FEDERAL COURT OF AUSTRALIA

Watts v Adelaide Bank Limited [2009] FCA 420

Brunninghausen v Glavanics [1998] FCA 230

Killoran v Duncan, in the matter of Killoran [1999] FCA 1574

BHOJI WATTS AND GAMBHIR WATTS v ADELAIDE BANK LIMITED

NSD 1945 of 2008

BUCHANAN J

29 April 2009

SYDNEY

THE COURT ORDERS THAT:

1.         The application to set aside bankruptcy notice No NN 4517/08 is dismissed with costs.

2.         Time to comply with the bankruptcy notice is extended to 8 May 2009.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
The text of entered orders can be located using eSearch on the Court’s website.

REASONS FOR JUDGMENT

BUCHANAN J:

1                          This judgment deals with an application to set aside a bankruptcy notice in the amount of $64,561.19 which was served on the applicants on 26 November 2008 and 5 December 2008 respectively.  The bankruptcy notice was founded on a judgment of the Supreme Court of NSW entered on 3 April 2006.

2                          The basic facts are not in dispute although the parties differ on the significance to be accorded to them.  They were set out in an affidavit affirmed by Robyn Clay on 17 March 2009 which was filed by the respondent.  The respondent made two loans to BMG Poseidon Corp Pty Limited (“BMG”).  The loans were made pursuant to loan agreements executed on 11 February 2004 and 30 June 2004 respectively.  The loans were secured by a first registered mortgage granted by BMG in favour of the respondent over a property at 68 Lyons Road, Drummoyne, New South Wales.  Each loan was also secured by a guarantee and indemnity from the applicants executed on 19 February 2004 and 6 July 2004 respectively. 

3                          BMG defaulted under each of the loan agreements in 2005.  On 11 May 2005 BMG was served with a default notice but failed to remedy the default thereby notified.  On 6 July 2005 the respondent called on the guarantees and indemnities.  The applicants failed to comply.  The applicants say that the respondent acted unreasonably in calling in the loans and calling on the guarantees and indemnities.

4                          On 22 July 2005 proceedings were commenced in the Supreme Court of New South Wales for debt and for possession of the property.  The proceedings were taken against BMG and the applicants.  On 24 March 2006 the respondent filed for default judgment and on 3 April 2006 judgment was entered in favour of the respondent granting possession of the property to the respondent and ordering BMG and the applicants to pay the respondent $1,028,725.29.  The respondent took possession and the property was sold on 24 May 2007. 

5                          Meanwhile two repayments of the loans of $6,222 each had been made on 8 September 2006 and 10 October 2006.  Ms Clay deposed that, taking into account the two repayments and the proceeds of the sale, the respondent received, after judgment in the Supreme Court and sale, a total of $1,005,924.86.  Those funds were applied first to outstanding fees and charges on the loan accounts and then to reduce the amount of the judgment.  As at 25 May 2007, $64,561.19 was outstanding, excluding interest. 

6                          The applicants and BMG moved on 4 October 2007 to set aside the judgment.  That was 18 months after judgment was entered and nearly twelve months after the respondent took possession of the Drummoyne property.  The application to set aside the judgment was dismissed on 12 February 2008 by McCallum J.  On 13 May 2008 the applicants and BMG filed an appeal in the New South Wales Court of Appeal.  The appeal was heard and dismissed on 6 August 2008.  The Court of Appeal said that her Honour had found that there was no agreement not to litigate concerning default under the loan agreements, that the proceedings which were commenced in the Supreme Court were not defended, that judgment was not entered irregularly or in bad faith and that there was no arguable defence.  Her Honour had found, particularly, that there was no defence available to the effect that the loan contract was unreasonable or that the penalty interest provisions were harsh.  The Court of Appeal found no error in her Honour’s approach or conclusions.

7                          The applicants and BMG applied for special leave to appeal to the High Court.  The application was made out of time.  The High Court declined to extend time saying that the applicants had not advanced any question of law that would justify a grant of special leave to appeal, that the matter concerned the application of settled principle on a point of practice and procedure and there was no reason to doubt the correctness of the decisions below.

8                          The position of the applicants, on the present application to set aside the bankruptcy notice, was stated in two affidavits affirmed by the second applicant which were filed on 16 December 2008 and 14 April 2009 respectively.  Although objections were taken that parts of the affidavits did not disclose facts, I allowed those parts of the affidavits to remain as a statement of the applicants’ position or arguments.  The first contention was that “no real debt lay behind the default judgment or orders relied upon by the creditor”.  The next contention was that the respondent is misusing the process of issuing a bankruptcy notice to put undue pressure on the applicants.  Reference was made to the service of earlier bankruptcy notices and their withdrawal by consent.  I know nothing about the circumstances in which those arrangements were made.  A third complaint, which was made in the most recent affidavit, was that the respondent acted unreasonably in commencing the proceedings in the Supreme Court and later taking possession.

9                          In written submissions filed in court on 22 April 2009, when the application was heard, the applicants’ position was more focussed.  The two contentions requiring attention were there identified as the arguments that no real debt lay behind the judgment and that the bankruptcy notice was an abuse of process.  They are the two matters with which I will deal.

