the mortgagee takes reasonable steps to get on sale the best possible price available for his property. The mortgagee must have regard to this interest.
In considering whether this has been done, it is necessary to consider not only the actions of the mortgagee itself, but also those of its authorised officers and those of the agents of the mortgagee, that includes … its solicitor and real estate agent … .
The Court is required in each case to make an assessment of the mortgagee's actions, along with those in its service and agents, and to determine whether or not the requisite subjective element of good faith is satisfied as well as the objective standard of reasonableness of conduct having regard to the mortgagor's interests.
See also Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309 at 312. The burden of proof is on the mortgagor or other person seeking to impugn the sale: cf The Australian and New Zealand Banking Group Limited v Bangadilly Pastoral Co. Pty Ltd (1978) 139 CLR 195 at 228-9.
Having regard to the terms in which, in Victoria, the duty of a mortgagee is formulated, there may be some deficiencies in the statement of claim as presently pleaded in the Supreme Court proceeding. I place such matters to one side, however, for the statement of claim may well be capable of amendment, if that should prove necessary. I am, nonetheless, unable to conclude that, on the material before me, it can be said that there is sufficient in the judgment debtor's claim to justify dismissing the petition.
In Marilla Suzanne Guss v Geelong Building Society (in liquidation) (unreported, Ryan J, 14 September 1998), Ryan J dismissed the application by the judgment debtor's daughter to set aside a bankruptcy notice served on her, because she failed to satisfy him that she had a "counter-claim, set-off or cross demand" for the purposes of s 40(1)(g) of the Act. The claim that Marilla Guss asserted against the supporting creditor before Ryan J is relevantly identical to the claim that her father asserts against the supporting creditor before me. The affidavits placed before his Honour in support and in opposition to her application are also relevantly identical to the affidavits placed before me in opposition to the sequestration order sought in this proceeding. His Honour stated, at pp 12-13, as follows:
On a review of the extensive affidavit material in this case I am not satisfied that the debtor has established a genuine prima facie case that the property was sold at undervalue or that to conclude that a sale on 5 February 1995 was unreasonable. Indeed, Mr Gilder, the valuer on whom the debtor relies, has deposed:
12. There was to my knowledge and from enquiries I made at the time reasonably strong demand for cliff top properties of the nature of the property in the summer of 1994/5.
Apart from the fortuitous advent of inclement weather on the date selected for the auction sale, nothing has been pointed to as indicating that the sale was not reasonably conducted in such a way as to attract that reasonably strong demand. The price secured was consistent with contemporaneous valuations and can also be seen with hindsight to be consistent with movements in the market and the use made of the property since the subject sale. Counsel for the debtor has been unable to refer me to any authority suggesting that it would be unreasonable for a mortgagee in circumstances like the present not to postpone a widely advertised sale or not to offer extended terms for payment of the price which it was prepared to accept for the mortgaged property. Similarly, there is apparently no authority indicating that it would be unreasonable in such circumstances for a mortgagee not to offer the property as two separate allotments and not to have first demolished the apparently substantial dwelling which was standing on it.
These observations apply to the claim put forward in this case, supported as it is by relevantly identical evidence. The price obtained was, plainly enough, consistent with contemporaneous valuations. In the circumstances set out in the affidavits relied upon by the parties, there is little, if anything, to support the claim that the mortgagee was in breach of its duty in holding the auction on 5 February, not 22 January. Mr Gilder's assertion that it would "possibly have had a beneficial effect on the auction of the [Portsea] property if it had been held soon after or on the same day" as the "Mandurah" property is quite inadequate to found a breach of duty on the mortgagee's part. There is, to my mind, nothing in the affidavits sworn by the judgment debtor that provides any stronger basis. Nor do I think that the fact the auction was held after there had been some rain relevantly assists the judgment debtor. Nor in the circumstances does it seem likely that the judgment debtor will succeed in his claim that the mortgagee was in breach of duty by not offering the property as two separate allotments, the conjunctional agents having considered, for good reason, that that option was not a viable one. Furthermore, the affidavits of Messrs Ellis, Sutherland and Anderson tend strongly to the conclusion that the sale price represented the true market value of the Portsea property.
