Eastern Pastoral Co Pty Ltd v McFarlane

REASONS FOR JUDGMENT 1 On 14 December 1998, on the petition of Eastern Pastoral Co Pty Ltd (Eastern Pastoral), a Judicial Registrar of the Court ordered that the estate of Malcolm McFarlane be sequestrated. Pursuant to s 18AC of the Federal Court of Australia Act 1976 (Cth) Mr McFarlane applies to review that decision. 2 Eastern Pastoral obtained judgment for $6,814.32, together with interests and costs, against Mr McFarlane in the Magistrates' Court at Melbourne on 13 January 1995. In March 1995 Mr McFarlane applied for and obtained an order that the judgment debt be paid by 65 monthly instalments of $150 each. That order was made under s 5(1) of the Judgment Debt Recovery Act 1984 (Vic). 3 Mr McFarlane paid the instalments due between April 1995 and October 1996. The total amount paid was $2,700. Thereafter no instalments were paid, save for one that I will mention shortly. In consequence of the failure to keep up the instalments, the unpaid balance of the judgment debt became due and payable (see s 9 of the Judgment Debt Recovery Act) as did interest fixed under s 2 of the Penalty Interest Rates Act 1983 (Vic): see s 100(7) of the Magistrates' Court Act 1989 (Vic). 4 On 9 June 1998 Mr McFarlane was served with a bankruptcy notice which required him either to pay the balance of the judgment debt together with interest or to secure, or compound, the debt and interest to the reasonable satisfaction of Eastern Pastoral. No payment was made and an attempt to compound the debt failed. However, Mr McFarlane did apply to set aside the bankruptcy notice. That application was unsuccessful. 5 The petition herein was presented on 15 October 1998. It provoked Mr McFarlane to apply for a further instalment order. The application is dated 18 November 1998. As far as I am aware it has not yet been determined. 6 On 7 December 1998 Mr McFarlane attended at the offices of Eastern Pastoral's solicitors and paid to them an amount of $150. Perhaps by inadvertence, that amount was recorded as having been paid on account of fees due by Eastern Pastoral to its solicitors and not as part payment of the judgment debt, which it plainly was. 7 Before the Judicial Registrar, Mr McFarlane, who appeared in person as he does on this application, relied upon four grounds to oppose the making of a sequestration order against his estate. It is convenient to set out those grounds as they appear in his notice of opposition. They are: "(1) The Applicant is not the same as the judgment creditor, as such (2) The Respondent owes the applicant nothing, (3) The judgment creditor is a defunct company, (4) The respondent has an Application before the Magistrates' Court for the variation of an Instalment Order and has not been notified by the Court of the outcome." 8 The first, third and fourth grounds are of no substance. In respect of two of these grounds, it seems that Mr McFarlane has based his arguments on a misunderstanding of the law. 9 The complaint that the petitioner and the judgment creditor are not the same person is based upon a variation in the name of the petitioner in the title to this proceeding and in the title to the proceeding in the Magistrates' Court. In the petition the petitioner is described as "Eastern Pastoral Co Pty Ltd (ACN 007 440 539) t/as Agricultural Assessments". In the Magistrates' Court proceeding it was named as "Eastern Pastoral P/L trading as: Agricultural Assessments". The difference is inconsequential and in any event the evidence shows that it is the same person. The failure to add the ACN number to all documents is also of no consequence. 10 The allegation that the petitioner is a defunct company arises because at one stage Eastern Pastoral had made an application to the Australian Securities Commission for deregistration as a defunct company. If, as a result of that application, the company had been deregistered it would cease to exist and could not bring the petition. However, the application for deregistration did not proceed and accordingly the company is not barred from maintaining the petition. 11 The application for an instalment order, even if successful, would not assist Mr McFarlane. The effect of an order under s 5(1) of the Judgment Debt Recovery Act is to stay the operation of the order to pay the debt to which the order relates. However, for the purposes of the Bankruptcy Act 1996 (Cth) if the creditor who issues a bankruptcy notice is in a position to enforce the judgment to which the notice relates as at the date of the notice, the notice will be valid: Schekeloff, Re; Ex parte Schekeloff v Hopkins Group Pty Ltd (1989) 22 FCR 407; Re Sgambellone; Ex parte Jacques (1994) 53 FCR 275. At the time of the issue and service of the bankruptcy notice Mr McFarlane was in default under the instalment order and the stay of the judgment debt had ceased to be in force. 