Ebert v The Union Trustee Company of Australia Ltd

REASONS FOR JUDGMENT (Extempore) I have before me an amended application dated 6 March 1997 brought on behalf of Bruce William Naghten and his wife, Irene Margaret Naghten. By consent, although the application does not expressly claim it, I treat the application as one to set aside a bankruptcy notice dated 12 September 1996 which was duly served upon each of them. The bankruptcy notice was served by the Commonwealth Bank of Australia ("the Bank"). The Bank is, of course, the respondent to this application. The bankruptcy notice claims as at the date of its issue an amount of $168,489.35. This amount is arrived at as at that date by a computation set out in the body of the notice. This computation takes into account a judgment debt of $774,575.71, together with accumulation from time to time of interest on that amount at appropriate rates, together with the deduction from the thus accruing amount of amounts received in reduction of the judgment debt and interest. The judgment debt is founded upon a judgment given in the Supreme Court of New South Wales ("the Supreme Court") entered on 27 October 1995 but, in fact, given on 23 May 1991. By that judgment, the applicants ("the Naghtens") were ordered to pay to the Bank the sum that I have referred to. Further orders were also made in relation to property of the applicants which had been held by the Bank as security in relation to overdraft accommodation and the like, in respect of which the proceedings had been brought in the Supreme Court. Two properties were involved. One was a unit described as 1/39 Hume Street, Crows Nest and further identified as "being the property contained in Folio Identifier 1/SP30953". The second property was at "81 Carlotta Street, Greenwich being the land in Certificate of Title Volume 6160 Folio 180". Leave was given to the Bank to issue forthwith writs of possession in respect of those properties and an order was made that the Naghtens pay the Bank's costs. The proceedings before me are based upon an assertion that the applicants have a counter-claim, set-off or cross demand of the kind referred to in s 40(1)(g) of the Bankruptcy Act 1966 (Cth). The proceedings as originally framed were wider in their import than the proceedings as they have been argued before me today. Reference was made to cross-claims which had been brought in the proceedings heard in the Supreme Court, involving parties other than the Bank. They were cross-claims for contribution and the like. It has been quite properly conceded that those cross-claims cannot relevantly be cross demands of the kind referred to in s 40(1)(g), and, insofar as it appeared from the manner in which the proceedings were formulated that they were to be brought in question, that any claims in respect of them are no longer pressed. Reference was also made in the application to a "third cross-claim". It has been sufficiently identified that that cross-claim was, in fact, a cross-claim, although described differently, which was heard and disposed of by Cohen J in the proceedings in the Supreme Court. Accordingly, it is not now claimed before me that that cross-claim was relevantly a cross demand to be considered in this present application. The claims that have been put forward today are claims based upon the exercise by the Bank of its power of sale in relation to the two properties to which I have made reference. Put concisely, the claim made before me in relation to the setting aside of this bankruptcy notice is based upon the assertion that proceedings which were commenced in the Common Law Division of the Supreme Court of New South Wales being proceedings No 20179 of 1997, relevantly amount to a cross demand sufficient to result in the setting aside of the bankruptcy notice pursuant to s 40(1)(g). I should add that, in the course of argument, it has been submitted on behalf of the applicants that I should have regard not only to the particulars of the claim made against the Bank in those proceedings, but also should have regard to a claim not currently to be found in those proceedings. I will deal with that matter later in these reasons. The test which the Court is to apply when considering whether a cross demand has relevantly been established within the terms of s 40(1)(g) was set out by the High Court of Australia in Ebert v The Union Trustee Company of Australia Ltd (1960) 104 CLR 346 at 350. This test has, of course, been frequently referred to in other cases but it is convenient to go to it at this stage before I enter upon a consideration of whether or not it has been made out in these proceedings. The court said, in reference to the section in an earlier manifestation:- "Section 52(j) makes it necessary that a debtor served with a bankruptcy notice, if he does not comply with its requirements, should satisfy the Court of Bankruptcy that he has a counter-claim, set-off or cross demand which equals or exceeds the amount of the judgment debt. The debtor clearly must satisfy the Court that there exists in him a counter-claim, set-off or cross demand. ... The appellant cannot satisfy the Court that a cross demand exists by showing no more than that she propounds one and states how she suggests that she can make it out. In Re Duncan; Ex parte Modlin (1917) 17 S.R.