10                        Necessarily, any evaluation of the first argument would require the Court to go behind the judgment of the Supreme Court of New South Wales.  Mr Skinner, who appeared for the respondent, accepted that there was power to go behind the judgment but he submitted it was neither necessary nor appropriate to do so in the present case.  I agree for a number of reasons.

11                        First, there is no doubt that there has been close attention in the Supreme Court of NSW, including by the Court of Appeal, to the question of whether default judgment was irregularly entered and also whether there was any arguable defence to the claim of debt.  There is no reason to doubt the correctness of the analysis there undertaken. 

12                        Secondly, Foster J has recently examined the facts and circumstances which led to the default judgment and the sale of the property (BMG v Poseidon Corp Pty Ltd v Adelaide Bank Limited; In the Matter of BMG Poseidon Corp Pty Ltd (No 2) [2009] FCA 404).  His Honour traced the course of events in detail.  It is not necessary that I should do so again.  In any event, his Honour apparently had the benefit of a much more detailed explanation of the facts than has been attempted before me.  His Honour rejected an application to set aside a statutory demand made against BMG which was founded on the judgment entered on 3 April 2006.  His Honour rejected arguments which were, in substance, to the same effect as the first contention advanced in the present proceedings.

13                        Although there would be power to examine the position yet again in the present proceedings, and to go behind the judgment entered on 3 April 2006 for that purpose, there must be an adequate reason to do so.  No such reason has been shown.  The first contention relied upon by the applicants must, therefore, be rejected.

14                        I might say in passing that the second affidavit, in its final paragraph, announced that the second applicant proposes to initiate “separate claims for the humongous losses and damages suffered by me, my family and BMG”.  It is clear therefore that no allegation is made in the present proceedings that there is a counter-claim, set-off or cross-demand which could not have been set up in the original proceedings.  Section 41(7) of the Bankruptcy Act accordingly does not arise for consideration.

15                        That leaves the allegation of abuse of process.  The applicants relied on Brunninghausen v Glavanics [1998] FCA 230 (“Brunninghausen”) where Emmett J said:

“I was referred to decisions of this Court of Re Sterling; Ex parte Esanda Pty Limited (1980) 44 FLR 125 and Re Lentini; Ex parte Lentini v CSR Limited (1991) 29 FCR 363 as to the inherent power of the Court to set aside a bankruptcy notice as an abuse of process.  I did not understand counsel for the creditor to dispute the Court’s jurisdiction to act in that way and I take it to be undisputed that if it is apparent that the purpose of the bankruptcy notice is to put pressure on a debtor to pay a debt rather than to invoke the Court’s jurisdiction in relation to insolvency, then the filing of a bankruptcy notice is an abuse of process.”

(Emphasis added.)

16                        However, it is clear that his Honour thereafter proceeded upon an evidentiary foundation which supported the contention of an abuse of process.  He said:

“In the light of the communications to which I have referred, there does not appear to be any explanation as to why the creditor considered it appropriate to proceed by way of bankruptcy notice, other than the possibility of putting pressure on the debtor.

One thing is clear and that is that no indication was given as to why the security offered was in any way inadequate.”

and:

“Having regard to the communications and the apparent failure to respond in any way to the proposal which was being put, in circumstances where the discussions arose from an indication that a stay would be sought unless some arrangements could be made, I conclude that the reason for the issue of the bankruptcy notice was to endeavour to put pressure on Mr Brunninghausen to make some payment. It follows that I should set the bankruptcy notice aside.”

17                        Brunninghausen was referred to in Killoran v Duncan, in the matter of Killoran [1999] FCA 1574.  There Gyles J said (at [12]-[13]):

“12       Whilst there is no debate about the jurisdiction of the Court to set aside a bankruptcy notice as an abuse of process where it can be concluded that it was simply to put pressure on the debtor rather than to genuinely invoke the Court’s jurisdiction, I am not satisfied that that is the position here.  There is nothing to indicate that the respondent creditor does not genuinely intend to pursue the matter if there is default in complying with the notice.  In my opinion, there is nothing special about abuse of process in this field, and, if a person wishes to resort to the jurisdiction of the Court for appropriate orders, then it will be an unusual case in which that will be prevented.

13        There is no evidence here of any collateral purpose or of any undue pressure being applied.”

            (Emphasis added.)

and (at [19]):

“19       I should also say, before leaving the matter, that there are significant differences between this case and the case of Brunninghausen v Glavanics, in the matter of Brunninghausen (supra) to which I have referred.  In that case an appeal was on foot which was conceded to be bona fide.  There was also an offer of a first mortgage security and a very considerable balance of solvency was proved.”

18                        In the present case, none of the features in Brunninghausen are present either.  More than mere assertion would be required to set aside the bankruptcy notice in the present case upon the footing that it was an abuse of process.  In my view there is no foundation for such a conclusion.

19                        The application to set aside bankruptcy notice No NN 4517/08 will be dismissed with costs.

Associate:

Dated:         29 April 2009