Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: MacDonald v Raupach [2011] NSWCA 320
• Hearing dates: 30 September 2011
• Decision date: 30 September 2011
• Before: Bathurst CJ at [26] [31] Young JA at [1]; Sackville AJA at [27]

Decision

Appeal is dismissed with costs.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: BANKRUPTCY- provable debts- bankrupt entered into a deed for payment of $100,000 to settle a District Court action in which he was a third party- deed entered into for relationship's sake not because of pre-existing liability- only paid $20,000- primary judge ordered appellant to pay $80,000 plus interest and costs- money due under deed not a provable debt because not a contingent debt existing at the time of the bankruptcy- bankruptcy later annulled because of composition- effect of annulment of bankruptcy is as if bankruptcy never occurred in the first place- no leave to proceed against the bankrupt in the District Court had been obtained- this did not vitiate- in any event annulment made the defect otiose- even if a provable debt, respondents' rights revived after annulment- deed enforceable- appeal dismissed.
• Legislation Cited: Bankruptcy Act 1966 (Cth) ss 82, 149; Contracts Review Act 1980
• Cases Cited: Foots v Southern Cross Mine Management Pty Limited [2007] HCA 56; 234 CLR 52; Lewis v Combell Constructions Pty Ltd (1989) 18 NSWLR 528; Re Coyle (1993) 42 FCR 72; Re Giuca; Ex parte The Bankrupts (1986) 70 ALR 219; Re Spratt; Ex parte Wilde (1986) 10 FCR 544; Reynolds v Reynolds [1977] 2 NSWLR 295; Union Club v Battenberg [2006] NSWCA 72; 66 NSWLR 1; Wilde v Spratt (1986) 13 FCR 284
• Category: Principal judgment
• Parties: Neil MacDonald (Appellant); Douglas Raupach (First Respondent); Enrico Di Lario (Second Respondent); Sandra Simone Di Lario (Third Respondent)
• Representation: Counsel: Appellant in person; V Bedrossian (First Respondent); R M Higgins (Second and Third Respondents); Solicitors: Appellant self represented; Accentro Legal (First Respondent); Hunter Lawyers (Second and Third Respondents)
• File Number(s): CA 2007/261840

Decision under appeal

• Citation: Raupach v MacDonald [2010] NSWSC 1326
• Date of Decision: 2010-11-24 00:00:00
• Before: Price J
• File Number(s): SC 2007/261840

Judgment

1 YOUNG JA: (Giving the first judgment at the invitation of the Chief Justice). This is an appeal against a decision giving judgment against the appellant for debt. The basal background facts appear to be that the appellant was associated with a company, Finance & Mortgage Corporation Pty Limited (Finance & Mortgage). By October 1994, the first respondent had lent monies secured by a mortgage to a number of clients of that company. One of those borrowings was by the second and third respondents. I have taken these facts from the appellant's affidavits in the blue appeal book.

2 The first respondent sued the second and third respondents in the District Court for repayment of the loan plus accrued interest. The principal defences of the second and third respondents were: (1) that the debt was statute barred; and (2) that they had fully repaid the loan and the then accrued interest to the first respondent on 17 November 2000 by paying the same to Finance & Mortgage Corporation or its authorised agent, the appellant. They also cross claimed against the appellant.

3 Finance & Mortgage was deregistered in December 2002. The proceedings came on before his Honour Judge Phegan in the District Court on 19 April 2004. There was no doubt that the judge strongly suggested settlement. The appellant says that the judge told him he ought to be very careful about his position as he may not only face a substantial judgment but also more serious ramifications in the nature of criminal prosecution. The other parties were represented by counsel, the appellant appeared for himself.

4 On the second day of the hearing, there was a settlement of the matter on the basis that the appellant would, by deed, promise to pay the first respondent $100,000, with $10,000 as a down payment and the balance at the rate of $10,000 per month, and the District Court proceedings would be dismissed with each party paying his or her own costs.

5 The deed was drawn up and was signed, sealed and delivered by the appellant and the three respondents. The appellant made the down payment and the first of the monthly payments, then stopped making payments. The present proceedings were commenced to force him to pay the remaining $80,000.

6 The deed contained a couple of schedules containing two alternative forms of short minutes depending on whether the deed was performed or not, however, the short minutes to record the formal order if the appellant did not fulfil the deed were not properly completed, so that the District Court found itself unable to make the orders contained in them. Thus, the District Court proceedings are still on foot.

7 The appellant became a bankrupt (for at least the second time) on his own petition as of 5 March 2002. He was thus an undischarged bankrupt on 20 April 2004 when the deed was executed. No leave had ever been given to the second and third respondents to sue the appellant by way of cross claim.

8 On 4 March 2005, that is, the day before the appellant would have been discharged from bankruptcy automatically under s 149 of the Bankruptcy Act 1966 (Cth), as a result of a meeting of his creditors agreeing to a composition under which they received about one cent in the dollar instead of a nil return under bankruptcy, the bankruptcy was annulled.

9 It is with this background that Justice Price considered the questions raised in the current litigation. His Honour delivered judgment on 24 November 2010. The appellant was ordered to pay the $80,000 plus interest, about $138,000 in all, plus costs. Further, his cross claim that the deed be set aside under the general law or the Contracts Review Act 1980 was dismissed with costs.

10 The appellant appealed to this Court. His notice of appeal basically alleged:

(1) that that primary judge should have held that the debt under the deed was a provable debt in the appellant's bankruptcy;

(2) that the primary judge misapplied the law as to the effect of annulment of a bankruptcy;

(3) that the primary judge should have set the deed aside under the general law or the Contracts Review Act ;

(4) that the primary judge should not have enforced the deed; and

(5) that the primary judge should have dismissed the proceedings as an abuse of process.

11 Following the notice of appeal in accordance with the rules, the appellant filed written submissions. These bore the name of Mr DeBuse of counsel. The appeal came on for hearing today. The appellant now is selfrepresented. Mr V Bedrossian of counsel appeared for the first respondent and Mr R M Higgins of counsel for the second and third respondents. Although the orange appeal book records that the solicitor for the appellant is FNH Group, it would appear that this entity is not a set of solicitors, but rather a mortgage broker with whom the appellant is currently associated.

12 I will deal with the five issues I stated above in my summary of the grounds of appeal one by one.

13 The first matter is whether the debt under the deed was provable in the bankruptcy. The appellant says that everyone knew he was an undischarged bankrupt at the time. Indeed, the solicitor for one of the opposing parties was a woman who had recently acted for the appellant. Although the debt was contracted after the bankruptcy, he puts that the debt was one that was inevitable or highly probable at the time of the bankruptcy and was a crystallisation or came about by reason of an existing liability. It is of course the case that a contingent debt existing at the time of the bankruptcy is provable in the bankruptcy however there is little to support the view that the debt in the present matter comes into that category.

14 The first respondent never sued the appellant for debt; the second and third respondents allege that they have repaid their debt to the first respondent by paying it to their own agent, Finance & Mortgage, of which the appellant was its officer. Just what was in the cross claim is unclear as the blue appeal book has not fully reproduced it, pp 70 and 71 only being the first and last pages. However, it appears to be an application by the second and third respondents that the appellant account either to Finance & Mortgage, or more likely to the second and third respondents, for the monies which they say they paid.

15 The primary judge was taken to the recent High Court decision in Foots v Southern Cross Mine Management Pty Limited [2007] HCA 56; 234 CLR 52, where the High Court ruled that a debt for costs in an order made after the commencement of the bankruptcy made in consequence of a decision made before the bankruptcy was not a provable debt. The facts in Foots as found by the Court are different to the facts in the present case, but what was said by members of the High Court in that case is some guide as to the way one approaches this sort of problem.

16 The appellant gave evidence, accepted by the primary judge at [51] and [82] of his judgment, that he had sought to resolve the matter commercially, not because he considered that he had any personal liability, but because of his relationship with the other parties. It is difficult to see on the facts of this case how the debt due under the deed could have existed in any form prior to 20 April 2004. The primary judge reviewed the law as to provable debts under the ambit of s 82 of the Bankruptcy Act and rejected the appellant's submission at [82] and [83] of his judgment on the basis that the proved facts did not support it.

17 The primary judge then gave two additional reasons which reinforced his finding. First, if any obligation did exist prior to the bankruptcy it was not one with which the present proceedings were concerned. Then secondly, that the annulment of a bankruptcy made the matter otiose. I see no error in his Honour's approach or reasoning.

18 The second point concerns the annulment of the bankruptcy. The effect of an annulment was authoritatively decided by this Court in Union Club v Battenberg [2006] NSWCA 72; 66 NSWLR 1. The effect of an annulment is that the bankruptcy, except for some very special situations, is treated as never having taken place for any purpose: see also Re Coyle (1993) 42 FCR 72, 77.

19 The appellant argued below and before us that, because noone had obtained the leave of a federal court for the cross claim against him, everything that happened in and about the deed was illegal and the deed was void. There is difficulty with this submission at its roots as a failure to get leave probably does not vitiate proceedings: see Re Spratt; Ex parte Wilde (1986) 10 FCR 544, 548 and on appeal Wilde v Spratt (1986) 13 FCR 284, 288-9. Even if this is wrong, the effect of annulment, viewed from this point in time, is that there was no need to obtain that leave as there was no bankruptcy.

20 Another effect of the annulment, as the primary judge correctly pointed out at [93], is that the rights of creditors who did not prove in the bankruptcy are revived: Re Giuca; Ex parte The Bankrupts (1986) 70 ALR 219 per Justice Jenkinson, Federal Court of Australia. Again, I see no error in his Honour's approach or reasoning.

21 Thirdly, as to whether the primary judge should have set aside the deed under the general law or the Contracts Review Act . The primary judge approached the matter, as is now recognised as being the correct procedure, focussing attention on the Contracts Review Act claim. His Honour examined the section, examined the relevant factors and decided that, on the facts, there was no inequality of bargaining power. The primary judge also rejected the appellant's evidence that his mind was affected by what he later said he perceived as a threat by the judge. The primary judge found that the possibility of criminal proceedings neither surprised the appellant nor created the anxiety of which he later complained. These findings were well within the primary judge's mandate and I find no reason to disturb them. There is no reason to set aside the primary judge's decision on the Contracts Review Act point. Any problem with possible vitiation of the deed under the general law would not amount to anything higher than the Contracts Review Act case so it is not necessary to deal with it.

22 Point Four was that the judge should have exercised his discretion not to enforce the deed. In Lewis v Combell Constructions Pty Limited (1989) 18 NSWLR 528, Justice Finlay, sitting in Common Law, declined to enforce a settlement because he considered (and he was acting before final judgment was signed) there was a discretion not to do so where, to enter the settlement as a judgment, would be to work an injustice.

23 The circumstances here are quite different to Combell . The issue is not whether judgment should be signed in accordance with a settlement. This is an action on a deed. Further, Combell is founded on an obvious mistake made by a party to a settlement. There is no mistake involved in entering into the deed, particularly once one discards any problems associated with bankruptcy, and accordingly, in my view, there is nothing in this point.

24 Finally, it is said that these proceedings are an abuse of process as the District Court proceedings are still on foot and an order for the appellant to pay the debt could be made in those proceedings. It is true that, ordinarily, two sets of proceedings in respect of the one claim are vexatious and one of them should be stayed: see Reynolds v Reynolds [1977] 2 NSWLR 295. However, that is a general rule of practice to be applied when it improves the working of the procedures of the courts and is not to be automatically applied.

25 In the circumstances of the present case the Court's processes are not impeded. Furthermore, as the primary judge pointed out at [126], the present proceedings are based on a cause of action, namely liability under the deed, whereas the District Court proceedings appear to be based on the original loan and its possible repayment. Accordingly, there is nothing in this ground. It follows that, in my view the appeal must be dismissed with costs.

26 BATHURST CJ : I agree with the orders proposed by Justice Young and with his Honour's reasons. I would only add this: Some reference was made today to the entry by the appellant into a deed of composition with his creditors. The deed of composition is referred to in para 45 of the judgment of the primary judge and it is evident from what his Honour said there that the present debt was not intended to be the subject of any such composition. That is hardly surprising because, having regard to the reasons of his Honour Justice Young, the debt was not a debt provable in the bankruptcy. Further, it was not alleged to the Court below that the only right the first respondent had was to prove in the composition and no such matter has been raised in the notice of appeal. In those circumstances the deed of composition cannot, in my view, assist the appellant in the present case.

27 SACKVILLE AJA : I agree with the orders proposed by Young JA and with his Honour's reasons. I agree also with the additional reasons given by the Chief Justice.

28 I would only add this on the first issue. An important consideration in Foots v Southern Cross Mine Management Pty Limited [2007] HCA 56; 234 CLR 52, was that the obligation to pay costs in that case was created by an order made by the Court after the sequestration order had been made. The majority judgment in the High Court emphasised (at 76 [65]) that no obligation to pay costs existed until the costs order had been made.

29 As Young JA has pointed out, the present appellant denied that he had incurred any relevant personal obligation predating his bankruptcy. His evidence, accepted by the primary Judge, was that he entered into the deed after his bankruptcy for reasons unconnected with any personal obligation that may have been owed by him to the respondents. The deed relied upon by the first respondent contains no provision suggesting that the appellant agreed to pay the sum of $100,000 to the first respondent as the result of any antecedent obligation owed by him to the first respondent or, for that matter, to the second and third respondents. It was the deed that created the obligation.

30 Accordingly, it seems to me that the decision in Foots leads to the conclusion that the obligation created by the deed was not a provable debt in the appellant's bankruptcy. For these additional reasons, I agree with the orders proposed.

31 BATHURST CJ : The order of the Court accordingly is that the appeal be dismissed with costs.

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Decision last updated: 10 October 2011