(N.S.W.) 152; 34 W.N. 49 Street J. said that the debtor need not satisfy the Court that there are reasonable grounds for believing that he will establish his cross action, but only that he has a bona fide claim which he is fairly entitled to litigate. This perhaps is expressed too favourably to the debtor. In Re A Debtor (1958) 1 Ch. 81 Roxburgh J said: 'But not every demand will suffice. A demand made in bad faith would not be good enough. The debtor must satisfy the Court that he has a genuine demand. ... But in my opinion a demand must be more than bona fide: the Court must be satisfied that it has a reasonable probability of success' ((1958) 1 Ch., at p. 99). Perhaps the standard may be expressed by saying that the debtor must show that he has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand." Accordingly, it is necessary that in these proceedings the applicants indicate that they have a bona fide cross demand which amounts, within the meaning of the test above, to a prima facie case, although that case does not have to be proved to the hilt, as it would if the matter was being fully litigated. It is sufficient that the nature of the case be properly indicated and that there be an indication that it is a provable case. The claim made in the Supreme Court amounts, in general terms, to an assertion that the Bank as mortgagee did not properly act in the interests of the applicants as mortgagors in respect of the properties that I have referred to. Again, put broadly, the filed statement of claim asserts that the Bank wrongly exercised its power of sale in relation to the properties by selling them at a demonstrable undervalue. The existence of the amount of this undervalue is said, for the purpose of these proceedings, to bring them within s 40(1)(g) in that a cross demand is shown in it, being part of an amount which exceeds the amount claimed in the bankruptcy notice. Allegations of a negligent exercise of the power of sale are set out in paragraph 13 of the statement of claim in the Supreme Court and in the particulars attached thereto. Relevant breaches are particularised in respect of each of the properties. It is convenient to deal with this case on the basis, in the first instance, of the allegations that are there made, and a consideration of the evidence that has been put before me in respect of it. In relation to the Crows Nest unit, the allegation is made that the Bank was relevantly in breach of its duty by refraining to consent to the sale of the Crows Nest unit in the sum of $400,000 in July 1991, and in failing to investigate properly the proposed purchaser of the unit, who had made an offer for that amount. A general allegation is made of a failure to take reasonable steps to obtain a proper price for the unit when it was sold, offering it at an undervalued price and obtaining for it only $185,000 when the market value was $400,000, or at least not less than $340,000. The evidence offered in support of these allegations is to be found in the affidavit of Mr Naghten sworn on 6 March 1997, which repeats the material put forward by him in an earlier affidavit sworn on 8 October 1997. Basically, the assertion made is that after the judgment in the Supreme Court had been given, and whilst he still remained in possession of the Crows Nest unit in circumstances that the Bank had not, at that stage, entered into possession, he was approached in or about June 1991 by a gentleman, Mr Eric Abraham Jury, who had had a previous interest in the unit, with an offer to purchase the unit for the sum of $400,000. The solicitors then acting for Mr Naghten were instructed to seek the Bank's consent to the proposed sale. The course of events thereafter is to be found in correspondence between the Bank and Mr Naghten's solicitors. In this application this correspondence is relied upon by both sides, and is annexed to the affidavit of Mr Naghten, and also to the affidavit filed on behalf of the bank. In my view, no arguable prima facie case in favour of the assertions made in the Supreme Court statement of claim emerges from a consideration of this correspondence. In my view, it has not been demonstrated, and cannot be demonstrated, that the Bank's attitude in requiring further information as to the terms and conditions of the proposed sale, and the substance of the proposed purchaser, was unreasonable in the circumstances. The matter, in my view, was very much left in the hands of Mr Naghten to progress his application for the Bank's permission, or authorisation, to sell to Mr Jury. It seems clearly enough to me that the onus was left with Mr Naghten to come back with the information that the Bank quite properly was seeking. In the absence of any worthwhile indication as to why that did not occur, I am plainly of the view that no prima facie case is made out in relation to the bank's failure to acquiesce in the suggested sale to Mr Jury for the sum he had offered. The other allegations that are made in relation to the Crows Nest unit relate to its allegedly being sold at an undervalue. That undervalue is said to be demonstrated, so far as the applicants are concerned, by the significant difference between the price that was ultimately obtained for it, and the price at which it was said Mr Jury was prepared to buy it. Reference is also made to an amount of $340,000, which apparently was to be found in a valuation of May 1991, provided to Mr Naghten. Evidence has, however, been placed before me in the affidavit of Mr Kupresak sworn on 26 May 1997, filed on behalf of the Bank, which indicates, in considerable detail, the steps that were taken by the Bank in its approach to the sale of the Crows Nest unit. In my opinion, it cannot seriously be asserted, in these proceedings or elsewhere, that those steps did not demonstrate a proper degree of care for the interests of the mortgagors, nor is it demonstrated that the price achieved at the time when the sale was made was anything but a proper market price. In these circumstances, I am satisfied that no viable cross demand has been shown in respect of the allegations made relating to the sale of the Crows Nest unit. I