12 Mr McFarlane also suggested that acceptance of the $150 instalment paid in December 1998 signified the assent of Eastern Pastoral to a reinstitution of the instalment program in lieu of proceedings in bankruptcy. No such agreement can be inferred from the fact of payment and there are no other facts before the court on which such an agreement can be founded. 13 Another complaint, not raised in the notice of opposition but about which I entertained submissions, related to the petitioner's address. In the bankruptcy notice that address is given as Level 16, 60 Collins Street, Melbourne. The notice also provides that payment of the debt claimed could be made to the petitioner's solicitors at Level 9, 469 LaTrobe Street, Melbourne. Mr McFarlane points out that neither address is the registered office of the petitioner. According to the records lodged at the offices of the Australian Securities Commission, the registered office of the petitioner is at 2nd floor, 106 Hardware Street, Melbourne. Mr McFarlane says that it is not proper for a company to specify in its bankruptcy notice an address that is not its registered office. 14 I do not accept that the failure by a creditor to set out its registered office in a bankruptcy notice is a deficiency in that notice. There is no requirement that a company must specify its registered address in a bankruptcy notice. The notice must state an address at which the creditor can be found in order, among other things, to notify the debtor where documents might be served and where the debt might be paid: In re Beauchamp; Ex parte Beauchamp[1904] 1 KB 572. As I have pointed out, such an address was given. Further, there is no evidence to suggest that officers of the petitioner could not be found at the Collins Street address. Thus, it has not been shown that an incorrect address was given. 15 There are two other matters that I should mention lest it be thought that I have overlooked them. First, Mr McFarlane has said that his wife, Jill McFarlane, has a claim against Eastern Pastoral that might entitle her to a judgment of approximately $1 million. I do not know the facts that give rise to her claim or the basis on which Mrs McFarlane says that she is entitled to recover $1 million. I therefore disregard the evidence. 16 Secondly, Mr McFarlane relies upon an affidavit sworn by his wife where it is alleged that the debt due to Eastern Pastoral that was the subject of the judgment in the Magistrates' Court, was a debt that was jointly owed by Mr McFarlane and his wife, being a partnership debt. He says that there had been no demand for the payment of that debt. Presumably this evidence was tendered to establish that Eastern Pastoral was not entitled to enter judgment against Mr McFarlane. The contention is misconceived. The cause of action that Eastern Pastoral was pursuing was for work and labour done. No demand for the payment of the value of that work was required. It is true that Eastern Pastoral might have been required to join Mrs McFarlane to the suit if objection had been taken at the hearing that not all proper parties were before the court. However, as no such objection was taken the present complaint is not a good one. 17 This then brings me to the only solid ground for the contention that the sequestration order should not have been made. Mr McFarlane says that he is solvent and seeks to establish that fact by showing that he has a good claim against the National Australia Bank Ltd which, if successful, will result in the recovery of damages that are more than sufficient to pay out his debts. 18 By s 52(1) of the Bankruptcy Act, where a petitioning creditor proves the matters there set out, a sequestration order may be made. Here each of those matters has been proved, namely, the facts stated in the petition, the service of the petition and that the debt relied upon is still owing. 19 Nevertheless, the court retains discretion whether to make the order. Section 52(2) provides that a court may dismiss a petition if it is satisfied by the debtor that he is able to pay his debts or that "for other sufficient cause" an order should not be made. In Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25 the Full Court said: "[T]he fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor's debt will amount to 'other sufficient cause' not to make a sequestration order." The relevant cases are then set out. 20 It is not enough in my view for a debtor to show merely that he has a claim on foot. The debtor must demonstrate that the claim is a good claim or, at the very least, that it is an arguably good claim, and that the damages that might be recovered will be, or are likely to be, sufficient to discharge his debts. 21 In 1995 Mr McFarlane instituted a proceeding in the Supreme Court of Victoria against the bank seeking to recover damages, interest and other relief. The proceeding was commenced by counterclaim in a suit in which the bank seeks to obtain possession of property that was mortgaged to it and where it seeks judgment for a debt due by Mr McFarlane. It appears that this debt, inclusive of interest, now exceeds $600,000. 