FEDERAL COURT OF AUSTRALIA Scook v Sims Construction Pty Ltd [2004] FCAFC 306 BANKRUPTCY – appeal – bankruptcy notice based on consent judgment – whether Federal Magistrate in error of law in construing deed of settlement as an accord executory and not an accord and satisfaction of the judgment – provision for forfeiture of shares by third parties - relevance of context BANKRUPTCY – appeal – bankruptcy notice – invalidity - notice given by one of several joint creditors Black's Law Dictionary 7th edn Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 cited Australian Hardwoods Pty Ltd v Commissioner for Railways [1961] 1 All ER 737 cited Australian Workers' Union v Bowen (1946) 72 CLR 575 applied Dudzinski v Kellow [2003] FCAFC 207 followed McDermott v Black (1940) 63 CLR 161 considered DEAN GEORGE SCOOK v SIMS CONSTRUCTION PTY LTD W109 OF 2004 RD NICHOLSON, JACOBSON and BENNETT JJ 18 NOVEMBER 2004 PERTH IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W109 OF 2004 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: DEAN GEORGE SCOOK APPELLANT AND: SIMS CONSTRUCTION PTY LTD RESPONDENT JUDGES: RD NICHOLSON, JACOBSON and BENNETT JJ DATE OF ORDER: 18 NOVEMBER 2004 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The appellant pay the respondent's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA WESTERN AUSTRALIA DISTRICT REGISTRY W109 OF 2004 ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA BETWEEN: DEAN GEORGE SCOOK APPELLANT AND: SIMS CONSTRUCTION PTY LTD RESPONDENT JUDGES: RD NICHOLSON, JACOBSON and BENNETT JJ DATE: 18 NOVEMBER 2004 PLACE: PERTH REASONS FOR JUDGMENT the court 1 This is an appeal from the judgment of a Federal Magistrate given on 5 May 2004 (Scook v Sims Construction Pty Ltd [2004] FMCA 274). The judgment dismissed an application by the appellant to set aside a bankruptcy notice which had been served on 18 November 2003. 2 At the commencement of the hearing of the appeal, counsel for the appellant sought to raise a contention not included in the appellant's notice of appeal. At the conclusion of argument on the notice of appeal as it stood the Court adjourned to provide to counsel for the respondent the opportunity to consider the proposed additional ground. On resumption counsel for the respondent did not oppose the addition of the ground. Orders were made granting leave to the appellant to add the ground provided that the respondent did not give a written notice of any opposition to such addition within 24 hours. No such notice was received. Accordingly the leave became absolute. The new ground reads: '1A. The bankruptcy notice was invalid due to the notice being issued by one but not all of the joint creditors.' It was agreed by the appellant's counsel that in the event the appeal was determined in favour of the appellant as a consequence of this additional ground alone, the Court should nevertheless order that the appellant pay the respondent's costs of the appeal. Both counsel requested the Court to address both the additional ground as well as the other grounds, which raise what was described as the construction issue. In these reasons we therefore consider the construction issue before considering the additional ground. background circumstances 3 The facts which give rise to the grounds of appeal are not in dispute. It is common ground that the bankruptcy notice refers to a total debt of $146 680.67. That was the amount claimed to be a judgment entered by consent between the appellant and the respondent (amongst others) in the District Court of Western Australia on 4 October 2001. In that proceeding the appellant was the second defendant and the respondent was the first plaintiff. 4 What is at issue on the appeal, as it was before his Honour, is the effect of a deed of settlement dated 12 May 2003 ('the Deed'). The Deed was entered into between the respondent and another as creditors, and the appellant and others as debtors, and two companies (Watertight Investments Pty Ltd and Glenside Enterprises Pty Ltd) as shareholders. Before his Honour and on the appeal it is common ground that at all material times those companies were shareholders of Sailbird Holdings Pty Ltd ('Sailbird'). The relevant provisions of the Deed, which were also set out in the reasons of his Honour, read as follows: 'RECITALS A. … B. … C. … D. … E. The parties agree that the sum of $146,681.00 is currently owed by the Debtors to the Creditor. F. The Creditor and the Debtors have agreed to enter into this deed of settlement ('Deed of Settlement') with respect to the monies owed by the Debtors to the Creditor. G. In consideration of the Creditors forbearing in requiring immediate payment, the Shareholders agree to guarantee the payment of the outstanding monies to the Creditor by the Debtor, which can be fully satisfied by the transfer of Sailbird Holdings Pty Ltd. NOW THIS DEED WITNESSES as follows: 1. The Debtors acknowledge that as at the date of this Settlement Deed they owe the sum of $146,681.00 to the creditor. 