FEDERAL COURT OF AUSTRALIA

Kerr (Trustee), in the matter of Cross (Bankrupt) v Bechara (No 3) [2015] FCA 708

THE COURT:

1.    Orders that paragraph 9 of the interim application filed by Maria Bechara and Feridun Akcan be dismissed.

2.    Declares that the net proceeds of the sale of the property at 7 Birdwood Avenue, Lane Cove in the state of New South Wales after payment of the secured creditors’ debts and expenses form part of the property divisible amongst the creditors of the Bankrupt Estates of Gabriel Cross and Rosabelle Cross.

3.    Declares that neither Maria Bechara nor Feridun Akcan have any interest in the said proceeds other than as ordinary unsecured creditors in the Bankrupt Estates of Gabriel Cross and Rosabelle Cross.

4.    Orders that Maria Bechara and Feridun Akcan pay the costs of David Kerr, in his capacity as trustee of the Bankrupt Estates of Gabriel Cross and Rosabelle Cross, of and in connection with paragraphs 4 and 5 of the amended application and paragraph 9 of the interim application, as agreed or taxed.

5.    Grants liberty to restore to all parties within 7 days in the event that a different costs order is proposed.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

The issues

1    The only matters remaining in this proceeding concern competing declarations sought by the trustee, Mr Kerr, and by the creditors, Ms Bechara and Mr Akcan.

2    In the amended application of Mr Kerr the relevant paragraphs are 4 and 5 which state as follows:

4.    A declaration that the nett proceeds of the sale of the property at 7 Birdwood Avenue, Lane Cove in the state of New South Wales after payment of the secured creditor’s debts and expenses (and the payment of $242,376.63 in accordance with these orders) form part of the property divisible amongst the creditors of the Bankrupt Estates of Gabriel Cross and Rosabelle Cross; and

5.    A declaration that neither Maria Bechara nor Feridun Akcan have any interest in the said proceeds other than as ordinary unsecured creditors in the Bankrupt Estates of Gabriel Cross and Rosabelle Cross …

3    In the document styled interim application filed on behalf of Mr Bechara and Mr Akcan the relevant paragraph is 9 which appears as follows:

9.    Declaration that the Applicants are entitled in respect of the net proceeds of sale of the property at 7 Birdwood Avenue, Lane Cove after payment of secured creditor’s debts and expenses to rank in preference to any other unsecured creditors.

Principles

4    In an outline of submissions handed up in court, counsel for Mr Kerr helpfully identified the relevant facts and principles. It was common ground that these submissions accurately set out the basis on which the claims of Ms Bechara and Mr Akcan are made. In these submissions it was said that while it was not clear what this basis was it seemed to be that the creditors relied on what is known as a “Universal Distributing” lien, which is a reference to the decision in Re Universal Distributing Co Ltd (in liq) (1933) 48 CLR 171 (Universal Distributing) or a more general lien based upon concepts adopted from the law of salvage as explained in Shirlaw v Taylor (1991) 5 ACSR 767 (Shirlaw v Taylor) and more recently in Ronald John Dean-Willcocks v Nothintoohard Pty Limited (In Liquidation) [2006] NSWCA 311.

5    In Universal Distributing, Dixon J (at 174) emphasised that the relevant principle was one which permitted, in that case, a liquidator to recover:

…only those expenses [that] appear to have been thrown against the fund belonging to the debenture-holders which have been reasonably incurred in the care, preserveration and realization of the property.

6    In Hewett v Court (1983) 149 CLR 639 the existence of the equitable lien over assets was explained as one that did not depend upon either contract, quasi-contract or possession but, as Gibbs CJ said, arose by operation of law under a doctrine of equity. Further, Deane J (at 668) explained that the existence of the lien, if it were to arise independently of a contract, was one where:

… the relationship between the actual or potential indebtedness and the identified and appropriated property be such that the owner would be acting unconscientiously or unfairly if he were to dispose of the property (or, if it be appropriate, more than a particular portion thereof) to a stranger without the consent of the other party or without the actual or potential liability having been discharged.

7    In Cadorange Pty Ltd (in liq) v Tanga Holdings Pty Ltd (1990) 20 NSWLR 26 (Cadorange) Young J (at 33) identified three conditions to the existence of any equitable lien sufficient to justify the form of restitution which is involved. His Honour said the conditions are:

(a)     where the defendant has freely accepted the benefit;

(b)     where the benefit is incontrovertible so that no reasonable person could say that the defendant was not enriched; and

(c)     where on an objective valuation of the benefit conferred by the plaintiff it is conscionable that the defendant should have to pay for it.

8    Moving to the salvage principles, in Shirlaw v Taylor the Full Court of the Federal Court of Australia said (at 228) that:

In Hewett v Court (supra) (at 667 et seq), Deane J referred to the treatment of the subject in Pomeroy’s Equity Jurisprudence (5th ed, 1941). The view is there expressed (1239) that, in addition to equitable liens arising from contractual dealings in property, equity may raise liens based either upon general considerations of justice or upon the principle that he who seeks the aid of equity in enforcing some claim (eg in an administration of assets) must admit the equitable rights of others directly connected with or arising out of the same subject matter: see also Note, “Equitable Liens” (1931) 31 Col L Rev 1335 at 1342-1343. Thus, where a party has by his efforts brought into court a fund in the administration of which various parties are interested, his costs and expenses should be a first claim upon the fund: see Batten v Wedgwood Coal and Iron Co (1885) 28 Ch D 317 at 324-325; Re Universal Distributing Co Ltd (In liq) (1933) 48 CLR 171 at 174-175, per Dixon J. Another illustration of these principles is provided by cases where the claim to contribution by one co-owner upon the other to recoup expenditure which benefits their joint property will be supported by an equitable lien or charge upon the undivided share of the other co-owner: see Calverley v Green (1984) 155 CLR 242 at 263, per Mason and Brennan JJ; Muschinski v Dodds (1985) 160 CLR 583 at 598, per Gibbs CJ.

9    In Dean-Willcocks v Nothintoohard Pty Ltd (in liq) [2005] NSWSC 357 Barrett J at first instance made these observations (at [22]):

But there may be a wider basis for the plaintiffs’ “salvage” claim, namely, that it is necessary to impose an equitable lien, as in Hewett v Court, above, to ensure that the second defendant, in relying upon its rights at law to sell the property as a means of obtaining satisfaction of moneys owing to it in priority to moneys owing to others, does not unconscientiously reap the reward of outlays by the plaintiffs productive of “incontrovertible benefit” to the property and therefore to the second defendant as the holder of a legal interest in it. Such an approach – characterised as an aspect of the law of restitution – has been recognised in somewhat analogous circumstances: see, for example, Monks v Poynice Pty Ltd (1987) 8 NSWLR 662; 11 ACLR 637; Young v ACN 081 162 512 Pty Ltd (in liq) (2005) 52 ACSR 629; [2005] NSWSC 139. Such a “salvage” claim, if properly available as a matter of principle, would be an example of the intervention of equity to prevent unconscientious reliance on common law rights and would operate as a qualification upon such rights.

10    In the decision on appeal (Ronald John Dean-Willcocks v Nothintoohard Pty Limited (In Liquidation) [2006] NSWCA 311) Beazley JA referred to the judgment of Barrett J at [109] in these terms:

Barrett J held at [23], however, and without himself coming to any firm conclusion whether such a principle was available, that it would not avail the receivers in this case because he was satisfied that none of the moneys expended by the receivers in relation to the sale of the property could:

…be said to have protected or preserved the property or enhanced its value in a way that produced incontrovertible benefit that ultimately enured to the advantage of [Sovereign] and the sale [Sovereign] effected.

11    Also McColl JA concluded as follows:

[119] In my view the case can be disposed of on the basis that as no conduct by the appellants created the fund from which they sought to be reimbursed, nor could the moneys they spent:

…be said to have protected or preserved the property or enhanced its value in a way that produced incontrovertible benefit that ultimately enured to the advantage of [Sovereign] and the sale [Sovereign] effected” [Beazley JA at [109]]

the circumstances which might give rise to an equitable lien (subject to what I say below) or the doctrine of salvage were not present.

[120] In such circumstances there is no need to consider whether an equitable lien for remuneration, costs and expenses may be asserted by a receiver appointed out of court, a question reserved by Barrett J (Ronald John Dean-Willcocks and Anor v Nothintoohard Pty Ltd [2005] NSWSC 357 at [39]), and doubted by Young CJ in Eq in Nicobar Pty Ltd v Abrokiss & Ors [2003] NSWSC 447; (2003) 48 ACSR 259 at [58]-[64].

12    For these reasons I accept the submission on behalf of Mr Kerr, which was also accepted by counsel for Ms Bechara and Mr Akcan, that the lien will not be available unless it can be established that there has been conferred what might be described as an incontrovertible benefit. The facts of this case disclose that there has been no conferral of such an incontrovertible benefit by any actions taken by Ms Bechara or Mr Akcan.

Discussion

13    As disclosed in my earlier reasons for judgment in relation to a different aspect of this matter (Kerr (Trustee), in the matter of Cross (Bankrupt) v Bechara [2015] FCA 284), the matter concerns the bankrupt estates of Gabriel Cross and Rosabelle Cross (the Crosses) each of whom became bankrupt on 9 October 2013. Before they became bankrupt, however, they had entered into a contract for the sale of land being a property at 7 Birdwood Avenue, Lane Cove (the Lane Cove property).

14    The contract for sale is dated 19 April 2013 and provides for a purchase price of $1.8 million apparently along with an option to purchase two units in what was then contemplated to be a redevelopment of the Lane Cove property along with other adjoining properties. The evidence reveals that at the time this contract for sale was entered into no development application had been lodged or granted for the contemplated redevelopment. The contract did, however, contemplate that it might be novated and a new contract come into existence in which a nominee of the then purchaser, IPM Pty Ltd, would become the new purchaser.

15    The Lane Cove property was mortgaged to the St George Bank to secure advances that had been made by that bank to various corporate entities controlled by the Crosses. It appears also that at some time the contract was novated and a company known as Lane Cove Trading Pty Ltd became the purchaser. The contract provided for completion to occur on 31 May 2013. That, however, had not occurred and the contract remained on foot at the time of sequestration orders being made against the Crosses.

16    Ms Bechara relies on certain evidence to establish that her actions and those of Mr Akcan enabled a greater value to be obtained for the Lane Cove property than would otherwise be the case. That evidence is set out in paragraphs 103 to 106 of her affidavit of 5 January 2015 which state as follows:

103. During the meeting Westpac indicated that it was prepared to accept the sale of the Lane Cove property at $1.8M (they held a First Mortgage over the Lane Cove Property which at that time stood in the sum of approximately $1.2M) and that they were looking to be paid $1.2m from the proceeds on the basis that it was a stand-alone security.

104. Westpac left it to Geoffrey Reidy to determine whether or not he would accept the offer.

105. In about November 2013, the Second Applicant and I commenced proceedings in the Supreme Court against IPN and Lane Cove Developments and Geoffrey Reidy. Again Geoffrey Reidy took no action in the proceedings and was legally represented throughout the proceedings by Mr Stephen Mullette of Matthews Folbigg.

106. In or about December 2013 for commercial reasons (having been requested to provide undertakings as to damages to the defendants), the Second Applicant and I were forced to discontinue, and suffered an adverse costs order on an indemnity basis. Those costs are currently being appealed after an assessment has taken place.

17     Ms Bechara and Mr Akcan also rely on certain other matters which include the following:

(1)    On or about 4 December 2013, Ms Bechara and Mr Akcan commenced proceedings in the Supreme Court of New South Wales which claimed principal relief on the basis of s 37A of the Conveyancing Act 1919 (NSW) seeking declarations that the sale of the Lane Cove property was an attempt to defraud the creditors of the bankrupt estate of the Crosses, with an associated order that the contract for sale be declared void.

(2)    On 11 December 2013 an email from Ms Bechara to the then trustee, Mr Reidy, provided details of an agent who sold an adjoining property, 9 Birdwood Avenue, Lane Cove, which according to an affidavit of Ms Bechara filed in support of the proceedings in the Supreme Court had been sold at a higher value than the contract for the Lane Cove property.

(3)    On 16 December 2013 the then solicitors for Ms Bechara and Mr Akcan put the solicitors for the receivers for St George Bank on notice that it was the position of Ms Bechara and Mr Akcan that the Lane Cove property was worth some $2.6 million.

(4)    On 2 January 2014 Mr Reidy, the then trustee, forwarded correspondence to the then solicitor for Ms Bechara and Mr Akcan which indicated that he believed the Lane Cove property should be worth in excess of $2 million but that a commercial resolution seemed appropriate.

(5)    On 7 January 2014 Ms Bechara’s agents, State Lawyers Pty Ltd, forwarded to Mr Reidy a valuation for the Lane Cove property which concluded that the property was worth $3 million as at 19 April 2013, being the contract date.

