JUDGMENT No, ©3, BS. CATCHWORDS Bankruptcy - Application to set aside bankruptcy notice claiming more than due under judgment - whether amount claimed to be due under provisions of mortgage instrument 1s amount due under judgment. RE: RITA PHYLLIS HANLON; EX PARTE: EAGLE STAR NOMINEES LIMITED No. B 1734 of 1987 BEAUMONT J. SYDNEY 4 MARCH 1988 IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY Ne. B 1734 of 1987 CORAM: PLACE: DATE: RE: RITA PHYLLIS HANLON Debtor EX PARTE: EAGLE STAR NOMINEES LIMITED Judgment Creditor BEAUMONT J SYDNEY 4 MARCH 1988 MINUTES OF ORDER THE COURT ORDERS THAT: Note: The time for making the application to review decisions of Registrar Inga be extended up to including 9 February 1988. The judgment creditor pay the debtor's casts of application to extend time. The decisions under review be affirmed. The judgment creditor pay the debtor's costs of application for review. the and the the Settlement and entry of orders 1s dealt with in Rule 124 of the Bankruptcy Rules. IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF No. B 1734 of 1987 THE STATE OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY RE: RITA PHYLLIS HANLON Debtor EX PARTE: EAGLE STAR NOMINEES LIMITED Judgment Creditor CORAM: BEAUMONT J PLACE: SYDNEY DATE: 4 MARCH 1988 REASONS FOR JUDGMENT On 6 February 1986, Eagle Star Nominees Limited ("the judgment creditor") obtained judgment in the Supreme Court of New South Wales against several defendants, including Rita Phyllis Hanlon, ("the debtor") in the sum of $172,977.25 and costs. On 8 May 1987, a bankruptcy notice was issued against the debtor; the notice recited that the judgment creditor "has claimed that the balance sum of $53,663.50 together with interest...making a total of $66,200.94 is still due by you ta the Cjudgment creditor] under a final judgment..."; the debtor was required, within 14 days of service (which occurred on 12 June 1987) (a) to pay the 2. sum of $66,200.94 or (b) to secure its payment or compound the sum. The debtor applied for, and obtained, a number of extensions of time for compliance with the notice. During this period, the debtor gave notice pursuant to s.41(5) of the Bankruptcy Act 1966 ("the Act") which provides: "(5) A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he disputes the validity of the notice on the ground of the mis-statement." The debtor then applied to set aside the bankruptcy notice on this ground. The application, which was opposed, was dealt with by Registrar Inga pursuant to s.31A(1)(h) of the Act. On 24 December 1987, Registrar Inga ordered that the notice be set aside as invalid for the reasons she then gave. On 29 January 1988, an application was filed on behalf of the judgment creditor seeking to review the Registrar's decision. Section 31A(6) of the Act provides that a party to a proceeding in which a Registrar has exercised any of the powers of the Court under s.31A(1) may, within the time prescribed by the rules, or within any further time allowed in accordance with the rules, apply to the Court to review that exercise of power. By r.119A(1), for the purposes of s.31A(6), the prescribed time is the period of 21 days after the day on which the Registrar has exercised the relevant power. The Court 18 empowered to extend this time under such terms as it thinks f21t (r.119A(2)); the Court may allow further time for such an application even if the prescribed time has already expired (r.119A(3)). On 9 February, 3. the judgment creditor filed a further application seeking an order for extension of time nunc pro tunc under r.119A(2) and (3). It 1s convenient to,deal with this application first. U ' Although the evidence on the point is not clear, it appears to be common ground that the reason for bringing the application for review out of time was oversight on the part of the legal representatives of the judgment creditor. However, the delay 18 by no means considerable (in the order of three weeks) and 1t occurred during the Christmas period. Moreover, the debtor cannot point to any specific prejudice, apart from costs, 1f the extension were to be granted. In the circumstances, I propose to grant the extension but to order that the judgment creditor pay the debtor's costs in this connection. Before going to the substantive questions which have been argued, it 1s necessary to refer to the course of the proceedings. Before the Registrar, the Judgment creditor sought to read an affidavit sworn by Tyson Joughin on 17 December 1987. Mr. Joughin is the company secretary of Brick Securities Limited, the mortgage manager for the judgment creditor. The debtor objected to the whole of the affidavit. I will return to this aspect later. But apart from this, the parties agreed on the following facts: "BRgrced Facts 1. The creditor obtained a judgment on 5 February 1986 for $173,324.25 being for principal and interest due under a mortgage plus costs. 