2. The Creditor agrees not to enforce any legal rights that it currently has against the Debtors if the following terms and conditions are met: (a) The Debtors will pay jointly and severally to the Creditor, the following: (i) The current outstanding sum, being $146,681.00; (ii) All legal costs on a solicitor/client basis incurred by the Creditor since the default of the Debtors with respect to the Deeds of Loan; (iii) Interest at the rate of 8% per annum calculated quarterly in advance on the total amount outstanding from time to time with respect to 2(a)(i) and 2(a)(ii) above; (iv) Payments are to be in sixteen quarterly amounts, with the first payment to be made by the Debtors within seven (7) days of receipt by the Debtors of this Deed signed by the Creditors and each payment thereof on the 15th April 2003 and each quarter thereafter until all monies due to the Creditor have been paid; (v) Any further legal costs on a solicitor/client basis with respect to enforcing this Deed of Settlement or the Deeds of Loan incurred by the Creditor, such costs to be added to any amount outstanding at the date that the costs are incurred by the Creditor; (b) Watertight Investments Pty Ltd and Glenside Enterprises Pty Ltd shall allow and consent to a fixed and floating charge to be placed over their shares in Sailbird Holdings Pty Ltd by the Creditor for the total amount of the debt. (c) In the event of any default in the repayment of the outstanding amount as set out above Watertight Investments Pty Ltd and Glenside Enterprises Pty Ltd shall forfeit shares in Sailbird Holdings Pty Ltd to the Creditor to the value of the balance of the outstanding sum owed at the date of default as determined by the Creditor's Accountants. (d) The Debtors shall indemnify the Creditor for any further legal costs, fees, or costs on a solicitor/client basis incurred by the Creditor enforcing this Deed of Settlement and the Deeds of Loan. 3. Scook and Hardie warrant that: (a) Watertight Investments Pty Ltd (ACN 058 483 042) and Glenside Enterprises Pty Ltd (ACN 064 082 462) are the sole shareholders in Sailbird Holdings Pty Ltd (ABN 12 067 072 253) of Unit 9, 154 Hampden Road, Nedlands, Western Australia; (b) Sailbird Holdings Pty Ltd holds a 5% interest in the issued capital of Peak Hill Manganese Pty Ltd (ACN 091 867 426) of Unit 9, Hampden Road, Nedlands, Western Australia; (c) For the duration of this Settlement Deed and until the Creditor has been repaid in full, Scook and Hardie will procure Watertight Investments Pty Ltd and Glenside Enterprises Pty Ltd not to transfer or assign their shareholdings in Sailbird Holdings Pty Ltd, and not to allow Sailbird Holdings Pty Ltd to transfer or assign its shareholding in Peak Hill Manganese Pty Ltd.' 5 At first instance, the appellant relied upon his affidavit sworn on 8 December 2003 and a supplementary affidavit sworn on 18 February 2004. In his first affidavit the appellant stated that he contended, based on legal advice, that the amount claimed in the bankruptcy notice and in the judgment were compromised and fully satisfied by the Deed. Additionally, he contended that a default would result in forfeiture of shares in Sailbird to the value of the balance of the outstanding sum owed to the respondent (and joint creditors) and that thereby repayment of all monies owed by the debtors to the respondent (and joint creditors) would have been made. The respondent relied upon an affidavit of Mr Paternoster sworn on 14 January 2004 and an affidavit of Ms O'Sullivan sworn on 14 April 2004. The affidavit of Mr Paternoster and the affidavits of the appellant contained evidence of an extrinsic nature going to the circumstances in which the Deed was concluded. Reasoning of Federal Magistrate 6 Before his Honour the appellant relied particularly upon the following passage from the decision of Dixon J in McDermott v Black (1940) 63 CLR 161 at 183 – 185 where it was stated: 'The essence of accord and satisfaction is the acceptance by the plaintiff of something in place of his cause of action. What he takes is a matter depending on his own consent or agreement. It may be a promise or contract or it may be the act or thing promised. But, whatever it is, until it is provided and accepted the cause of action remains alive and unimpaired. The accord is the agreement or consent to accept the satisfaction. Until the satisfaction is given the accord remains executory and cannot bar the claim. The distinction between an accord executory and an accord and satisfaction remains as valid and as important as ever. An accord executory neither extinguishes the old cause of action nor affords a new one. The decision of the Court of Appeal in British Russian Gazette &c. Ltd. and Talbot v. Associated Newspapers Ltd, though doubtless some of the reasons display less zeal for principle than for reform, does not appear to me to be inconsistent with the received doctrine that no new cause of action is given by an accord executory. In that case, the agreement constituting the accord was made as a compromise of three several causes of action vested in three persons respectively. It was made by one of them purporting to act not only on his own behalf but also as agent for the other two. In fact he had no authority to do so, and he was held liable for damages for breach of warranty of authority. This result might perhaps be supported, even if the agreement were an accord executory, on the ground that, at all events, the opposite party had acted to some extent on his representation of authority, but the intention of the parties appears to have been that the agreement of compromise should itself have been accepted as in satisfaction of the causes of action, so amounting to an accord and satisfaction. The case, therefore, provides no more than a late illustration of the doctrine, finally established perhaps by Flockton v. Hall, that of accord and satisfaction there are two cases, one where the making of the agreement itself is what is stipulated for, and the other, where it is the doing of the things promised by the agreement. The distinction depends on what exactly is agreed to be taken in place of the existing cause of action or claim. An executory promise or series of promises given in consideration of the abandonment of the claim may be accepted in substitution or satisfaction of the existing liability. Or, on the other hand, promises may be given by the party liable that he will satisfy the claim by doing an act, making over a thing or paying an ascertained sum of money and the other party may agree to accept, not the promise, but the act, thing or money in satisfaction of his claim. If the agreement is to accept the promise in satisfaction, the discharge of the liability is immediate; if the performance, then there is no discharge unless and until the promise is performed.' 7 It is not necessary here to recite all of the contentions made by the appellant at first instance because these have been repeated on appeal and will be addressed so far as is necessary. It is sufficient to state that his Honour accepted that there was a conflict between recital G and cl 2(c) of the Deed. He said that recital G simply provided for the prospect that upon the creditors' forbearing in requiring immediate payment, the shareholders referred to in the Deed agreed to guarantee payments of the outstanding monies to the creditors by the debtors which can be full satisfied by the transfer of shares in Sailbird. Clause 2(c), however, provided that in the event of default in the repayment of the outstanding monies the shareholders 'shall forfeit shares in Sailbird Holdings Pty Ltd' to the creditors to the value of the balance of the outstanding sum owed at the date of default as determined by the creditors' accountants. 8 His Honour accepted that where there is a conflict between recital clauses and the operative clauses of the Deed, the operative part is to be preferred. He therefore found that cl 2(c) must prevail. 9 He then proceeded to consider whether the Deed as so understood could properly be regarded as an accord and satisfaction in accordance with the above reasoning of Dixon J in McDermott. He was not satisfied it provided anything more than an accord executory and found that it did not either extinguish the old cause of action or afford a new one. His reasoning was as follows at [41] – [48]: '…Whilst I have some reservations in reaching that conclusion I accept the submissions made for and behalf of the respondent that on an analysis of the deed there does not appear to be any specific reference to a discharge of obligations by the applicant. Rather the respondent has agreed not to enforce any legal rights that it currently had against the applicant "if the following terms and conditions are met" (see clause 2 of the deed). Clause 2(c) certainly provides for a default process but does not on a proper reading extinguish the rights of the respondent to enforce any legal rights it then has against the applicant. If the deed was intended to extinguish those rights and provide a new cause of action to replace the old cause of action then in my view the deed should clearly set out that objective. Instead it seems clear by the introductory words to clause 2 that the respondent agreed not to enforce legal rights only if the terms and conditions set out thereafter were met. There is no dispute that the payments pursuant to those terms were not made. The issue then remains whether clause 2(c) is operative to the extent that it replaces the cause of action or rights which the respondent then had against the applicant and in my view the cause does not clearly set out that intention. On my interpretation of clause 2(c) it simply provides an additional form of security and payment. There is insufficient evidence to suggest that forfeiture of shares in Sailbird Holdings Pty Ltd would in any event satisfy the balance of the outstanding sum owed at the date of default as determined by the creditors (sic) accountants. The evidence including the affidavit of Ms O'Sullivan demonstrates that that issue was not fully or adequately explored. In my view the deed may properly be described as an agreement to accept the satisfaction, that is payment by instalments with perhaps an additional option provided by clause 2(c). Until the debt has been satisfied then in my view the deed can properly be regarded as an accord executory which has not yet extinguished the old cause of action nor does it afford a new one.' 10 In reaching this view his Honour said that he did not consider it was necessary for him to admit extrinsic evidence to resolve the doubts as to the intentions of the parties. 11 His Honour also held that in the absence of satisfaction of the claim it was unnecessary for him to apply the contra proferentem principles. reasoning on construction issue 12 The appellant accepts that his Honour was correct in resolving the issue of construction without turning to any extrinsic evidence. He submits that the intention of the parties appears from the words of the Deed: Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109 per Gibbs CJ. There is no reliance placed by the appellant on a contention that terms should be implied into the Deed. 13 The appellant contends that by their entry into the Deed the creditors accepted the debtors' promise of payment, expressed in cl 2(a)(iv), in exchange for the obligation to repay resulting from the judgment. The construction issue raised on the appeal is whether his Honour was correct to conclude that the promise of payment was not accepted on the basis of such an exchange. 14 The appellant's case is that the true intention of the parties appears from cl 2(c) of the Deed read in conjunction with cl 2(b) and cl 3. In cl 2(c) he relies heavily upon the use of the word 'forfeit', particularly in conjunction with the word 'shall'. In support the appellant cites Black's Law Dictionary 7th edn at 661 where 'forfeiture' is defined as '1. The divestiture of property without compensation. 2. The loss of a right, privilege or property because of a crime, breach of obligation, or neglect of duty. … 3. Something (esp. money or property) lost or confiscated by this process; a penalty'. The appellant contends that the use of this word and the absence of other words appropriate to describe a security, such as reference to a power of sale, result in the conclusion of his Honour being in error of law. 15 Whatever may be the understanding of the word 'forfeiture' read alone, it must be read in its particular context in the Deed. Clause 2(c) is to be understood in the context that the 'forfeiture' provision it contains is applicable in relation to the shareholders in Sailbird, not to the debtors themselves. The shareholders are in the character of third parties brought in as guarantors for repayment of the debt by the debtors. That understanding is consistent with the covenant by each of them in the Deed not to transfer or assign their shareholdings in Sailbird until the creditors have been repaid in full and with the charge over the shares granted by cl 2(b). It is entirely consistent with recital G in which it is stated that the shareholders agree 'to guarantee' the payment of the outstanding monies to the creditors by the debtors. 16 The word 'forfeit' as it appears in cl 2(c) must in any event be read with the words around it, namely 'shall forfeit shares in Sailbird to the creditor to the value of the balance of the outstanding sum owed at the date of default as determined by the Creditor's Accountants'. The words raise the question whether the transfer of the shares would in fact necessarily result in satisfaction of the debt. The appellant contends that it is open to infer from cl 2(c) that the parties assumed and accepted that the shares referred to there would be of sufficient value to result in satisfaction. We are unable to accept that submission. There is no recital of this assumption nor of the value of the shares in the Deed which would have been expected if that were the case. There is the reference in recital G to the effect that the guarantee by the shareholders 'can' be fully satisfied by the transfer of the shares in Sailbird, but that is a mere assertion of a possibility. As is the case with a guarantee that does not satisfy the debt, the creditor is entitled to look to the debtor for any shortfall. The circumstances apparent from the face of the Deed do not therefore support a construction of cl 2(c) as providing a basis for establishing an acceptance by the parties of the security there provided in exchange for the judgment. 17 It is in the context of there being no necessary satisfaction provided by the provisions of cl 2(c) that his Honour was correct to point to the absence of any provisions unequivocally providing for discharge of the debtors by the creditors. In those circumstances the appellant's submission that the effect of the provisions of the Deed is that the creditors accepted the new promise to repay the debt in place of the judgment debt does not reflect the correct understanding of the Deed construed in its commercial context. 18 The appellant also contends that the words appearing in cl 2(c) after the reference to 'forfeit' require the respondent to take action through the creditors' accountants to have the value of the outstanding debt fixed. As a consequence of the respondent not having taken any such step, the appellant contends the respondent is in breach of the Deed and therefore cannot rely upon the debtors' breach to enforce the Deed: Australian Hardwoods Pty Ltd v Commissioner for Railways [1961] 1 All ER 737 at 742. Again we do not agree. It follows from the wording of cl 2(c) that in the event of default the shareholders are bound to transfer the shares in Sailbird to the respondent and to take such steps as would be necessary, including contacting the creditors' accountant to obtain a determination of value, to effect the 'forfeiture'. 19 The appellant submitted additionally that the issue of construction arises in the context of the bankruptcy notice issued against him so that if there was any doubt on the issue of construction, the appellant should have the benefit of that doubt. This submission is founded on the statement by his Honour that he may have had some reservations in reaching his conclusion. We do not share any such doubts. In our view the plain effect of the Deed and of cl 2(c) read in its context was not to result in the debtors having exchanged the judgment debt for the promise of repayment contained in cl 2(a)(iv) of the Deed. His Honour was therefore not in error of law in concluding that there had not been an accord and satisfaction in relation to the judgment debt. 20 This conclusion does not lead to a result which is capricious or unreasonable. The appellant contends that if shares can be lost ('forfeited') under the Deed without the judgment debt being extinguished, the creditors could seek to seize other assets of the guarantors to satisfy the judgment debt. It was not made apparent to the Court where that additional liability on the shareholders as guarantors could arise under the Deed. Furthermore there is nothing capricious or unreasonable about a judgment debt being satisfied by such means as the parties have provided for satisfaction of the debt if such further means are so available. If it were the case that the shareholders 'forfeited' their shares in Sailbird to the creditors that would be a 'forfeiture' to the value of the balance of the outstanding sum owed at the date of default as determined by the creditors' accountants. If the shares subsequently doubled in value, as the appellant argued, that would be an event after the application of the provision requiring 'forfeiture' and would not be a result that was capricious or unreasonable. This is because the creditors would have held the shares with an equal risk that their value would fall. These are further arguments why the appellant contends the provision for 'forfeiture' constituted an accord and satisfaction. We do not consider such arguments follow from the plain wording of the Deed. 21 For these reasons we consider that the appeal on the construction issue should be dismissed. reasoning on the bankruptcy notice issue 22 The position on the additional ground is otherwise. The appellant supports the ground by reference to Australian Workers' Union v Bowen (1946) 72 CLR 575. That is an authority for the proposition that a bankruptcy notice given by only some of the judgment creditors is invalid. The authority has been regularly followed and was recently applied by the Full Court in Dudzinski v Kellow [2003] FCAFC 207. The respondent does not contest the effect of the authority or submit that it was not followed in the formulation of the bankruptcy notice relevant to this proceeding. Accordingly, the appeal should be allowed on the additional ground, which was not argued before his Honour. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices RD Nicholson, Jacobson and Bennett. Associate: Dated: 18 November 2004 Counsel for the Appellant: HR Robinson Solicitor for the Appellant: Haydn Robinson Counsel for the Respondent: AR Paternoster Solicitor for the Respondent: Lane Buck Higgins Date of Hearing: 1 November 2004 Date of Judgment: 18 November 2004