Barwick Management Pty Ltd v Coci, Helen Joy & Ors [1998] FCA 282

IN THE FEDERAL COURT OF AUSTRALIA

WESTERN AUSTRALIA DISTRICT REGISTRY WG116 of 1997

GENERAL DIVISION

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN: BARWICK MANAGEMENT PTY LTD

Appellant

AND: HELEN JOY COCI, ERNEST RAMPELLINI and JENNIFER ANNE RAMPELLINI

Respondents

JUDGES: WILCOX, COOPER and LINDGREN jJ

DATE: 27 march 1998

PLACE: PERTH

EXTEMPORE REASONS FOR JUDGMENT THE COURT: We think this appeal must fail, substantially for the reasons given by the learned primary Judge, R D Nicholson J. We do not think it necessary to recite all the facts or to repeat his Honour's reasoning. However, it is appropriate for us to comment on some aspects of the argument placed before us by Mr Solomon on behalf of the appellant. We agree that, ordinarily, a sequestration order will be made upon proof of the requirements of s 52(1) of the Bankruptcy Act 1966. The evidence placed before R D Nicholson J satisfied those requirements. However, we note the important point that the petition is not based on a judgment and the money claim is in dispute. We also agree it is unusual for the Court to dismiss a petition for a sequestration order pursuant to s 52(2)(b) of the Act on the basis it is satisfied that "for other sufficient cause" a sequestration order should not be made. The Court will be particularly loathe to take this course where it seems the debtor has a substantial excess of liabilities over assets and perhaps, as suggested by Mr Solomon, where the relevant act of bankruptcy is a "public act" such as the signing of a s 188 authority. Nevertheless, even in these cases, the Court is entitled to dismiss the petition under s 52(2)(b) where it considers this to be necessary in the interests of justice. The facts concerning the present debtors' relationship with the creditor, Barwick Management Pty Ltd, and persons and companies associated with Barwick Management, apparently have not yet been judicially investigated. Certainly, they have not been investigated in this Court; accordingly, we make no findings about them. However, it seems some things are common ground. (i) Barwick Management is closely connected with a group of accountants who controlled a company called Barwick Consultants Pty Ltd. That company apparently carried on an accountancy practice under the name "Barwick Partners". It is unclear to us which particular individuals were amongst the group of accountants, from time to time but, at all material times, they seem to have included Lewis Robert Thomas, John Louis Casey and Russell Alexander Black; all of whom are defendants in a suit brought in the Supreme Court of Western Australia (CIV 1845 of 1996) by the three present debtors and Joseph Coci. In that suit the plaintiffs allege various members of Barwick Partners were directors, from time to time, of Barwick Management. (ii) The debtor Ernest Rampellini and Mr Coci consulted Mr Thomas in his professional capacity as an accountant in connection with a proposal by them to lease a nightclub operated in the Peninsula Hotel at Mandurah. They proposed to take the lease in the name of a company they controlled called Northoak Holdings Pty Ltd. (iii) Shortly afterwards, Mr Thomas informed Mr Coci and Mr Rampellini that his partner, Mr Black, was setting up a syndicate of clients to purchase the freehold of the hotel. He recommended that Northoak take a lease from the syndicate of the entire hotel, not only the nightclub. (iv) Mr Thomas also recommended that Mr Coci and Mr Rampellini, and their wives, the other debtors, take shares in the proposed syndicate. (v) Mr Coci and the debtors accepted these recommendations. Northoak entered into a lease of the hotel at a rental of $375,000 per annum and accepted various ancillary obligations. The debtors and Mr Coci also took shares in the syndicate. (vi) Barwick Consultants, or someone associated with that company, received a "success fee" of $400,000 on consummation of the lease. (vii) The hotel traded unprofitably and the debtors (and Mr Coci) fell into financial straits. They incurred liabilities they could not meet, including the debt as syndicate members upon which is based the present bankruptcy petition. Other relevant matters are not common ground, but are the subject of allegations made by the plaintiffs in the Supreme Court proceedings. They include: (a) Despite the obvious conflict of interest arising out of the circumstance that Mr Black was acting for the syndicate members in negotiating the lease of the hotel to Northoak, and his partner Mr Thomas for Northoak, and Barwick Consultants was receiving a substantial success fee, nobody within Barwick Partners advised the debtors or Mr Coci to obtain independent advice about the desirability of the lease transaction or the reasonableness of its suggested terms; and they did not in fact receive such advice. (b) The true rental value of the hotel was about $225,000 per annum. (c) Barwick Partners failed to reveal to the debtors or Mr Coci that it stood to earn (and did eventually receive) a "success fee" of $400,000. As we say, we make no finding as to whether these allegations are justified. But they are seriously made and have sufficiently impressed two Masters of the Supreme Court as to cause them to rule against the Barwick interests in two interlocutory applications. The first application was one for summary judgment in an action by syndicate members against the debtors and Mr Coci seeking to recover moneys due under their guarantees of Northoak's lease obligations (CIV 1624 of 1995). Master Adams refused the application for summary judgment, holding that the matter should go to trial on the merits. It is pertinent to note the critical point in