Finikiotis v Sandhurst Trustees Ltd

Federal Court of Australia|2002-02-27|Before: Williams J, North J

REASONS FOR JUDGMENT 1 Before the Court is an appeal against orders made by Federal Magistrate Raphael on 23 August 2001. The magistrate dismissed an application for review of orders made by Registrar Baldwin on 19 February 2001. Registrar Baldwin made a sequestration order against the estates of each of the appellants, Dr Finikiotis and Mrs Zervos. The orders were made under s 52(1) of the Bankruptcy Act 1966 (Cth) (the Act). The registrar acted under s 102(2)(i) of the Federal Magistrates Act 1999 (Cth) and rule 1.4(1) in item 8 Federal Magistrates Court (Delegation to Registrars) Rules 2000. 2 The registrar considered and rejected an argument that the hearing of the creditor's petition should be adjourned because Dr Finikiotis and Mrs Zervos were engaged in a number of pieces of litigation connected with the debt upon which the bankruptcy notice was based. 3 The magistrate reviewed the orders of the registrar under s 104(3) of the Federal Magistrates Court Act 1999 (Cth). This was a hearing de novo: r 20.03 Federal Magistrates Court Rules. Again, the focus of the argument was on whether the creditor's petition should be adjourned pending the determination of the outstanding litigation. 4 The appeal to this Court is heard by a single judge pursuant to a direction made by the Chief Justice on 12 October 2001 under s 25(1A) of the Federal Court of Australia Act 1976 (Cth). The appeal is brought under s 24(1)(d) of the Federal Court of Australia Act 1976 (Cth). 5 It is necessary to examine the approach taken by the magistrate to the question of the adjournment. He expressly proceeded on the basis of the principle enunciated in Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148: "It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds: Re Rhodes; Ex parte Heyworth (1884) 14 QBD 49; Bayne v Baillieu (1907) 5 CLR 64; and Re Verma; Ex parte DCT (1985) 4 FCR 181." 6 I now turn to the background facts, the litigation and how the magistrate dealt with the issues relating to adjournment.

the sandhurst loan 7 On 12 August 1997, Sandhurst Trustees Ltd (Sandhurst) agreed to lend Gallerie Investments Pty Ltd (Gallerie Investments) $3.4 million to develop a shopping complex in the inner city of Adelaide. Dr Finikiotis and Mrs Zervos, among others, guaranteed the loan.

The Supreme Court Proceedings 8 There was a default under the loan agreement. Sandhurst called up the loan and sued in the Supreme Court of South Australia. On 14 February 2000, a master entered summary judgment against, inter alia, Dr Finikiotis and Mrs Zervos for $4,106,759.38. On 13 March 2000, Williams J dismissed an appeal against that judgment. 9 On 15 November 2000, Dr Finikiotis and Mrs Zervos filed an application for an extension of time within which to appeal against the order of Williams J. When the magistrate heard the review, that application had not been determined. However, the magistrate said: "I do not see any genuine or arguable grounds in respect of which the appeal is likely to be successful." 10 The magistrate seemed to be of the view that the proceeding before the Full Court was an application for leave to appeal rather than an application to extend the time for filing a notice of appeal. The misapprehension is immaterial, because the magistrate addressed the question of the likely result of the appeal assuming the necessary leave had been granted. 11 Since then, a single judge of the Supreme Court of South Australia has refused an extension of time and, on 9 November 2001, the Full Court of the Supreme Court of South Australia refused leave to appeal against that decision. The Full Court (Doyle CJ, Perry and Lander JJ) said: "We are also of the view that, in any event, on the merits the appeal has no reasonable prospect of success." 12 Although this event occurred after the decision of the magistrate, the parties to the appeal mentioned the fact and it is proper for me to take it into account in determining the validity of the exercise of discretion by the magistrate. 13 Orders had also been made in the Supreme Court of South Australia that a counterclaim against Knight Frank SA Pty Ltd (Knight Frank) and Heine Mortgage Management Pty Ltd (Heine) be dismissed on the ground that the counterclaim had no sufficient connection with the proceedings brought by Sandhurst. The nature of the counterclaim is explained below.