Counsel for the judgment debtor invited me to take the view that the trial by jury contemplated by the judgment debtor would increase the judgment debtor's prospects of success. I find no merit in that submission.
It cannot be said that the Supreme Court proceeding was instituted promptly. It is tolerably clear that a writ could have been issued in 1995. But it was not until the resumed hearing of the application before Ryan J on 14 September 1998 that the action was in fact begun. I accept, as the supporting creditor submits, that the judgment debtor has not adequately explained that delay: cf Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303 at 309.
For these reasons, I reject the submission that the proceeding in the Supreme Court provides sufficient cause, within the meaning of s 52(2)(b), for not making a sequestration order: cf Re LHF Wools Ltd [1970] Ch 27 at 40 per Harman LJ, referring to Re Douglas Griggs Engineering Ltd [1963] Ch 19 at 23 per Pennycuick J.
I have not overlooked the further submission made by counsel for the supporting creditor that there was "no mutuality to enable … a set off as [the judgment debtor] has suffered such damage [in consequence of any breach of duty on the mortgagee's part] in his capacity as trustee". That submission was made because the statement of claim in the Supreme Court proceeding alleges that the judgment debtor held the Portsea property on trust for his daughter and son. The judgment debtor, by his counsel, responded by submitting that, if he were successful in his claim against the supporting creditor in the Supreme Court, he would be entitled to be indemnified by the beneficiaries for the amount of the claim that had been brought against him by the supporting creditor in the Supreme Court. But it had never, so counsel for the supporting creditor said, previously been put to the supporting creditor that the debt owed to it by the judgment debtor was owed in his capacity as trustee. It suffices to say that there is much merit in the submission put by the supporting creditor on this issue, but, having regard to the conclusion I have already reached as to the strength of the judgment debtor's claim, I do not find it necessary to decide the point.
Moreover, I am not satisfied that the proceeding upon the amended petition should be adjourned until the judgment debtor's claim is determined in the Supreme Court. The claim is of doubtful merit (or validity: cf Re Schmidt 13 FLR at 116). Its sufficiency, for the purpose of these proceedings, has been properly contested by the supporting creditor. As I have noted already, whilst the auction was held in February 1995, the Supreme Court proceeding was not instituted until September 1998. Preparation for trial is not shown to be well advanced.
I have also not overlooked the judgment debtor's claim (not made in the Supreme Court proceeding) that the mortgagee has paid excessive amounts by way of rates, taxes and conveyancing costs. None of those complaints has been quantified. There was no admissible evidence produced by the judgment debtor to support the claim. There was also the very real question whether he could as trustee rely upon those matters by way of set-off against the supporting creditor's claim against him.
Section 43(1) of the Act provides, amongst other things, for the making of a sequestration order against a debtor personally present or ordinarily resident in Australia, where the debtor has committed an act of bankruptcy. As noted above, the judgment debtor committed an act of bankruptcy on 30 May 1997. The supporting creditor has established a prima facie right to a sequestration order. There was, in this case, no attempt by the judgment debtor to show that he was solvent and he did not deny that he had other creditors interested in the proceeding, including claimants for payment of a judgment debt or under Court order. There is a real possibility that payments made to the original petitioning creditor were preferences within the meaning of s 122 of the Act: cf Re Dolman: Ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 384 at 390-1. For the reasons set out above, I do not consider that the claim made by the judgment debtor in the Supreme Court proceeding has sufficient prospects of success to justify an exercise of discretion in the judgment debtor's favour. Having regard to the interest of the parties and of the public, I am not satisfied that a sequestration order ought not to be made.
I am satisfied of the matters of which s 52(1) of the Act requires proof.
Accordingly, for these reasons, I propose to make the following orders:
- That in the matter of the amended petition No. VG 7353 of 1997 of the petitioning creditor herein, the Geelong Building Society (in liquidation) be substituted as petitioning creditor in place of the said petitioning creditor and the amended petition be further amended accordingly.
- Service of the further amended petition on the judgment debtor be dispensed with.
- The further amended petition be heard and determined forthwith.
- The estate of the debtor be sequestered.
- The costs of the original petitioning creditor and of the substituted creditor, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth).
I certify that this and the preceding twenty-two (22) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny