Finikiotis v Sandhurst Trustees Limited

REASONS FOR JUDGMENT 1 This is an application to set aside a bankruptcy notice issued on 31 March 2000, and shortly afterwards served on the two judgment debtors who make the application, Dr Finikiotis and his sister Mrs Zervos. Within the twenty-one day period specified in the bankruptcy notice for compliance, the judgment debtors issued the application now before the Court and filed a supporting affidavit. Dr Finikiotis has appeared to prosecute the application on his own behalf and on behalf of his sister. 2 The matter first came on for hearing on 29 May 2000. The issues raised by the application were discussed at some length. At the conclusion of that hearing the matter was adjourned to enable the judgment debtors to obtain legal advice, a step that they were urged by the Court to take as it appeared that they did not understand the issues that they needed to address under s 41 of the Bankruptcy Act 1966 (Cth) (the Act). In the meantime, Dr Finikiotis has filed a further affidavit, and a written summary of submissions. Today he has spoken to those documents, but it is clear that he has not had the benefit of legal advice. 3 The judgment debtors rely on subs (5), (6A)(a) and (7) of s 41, and it is necessary to address each of these subsections. 4 First, I briefly outline a number of events which have occurred in what has now become protracted litigation in the Supreme Court of South Australia. The origins of the dispute between the parties lies in an agreement for a loan dated 12 August 1997 between the judgment creditor Sandhurst Trustees Limited (Sandhurst) and Gallerie Investments Pty Ltd (Gallerie). Gallerie borrowed $3.4 million for the redevelopment of a shopping complex within the central business district area of Adelaide. 5 The loan was guaranteed by two other companies and four individuals. One of those companies was Anacon Enterprises Pty Ltd, the proprietors of which are Dr Finikiotis and Mrs Zervos who are also guarantors. Sandhurst, by a Notice to Pay dated 4 May 1999, asserted that defaults had occurred under the loan agreement and called up the principal sum and all interest due under the loan agreement. The Notice to Pay was not met, and Supreme Court proceedings were commenced on 18 August 1999 by Sandhurst against Gallerie and the six guarantors. 6 It appears from papers before this Court that a document entitled Defence and Counterclaim was lodged by the judgment debtors on 15 September 1999 in the Supreme Court and that subsequently a number of affidavits were filed by them which, I infer, raised grounds for asserting that they were not liable to pay the amount claimed or any part of it. 7 An application was made by Sandhurst in the Supreme Court proceedings for a summary judgment on 6 December 1999. 8 Only brief information about the events that thereafter occurred is before this Court, but that information, such as it is, indicates that there were a number of interlocutory hearings, in the course of which a counterclaim filed in the Supreme Court proceedings by the judgment debtors against a number of other parties, including Heine Mortgage Management Pty Ltd (Heine) and Knight Frank (SA) Pty Ltd (Knight Frank) was struck out. On 14 February 2000, summary judgment was entered against the defendants, including the judgment debtors, in the sum of $4,106,759.38. 9 It is on that judgment that the bankruptcy notice is based, and the amount claimed in the bankruptcy notice is the judgment sum with no additional interest being sought. 10 The judgment debtors appealed against the summary judgment. On 13 March 2000, the appeal was heard by Williams J who, after argument, dismissed it. The reasons for judgment are before this Court. 11 On 6 April 2000, Williams J refused leave to appeal to the Full Court of South Australia from his judgment. On 17 April 2000, the judgment debtors lodged papers at the Registry of the Supreme Court seeking leave to appeal to the Full Court. Those papers, however, were rejected by the Registry as being in an improper form. On 16 May 2000 -after the bankruptcy notice had been served on each of the judgment debtors - they applied for a stay of the judgment. The application was refused on 16 May 2000. 12 More recently, a further application for a stay was made on 6 June 2000. That application was heard and determined by Judge Kelly on 13 July 2000, the stay being refused. On 11 July 2000, the judgment debtors lodged further papers with the Supreme Court, again seeking leave to appeal against the decision of Williams J. Dr Finikiotis has attached to his outline of argument a copy of that application. There is no information before this Court whether the application has in fact been accepted, although in the result nothing will turn on whether it has or has not been accepted. 13 It is against that background that the application to set aside the bankruptcy notice must be considered. The affidavit filed at the same time as the application to set aside the bankruptcy notice does not with any clarity indicate that it was intended to allege a counterclaim, set-off or cross-demand of the kind referred to in s 40(1)(g) of the Act. Nevertheless, I am prepared to accept that it was intended to have that purpose, and to deal with the present application as if the paperwork adequately raises an issue for consideration under s 41(7) of the Act. 14 The judgment debtors contend that the bankruptcy notice overstates the amount due. Indeed, the assertion is that no amount is due or, alternatively, very little is due. They contend that the Notice to Pay was wrongly given because there had not been a default as alleged in the payment of interest and fees and, further, that other grounds stated in the Notice to Pay as defaults under the loan agreements were not in accordance with the true facts. An alternative argument that the bankruptcy notice overstates the amount relies on the contention that the judgment creditor is now in possession of the shopping complex under a mortgage given as one of the securities, and that credit has not been given to the judgment debtors for the value of that property. 