The Federal Court Bankruptcy Proceedings 14 On 31 March 2000, Sandhurst issued a bankruptcy notice against Dr Finikiotis and Mrs Zervos. They applied to have it set aside. On 14 July 2000, von Doussa J rejected that application: Finikiotis v Sandhurst Trustees Ltd [2000] FCA 978. On 1 December 2000, the Full Court of the Federal Court dismissed an appeal against the decision of von Doussa J: Finikiotis v Sandhurst Trustees Ltd [2000] FCA 1783. 15 The central issue in the appeal was whether Dr Finikiotis and Mrs Zervos had a counterclaim, set-off or cross-demand for the purposes of s 41(7) of the Bankruptcy Act. Von Doussa J had held as follows: "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; the 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. 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.' 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. 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." 16 The Full Court held that there was no error in the reasoning of von Doussa J. 17 An application for special leave to appeal to the High Court was filed by Dr Finikiotis and Mrs Zervos against the decision of the Full Court. 18 The magistrate in the present proceedings considered the likely outcome of the High Court proceedings. Before the magistrate was Sandhurst's summary of argument on the special leave application, filed in the High Court on 20 February 2001. On the basis of this material, and the circumstances of the Full Court decision, the magistrate said: "I do not believe there is any serious likelihood of special leave being granted."

The Federal Court Trade Practices Proceedings 19 On 13 July 2000, Dr Finikiotis and Mrs Zervos instituted proceedings against Knight Frank, Heine and Sandhurst in the Federal Court. The statement of claim stated: "1. The applicants are directors of Gallerie Investments Pty. Ltd. and Anacon Enterprises Pty. Ltd. In reliance on a true and proper valuation by Knight Frank SA Pty. Ltd. engaged by Jones Lang Wootten [managers for Gallerie Investments] the applicants executed the Guarantee and Indemnity, Mortgage over the Gallerie Centre 20 Gawler Place and the Facility Agreement pertaining to a loan of $3.6 million approved by Heine on behalf of Sandhurst on or about 12 August 1997. 2. In addition to the initial valuation prior to the fist advance on 20 August 1997, further valuations were made by Knight Frank and sent directly to Heine for approval prior to further advances on 29 August 1997, 11 September 1997, 16 October 1997 and 28 January 1997. 3. The Knight Frank valuation relies excessively on the success of the Homewares tenancy the relocation of the basement tenancies, the J.L.W. Advisory Asset Management Strategy Report and revised letter of 18 April 1997 which give an anticipated gross income of $1.5 million and an anticipated nett income of $830,000 approximately which the Knight Frank valuers knew or should have known was excessively overestimated and could not be achieved. The representation pertaining to the income was false and consequently the applicants have suffered loss and damage. 4. The calculation shedules [sic] show that the Knight Frank valuation V 12324 May 1997 was misleading and deceptive as the capitalisation value of $6.3 million as at 1st November 1997 upon which the loan of $3.6 million was approved should have been only $2 millionwithout [sic] the 'imputed' rent. The representation by Knight Frank that the valuation as at 1st November 1997 would be $6.3 million was false and the applicants refer to the Land Valuers Regulations 1995, the Land Valuers Act S.A., 1994 and the Fair Trading Act S.A. 1987. 5. Knight Frank was negligent as it owed a duty of care to provide a true and proper valuation. As a consequence of the above the applicants have suffered loss and damage. 6. A conflict of interest existed between Heine Mortgage Management Pty. Ltd., Sandhurst Trustees Ltd., Heine Management Ltd. [trustee] and the Heine Retirement Fund and consequently the flawed and false valuation was missed as there was no independent body to make an [arms length] appraisal and the applicants refer to the Superannuation Industry Supervision Act 1993 [Section 109] Heine Mortgage Management Pty Ltd was negligent as it owed a duty of care to make a proper appraisal of the valuation prior to loan approval on behalf of Sandhurst Trustees and as a consequence the applicants have suffered loss and damage. 7. The applicants relied on and accepted the expertise of Knight Frank and Heine. As a result of the breach of duty of care and negligence of Knight Frank and Heine the applicants have suffered loss and damage. 8. Loss of income and capital value; Annual rental as at 31 March 1997 equals $881,589 minus John Martins rental $275,000 minus annual rental Sept. 1999 approx $200,000 equals $406,589 capitalised at 11.3% equals $3,598,132 approx 9. For projected gross income of $1.5 million; minus annual rental Sept. 1999 approx $200,000 equals $1.3 million capitalised at 11.3% equals $10,833,330. 10. Continuing future loss in income, value, damages, costs and interest. 20 On 19 January 2001, O'Loughlin J dismissed the proceedings on the ground that no reasonable cause of action was disclosed. His Honour identified some of the defects in the statement of claim as follows: "· the applicants have not established that they have standing to bring any action. The alleged losses were initially suffered by the registered proprietor of the shopping centre and the extent to which the applicants, as guarantors, may have suffered losses has not been pleaded with any, or any sufficient, particularity. For example how can it be said that the applicants suffered a loss of rental income of $881,589? If such a loss were sustained it would, presumably, have been a loss of the company. · as to the first respondent, Knight Frank, the applicants have not pleaded the basis of any duty of care that was allegedly owed by Knight Frank to them nor any degree of proximity which would have given rise to such a duty: and furthermore, of course, there has been no plea of any contractual relationship between the applicants and Knight Frank; · the applicants have failed to plead the basis upon which they alleged that they were entitled to rely upon Knight Frank's valuation; · in respect of all three respondents the applicants have failed to plead, with appropriate particularity, the respective relationships which existed between the applicants on the one hand and each of the respondents on the other: nor have they pleaded the circumstances under which they commissioned (if indeed they did) the valuation and the manner in which they relied upon the valuation (if indeed they did)." 21 Dr Finikiotis and Mrs Zervos have appealed against this decision. The magistrate said that he had "serious doubts about the possibility of success in the appeal to the Full Court". 22 On 22 November 2001, the Full Court heard a motion by Knight Frank, Heine and Sandhurst to strike out the appeal on the ground that Dr Finikiotis and Mrs Zervos are bankrupt and therefore do not have standing to bring the appeal. The Full Court stayed the appeal until further order and ordered that Dr Finikiotis and Mrs Zervos seek no further order unless the sequestration orders are set aside or the bankruptcy is annulled. Again, this was a fact referred to in argument which, although not before the magistrate, has relevance to this appeal, in a way which will be mentioned in due course. 23 The magistrate, after setting out the passage from Ahern previously referred to, then applied that principle to the circumstances of the litigation in which Dr Finikiotis and Mrs Zervos were involved. He carefully examined the stage which each of the proceedings had reached and determined that none of the appeals were based on genuine or arguable grounds. In the case of the Supreme Court proceedings, this view has been confirmed by the dismissal of the application for leave to appeal after the magistrate's decision. That fact serves to underscore that the view expressed by the magistrate was open to him. It should also be noted that Dr Finikiotis referred to the fact that an application for special leave to appeal to the High Court has been lodged in relation to the Full Court decision.

