FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - application for sequestration order - act of bankruptcy committed - whether discretion under s 52(2)(b) of the Bankruptcy Act 1966 should be exercised not to make sequestration order - factors relevant to the exercise of that discretion - whether s 41(7) of Bankruptcy Act 1966 fetters that discretion - debtor commenced proceedings against petitioner for an amount exceeding debt giving rise to bankruptcy notice - consideration of likelihood of success of action - whether action would be maintained by estate if sequestration order made - effect of sequestration order on that action - whether appropriate to dismiss or adjourn application.

Bankruptcy Act 1966 (Cth) s 41(7) and s 52(2)(b)

Cain v Whyte (1933) 48 CLR 639, considered

Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111, considered and applied

Re James, ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14,

considered and applied

Re Willats, ex parte Nissan Finance Corporation Ltd (1991) 31 FCR 206, distinguished

In the matter of DOUGLAS DRAGAN JOVANOVIC

SLAVKO GOVEDARICA and MILORAD GOVEDARICA v DOUGLAS DRAGAN JOVANOVIC

SG 7285 of 1997

MANSFIELD J

ADELAIDE

4 MAY 1998

In the matter of douglas dragan jovanovic

THE COURT ORDERS THAT:

1.         Application adjourned to 9.00 am on Friday 29 May 1998.

2.         Liberty to apply.

Note:  Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

In the matter of douglas dragan jovanovic

REASONS FOR JUDGMENT

THE ISSUE

This matter involves a contested application dated 23 December 1997 for a sequestration order.  The application is made on the basis that the respondent Douglas Dragan Jovanovic (”Mr Jovanovic”) committed an act of bankruptcy by failing to comply with a bankruptcy notice based upon a final order against him within the time specified in the notice:  s 40(1)(g) of the Bankruptcy Act 1966 (Cth) (“the Act”).

On 8 July 1997 in Action No. 1127 of 1996 in the District Court of South Australia (“the first District Court action”) the applicants (“the Govedaricas”) obtained a final order against Mr Jovanovic for $10,000.  Mr Jovanovic was the plaintiff in that action, but discontinued it during the trial and submitted to an order for costs against himself.  The final order for payment of $10,000 was an allocatur for payment of part of the costs so ordered.  The execution of that order has not been stayed.  On 16 July 1997, a bankruptcy notice dated 11 July 1997 (“the bankruptcy notice”) in respect of that final order was served on Mr Jovanovic.  He did not comply with it.  Thus, I find that on 6 August 1997 Mr Jovanovic committed an act of bankruptcy.  The amount of the final order has not been paid.  Mr Jovanovic did not attempt to satisfy the Court that he had a counter-claim, set-off or cross-demand equal to or exceeding the amount of the judgment debt which he could not have set up in the first District Court action.  No application was made under s 41 of the Act to set aside the bankruptcy notice within the twenty-one day period which it specified.  In other respects, I find the requirements of the Act have been complied with.

Mr Jovanovic’s opposition is based upon the discretion that the Court has under s 52(2)(b) of the Act.  It provides that the Court may dismiss the application if it:

“. . . is satisfied by the debtor . . . that for other sufficient cause a sequestration order ought not to be made.”

He does not assert that he is able to pay his debts, although there is no detailed evidence as to his assets or liabilities.  He claims that, notwithstanding the discontinuance of the first District Court action, he has a substantial cause of action which he is now pursuing against the Govedaricas which, if successful, will result in a judgment in his favour very considerably in excess of $10,000 and that in the particular circumstances the Court should dismiss or adjourn the petition.

THE LAW

There is no real issue between the parties as to the applicable law under s 52(2).

The Court has a discretion, but one which must be exercised on proper material.  In Cain v Whyte (1933) 48 CLR 639 the Court (Rich, Starke, Dixon, Evatt and McTiernan JJ) agreed with the judgment of Henchman J sitting as a Judge in Bankruptcy whose reasons are included in the reported decision.  His Honour said (at 646):

“. . . that prima facie, on proof of the matters mentioned in sec. 56(2) the Court will proceed to make an order for sequestration, and that it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due.  Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order.”

The reference to s 56(2) of the Bankruptcy Act 1924-1932 (Cth) can now be taken as applicable to s 52(2) of the Act as those provisions are relevantly in identical terms.

The existence of a substantial claim for unliquidated damages by the debtor against the petitioning creditor may provide a sufficient cause for declining to make a sequestration order.  In Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 Gibbs J (as he then was) said at 116:

“Where, however, the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor the position seems to me to be different.  As a general rule this Court is not an appropriate forum to decide such a claim and is limited to forming a view as to whether it appears that there is sufficient validity in the debtor’s claims to justify a dismissal or adjournment of the petition.  . . .  Considerable evidence directed to this issue has been given before me and it seems to me that I ought to consider this evidence for the purpose of deciding only whether it is probable that the debtor has against the petitioning creditor a claim which is likely to succeed.  If I am satisfied that the debtor has a claim against the petitioning creditor equal to or exceeding the amount of the judgment debt, I should not make a sequestration order.”

An illustration of the application of that approach is provided by the decision of Heerey J in Re Daley; Ex parte National Australia Bank Ltd (1992) 37 FCR 390.

In Re James, ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14, Olney J explored further what Gibbs J had in mind in his observations in Schmidt (above).  His Honour said (at 22):

“It seems to me that Gibbs J has distinguished between a claim of the debtor against the petitioning creditor that is likely to succeed (which would justify the Court refusing to make a sequestration order) and the existence of a “real claim” which presumably the Court has been unable to classify as one that is likely to succeed, but nevertheless is thought to have sufficient integrity to warrant the debtor being given an opportunity to have it litigated.  In such a case Gibbs J thought that it would be appropriate to adjourn the petition pending resolution of the litigation.”

His Honour declined to adjourn the application for a sequestration order because it was not asserted, nor sought to be established, that if the then current proceedings against the petitioning creditor were successful so as to extinguish the petitioning creditor’s judgment then the debtors would also be solvent.  The absence of evidence in that case caused his Honour to infer that, notwithstanding success in those proceedings, the debtors were not presently and would not be able to pay their debts.  He therefore concluded that it was not appropriate to adjourn the petition to await the outcome of those proceedings.  His Honour had earlier concluded, on the material before him, that he should not simply dismiss the petition.  He was not satisfied that (to use the words of Gibbs J) ‘it is probable that the debtor(s) (have) against the petitioning creditor a claim which is likely to succeed’, but only that their claim was ‘a real claim to litigate’.  Thus he made the sequestration order sought.

I do not think that those decisions purport to lay down any mechanistic or formulaic approach to the exercise of the discretion under s 52(2) of the Act.  It is appropriate to observe that, in the absence of other creditors seeking to support the petition, the firmer the prospects of success of the debtor’s claim against the petitioning creditor the more that matter will weigh in the scales in favour of dismissing the petition, but it will not necessarily be the case that dismissal as opposed to adjournment will be the appropriate order, nor inevitably that the discretion will be exercised favourably to the debtor.  In many cases, the nature or complexity of the issues between the debtor and the petitioning creditor may mean that the debtor cannot demonstrate without a trial a ‘probability’ of success.  In many instances, it is difficult to draw a firm conclusion that the debtor’s claim has emerged from the duller shades of a ‘real claim’ to the firmer shades of a ‘probably successful’ claim.  One example may be where there is simply a direct conflict of evidence on a critical fact, without inherent probability supporting one or other version.  In such cases, it will not necessarily be that the discretion could not lead to dismissal of the petition.  It is not desirable that the hearing of the petition should provide an alternative venue for what would amount to a preliminary trial of the ongoing issues between the debtor and the petitioning creditor to demonstrate ‘probability’ of success at the hearing of the debtor’s claim.  Nor will it necessarily be that, absent evidence of solvency if the judgment which is the foundation of the bankruptcy notice is put aside, the discretion could not be exercised in favour of adjourning the petition.  Such an approach would be unduly to restrict the exercise of the discretion itself.  In any particular case the existence of a claim by the debtor against the petitioning creditor may provide a sufficient cause for declining to make the sequestration order, but whether the Court then exercises its power under s 52(2) will depend upon the particular circumstances of the matter including, but not necessarily limited to, the assessment of the strength of that claim and the solvency of the debtor if the claim is successful.

It is in the light of those matters that I turn to consider the material before me.

At the hearing, apart from proof of formal matters, the evidence was confined to an affidavit of Mr Jovanovic and on the part of the Govedaricas an affidavit of Marko Runjajic (“Mr Runjajic”), a solicitor acting for them.  There was no application to cross-examine either deponent.  Much of the relevant background is therefore uncontentious and, at this stage, uncontested.  It enables that background to be identified fairly briefly.  My findings must, of course, be taken to be on that uncontested material.  They do not reflect what might have to be addressed at the trial of the present claim by Mr Jovanovic against the Govedaricas, if he is able to pursue it.

THE PLAZA HOTEL TRANSACTIONS

Before the events relevant to this application first arose, Mr Jovanovic and the Govedaricas were friends.

In late 1994 Mr Jovanovic was informed by the Govedaricas that they were the directors and shareholders of Plaza Hotel Pty Ltd, Plaza Hotel Car Park Pty Ltd, and Roclin Developments Pty Ltd (“Roclin”).  The assets of those companies include the Plaza Hotel at 83-89 Hindley Street Adelaide (“the hotel”) and Plaza Hotel Car Park nearby (“the car park”).  It appears that Roclin owned the hotel, and operated the business of an unlicensed hotel (“the hotel business”).  There were also three separately leased shops on the ground floor of the hotel, which provided rental income to Roclin.  Mr Jovanovic was told by the Govedaricas that they were in financial difficulties due to substantial indebtedness to their financiers State Bank of South Australia to the extent of some $4.1 million and Westpac Banking Corporation (“Westpac”) to the extent of some $785,000.  The value of the assets securing those borrowings was not sufficient to repay them.  I do not have a clear picture of the assets of those three companies, or the terms of the borrowings or the securities granted in support of them.

Mr Jovanovic was asked by the Govedaricas to take a lease of the hotel from Roclin and to “run” the hotel business.  Although to be nominally in his name, it was proposed that he would hold that property and operate the hotel business in trust for the Govedaricas, through a jointly held account in the name of Milan Investments.  The hotel business was in fact still to be run day to day by them.  Mr Jovanovic agreed.

Accordingly, on 13 December 1994 Mr Jovanovic duly registered the business name Milan Investments.  On 12 January 1995 he signed a lease of the hotel (apart from the shops already leased) from Roclin to himself, at a rental of $96,000 per annum.  On 17 January 1995 he started a bank account for the hotel business in his name trading as Milan Investments, with himself and Slavko Govedarica as signatories.  It is unclear what, if anything, physically altered in relation to operating the hotel business at the time.  That lease was not registered.  I shall return to its significance below.  That lease, if presented to the financiers, would have indicated a significant anticipated cash flow into Roclin.

In about April 1995, the Govedaricas asked for further help.  They wanted Mr Jovanovic to borrow monies with a view to offering to acquire the second mortgage to Westpac securing the borrowings of their three companies.  They offered to repay that borrowing with interest.  The proposed security for the borrowing was the home of Mr Jovanovic’s mother.  He and his mother agreed, and $98,000 was duly borrowed on 1 May 1995.  The Govedaricas guaranteed its repayment and agreed to pay the interest instalments on that mortgage, of $857 per month.  On the same date, Mr Jovanovic and his wife purchased a newsagency business, the Hindley Street Book Stall, for a modest sum, and the $98,000 was deposited into the operating account of that newsagency.  At the instigation of the Govedaricas’ solicitor, he offered Westpac $150,000 for its second mortgage over the properties owned by Roclin but also on the basis that all debts owing to Westpac by the Govedaricas and their companies and all guarantees in support of it be released.  There is no evidence that Westpac accepted that proposal, or that further negotiations on that topic took place. The Govedaricas did not pay any of the interest on the $98,000 borrowing.  Mr Jovanovic did so for six months (a total of $5,142) until that loan was refinanced, and he also paid the initial loan fees of $1,250 and the refinancing costs of $2,500.  I do not know the detail of that refinancing, but I assume Mr Jovanovic continues to service that borrowing.

On 10 June 1995, Mr Jovanovic and his wife leased from Roclin a newsagents shop on the ground floor of the hotel.  That was one of the three separately and independently leased shops at the hotel.  It was a transaction unrelated to the other arrangements between Mr Jovanovic and the Govedaricas.  The shop was refurbished at a cost of $25,000, and the $25,000 was paid from the $98,000 referred to.  It is unclear how the balance of the $98,000 was applied.

The strategies suggested to Mr Jovanovic by the Govedaricas did not result in pressure from the Govedaricas’ financiers being eased.  In August 1995, the hotel and the hotel car park were put up for sale by them to avoid foreclosure.  The Govedaricas then approached Mr Jovanovic with yet a further plan, which he was told was to enable them to retain the hotel car park as it produced significant cash flow.  It involved the “sale” of the hotel to a friendly buyer who would in fact hold the hotel on trust for them.  He was asked to participate.  On their invitation, on 15 September 1995 he offered to buy the hotel for $700,000; he was told that the State Bank of South Australia did not agree to that price and that he should increase the offer to $750,000.  He did so on 4 October 1995.  That offer was accepted.  When settled, the mortgages securing the hotel to support the Govedaricas borrowing would be discharged, and the purchase price paid to the first mortgagee.  He sought finance from the Commonwealth Bank of Australia (“the Commonwealth Bank”) to finance the purchase.  He established a sophisticated ownership and operating structure.  He acquired a new company Fortson Pty Ltd (“Fortson”).  He established the Plaza Unit Trust, the units in which would be held by the Jovanovic Family Trust.  He established the Jovanovic Family Trust, with himself and his wife as beneficiaries.  Fortson was to buy the hotel and all the hotel business assets as trustee for the Plaza Unit Trust.  He also established the Milan Investments Trust, of which he and his wife were to be trustees.  The beneficiaries were himself, his wife and Roclin.  Fortson was to lease the hotel to Mr Jovanovic and his wife, or to maintain the lease of 12 January 1995, at the rental of $96,000 per annum.  Mr Jovanovic and his wife, as trustees of the Milan Investments Trust, were to engage Roclin to manage the hotel business, as it had been doing up to that time.  The revenue to meet the borrowing obligations to the Commonwealth Bank was to come from the rental payable by three shops on the ground floor of the hotel, including the newsagency shop referred to above, and from the hotel.  He had prepared by his accountants a budgeted profit and loss statement for the hotel business as well as for the newsagency, the proposed Plaza Unit Trust, and on a consolidated basis.  It does not appear on the material before me what role the Govedaricas played in the provision of information for the preparation of those budgets, but up to this time in fact Roclin had continued to operate the hotel business and Mr Jovanovic had played little part in its day to day operations despite the lease of 12 January 1995.

Effectively, the Plaza Unit Trust was to own the hotel and all the assets including those of the hotel business, and the Milan Investments Trust was to own the hotel business itself.

A contract for the sale and purchase of the hotel was duly signed on 12 October 1995 between Roclin as vendor and Fortson as purchaser for $750,000, and Mr Jovanovic paid the $5,000 deposit.  Settlement took place on 15 November 1995.  The purchase price was funded by borrowings from the Commonwealth Bank, secured by mortgage, but there was a further sum of $32,321 payable at settlement for stamp duty, registration fees and other adjustments.  Mr Jovanovic paid $27,321 of that sum from his own funds in the newsagency running account, and the balance of $5,000 from Fortson with funds lent to him by Fortson.

It is convenient to note that on that date, or soon thereafter, he also paid $7,185 for insurance (there is a balance owing of $997), legal fees of $1,180, accounting fees of $4,524 (there is a balance of $1,976 owing), $20,000 to Fortson in partial reduction of its operating overdraft, and $500 towards a valuation fee.  There was also a dispute with a tenant, which led to him paying $7,000 further legal fees, and $2,000 to the Australian Taxation Office for the Milan Investment Trust for unpaid group tax.

I also note that Mr Jovanovic made a further payment of $38,361 to the Commonwealth Bank on about 3 October 1997, as guarantor of the Fortson indebtedness to that bank, being the balance owing under the finance facility to Fortson when the hotel was yet again sold (this time to the Govedaricas) for $800,000 following Fortson defaulting in its obligations to the Commonwealth Bank.

The structure for acquiring the hotel and operating the hotel business just referred to appears to have been an elaborate facade for an entirely different transaction.  At the time of settlement Mr Jovanovic and his wife and the Govedaricas entered into a partnership on those matters.  It is partly recorded in writing in a document entitled “Deed of Secret Partnership”, and is said to be partly oral and partly to be implied.  I shall refer to it as “the secret partnership”.  The transfer of the hotel, leading to the discharge of the existing mortgages, was effected as if it were an arm’s length transaction, but the secret partnership restored the Govedaricas to a two-thirds interest in the hotel and the hotel business.

The Govedaricas assert (in pleadings in the first District Court action) that the secret partnership contained the following terms.  The written document related to the hotel, and provided for the hotel to be partnership property.  It provided:

·      that the partnership property would be divided into shares as follows:

(i)                the Jovanovics one-third

(ii)               Slavko Govedarica one-third

(iii)              Milorad Govedarica one-third

·      that notwithstanding any arrangement relating to possession of sole legal title to the partnership property, Fortson would hold the partnership property on trust for the benefit of the Jovanovics and the Govedaricas in the proportions specified

·      that either upon the written or oral request of either or both the Govedaricas, the Govedaricas would be able to obtain legal title to the hotel in the proportions specified.

That document was not in evidence before me.

The oral terms were said to be that the Govedaricas were to operate and manage the hotel business for the secret partnership for a fee of $500 per week, that all receipts after payment of operating expenses would be applied to reducing the mortgage to the Commonwealth Bank and if there were insufficient funds to repay that loan (it is not said whether that relates to interest payments only or also to some reduction of principal at an agreed rate) then

“any partner who had sufficient funds to meet the shortfall would do so in order to maintain the financial commitments of the partnership”.

As a consequence, it is said to be implied that the lease of 12 January 1995 from Roclin to Mr Jovanovic was of no effect and would not be acted upon.

The Govedaricas also assert in those pleadings that through their corporate structure they had occupied the hotel and operated the hotel business since 1986 and had continued to do so up to 15 November 1995.

From 15 November 1995 to 15 August 1996 the Govedaricas in fact occupied the hotel and operated the hotel business pursuant to the secret partnership.  Mr Jovanovic also assisted from time to time.  The receipt of monies, banking, and payment of expenses was entrusted to the Govedaricas.

In February to April 1996, Mr Jovanovic paid into Fortson $19,000 on account of the secret partnership.  That amount was to support the continued operations of the secret partnership.  It has not been repaid.  The bank statements in evidence suggests that some other deposits into the Fortson account were made, but there is no information as to their source.  In particular, there is nothing to indicate that those other deposits came from the Govedaricas, as distinct from rental income or from some other source.

In May 1996, Mr Jovanovic sought from the Govedaricas the appropriate primary records to have prepared financial accounts for the hotel business to 31 March 1996.  His accountants informed him that many of the documents so produced were incomplete or inadequate, and that some showed payment from the funds of the hotel business towards personal expenses of the Govedaricas.  Those presently specifically identified by Mr Jovanovic through his accountants total $6,147.  There is reason to think that some other expenses incurred do not relate to the hotel business.  There is also reason to think that a significant amount of income has not been accounted for.  Mr Jovanovic confronted the Govedaricas.  His concerns were not assuaged.  As only one of three partners, he did not think he could do much about the ongoing management of the hotel business by the Govedaricas.  On 15 August 1996, he purported to terminate their occupation by exercising his rights under the lease of 12 January 1995.  They refused to vacate.  On 11 September 1996 he brought the first District Court action seeking possession of the hotel, asserting his entitlement under that lease.  In the meantime, the Govedaricas remained in possession of the hotel and operated the hotel business.

The trial of the first District Court action took place on 14-16 January 1997.  As noted above, Mr Jovanovic discontinued it.  I shall refer to that action further below.  The Govedaricas continued to occupy the hotel and to operate the hotel business.

By April 1997, Fortson was well in arrears of interest payments of $8,000 per month payable under the $750,000 facility granted by the Commonwealth Bank.  According to Mr Jovanovic, those payments should have been paid by the Govedaricas from the operating income of the hotel business under the secret partnership.  They apparently accumulated to increase the amount due.  Ultimately, during 1997, the Commonwealth Bank explored both with Mr Jovanovic and with the Govedaricas the sale of the hotel.  It agreed to sell the hotel to the Govedaricas for $800,000.  That sale took place in the second half of 1997.  I assume the Govedaricas obtained alternative finance to effect the purchase.  I do not know what corporate vehicle was used.  The outstanding balance payable after settlement of that sale, namely $38,361 was paid by Mr Jovanovic to the Commonwealth Bank under his guarantee on 3 October 1997.

It is now accepted that the lease of 12 January 1995 was never acted upon by the parties.  Consequently, by reason of that most recent sale, Mr Jovanovic has no ongoing interest in the hotel, or the hotel business (assuming also, as appears to have been accepted by all parties, that the secret partnership came to an end on 15 August 1996).  The hotel, and the hotel business, are now owned and operated again by the Govedaricas.

THE FIRST DISTRICT COURT ACTION

In that action Mr Jovanovic was plaintiff and the Govedaricas were defendants.  He sought an injunction restraining them from entering the hotel, and for an account of all monies received by him in their running of the hotel.  He relied on the lease dated 12 January 1995, and an agreement between himself as lessee and the Govedaricas that they should run the hotel business on his behalf.  It is implicit that that arrangement was terminable at will, as the statement of claim then alleges that on 15 August 1996 the arrangement was terminated by written notice, but that the Govedaricas nevertheless remained in occupation of the hotel and continued to operate its business, including collecting and banking the takings of the hotel business, and paying the expenses of that business on behalf of Mr Jovanovic.  There was also a claim for an account, relating only to the period from 1 July 1996.  The Govedaricas’ defence was that their occupancy of the hotel, and their operation of the hotel business, was at no time pursuant to the arrangement alleged by Mr Jovanovic as lessee.   The lease from Roclin to Mr Jovanovic was said never to have been intended to take effect nor to have been acted upon.  That is now common ground.  Nevertheless, it was the basis of Mr Jovanovic’s claim in that action.  He made no reference to the secret partnership.

The Govedaricas allege in their defence that they entered into the secret partnership with Mr Jovanovic and his wife, in the terms described above, and so claimed to be entitled to continue in occupation of the hotel and to operate the hotel business.

Thus the critical dispute between the parties in the first District Court action was whether Mr Jovanovic was entitled to occupy the hotel under the lease from Roclin, and had agreed to permit the Govedaricas to run it for him but had brought that arrangement to an end, or whether the Govedaricas were occupying the hotel pursuant to the secret partnership.

That action went to trial on 14 January 1997.  On 16 January 1997, during his cross-examination, Mr Jovanovic discontinued that action, with an order that he pay the costs to be taxed to the Govedaricas.  In the course of his evidence, Mr Jovanovic was asked about the written document dated 15 November 1995, part of the secret partnership agreement.  I was taken to parts of his evidence on that document, which he described as “useless” and as not giving rise to any legal rights or obligations; he denied having discussed the possibility of such a partnership as that contemplated by the secret partnership, or that any draft of that document was discussed.  He said it was first presented to him for signature at the time of settlement, when he had no option but to sign it, as otherwise no settlement would have occurred.

It might be inferred that Mr Jovanovic, by discontinuing the District Court action, was “cutting his losses’ in the face of an unsustainable denial of the secret partnership agreement.  That is what the Govedaricas asked me to conclude.

The debt of $10,000 giving rise to the bankruptcy notice arises on an interim allocatur issued on 8 July 1997 for the costs then awarded.  A further allocatur for $2,154.92 was issued on 20 October 1997, for the balance of those costs.  Mr Jovanovic had previously paid two earlier interim allocaturs totalling $6034.

THE SECOND DISTRICT COURT ACTION

On 13 March 1998 Mr Jovanovic instituted separate proceedings against the Govedaricas in District Court of South Australia Action No. 358 of 1998 (“the second District Court action”).  The claim is based upon the secret partnership entered into in November 1995.  Its alleged terms largely reflect those asserted by the Govedaricas in their defence to the first District Court action.  The secret partnership was to:

·      purchase the hotel and operate the hotel business

·      the three partners were to have equal joint and several shares in the assets of the partnership

·      Mr Jovanovic was to buy the hotel on behalf of the partnership

·      the partners would provide “venture capital” and cash advances to the partnership as they were able

·      the partners would act honestly in collecting the income of the partnership and depositing it in the bank account.

It is not pleaded that the Govedaricas were to conduct the hotel business on behalf of the partnership, nor that they were to do so for a weekly recompense of $500.  Mr Jovanovic also alleges, consistent with the Govedaricas’ earlier defence, that he bought the hotel for the partnership and that the secret partnership persisted until August 1996 when he was evicted from the hotel.  During that period he advanced $115,571 to the partnership, made up of various amounts for stamp duty, insurance, loan fees, legal fees, accountancy fees, cash advances, and $38,180 (elsewhere this figure is said to be $38,361) for final repayment of the outstanding loan to the Commonwealth Bank.  Having been evicted from the hotel, since August 1997 he has been unable to get access to the books of the partnership or to get any accounts.  He asserts that the Govedaricas have simply conducted the hotel business on their own account, using the substantial assets of the hotel business.

The Govedaricas have applied to have the second District Court action dismissed as an abuse of process on the ground that it seeks to relitigate those matters raised in the first District Court action which was discontinued.  They assert the second District Court action is a sham, issued only to subvert the petition before the Court.  The material before me indicates that, on that application also, the material put to the Court is confined to describing the earlier proceedings.  That application to dismiss the second District Court action has been heard, and judgment reserved.

CONSIDERATION OF SUBMISSIONS

If successful in the application to have the second District Court action dismissed, or in obtaining a sequestration order against Mr Jovanovic on this application, the Govedaricas will have effectively applied a pre-emptive strike to avoid the issues raised between the parties ever being resolved by proceedings.  It is, in my view, unlikely that a trustee of Mr Jovanovic’s estate would elect to pursue the second District Court action either in its present form or in any amended form against the Govedaricas, simply because there is nothing to suggest that funds will be available to the estate to do so.  At present, those issues have not been litigated to resolution.

But for the first District Court action, I would be satisfied on the basis of the material before me that Mr Jovanovic probably has (to paraphrase the words of Gibbs J in Schmidt):

·      a claim for an account against the Govedaricas which is likely to succeed, as a matter of principle

·      on the taking of that account, a claim that he has contributed substantial funds to the secret partnership that is likely to succeed

·      in the taking of that account, a claim that the Govedaricas have misapplied funds of the secret partnership that is likely to succeed

·      in the taking of that account, a claim that there will be an amount adjudged to be due to him from the Govedaricas that is likely to succeed.

It is difficult to be more precise about the outcome of the account.  The records of the secret partnership are held by the Govedaricas, including the detailed records relating to the operations of the hotel business.  There has been no accounting for the assets of the partnership.  No receiver of the assets of the partnership has been appointed.  No question has been raised as to whether the Govedaricas now hold the assets of the partnership in circumstances where they are liable to account to the partners of the secret partnership for them or for the profits (if any) generated by their use since August 1996, including the hotel itself (cp. Chan v Zacharia (1984) 154 CLR 178).  There is no evidence from the Govedaricas to show to what extent they contributed funds to the secret partnership.  It is in fact not entirely clear as to the basis upon which funds were contributed to the secret partnership.

I have not endeavoured to isolate the position of Mr Jovanovic from that of his wife, although it appears that the newsagency business is owned and operated by them together, so that funds drawn from its account may not be those of Mr Jovanovic only.  Nor have I attempted to isolate those advances or payments by Mr Jovanovic which are clearly to, or on behalf of, the secret partnership from those advances or payments which may only indirectly have been so, although directed in a general way for its purposes.  Nor have I set out to distinguish between the position of Mr Jovanovic and entities which he controls or between the position of the Govedaricas and entities which they control.  The parties do not appear to have sought to draw such distinctions to date, and no submission was put that I should do so.  Those are matters of detail which may ultimately however have to be explored.  I mention those topics simply to indicate they have not been overlooked.  I am satisfied as to the matters referred to above, notwithstanding any variations to the detailed accounting which may be required by reason of those relationships.

The Govedaricas contend however that there are significant questions to consider because of the first District Court action, which Mr Jovanovic has not sought to answer.  Those questions relate to the form of the first District Court action, the reason for its discontinuance, and the timing of the second District Court action.  It is said that Mr Jovanovic denied the existence of the secret partnership until the second District Court action, and discontinued the earlier action only because that denial became unsustainable.  The secret partnership was not alleged, even by way of alternative, in the first District Court action.  There is no reason why such an allegation could not have been made, even by amendment.  It is also said that the second District Court action is brought only because the hearing of the petition was imminent; it was first listed for mention on 11 February 1998 when directions were given with a view to its hearing on 16 March 1998.  Thus, it is contended, those matters indicate that those proceedings are strategic only, and do not represent a genuine claim by Mr Jovanovic.

I have carefully considered those matters.  It is not explained in the material before me why Mr Jovanovic did not allege the secret partnership in the first District Court action, either initially or by amendment.  Nor is it explained why he denied its existence.  He does depose to the fact that, as its description indicates, it was intended to be confidential and not disclosed beyond himself and the Govedaricas.  It may be that, as his evidence at the hearing of the first District Court action indicated, he did not appreciate its significance.  It may be that, from some misguided sense of loyalty or friendship, he did not first allege it because of its very nature, although that would not explain why it was not alleged once the Govedaricas pleaded it in their defence.  It may be the result of his legal advice.  But, in my view, the important factor is that the secret partnership is asserted by the Govedaricas and it is upon their assertion as to its existence that the second District Court action is now sought to be pursued.  Furthermore, its existence cannot be doubted at least to the extent of the written terms recorded in the document referred to.  Whatever the reason for Mr Jovanovic not having based his claim on the secret partnership earlier, his failure to do so or his disposition of the first District Court action does not alter my conclusions as to the prospects of success in the second District Court action set out above.

An overview of the position of Mr Jovanovic and of the Govedaricas before and after the secret partnership lends, in a general way, to confirm those views.

Before 1995, Mr Jovanovic had no interest in the hotel or the hotel business.  As a result of the matters described above, firstly he borrowed $98,000 on security of his mother’s house at the behest of the Govedaricas and for their purposes although it is not clear ultimately whether any of that money was applied, as first intended, for their purposes, and then in the latter part of 1995 he acquired through a complex corporate and trust structure one-third interest in the hotel and in the hotel business under the terms of the secret partnership, by borrowing $750,000 from the Commonwealth Bank and by paying significant amounts from his own resources.  The secret partnership was apparently dissolved in August 1996.  During the secret partnership, he again paid significant sums towards its operations, and it appears the Govedaricas who actually operated the hotel business misappropriated monies from it, failed to account for monies received by it, failed to keep proper records, and did not account to Mr Jovanovic at all.  There is nothing put forward by them, at this point, to respond to any of those matters or to indicate they put any of their own funds into the secret partnership, or to indicate what drawings they took from the hotel business.  By the end of 1996, Mr Jovanovic was left with a liability to the Commonwealth Bank of $38,361 under his guarantee, which he subsequently paid, and he had no interest in the hotel business or the hotel.

On the other hand, on the material before me, the Govedaricas have effectively altered their position by now holding the hotel and the hotel business free of the then charges supporting borrowings of some $4.85 million, and with only the borrowing supporting the last purchase price of $800,000.  In the period November 1995 to August 1996 they retained a two-thirds interest in the hotel and the hotel business, and they continued to operate it, with the benefit of monies advanced by Mr Jovanovic and with his participation in the secret partnership.  They have not accounted to him at all for their operation of the hotel business during the secret partnership.  They now want to stop Mr Jovanovic from pursuing his claim against them for such an account, and including his claims that they misappropriated funds from the secret partnership, even though his claim is based upon the secret partnership which they pleaded in the first District Court action.

They may achieve that result if the second District Court action is dismissed summarily.  But in my view the circumstances referred to above do not warrant this Court achieving that end for them by making the sequestration order sought when, as I have found, Mr Jovanovic has a claim against them in the second District Court action which is likely to succeed.

The timing of the second District Court action does not alter my conclusions.  It may be accepted that it was a last throw of the dice.  Without the second District Court action, it would have been difficult for Mr Jovanovic to satisfy the Court that he had a substantial claim against the Govedaricas to set-off against the debt upon which the bankruptcy notice was based, and that he intended to pursue it.  The delay in its initiation is in part explained by the evidence that Mr Jovanovic had difficulty in procuring funds to instruct his solicitors to pursue that claim.  Overall, therefore, the focussing of the mind by the imminent hearing of the petition does not affect the conclusions which otherwise I have reached on the material before me.

Finally, the Govedaricas referred to Re Willats, ex parte Nissan Finance Corporation Ltd (1991) 31 FCR 206.  It is contended that, because the matters raised in the second District Court action could not have provided a basis for setting aside the bankruptcy order under s 41(7) of the Act, those matters cannot or should not provide a sufficient cause for dismissing the petition under s 52(2)(b).  Mr Jovanovic does not contend that he could not have raised the matters in the second District Court action in the earlier action (although as he was the plaintiff he should have done so as claimant rather than by way of counterclaim or set-off) and thus that those matters could have been set up in the first District Court action:  cp. s 40(1)(g).  Willats is an illustration of the application of s 41(7) of the Act, but in my view it does not extend to the proper operation of s 52(2)(b).  The power which s 52(2)(b) provides is on the premise of there having been an act of bankruptcy, relevantly here an act of bankruptcy by failure to comply with the bankruptcy notice within the time permitted by the notice or as extended by s 41(7).  Accordingly, I do not think that the fact that Mr Jovanovic did not bring any application under s 41(7) when the bankruptcy notice was served on him necessarily means that the Court cannot be satisfied under s 52(2)(b) that other sufficient cause exists for dismissing the petition.  That he did not raise the matters now to be aired in the second District Court action earlier is a matter relevant to whether the Court is so satisfied, but a matter to which I have had regard in determining whether to exercise the power under s 52(2)(b) in favour of Mr Jovanovic.

The result of my consideration of the material is that I am satisfied by Mr Jovanovic that sufficient cause exists, subject to one matter, that the petition for the sequestration order should be dismissed.  That matter is simply that there is a reserved judgment on an interlocutory application to have his claim in the second District Court action dismissed.  In that circumstance I do not propose presently to dismiss this application.  If I were to do so, and then the District Court in the second District Court action were to dismiss that action, the consequence would be that Mr Jovanovic could no longer pursue that action.  Subject to any appeal processes, his opportunity to pursue claims based upon the secret partnership against the Govedaricas would be lost.  There would then be no ongoing basis to exercise the discretion in s 52(2)(b) in his favour.  However, until that decision is given, in my view it is appropriate to adjourn this application.  If that application for summary dismissal of the second District Court action is dismissed, so that the second District Court action can proceed to trial, then in my view this is one matter where the application before the Court should be dismissed under s 52(2)(b) of the Act.

Counsel informed me that they anticipate that judgment on that application for summary dismissal is anticipated in the near future.  I accordingly propose to adjourn this application to a date which I shall determine in consultation with counsel for the parties being a date after the judgment on that application is expected to have been delivered.  In the light of that judgment, I shall then make an order in accordance with the reasons set out above either dismissing the application before the Court (if the second District Court action is allowed to stand and proceed to trial) or making a sequestration order (if the second District Court action is dismissed).

Associate:

Dated:                          4 May 1998