4. 2. The principal sum secured under the mortgage was $120,000 and the mortgage was executed on 27 October 1982. 3. Prior to 6 February 1986 the creditor as mortgagee in possession of the security property had derived rental income of $3500 from letting the security property to a tenant, which was not taken into account in determining the amount for which judgment was entered on 6 February 1986. 4. On 21 February 1986 the creditor, as mortgagee in possession of the security property, completed the sale of the security property for $125,000 pursuant to a contract for sale and in exercise of the power of sale conferred by the mortgage. 5. A Copy of the mortgage together with an annexure to the memorandum of mortgage, was produced to the Court and marked exhibit "A". A copy of the memorandum of mortgage R491789 was produced to the Court and marked exhibit "B". 6. On 8 May 1987 a bankruptcy notice issued against the debtor claiming that the balance sum of $53,663.50 plus interest of $12,537.44 was due to the judgment creditor." The memorandum of mortgage dated 27 October 1982 was expressed to be made by Maxwell Otto Brown and the debtor as mortgagors. It incorporated the covenants in the memorandum filed in the Registrar General's office as No. R491789. In memorandum of mortgage No. R491789, clause 19 provided: "19. THAT The purchase money to arise from the sale of the Mortgaged Land or any part thereof upon or pursuant to the exercise of the powers of the Mortgagee or any other person shall be applied in the following order: (a) in payment of the expenses occasioned by such sale, (b) in payment of mortgages and charges having priority to this Mortgage, in order of their priority, (c) in payment of the Moneys Hereby Secured and any other moneys which may then be due and_owing hereunder to the Mortgagee, (d) in payment of subsequent mortgages or encumbrances in the order of their priority, and (e) in payment to the Mortgagor." (Emphasis added) By clause 1dii) of the mortgage, the "Monies Hereby Secured" (cf. clause 19.(c)) are defined to include, inter alia - "...all costs, charges, expenses and payments which the Mortgagee or the Receiver or any attorney of the Mortgagor herein appointed pays, is liable to pay or sustains in comnection with the exercise or attempted exercise of any right, power, authority or remedy conferred under or by virtue of this security or by statute;...(hereinafter called 'Further Moneys'). By clause 1.(i11), the definition of "Moneys Hereby Secured" also includes interest on the Further Moneys. In his affidavit, Mr. Joughin claimed that the debtor owed the sum of $2,700.00 by way of additional interest. According to the affidavit, the debtor was also indebted to the judgment creditor in the further sum of $6,397.96 made up as indicated in the schedule annexed to the affidavit as follows: Invoice Annexure SCHEDULE Date Amount Payee 22.07.83 4.00 Bank 04.11.83 4.00 Bank 18.07.84 200.00 Geo M Hume 16.09.84 1,584.80 Stephen Jaques Stone James 19.04.85 1,905.55 Stephen Jaques Stone James 02.05.85 150.00 Paul McNeilly 24.05.85 888.90 L.J. Hooker 05.06.85 361.80 Stephen Jaques Stone James 12.07.85 750.10 Stephen Jaques Stone James 21.08.85 150.00 E. Horace Such 05.09.85 57.45 All Purpose Plumbing 11.09.85 95.00 Macquarie Centre Locksmiths 12.09.85 246.36 Bayway Insurance $6,397.96 Nature Returned cheque Returned cheque Valuation fee Legal fees Legal fees Valuation fee Auction expenses legal fees Security on removal of chattels Plumbin 4 Locksmith Insurance In support of the claim made in the above schedule, there were annexed to the affidavit the following documents giving details of claims for expenses incurred in connection with the mortgagee''s property: (i) an invoice from Geo. M. Hume, Valuer; (ii) memoranda of fees and disbursements from Stephen Jaques Stone James, Solicitors as follows: (a) the sum of $1,584.80 for acting to obtain possession of the property; (b) the sum of $1,835.55 for acting in obtaining possession and generally in the matter; (c) the sum of $361.80 in issuing default notices; (d) the sum of $750. 