Federal Court of Australia

Monks v Mawhinney [2024] FCA 582

ORDERS

THE COURT ORDERS THAT:

1.    The second further amended creditor’s petition be dismissed.

2.    The applicants pay the respondent’s costs.

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

REASONS FOR JUDGMENT

STEWART J:

Introduction

1    The applicants, Aaron Monks and 360 Degree Media Group Pty Ltd, move on a second further amended creditor’s petition for the sequestration of the estate of the respondent, James Peter Mawhinney. The application is brought under s 43 of the Bankruptcy Act 1966 (Cth).

2    The applicants allege that Mr Mawhinney is indebted to them in the amount of $3,500,000 as the admitted balance of the principal amount owing under a Deed of Agreement concluded on 21 August 2020. The act of bankruptcy that they rely on is that Mr Mawhinney gave notice to Mr Monks in conversations on 16 and 27 September 2023 that he had suspended payment of his debts.

3    The issues in dispute with regard to whether a sequestration order should be made are the following:

(1)    Whether Mr Mawhinney is indebted to the applicants, or either of them (as required by s 44(1)(a) of the Act); and

(2)    Whether Mr Mawhinney, in the conversations with Mr Monks referred to above, said words to the effect that he had suspended payment of his debts to all creditors (within the meaning of s 40(1)(h) of the Act).

4    If those two matters are established, there is then the question whether as a matter of discretion the Court should order the sequestration of Mr Mawhinney’s estate.

5    It is common ground that on the authorities the act of bankruptcy identified in s 40(1)(h) – ie “if he or she gives notice to any of his or her creditors that he or she has suspended, or that he or she is about to suspend, payment of his or her debts” – requires notice of the suspension of the payment of debts to all creditors, not only to the creditor to whom the notice is given: Cropley’s Ltd v Vickery [1920] HCA 19; 27 CLR 321 at 326 per Rich J. The act of bankruptcy has two requisites: first, an intention residing in the mind of the debtor that they will, as their own act, refuse to pay their debts as they become payable, and, second, a communication of that intention to one of their creditors: Cropley’s at 325 per Knox CJ. Although the notice in question must be a deliberate statement, there is no requirement as to its formality; it must be deliberately given and not merely a haphazard or casual communication: Moy v Briscoe Company Ltd [1907] HCA 36; 5 CLR 56 at 62-63 per Griffith CJ; Re Hewson; Ex parte Sydney Stock Exchange Ltd (1967) 10 FLR 479 at 485 per Gibbs J.

6    A sequestration order has grave consequences that include a change of status. As such, on matters of proof, the reasonable satisfaction of the Court “should not be produced by inexact proofs, indefinite testimony, or indirect inferences”: Briginshaw v Briginshaw [1938] HCA 34; 60 CLR 336 at 362. See ANZ Banking Group Ltd, in the matter of James v James [2016] FCA 332 at [83] per Katzmann J. Given the interest of third parties, namely the alleged debtor’s other creditors, satisfactory proof of the petitioning creditor’s debt is required – the Court must be satisfied that there really is a debt due to the petitioning creditor: Wren v Mahony [1972] HCA 5; 126 CLR 212 at 222-223 per Barwick CJ, Windeyer and Owen JJ agreeing, citing In re Fraser; Ex parte Central Bank of London [1892] 2 QB 633 at 636-637. See also Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148.

The debt

7    The origins of the alleged debt lie in invoices from 360 Degree to Mayfair Wealth Partners Pty Ltd (MWP), a company associated with Mr Mawhinney, in the period August 2019 to June 2020. At the end of that period the balance owing was $4,290,509.01. The invoices reflect that 360 Degree purchased advertising in various media outlets for MWP. That is to say, 360 Degree was liable to third parties for substantial sums of money for the benefit of MWP.

8    On 21 August 2020, the Deed of Agreement mentioned above was concluded. The parties were 360 Degree, Online Investments Pty Ltd t/a Mayfair, MWP, New Media Ventures Pty Ltd t/a Lionize, Mr Monks and Mr Mawhinney. The recitals recorded that Mayfair and MWP had engaged Lionize to provide media marketing services for reward, but that they had been unable to pay the invoices in time. The recitals also recorded that to assist with the cash flow of Lionize as a result of the non-payment of the invoices, 360 Degree and Mr Monks had to take out loans which was done on the basis that Mayfair, MWP and Mr Mawhinney would indemnify 360 Degree and Mr Monks in full and Mayfair, MWP and Mr Mawhinney would continue to meet their obligations with respect to the invoices in full.