22 In his counterclaim Mr McFarlane alleges that in mid-1998 he had sought the advice of the bank concerning the desirability of purchasing certain farming land owned by Mr and Mrs Alexander and the means of financing that purchase. The pleading asserts that Mr McFarlane was orally advised by a bank officer that he should purchase the land and that he should borrow the whole of the purchase price from the bank. The pleading goes on to allege that, in consequence of that advice, the land was purchased with money borrowed from the bank. Mr McFarlane asserts, again in the pleading, that the advice given was negligent and in breach of a fiduciary duty owed by the bank. The loss and damage said to have been suffered as a result of the alleged negligence or breach of duty is set out in particulars provided pursuant to an order of the Supreme Court. Those particulars read: "(a) Loss of Equity; (b) Loss of Production and (c) Interest pursuant to Statute from the time of service of the Writ in these proceedings to 31 October 1998, equals $811,206.80." 23 To support his allegation that he has a good claim against the bank Mr McFarlane produced two internal notes made by bank officers. The first note is undated and appears to have been written well after the loan was granted. The second note is dated 20 February 1989. The first note reads, "Whilst some of the past decisions on this account [a reference to Mr McFarlane's account] seem to have been based more on hope and the growth of our lending book rather than history of performance we nevertheless do not consider that there [are] personnel [sic] issues to be addressed." The other note reads, "In my opinion we have placed McFarlanes in a no win situation by giving them the money to buy this extra land." 24 While these notes do not show the bank in a good light, they do not support the proposition that Mr McFarlane was given any advice, let alone any negligent advice, concerning his acquisition of the land. On the other hand, the notes do not suggest that no such advice was given. 25 The counterclaim against the bank, which was instituted in 1995, has proceeded slowly. In part, this may have been due to the fact that Mr McFarlane's former solicitors did not prosecute the claim diligently. Certainly, this is what Mr McFarlane says is the case. I do note that there was some attempt at settlement of the proceeding that, as it turned out, was unsuccessful. The attempted settlement may also have slowed down the progress of the litigation. Nevertheless, the proceeding has been in existence for an inordinate period. 26 At an earlier hearing I suggested to Mr McFarlane that he should submit material in order to demonstrate that he has a good claim against the bank for the amount claimed. That invitation was taken up in part. Mr McFarlane has now produced an affidavit sworn by a solicitor, Mr Voitin, who has examined Mr McFarlane's papers. The solicitor says that, based on his instructions and his examination of the papers, he believes that Mr McFarlane does have a better than reasonable chance of succeeding against the bank. However, the solicitor makes no attempt to verify the quantum of damages that might be recovered if the claim is successful. 27 I do have a note from Mr McFarlane's former solicitor which, in a limited sense, does deal with this issue. The note records that counsel who had been retained in the matter "feels that we should win". The note goes on to say: "The writer [that is the solicitor] asks the question - what are we going to win? I think you should address the fact that if we do win, then what to [sic] do we win? Do we win the fact that the new debt of $150,000 created some time ago does not exist plus interest up to date and we hand back the land, or do we win from the fact that the bank will not claim the $150,000 plus interest and we keep the land, or do we go halfway and this is the matter that is unclear? There is no open and shut case to show who wins what, if you do win." 28 This note suggests that Mr McFarlane's former solicitor was of the view that, even if successful in his claim, Mr McFarlane would not recover damages that would exceed the bank's claim. It is to be remembered that his indebtedness to the bank is likely to be around $600,000 and, whilst the interest component of that amount may be the subject of some argument, there is no serious dispute that a significant sum of money is due to the bank. 29 Mr McFarlane did produce a statement of Assets and Liabilities and Cash Flows for his various enterprises between 1988 and 1994 that his accountant had prepared to show the loss and damage suffered by reason of the bank's conduct. The statement of assets andliabilities asserts that as at 30 June 1988 Mr McFarlane had net assets that exceeded $280,000 and that as at 30 June 1994 he had a deficiency of assets of around $14,000. A