conclusion 24 The appeal in this Court is by way of re-hearing. The decision of the registrar was a discretionary decision: see Ahern at 147. The approach of an appeal court to such a decision has been restated many times. For instance, in Australian Coal and Shale Employees' Federation v Commonwealth (1953) 94 CLR 621 at 627, Kitto J said: "[T]he true principle limiting the manner in which appellate jurisdiction is exercised in respect of decisions involving discretionary judgment is that there is a strong presumption in favour of the correctness of the decision appealed from, and that that decision should therefore be affirmed unless the court of appeal is satisfied that it was clearly wrong. A degree of satisfaction sufficient to overcome the strength of the presumption may exist where there has been an error which consists in acting upon a wrong principle, or giving weight to extraneous or irrelevant matters, or failing to give weight or sufficient weight to relevant considerations, or making a mistake as to the facts. Again, the nature of the error may not be discoverable, but even so it is sufficient that the result is so unreasonable or plainly unjust that the appellate court may infer that there has been a failure properly to exercise the discretion which the law reposes in the court of first instance: House v R(1936) 55 CLR 499 at 504-5." 25 In respect of the adjournment application, the magistrate acted on the correct principle enunciated in Ahern. He did not give weight to irrelevant matters or fail to give weight to relevant considerations and he made no material mistake of fact. The arguments put by Dr Finikiotis, who appeared on his own behalf, and with the acceptance of Sandhurst, on behalf of Mrs Zervos, took the form of elaborating, by reference to material, the basis of the damage which he claims has been suffered as a result of this unfortunate transaction. 26 He explained in detail his criticisms of the valuation procured by Knight Frank in support of the application for a loan to Sandhurst. He explained that the valuation would have caused Sandhurst to lend the money but, as the valuation was wrong, it followed that the loan was made on a mistaken basis. This meant that, had the proper valuation been made, the loan would not have been made and the damage inflicted would not have occurred. 27 As has been drawn to Dr Finikiotis' attention now on a number of occasions in the various pieces of legislation, even if that line of reasoning was completely accepted, it gives no basis to a cause of action against the lender, Sandhurst. It is Sandhurst which obtained the judgment upon which the bankruptcy notice and, hence, the sequestration order was based. A further difficulty faced by Dr Finikiotis was emphasised in his submission relating to further discovery, to which I will return. The essence of this argument was that he needed to see, and had not yet seen, the second version of the valuation. He assumed that that valuation was also mistaken but, importantly, for the purpose of this proceeding, it seems clear enough that Dr Finikiotis and apparently the head borrower, Gallerie Investments, had not seen and therefore could not have relied on that valuation. 28 In my view, the magistrate, assessing the material before him, committed no appellable error. It was open to him to hold that there was no good reason to go behind the orders on which the judgment was based, and, also, it was open to him to assess the chances of success of the various proceedings in the High Court, the Full Court of the Supreme Court of South Australia, and the Federal Court as highly unlikely. 29 While the focus of the magistrate's attention was the application for the adjournment, many of the arguments raised in support of the adjournment equally applied to the question whether there was other sufficient cause under s 52(2)(b) of the Act to refuse to make a sequestration order. The magistrate did not specifically address the terms of s 52(2)(b). However, I am satisfied that the issue was addressed in the discussion of the likely fate of the pending proceedings. Indeed, in par 4, of his reasons for decision the magistrate described the argument of Dr Finikiotis as effectively alleging that: "[A]t the time Sandhurst Nominees issued the Notice of Demand and then took possession of the mortgaged premises there was no money due and owing to it." 30 After the discussion of the likely outcome of the various pieces of litigation, the magistrate said that he agreed with the decision of the registrar and "would myself grant a sequestration order in this case".