9    Under the Deed, Mayfair, MWP and Mr Mawhinney acknowledged liability for the invoiced debt and the loans with associated fees and charges (cl 5a). Clause 5 was relevantly then as follows (emphasis added):

…

b.    To affect [sic] the purpose and agreement underlying this Deed, Mayfair, MWP and/or [Mr Mawhinney] will:

i.    Pay to 360 [Degree] and/or [Mr Monks] the full amount of the Invoices, interest pursuant to the Terms, and interest and all other fees and charges in connection with the Loans, as soon as reasonably practicable; …

…

j.     Mayfair, MWP and [Mr Mawhinney] hereby acknowledge and agree that, in the event of a breach of this Deed or in the event that the debts owing by them as contemplated by this Deed are not repaid in full within twelve months from the date of this Deed, and/or substantial repayments have not been made in accordance with this cl 5, 360 [Degree], Lionize and/or [Mr Monks] have the right to appoint an external administrator(s) of their choosing to either Mayfair, MWP or any of their Associated Entities in order to fulfil the objectives of this Deed, and this Deed may be tendered as an absolute bar and defence to any dispute regarding same.

k.     For the avoidance of doubt, this clause is taken to create independent, joint and several obligations of Mayfair, MWP and [Mr Mawhinney], with Mayfair and/or MPW [sic] the primary liable Party and [Mr Mawhinney] personally guaranteeing the performance of Mayfair, and the other Parties may enforce this Deed against either or all of Mayfair, MWP and [Mr Mawhinney] at first instance in the event of a breach.

10    There can be little doubt that by those clauses Mr Mawhinney became personally liable to at least 360 Degree for the invoiced amounts. It is common ground that since the conclusion of the Deed, no payments were made to reduce the indebtedness (T7:7-9).

11    Mr Mawhinney’s principal submission against a finding of indebtedness is that although cl 5 creates the personal indebtedness of Mr Mawhinney (ie the debt is due), the debt would not be payable unless it was “reasonably practical” to pay it – with reference to cl 5b(i). He submits that the reference in cl 5j to the debt not being repaid in full within 12 months merely creates the right to appoint administrators and does not make the debt payable. He says that no facts were pleaded or proved to establish that the debt had become payable on the basis that it had become “reasonably practical” for it to be paid.

12    In August 2023, Mr Monks and 360 Degree as plaintiff commenced a proceeding in the NSW Supreme Court against Mayfair, Mr Mawhinney and another company associated with him, Australian Income Solutions Pty Ltd, claiming the same debt. The defendants in that proceeding have filed a defence and cross-claim. The proceeding is still a long way from trial. Although I accept that if the cross-claim is good, the amount claimed in the cross-claim ($185,000) will not even come close to extinguishing the debt, it is not so easy to conclude on what is before me that the defence will fail. The construction that Mr Mawhinney would put on the Deed, in particular that the debt is not payable until it is reasonably practicable to make payment, seems to me to be uncommercial and too uncertain to be readily accepted. I note, however, that no application has been made in the Supreme Court to strike out the defence or for summary judgment.

13    There is a recorded conversation between Mr Monks and Mr Mawhinney on 16 September 2023, to which I will return, in which Mr Mawhinney admitted his indebtedness to Mr Monks or 360 Degree. However, that conversation did not deal with the question of whether the debt was payable – the admission can be understood as being only with regard to the debt existing, ie being due, and the discussion about repayment can be understood as going to the question of reasonable practicability. See [16] below.

14    In all the circumstances, although the claim against Mr Mawhinney has the hallmarks of being a good claim, it is not without complexity and it is difficult to have the requisite level of satisfaction in relation to it. Given my conclusion below that the act of bankruptcy relied on by Mr Monks is not established, and that there is an extant proceeding in the Supreme Court, it is better that I say no more about the debt at this stage.

Suspension of payment of debts

15    As mentioned, Mr Monks relies on conversations that he had with Mr Mawhinney on 16 and 27 September 2023 to establish the act of bankruptcy in s 40(1)(h) of the Act. In order to assess whether that is indeed established it is necessary to deal with the events relevant to that issue chronologically.

16    Mr Monks and Mr Mawhinney had a telephone conversation with each other on 16 September 2023. Mr Monks recorded that conversation without Mr Mawhinney’s knowledge. A transcript of the conversation and the recording are in evidence. The conversation lasted about 15 minutes. Relevantly it included the following exchange – where “A” is Mr Monks and “J” is Mr Mawhinney:

A:     Well, look I’m happy to help but there’s a couple of things I’ve got to clarify alright? So mate, you Like obviously, we suspended payments in January 2020, um and you were say you agree to pay me 3.9 but you don’t want to pay any interest on the money that was outstanding is that right?

J:     right …

A:     so I just want to try and get to a point where you agree your gonna pay, give me a way you’re gonna pay and how can I help you get to that point.

J:     Sure, Yeah, I mean I’m happy to do that but I’m just not in a position to really do anything at this sort of immediate moment. That’s the issue.

A:     yeah, but what I’m saying is you agree that, you agree that you suspended payments and you owe me $3.9 million but you just don’t know how you’re gonna get me paid?

J:     Well yeah that’s exactly right, I can’t remember what the total was but It was 3 point something, and so that, that’s why I’m talking to you because I acknowledge that its there. Yeah no issues in that respect.

17    There is a clear acknowledgement by Mr Mawhinney in the last two entries in that exchange that he owes Mr Monks and/or his companies “3 point something” million dollars and that he had suspended payments. There is, however, no statement to the effect that Mr Mawhinney had suspended payment of his debts to all his creditors.

18    On 27 September 2023, there was a meeting between Mr Monks and Mr Mawhinney in Mr Mawhinney’s office in Melbourne. I will return to what they each said about what was said in that conversation.

19    On 28 September 2023, the creditor’s petition was filed and it was served on Mr Mawhinney. The petition, which was verified on affidavit by Mr Monks, did not state in terms that Mr Mawhinney had suspended payments to his creditors. It relevantly stated as follows:

3.     The Respondent debtor has suspended and given notice of suspension as to the payment of his debts, having made no payments under the Deed at any time, …

20    The reference to having made no payments under the Deed implies that the suspension of payments referred to immediately before that is to the suspension of payments of the debt under the Deed rather than the suspension of payments to creditors generally.

21    Mr Monks affirmed another affidavit on 28 September 2023 in support of the creditor’s petition. In it Mr Monks stated that he had had a number of conversations with Mr Mawhinney as to the latter’s obligations to make payment under the terms of the Deed. He stated that they had had discussions in the following terms:

I said, “You owe me at least $3,900,000, plus interest under the deed”.

The Respondent said, “yes, I know that I owe you at least $3,500,000, I cannot pay you right now, but I want to work something out for you.”

I said, “Are you suspending payments of the debt for now?”

The Respondent said, “I cannot pay anything at the moment.”

I said, “I can help you out. I want to put you in a position to pay me”.

The Respondent said, “Well, I cannot pay you now. I’m happy to talk to you but I cannot pay you now.”

I said, “When will you be able to pay?”

The Respondent said, “I do not know. Not now.”

22    Notably, Mr Monks did not reproduce extracts from the recorded conversation on 16 September. Also, he did not say that Mr Mawhinney had said that he had suspended payment of his debts to his creditors. In cross-examination, he said that the conversation reflected in that paragraph was in Mr Mawhinney’s office in Melbourne on 27 September (T23:39), but he later said that the statements were extracted from conversations on different occasions (T24:8), and yet later he said that it was the conversation on 16 September (T29:47-30:1; 31:4-13).

23    On 20 October 2023, Mr Mawhinney’s solicitors, Roberts Gray Lawyers, sent a letter to Mr Monks’ solicitor, Trevor Hall of Hall Partners. The letter cited authorities to the effect that to commit the act of bankruptcy constituted by giving notice of suspension of payment of debts under s 40(1)(h) of the Act, a debtor must give notice that they have suspended or are about to suspend payment of their debts generally, not just that they do not propose to pay the debt due to one creditor. The letter argued that Mr Monks’ petition and evidence was deficient in that respect.

24    On 31 October 2023, Mr Mawhinney filed a notice stating his grounds of opposition to the creditor’s petition. The grounds of opposition articulated in the notice, consistently with the letter, include that on the facts alleged in the petition and supporting affidavit, Mr Mawhinney had not committed an act of bankruptcy within the meaning of s 40(1)(h) of the Act.

25    On 1 November 2023, Mr Mawhinney filed his affidavit in opposition to the petition in which he disputed Mr Monks’ version of the conversations set out in Mr Monks’ affidavit.