15 Dr Finikiotis relies on a valuation made in November 1997 by Knight Frank which put the value of the shopping complex as a going concern after renovation at $5.5 million, and suggested that upon a forced sale it would realise $4,950,000. There is information before this Court that the judgment creditor has made attempts to sell the property unsuccessfully and is still endeavouring to do so. There is presently no contract of sale between the judgment creditor in possession and any third party. 16 In my opinion, the allegation that the bankruptcy notice is invalidated through overstating the amount due is not made out. Section 41(5) provides that: "A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement." 17 There was no such notice given to Sandhurst by the judgment debtors. Moreover, s 41(5) is directed to a misstatement of the amount due under the judgment debt. It is plain that judgment was entered in the Supreme Court on 14 February 2000 for the amount stated in the bankruptcy notice and the bankruptcy notice does not, in any sense, misstate the amount due under that judgment. The matters advanced by Dr Finikiotis are beside the point, but I will return to them later in this judgment. 18 I turn then to s 41(6A)(a). That subsection gives a discretionary power to the Court to extend time for compliance with a bankruptcy notice. It does not provide a ground for setting aside a notice. If the conditions for the exercise of that power were made out it would, however, be open to the Court to extend time for compliance under the bankruptcy notice to enable Dr Finikiotis to pursue other matters that he is seeking to pursue, both in the Supreme Court and now in this Court under the Trade Practices Act 1974 (Cth). I stress, however, that the remedy is a discretionary one. 19 The power under s 41(6A)(a) is enlivened only where before the expiration of the time fixed for compliance with the requirements of the bankruptcy notice, proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor. I accept for present purposes that the institution of an appeal against a judgment or order can constitute "proceedings to set aside the judgment or order" within the meaning of those words in s 41(6A)(a), (as to which see McDonald, Henry and Meek "Australian Bankruptcy Law and Practice", 5th ed, at para 41.6A.15). However, in this case, there was no valid institution of the appeal process. There was an attempt made by Dr Finikiotis on behalf of the judgment debtors to file an application for leave to appeal from the decision of Williams J. That application was lodged at the Court on 17 April 2000, within the time for compliance with the bankruptcy notice. However, that application was rejected by the Supreme Court and it follows, in my view, that proceedings to set aside the judgment were not instituted by the debtor. The Act means instituted in fact, not merely that some unsuccessful attempt was made to do so. The application under s 41(6A)(a) must therefore fail on that ground. 20 In my opinion, however, even if the power were enlivened, it would be quite inappropriate for this Court, in the circumstances of this case, to extend time. I say that because the judgment debt is for a very substantial sum and it is plain from the papers that the circumstances giving rise to that debt, and the various matters which the judgment debtors now raise in opposition to it, have been canvassed at length in the Supreme Court. Not only was there consideration of the matter on the summary judgment application, there has also been an appeal and there has been consideration of whether a further appeal would have any prospect of success. There have been two stay applications, each of which has been refused. There is no reason disclosed by the papers or by that history to suggest that further time is likely to alter the situation regarding the existence of the judgment debt. 21 The third matter relied on is the alleged counterclaim, set-off or cross-demand alleged for the purpose of s 41(7). Again, the judgment debtors face a technical difficulty, but one of importance. Not only must they allege a bona fide and prima facie or at least an arguable counterclaim, set-off or cross-demand (see Re Brink; Ex parte The Commercial Banking Company of Sydney Limited (1980) 44 FLR 135) they must also show that it is not one that could have been raised in the proceedings in the Supreme Court in the action in which the judgment the subject of the bankruptcy notice was issued. 22 Dr Finikiotis has informed the Court that the Defence and Counterclaim filed in September 1999 was "rejected" by the Supreme Court. It is not clear why - indeed, there is nothing on the papers to indicate if or why - that occurred. That Defence and Counterclaim is not before this Court. However, the subject matter of the alleged counterclaim, set-off or cross-demand has now been articulated by Dr Finikiotis in proceedings under ss 52, 53 and 59 of the Trade Practices Act, commenced in this Court yesterday by the judgment debtors against Sandhurst, Heine and Knight Frank. 23 The claim asserted in those proceedings, insofar as it is possible to understand the nature of it, is plainly one that could have been commenced in the Supreme Court of South Australia. The documents before this Court fail to demonstrate that the alleged counterclaim, set-off or cross-demand is one that could not have been commenced in the Supreme Court proceedings, and the application under s 41(7) must fail on that ground. 24 There is also a further issue under s 41(7). I said earlier that I would come back to the circumstances of the judgment in the Supreme Court. The gravamen of the complaints made by Dr Finikiotis, both in these proceedings and in the proceedings recently commenced under the Trade Practices Act is that Knight Frank prepared schedules as part of a valuation process in November 1997 which overestimated rental income and led to a valuation which far exceeded the true value; that valuation led to Sandhurst making a loan of $3.4 million to Gallerie. The argument goes on that the loan far exceeded the amount which should have been lent and that, in turn, has caused the losses which Gallerie and its six guarantors now allege they have suffered. Because the loan was more than it should have been, it is said that that led to the events which caused an unlawful entry into possession. 25 In the judgment of Williams J, dismissing the appeal against the summary judgment, his Honour notes an order of a Master of the Court made on 13 January 2000 which struck out counterclaims in those proceedings against Knight Frank and Heine because they were insufficiently related to the subject matter of the plaintiff's action in the Supreme Court. His Honour noted that if there were to be some criticism of Knight Frank and Heine, that was a matter that could be pursued in separate proceedings. Important for present purposes, however, is the fact that his Honour, who had much more information than this Court has, observed that the allegations that were made in the Supreme Court proceedings against Knight Frank and Heine made no criticism of Sandhurst so far as the circumstances of the valuation were concerned, and his Honour was unable to see that there was any relevant connection between the valuation transaction and the loan transaction. His Honour observed that Dr Finikiotis had asserted that the Knight Frank valuation was wrong, and said: "I have fully investigated the consequences that might flow from such an assertion if it were correct. I am satisfied that, relevantly, the plaintiff [Sandhurst] has not been shown to be involved in anything arising out of Knight Frank's actions." 26 The paperwork before this Court fails to demonstrate that the allegations of a wrong or negligent valuation made by Knight Frank, and the involvement of Heine in that allegedly wrong valuation, has any bearing on the liability which Gallerie and the six guarantors have to Sandhurst under the relevant loan and guarantee documents. Sandhurst is apparently a trustee of a large superannuation fund and stands as a lender in the transaction. It may have acted upon the strength of valuations prepared by others, but that fact alone fails to demonstrate that the matters that Dr Finikiotis is alleging bear on the liability that the judgment debtors and others have to Sandhurst under loan and guarantee documents. 27 In those circumstances there is simply no basis shown upon which this Court could find that there is an arguable counterclaim, set-off or cross-demand which the judgment debtors have against Sandhurst. The application to set aside the bankruptcy notice under s 41(7) must also fail on that ground. 28 I add that the failure of Sandhurst to give credit at this stage for the value of the shopping complex now in its possession does not invalidate the bankruptcy notice. It was held by a Full Court of this Court in Groom and Others v Abela [1992] FCA 562 that a bankruptcy notice based on a judgment against a guarantor of a loan was not invalid because the judgment creditor had not given credit for an unrealised security which it held. The Court, at 7-8, said: "[The trial judge] held, as a matter of law, that the mere holding by a judgment creditor of a security which may, upon realisation, produce a surplus which will at that time reduce the judgment debt, does not preclude the creditor from having a bankruptcy notice issued in respect of the amount payable under the judgment at the date of the issue of the notice. We are satisfied that that is a correct statement of the law: see In re Renison; Ex parte Greaves [1913] 2 KB 300 at pp 302, 303. The mere existence of such a security does not preclude the creditor from issuing execution upon the judgment. Nor is the position different in a case such as this where the creditor has, before the issue of the bankruptcy notice, taken possession of the property by exercising his powers as mortgagee but the exercise of that power has not resulted in any moneys being received by him or being held beneficially on his behalf: cf. Re Scott; Ex parte Scott (1921) 38 WN (NSW) 72: Re Taylor; Ex parte Taylor v Bill Acceptance Corporation Ltd (1985) 8 FCR 568." 29 For these reasons, the application to set aside the bankruptcy notice fails and the application is dismissed. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice von Doussa.