the Master's reasoning: "The evidence indicates that Barwick Partners charged a success fee of $400,000 to secure Norfolk Holdings as a tenant in the venture, that being a charge to the syndicate. Various arguments were put to me as to the prospects of a defence on that recitation of the facts. What I think is significant about the case is that the firm of Barwick Partners acted for both parties. That much is clear. True it is that different personalities were involved but it seems that Barwick Partners were more than just professional advisers. They acted for the syndicate, and it seems they promoted it. They became through presumably one of the firm's companies managers of the syndicate. They collected a success fee for putting the transaction together and a management fee, so they clearly had a substantial financial interest in the matter being concluded successfully. In those circumstances questions must arise as to whether the personalities involved in the firm were truly acting for the benefit of those who were said to be their clients. Where an agent is involved by both parties to a transaction, particularly a transaction where, as here, guarantees are involved, it needs to be carefully scrutinised particularly in a summary judgement application. In my view, the involvement of Barwick Partners has infected everything that has transpired in this case. It may well be when all of the facts are known that there was nothing untoward about their conduct. It may well be otherwise. In any event it seems to me that this is not an appropriate case where summary judgment should be entered. No plaintiff in the position of these plaintiffs should be allowed to have judgment without the full scrutiny of a trial, given the circumstances that I have recited. There may well be defences available to the defendants once all the facts are known but they will probably not all be known until trial. For all of those reasons it seems to me that this is clearly a case where there is some other reason why the matter should go to trial and accordingly I refuse to enter summary judgment. The matter must go to trial and the defendants will have unconditional leave to defend." The other application was made in a third proceeding (COR 366 of 1996) wherein Northoak applied for an order removing a receiver appointed by the syndicate members, or alternatively restraining him from discontinuing the first Supreme Court proceeding, CIV 1846 of 1996. In rejecting that application, Master Ng said, amongst other things: "The receiver ought not to permit his office to be misused to protect Barwick Management from being sued by the applicant. If the applicant has a prima facie valid claim against Barwick Management or Casey, it ought to be entitled to pursue it. There is clearly a conflict of interest in Barwick Management continuing to act as managers of the syndicate while it is a defendant in the damages claim." We agree with the approach of both Masters. The Full Court of the Supreme Court has recently reversed Master Ng's decision on the basis that it had not been shown the receiver did in fact misuse his office. That does not affect the Master's comment about the desirability of the claim being considered on its merits. The allegations made by the debtors and Mr Coci raise matters of serious concern, especially having regard to the professional status of those against whom they are made. There is a public interest in them being resolved. The making of a sequestration order would not necessarily preclude continuance of the debtors' action (CIV 1846 of 1996): see s 60(2) and (3) of the Bankruptcy Act. However, it would imperil the prospect of, and complicate, continuance. In this particular case, there is no countervailing public interest; the debtors are not continuing to trade and incur debts. Perhaps more important than the general public interest is the possibility of serious injustices to the debtors. If they are successful in establishing breach of fiduciary duty or negligence, they will be entitled to recover by way of damages or compensation losses sustained by them as a result of those breaches. Those losses presumably include the moneys upon which the present petition is based. We appreciate that different parties are involved, but it would apparently be open to the Supreme Court to order the defendants in CIV 1846 of 1996 to indemnify the plaintiffs (the present debtors) in respect of those moneys; and perhaps other liabilities they incurred as a result of going into the hotel. An indemnity order may cover many, if not all, the liabilities which presently put the debtors in such a parlous financial position. We think it is desirable that the Supreme Court litigation be finalised before any sequestration order is made against any of the debtors, especially any sequestration order at the behest of anybody associated with the Barwick interests. We do not know how long it will be before finality can be achieved. But the litigation has been on foot for some time. No doubt trial preparations are well advanced and the parties may be relied on to co-operate in obtaining an early hearing date. In summary, we agree with the view of R D Nicholson J. This is one of those rare cases in which there is "other sufficient cause" for dismissing a petition, notwithstanding proof of the matters mentioned in s 52(1). The appeal will be dismissed. The appellant must pay the respondents' costs of the appeal. I certify that this and the preceding three (3) pages are a true copy of the Reasons for Judgment of the Court. Associate: Dated: 27 March 1998 Counsel for the Appellant: D H Solomon Solicitors for the Appellant: Solomon Brothers Counsel for the Respondents: A Metaxas Solicitors for the Respondents: Arthur Metaxas