26    On 16 November 2023, Mr Monks affirmed a further affidavit that was filed that day. In the affidavit he set out extracts from the transcript of the conversation between him and Mr Mawhinney on 16 September 2023, including the extract reproduced at [21] above. He also stated that in the meeting between him and Mr Mawhinney in Melbourne on 27 September 2023 the following words were stated – where “AM” is Mr Monks and “JM” is Mr Mawhinney:

AM:     You are going to keep my payments suspended for now and you can’t even pay $100 a week, for now?

JM:     I can’t pay anything now and $100 is just embarrassing.

AM:     What about your other creditors, are you paying them?

JW:     I am not paying them.

AM:     Have you suspended them?

JW:     I have had to. The same.

27    That is the exchange on which Mr Monks relies to establish that Mr Mawhinney gave notice that he had suspended payment of his debts to his creditors. The critical question is whether Mr Monks’ account of that conversation is reliable. Needless to say, Mr Mawhinney denies having had a conversation in those terms.

28    When cross-examined on why he did not include evidence of Mr Mawhinney having said that he had suspended payments to his creditors in his two affidavits of 28 September 2023, and only included that on 16 November 2023, Mr Monks said that he had had a conversation with his lawyer about what to say in the later affidavit (T34:30-34). Indeed, Mr Monks repeatedly said that what he had discussed with Mr Mawhinney in the two conversations in order to extract admissions, including the recording of the 16 September conversation, had been on his lawyer’s instructions (see, eg T22:14-24, 25:1, 25:40, 26:47, 28:19-26). That is to say, Mr Monks was very deliberate about getting Mr Mawhinney to agree to what was necessary, ie to admit the debt and to commit an act of bankruptcy. That is borne out by his use of the terminology of “suspension” of payments which was drawn from the Act.

29    The principal difficulty that I have with Mr Monks’ version of the conversation that he had with Mr Mawhinney on 27 September is that he said that what he canvassed in that conversation was specifically on the instructions of his lawyer, yet when he affirmed an affidavit the very next day as to what was said in the conversation he omitted the critical point that Mr Mawhinney had suspended payment of his debts to his creditors. If Mr Mawhinney had indeed said that he had suspended payment of his debts to his creditors as he alleged in his affidavit some six weeks later, that would have been a critical fact to depose to in the affidavit the next day. However, that fact was not included in the petition or in the affidavit which rather suggests it was at that time not appreciated by Mr Monks that that was a necessary admission to extract from Mr Mawhinney.

30    It was only after Mr Mawhinney’s lawyers had raised the absence of the necessary allegation in correspondence, that Mr Monks then in his later affidavit sought to remedy the deficiency by including the relevant statement by Mr Mawhinney. The lateness of the allegation as to Mr Mawhinney’s suspension of payment of his debts to creditors raises substantial doubt as to its reliability.

31    Also, as indicated above, there was some confusion by Mr Monks in the witness box about what had been said in which of the conversations. That raises further doubt as to the reliability of his account.

32    In all those circumstances, I am simply not satisfied that Mr Mawhinney was asked whether he had suspended payments to his creditors, or that he said that he had. I am also not satisfied that such a statement was made, if at all, with the required deliberateness and not merely haphazardly or casually.

33    I do not consider that the fact that Mr Mawhinney was apparently indebted to the Commissioner of Taxation for a director’s penalty in the amount of about $30,000 which had remained unpaid since October 2019 supports Mr Monks’ case that Mr Mawhinney had given notice that he had suspended payments to his creditors. That is to say, even if Mr Mawhinney had not paid his other known creditor over a long period of time, that does not mean that he had given notice that he had suspended payments to his creditors.

34    Also, I do not accept that if Mr Mawhinney’s version of the relevant conversation is to be excluded as unreliable, as submitted on behalf of Mr Monks, that has the effect that Mr Monks’ version must be accepted. There is nothing to support such an approach. Even assuming Mr Mawhinney’s version to be self-serving and unreliable, which I do not need to decide, I am not sufficiently satisfied as to the reliability of Mr Monks’ version to be able to accept it as establishing the act of bankruptcy relied upon.

Conclusion

35    For those reasons, it is not established before me that Mr Mawhinney committed the act of bankruptcy identified in s 40(1)(h) of the Act. The creditor’s petition must therefore be dismissed.

36    There is no apparent reason why the applicants should not pay Mr Mawhinney’s costs.

Associate:

Dated:    5 June 2024