(6)    Also on 7 January 2014 the solicitors for Mr Reidy sought instructions from Mr Reidy about the notice to complete the contract which, by then, had been served by the vendors.

18    It is apparent that Mr Reidy could not re-negotiate the terms of the contract successfully. Instead, on 13 January 2014, his solicitors notified the purchasers solicitors that Mr Reidy would be commencing proceedings to set aside the contract pursuant to the provisions of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act). Thereafter the St George Bank, which had the first registered mortgage over the Lane Cove property and had not yet received payment of indebtedness secured by that property so as to discharge the mortgage, appointed agents for the bank as mortgagee in possession who then took control of the property.

19    On 12 March 2014, the Lane Cove property was sold by the bank exercising a power of sale pursuant to the mortgage to the same company, Lane Cove Trading Pty Ltd, but for the price of $3 million.

20    The difficulty with the case for Ms Bechara and Mr Akcan is that it overlooks other facts and the context in which these matters were taking place.

21    As was submitted on behalf of Mr Kerr, Mr Reidy was bound by s 123 of the Bankruptcy Act. By s 123 the conveyance was a protected transaction provided it was a conveyance for market value, in good faith and in the ordinary course of business. The fact that Ms Bechara and Mr Akcan considered the Lane Cove property to be worth more than the original contract amount was not evidence which would have enabled Mr Reidy to conclude that he could take proceedings to have the contract set aside under ss 120 or 121 of the Bankruptcy Act.

22    More to the point, however, there is no suggestion in the evidence that Mr Reidy had made any decision to complete the contract of sale. In circumstances where Ms Bechara had set out her demands on 19 November 2013, the Crosses having only become bankrupt on 9 October 2013 and having lodged a statement of affairs on 8 November 2013, the most likely position, and one which is supported by the evidence, is that Mr Reidy had not yet made up his mind whether to seek to set aside the contract as invalid. Indeed, this seems to have remained the position at 7 January 2014 when the solicitors for Mr Reidy asked for instructions whether he intended to comply with a notice to complete which had then been issued. Had Mr Reidy already decided to complete, this request would have been unnecessary.

23    Despite the fact that there was no real basis to infer that Mr Reidy intended to complete the contract, Ms Bechara and Mr Akcan commenced the Supreme Court proceedings on 4 December 2013 in which Mr Reidy was the third defendant.

24    While those proceedings were on foot the purchaser named in the contract served a notice to complete which required a completion on or before 13 January 2014. As has been submitted for Mr Kerr, and indeed seems to have been accepted in the submissions put for Ms Bechara and Mr Akcan, the Supreme Court proceedings were misconceived in that none of the evidence filed in support of the proceedings disclosed any proper foundation for an allegation of fraud. This seems to be borne out by what subsequently occurred.

25    The proceedings came before Pembroke J in the Supreme Court on 19 December 2013. He directed Ms Bechara and Mr Akcan to file and serve any further affidavits in support of their application by 23 December 2013 and also said:

[10] It is not apparent to me on the evidence so far filed that there is any proof of the requisite intention to defraud by Gabriel Cross and Rosabelle Cross, nor any proof that the first defendant shared their fraudulent intention. If the application were heard today I would have dismissed it.

26    Ms Bechara and Mr Akcan did not file and serve any further affidavits to support their claims. Instead, on 20 December 2013, their solicitor served a notice of intention of ceasing to act.

27    In the meantime, on 28 December 2013, Mr Reidy took steps to obtain his own valuation of the Lane Cove property as at 19 April 2013, being the date of the contract for sale.

28    Another record of the Supreme Court of New South Wales shows that on 30 December 2013, and without leave, Ms Bechara filed a notice of discontinuance of the Supreme Court proceedings, as a result of which she and Mr Akcan were subsequently ordered to pay Mr Reidy’s costs on an indemnity basis.

29    By the same date, 30 December 2013, Mr Reidy obtained a valuation of the property as at the contract date for $2,942,000. As noted, on 7 January 2014, Ms Bechara’s solicitors provided a copy of a valuation which she had obtained valuing the property, at $3 million as at the date of the contract.

30    In these circumstances no inference can be drawn that anything Ms Bechara and Mr Akcan did had any benefit in terms of the realisation of the value of the asset constituted by the Lane Cove property. Indeed if anything they put the then trustee, Mr Reidy, to unnecessary cost by reason of the Supreme Court proceedings.