The motion seeking discovery 31 Dr Finikiotis filed a motion on 13 December 2001 on behalf of himself and Mrs Zervos seeking: "further and better discovery of documents pertaining to the Sandhurst loans; details of loan structure with regard to the many financiers; any valuations, instructions and correspondence between the parties previously not discovered." 32 Dr Finikiotis explained that, despite the multiplicity of proceedings, there had been no discovery in any of them. Most had not reached the stage where discovery would have occurred. 33 In relation to the proceedings before the registrar and the magistrate, no application for discovery was made. It is inappropriate for discovery to be ordered in relation to an appeal of this nature. The questions under consideration in the appeal could not be assisted by making such an order. Indeed, it became clear as the argument developed that Dr Finikiotis' reason for seeking discovery was to find out whether anything in the documents relating to the loan would assist in the case which he has enunciated. Such a purpose is not a reason for ordering discovery in the appeal. Indeed, as Mr Howard, who appeared for Sandhurst, contended, the spirit of the order made by the Full Court in the motion to strike out the appeal against the orders made by O'Loughlin J is to prevent Dr Finikiotis and Mrs Zervos taking any step in further pursuit of the trade practices claims against Sandhurst, Heine Management and Knight Frank. To make such an order in this appeal would, in some degree, frustrate that order. 34 I accept Mr Howard's argument that nothing said by Dr Finikiotis supported the production of documents against Sandhurst. Whatever cause of action might exist against Knight Frank and Heine Management, the only involvement which Sandhurst had in the transaction was as a borrower. The circumstances concerning the making of the valuations cannot bear upon the relationship between Sandhurst and Dr Finikiotis and Mrs Zervos in the way presently enunciated by Dr Finikiotis.

mediation 35 Finally, in the course of the argument Dr Finikiotis indicated that very early in proceedings he had sought a mediation of the issues in dispute. As I pursued this with him, he indicated that he was still willing to engage in mediation. On behalf of Sandhurst, Mr Howard indicated that he thought there would be little value in a mediation between Sandhurst and Dr Finikiotis, because the offer by Dr Finikiotis seemed to be founded on the notion that Dr Finikiotis would be compensated in some way or another. 36 It is not appropriate that I take this matter further. The proceedings have been numerous and it would be wrong in the circumstances to force Sandhurst into a mediation. Nonetheless, one cannot help but to be moved by the circumstances in which Dr Finikiotis finds himself. He has presented his case with restraint, politeness and clarity. I would imagine that he would conduct himself in a mediation in a reasonable and constructive way. 37 I can only make the suggestion that Sandhurst use its good offices with Heine and Knight Frank to sit down with Dr Finikiotis and seek to resolve what is still a plethora of legal proceedings. In the end, the circumstances are now so far advanced that it is likely that a commercial resolution is possible. That might avoid the continuing bankruptcy of Dr Finikiotis and Mrs Zervos and may yield as much to the other participants as is likely to be achieved at the end of much more protracted litigation. The Court's registrars would be available to the parties to facilitate any mediation. 38 I do hope that these remarks will be conveyed to Knight Frank and to Heine Management.

costs of trustee 39 The trustee, who appeared by counsel but took no active role in the argument on the appeal, has applied for his costs of appearance to be paid out of the estate. In all the circumstances, although I have some reluctance to do so, it seems inevitable that the trustee should get his costs out of the estate. He was served with the proceedings and it cannot be said that his attendance at the hearing was therefore wrong. It might have been more prudent for him to have described the issue of his involvement before the hearing, but I do not consider that to be a consideration which should deprive him of his costs. 40 The appeal is dismissed with costs. I certify that the preceding forty (40) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice North .

Associate: Dated: 26 March 2002 Appellant: The first appellant appeared on behalf of both appellants.

Federal Magistrates Act 1999(Cth)

Federal Magistrates Court Act 1999(Cth)

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