significant cause in the decrease in the value of Mr McFarlane's assets over this period is his increased indebtedness to the bank. In June 1988 that indebtedness was approximately $112,000 and by June 1994 it exceeded $415,000. Part of the increase in the debt is explained by the fact that Mr McFarlane had borrowed $150,000 to purchase the land from the Alexanders. Mr McFarlane said that the remainder of the increase represents borrowings that were necessary in order to meet the interest that was payable to the bank. 30 The income and expenditure statement shows significant trading losses as a result of farming activities conducted on the land purchased from the Alexanders. For the period 1988 to 1993 those losses amounted to approximately $88,000. However, a major expense that contributed to these losses was interest in the sum of approximately $144,000. That interest is the same as that taken into account in the calculation of the diminution of assets. 31 The assets and liabilities statement records that the land purchased from the Alexanders was only worth approximately $100,000. Thus, it is put that Mr McFarlane was induced to pay $50,000 more than the land was worth. 32 I accept that, provided Mr McFarlane were to succeed in his claim against the bank, he may be entitled to recover his trading losses of approximately $88,000 and, if he paid more for the Alexanders' land than it was worth, the amount of overpayment. For present purposes I will accept that the amount is approximately $50,000. 33 Mr McFarlane says that he is also entitled to recover from the bank the difference between his net worth as at 30 June 1988 and as at 30 June 1994. The difference is in the order of approximately $298,000. I doubt that Mr McFarlane can maintain this claim. First, as I have pointed out, interest has been brought to account both in the calculation of the diminution of net worth and in the calculation of the trading losses. Mr McFarlane cannot recover the same amount twice. Secondly, it is my view, as presently advised, that Mr McFarlane will not be able to show a causal nexus between the alleged negligence or breach of fiduciary duty on the part of the bank and this particular head of damage. 34 A further item of loss appears to be the difference between the income that Mr McFarlane says that he would have earned carrying out his general farming activities had he not purchased the land from the Alexanders and the income that he did earn having purchased that land. The amount of loss under this head is said to total approximately $66,000. I cannot say whether this amount is recoverable, but on the material that I have before me I am of the view that there will be real difficulty in its recovery. 35 Thus, on the evidence that I have, it does not appear that Mr McFarlane will be able to recover, by way of damages, an amount that will be sufficient to discharge all of his debts, even taking into account the value of his assets. Of course I might be wrong in this regard. But, Mr McFarlane has the onus of establishing that there is sufficient cause why a sequestration order should not be made and he has not discharged that onus. In these circumstances, I cannot accede to Mr McFarlane's application to discharge the orders made by the Judicial Registrar and dismiss the petition. 36 However, the position may not be as bad as it appears. Mr McFarlane's trustee will be required to deal with the bank's claim for possession of the mortgaged property and Mr McFarlane's counterclaim. If the trustee takes the view that Mr McFarlane does have a good claim against the bank no doubt the trustee will take appropriate steps to ensure that the bank does not look to the mortgaged property for the full value of the debt due to it without making allowance for the damages suffered by Mr McFarlane. 37 Indeed, commonsense and perhaps legal obligation would suggest that if the trustee does consider that Mr McFarlane has a good claim against the bank which may diminish or eliminate the bank's claim against the mortgaged land, the trustee will take appropriate steps to protect the land for the benefit of the estate. This may or may not require the trustee to press on with the counterclaim. I do not say that the trustee will be required to take this course because I do not have sufficient information to form a view about the matter. Nor is it appropriate for me to do so in an application to which the trustee is not a party. 38 Further, it does seem, having regard to the correspondence that previously passed between the parties, that the trustee may well be able to arrive at some accommodation with the bank that would result in the estate having available to it, after payment of all debts, some surplus assets. If that does come about, and I cannot speak to its likelihood, although it does appear to be more than a mere possibility, Mr McFarlane will be in a position to apply to have his bankruptcy discharged at an early point in time.