31    It cannot be inferred on any logical or rational basis that it was the Supreme Court proceedings that prevented Mr Reidy from otherwise completing the contract for sale. There is no evidence that he intended to complete the contract for sale or at least intended to do so before he had reached his own view, which it was necessary for him to reach, that the contract had been entered into in good faith, for market value and in the ordinary course of business.

32    If one puts aside the actions of Ms Bechara and Mr Akcan one can see no different result having been reached. In the ordinary course and in a timely manner Mr Reidy had to decide whether or not the contract for sale should be completed. In so doing he was bound by his obligations as a trustee to consider whether the contract was one which he was satisfied had been entered into in good faith and for market value. For that purpose he obtained a valuation. The valuation indicated that the property had been entered into at an undervalue. Mr Reidy then conducted extensive negotiations with the purchasers in order to see whether a commercial solution was possible. When a commercial resolution proved to be impossible Mr Reidy notified the purchasers that he did not intend to complete the contract for sale. The bank, as mortgagee, then stepped in.

33    As has been submitted for Mr Kerr, it seems from these circumstances that the most significant factor in achieving the higher price for the property might well have been the appointment of receivers which neutralised the effect of the notice to complete and which had nothing to do with Ms Bechara and Mr Akcan. As submitted for Mr Kerr, there is no evidence in this matter to suggest that any involvement of Ms Bechara and Mr Akcan conferred any benefit, let alone an incontrovertible benefit, on the bankrupt estates in respect of the realisation of the value of the Lane Cove property.

34    Indeed the submissions for Ms Bechara and Mr Akcan, perhaps realising this difficulty, went so far as to say that even though some of their efforts were misconceived and unsuccessful, they should nevertheless be compensated for the steps which they took. I do not accept that there is any principled basis to act on those submissions. It was then said that by analogy to s 109(10) of the Bankruptcy Act a generous and liberal approach should be taken to encourage persons in the position of Ms Bechara and Mr Akcan to take action to bring greater value into an estate. I do not consider that any circumstances in this matter would suggest the existence of a discretion which should be exercised in favour of Ms Bechara and Mr Akcan.

35    The next point that was made was that in other proceedings in the Supreme Court of New South Wales, in which Ms Bechara and Mr Akcan were again the plaintiffs, the result was that certain shares were brought into the purview of the bankrupt estates. As I understand this submission it is that because the actions of Ms Bechara and Mr Akcan ensured that some shares were within the purview of the bankrupt estates, their claim to have the net proceeds of the sale of the Lane Cove property should succeed. I do not see any logical connection between the two circumstances. Moreover, I have no basis upon which I could infer the existence of any such connection. All that is before me today are the competing claims in respect of the Lane Cove property.

36    The last point that was made on behalf of Ms Bechara and Mr Akcan was that although the courts, as a matter of principle, have taken a rigorous approach to the valuing of costs and expenses which have been reasonably incurred in obtaining such incontrovertible benefits it was not possible for Ms Bechara and Mr Akcan to quantify their claim other than to the extent which they had done in paragraph 9 of the interim application. I accept the submission for Mr Kerr that it was the responsibility of Ms Bechara and Mr Akcan to quantify their claim and without such quantification no relief would be granted in any event. But it is not necessary to decide the matter on this basis.

37    Instead I accept what was put for Mr Kerr that none of the three conditions which Young J identified in Cadorange have been satisfied in this case so as to give rise to a lien. Mr Reidy, who was the relevant trustee at the time, presumably did not freely accept the so-called benefit of being the third defendant in Supreme Court proceedings commenced by Ms Bechara and Mr Akcan which seem to have been doomed to failure. Moreover, the benefit that was obtained was a result of Mr Reidy’s actions and not as a result of any action taken by Ms Bechara or Mr Akcan. Accordingly, any enrichment of the bankrupt estate has, in my view, nothing to do with actions taken by Ms Bechara and Mr Akcan.

38    In the circumstances it cannot be concluded that it is conscionable that Ms Bechara and Mr Akcan should be rewarded for a benefit which, in truth, they did not confer.

39    Accordingly, paragraph 9 of the interim application filed by Ms Bechara and Mr Akcan must be dismissed, and the declarations sought in paragraphs 4 and 5 of Mr Kerr’s application should be made.

Associate:

Dated:    15 July 2015