turn, then, to the allegations that are made relating to the sale of the property in Carlotta Street, Greenwich, which was apparently the home of the Naghtens. The particulars in relation to alleged breaches of duty in relation to that property are set out in the same paragraph of the Supreme Court statement of claim. They assert that a relevant breach occurred through the Bank obtaining no more than $800,000 for the Greenwich home when the market value was in excess of $1,000,000. Dealing with that allegation, I am satisfied that plainly it cannot be made out. There is no evidence placed before the Court as to the Greenwich home having a market value in excess of $1,000,000. Indeed, a valuation obtained by Mr Naghten himself places the value in the vicinity of $800,000. I am satisfied that the Bank, before proceeding to sell, obtained quite properly at least two valuations, both of which placed the anticipated market value of the property in that vicinity. Efforts to sell the property at auction did not succeed in obtaining the reserve price, but negotiations following the auction resulted in a price fairly close to it. In my view, there is no prima facie case demonstrated of a failure of the Bank to exercise due care in relation to the price obtained. It is also put that the Bank did not mount an adequate and proper marketing campaign for the selling of the properties. In my view, the evidence amply demonstrates that a perfectly proper campaign was engaged in, and no prima facie case has been made in that respect. I should add that claims are made in respect of both properties that there should have been an obtaining of a proper rental for the properties before they were sold. No material is placed before me in affidavit form to indicate what a proper rental would be, or why, indeed, the properties should have been let in all of the circumstances. I do not consider that a prima facie case has been shown within the meaning of the authorities in respect of that allegation. In the course of argument today, counsel for the applicants has made a further submission of breach. This is to the effect that there was unreasonable delay in relation to the sale of the Carlotta Street, Greenwich property which has resulted in an unnecessarily large accrual of interest payable by the applicants to the Bank. It is put, although it has not been quantified, that the amount of interest thus allegedly improperly accruing would be in excess of the amount claimed in the bankruptcy notice. Objection has been taken to this matter being raised at all as it quite clearly was not, and is not, a matter raised in the proceedings in the Supreme Court. No precise authority has been quoted as a basis for an allegation in these terms. It has merely been put on the basis that a proper exercise of care on the part of the mortgagee in respect of the mortgagor would have required the earlier sale of the property. It may be noted that the question of the sale of the property was addressed in certain orders made by consent in the Supreme Court in 1993. In considering whether some prima facie case of an appropriate cross demand is made out in relation to this allegation, I have been able to have regard to material placed before me by the Bank as to problems that existed in relation to the immediate selling of the Greenwich property. The respondent Bank had only a second mortgage, whilst the National Australia Bank had the first mortgage and also a third mortgage. It is apparent that there were concerns of a legal nature relating to these mortgages as to what claims might properly be made by National Australia Bank in relation to the sale of the properties by the respondent Bank pursuant to the Court order. In my view, it cannot be asserted that the respondent Bank was under some obligation, notwithstanding that these problems needed to be resolved, to push ahead and sell the property purely in the interests of the defaulting mortgagors whose interest obligations were obviously accruing in the mean time. The very fact that this matter of accruing interest has been raised at this time and was not raised in the statement of claim previously filed is something which I need to take into account. I note that the statement of claim was not the product of counsel who appears for the applicants in these proceedings, and who has argued most cogently and lucidly the case on behalf of her clients. Notwithstanding that, it is obviously a document carefully prepared by the legal representatives of the applicants at the time of its filing. The absence of any such claim is a matter which I feel should not unreasonably be taken into account when one has regard to the other aspect of this matter, namely, whether I am satisfied that the application constituting the cross demand is a bona fide application. The claim quite obviously could have been made at a far earlier point of time than it was, and it clearly appears from material that has been put before me, that it has not been progressed in the Supreme Court. Whilst it has been asserted that that applicants suffer financial constraints which have precluded them from moving their proceedings forward in the Supreme Court, I am not satisfied that that is a sufficient answer to the inference, which springs from the whole of these proceedings, that this cross demand lacks the necessary bona fides required for it to qualify as a means of setting aside this bankruptcy notice pursuant to s 40(1)(g). For all the reasons I have given, I have come to the conclusion that this application, construed as an application to set aside the bankruptcy notice, must necessarily fail. I accordingly dismiss it with costs. I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Foster.