10for acting in connection with the debtor's default and on the sale; (211i) memorandum of fees from Paul McNeilly & Associates Pty. Ltd., Valuers; (iv) memorandum of auction expenses from L.J. Hooker Limited; (wv) memorandum of fees from E. Horace-Such Agency, Licensed Commercial and Private Enquiry Agents; (v1) statement of account from All Purpose Plumbing Services Pty. Limited, Plumbers; (vii) invoice and statement from Macquarie Centre Locksmiths and (viii) invoice from Bayway Insurance, Insurance Brokers. The debtor disputed the claims made by Mr. Joughin. A number of questions arose in this connection. It will he remembered that the debtor objected to Mr. Joughin's affidavit. Its admissibility must, of course, depend upon the character of the issue, if any, to which it relates. Where a judgment creditor holds a security and, after obtaining judgment, realises that security, there is ta be brought to account not only the proceeds of sale but also any reasonable expenses incurrdd in that connection. If, as here, the judgment creditor seeks to deduct any amount from the proceeds of sale, the onus of proof will be upon him to establish not only that the sum was paid but that it was truly incidental to the realisation of the security and that it was reasonable in amount. As has been noted, Mr. Joughin's affidavit sought to establish these matters merely by annexing the several memoranda of fees and expenses rendered by those who provided services to the judgment creditor. The debtor having disputed these items, the judgment creditor was thereupon on notice that it was required to prove these items in accordance with the rules of evidence and further to prove that the amounts claimed had the appropriate connection with the realisation of the security and were reasonable in amount. It may be that the documentary material annexed to Mr. Joughin's affidavit could have been made admissible as business records under the relevant legislation. As such, the statements may have been admissible as evidence of the truth of their contents. But no attempt to prove the documents in this way was made. More important, although it bore the onus in this respect, no attempt was made by the judgment creditor to prove that the amounts claimed as expenses were relevant (in the sense that they were costs wholly incurred in effecting the sale - for instance, some apportionment of the solicitor's fees may be required) and reasonable and thus properly to be taken into account. On behalf of the judgment creditor, it is said that the provisions or the mortgage instrument are decisive in this regard. That instrument may well govern the security relationship between the parties. It cannot be decisive of the question, one of mixed fact and law, of what is properly due under the judgment for the purposes of s.41(5) of the Act. In any event, the general references in the mortgage to the mortgagee's costs and expenses probably take the judgment creditor's position no further. Such general words would, in accordance with ordinary principles of construction, be interpreted to refer only to such costs and expenses as were reasonably incurred. In other words, the judgment creditor could, in my view, only rely upon the expenses contained in the material annexed to Mr. Joughin's affidavit if it could show that they were relevant and reasonable in amount. In this connection, I offered the parties a reference to a Registrar for the purpose of inquiring into the state of the accounts between the parties (cf. the Act §.30(2)}. The offer was declined. In the absence of any evidence that the amounts claimed were wholly relevant and were reasonable 1n amount it follows that they must be disallowed. It 1s not enough that the judgment creditor merely asserts that the amounts were relevant and reasonable. When confronted with an objection, appropriate evidence must be adduced to establish that the expenses claimed were incurred in realising the security and were fair and proper 10. As I followed the argument, 1t was accepted on behalf of the judgment creditor that 1f 1t could not satisfy the Court that all the expenses claimed by Mr. Joughin should be taken into account, the bankruptcy notice claimed significantly more than was due under the judgment; as has been noted, a notice under 5.41(5) was given. The bankruptcy notice was accordingly invalid (see Re Manion; _Ex parte Deputy Commissioner of Taxation (1978-79) 23 A.L.R. 270 per Lockhart J. at pp.273-4). In the resuit, the Registrar's decision 313 affirmed, with costs. \, l certify that this and the preceding AiNG (4 ) pages are a true copy of the Reasons for Judgment of his Honour Mr Justice Beaumont. Dp Associate: ZC yew. Uy: Date: 4 March 1988 Counsel for the Debtor: Miss L.M. Steer Solicitors for the Debtor: Messrs E.W. Renouf & Co. Counsel for the Judgment Creditor: Mr. RW. Cray foliciters for the Judgment Creditor: Messr ta) wD Gy2 ara Perkes Dates cf hearina: 29 February and 1 March 1988 Date of judgment: 4 March 19868