Commonwealth Development Bank of Australia Ltd V Langman, Edward James [1998] FCA 338

FEDERAL COURT OF AUSTRALIA BANKRUPTCY - sequestration - circumstances in which Court will go behind a judgment debt - allegation of claim against petitioning creditor - claim not a "real claim" - quantum of claim not verified Bankruptcy Act 1966 (Cth) ss 52(2) Ling v Enrobook Pty Ltd (1997) 143 ALR 396 mentioned Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 applied COMMONWEALTH DEVELOPMENT BANK OF AUSTRALIA LTD v EDWARD JAMES LANGMAN VG 7612 of 1997 FINKELSTEIN J MELBOURNE 24 FEBRUARY 1998

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY vg 7612 of 1997

BETWEEN: Commonwealth Development Bank of Australia Ltd

Applicant

AND: Edward James Langman

Respondent

JUDGE: FINKELSTEIN J

DATE OF ORDER: 24 FEBRUARY 1998

WHERE MADE: MELBOURNE

THE COURT ORDERS THAT: 1. A sequestration order be made against the estate of Edward James Langman. 2. The petitioner's and the supporting creditor's costs of and incidental to the petition be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth). Note: Date of act of bankruptcy as 11 September Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY VG 7612 of 1997

BETWEEN: Commonwealth Development Bank of Australia Ltd

Applicant

AND: Edward James Langman

Respondent

JUDGE: FINKELSTEIN J

DATE: 24 FEBRUARY 1998

PLACE: MELBOURNE

REASONS FOR JUDGMENT HIS HONOUR: The Commonwealth Development Bank of Australia Ltd (the bank) petitions for a sequestration order against the estate of Edward James Langman. The act of bankruptcy upon which the petition relies is the failure by Mr Langman to comply with a bankruptcy notice that had been served on him. The bankruptcy notice was issued in respect of a judgment in the sum of $123,074.30 obtained in the Supreme Court of Victoria against Mr Langman by the bank. The bank has recovered a portion of that judgment debt, namely, $1154.38, and the notice demanded the balance that was due. Mr Langman does not dispute that he is indebted to the bank in the amount claimed in the notice. The only ground upon which Mr Langman seeks to resist the making of a sequestration order is that he has a claim against the bank which, if successful, is for an amount greater than the judgment that has been entered against him. The material facts upon which Mr Langman relies are not in dispute at least for the purposes of the application that is presently before the court. Mr Langman is a farmer. Some time in the latter part of 1991 he wished to purchase a farm in Heifers Road, Kerang, Victoria. The farm was in a rundown condition and needed considerable expenditure to turn it into a viable farming property. Mr Langman discussed the proposed purchase with the manager of the Warracknabeal branch of the Commonwealth Trading Bank. (The branch of the Commonwealth Development Bank might have been at the same location). The manager was a Mr Muir. Mr Langman told Mr Muir that he wished to borrow $100,000 from the bank or from the Trading Bank in order to meet the purchase price for the farm which was $150,000. He says that he explained to Mr Muir that the farm was in a rundown condition and told him that he would require funds to develop the farm to make it viable. Mr Langman says that Mr Muir told him : "Our bank - a reference to the Trading Bank -will meet your costs of living and running and establishing the property for the first two years." Subsequently the Commonwealth Development Bank, not the Commonwealth Trading Bank, advanced Mr Langman $100,000 to enable him to purchase the farm and took a mortgage over the farm to secure the repayment of the advance. The bank also provided Mr Langman with an overdraft facility, presumably to enable him to meet the costs of operating the farm. The evidence does not disclose the terms of that facility, nor what limit the bank had placed on the overdraft account. By early 1992 Mr Langman had reached the limit of his facility, but still needed further funds to operate the farm. He approached the bank, or it might have been the Trading Bank, and requested that he be provided with those funds. Mr Langman does not say what response he received. I infer that he was not provided with any further money. Importantly, it is not suggested that Mr Langman advised the bank or the Trading Bank that it was under some obligation to continue to fund the development of the farm. By October 1992 Mr Langman had incurred a number of outstanding debts that he had to pay if he was to continue to operate the farm. The debts represented the cost of seed, superphosphate, fertiliser, irrigation water and other expenses associated with the farm. Mr Langman again went to the bank with a request for funding. An officer of the bank, one Mr White, apparently told Mr Langman that the bank would pay his "costs of getting the crop in and keeping the place going." In consequence, Mr Langman forwarded the outstanding accounts to the bank. The bank paid some but not all of those accounts. The result was that Mr Langman was unable to operate the farm. He did not have the funds to buy the seed and fertiliser and therefore did not plant any crops. In any event, because Mr Langman failed to pay the account due to the Rural Water Commission, his supply of irrigation water was disconnected. Thus, even if Mr Langman had the funds to buy seed and fertilizer, he could not grow any summer crops for lack of water. Not only did the failure by the bank to provide Mr Langman with funds lead him to suffer loss of income, Mr Langman was also unable to meet his obligations to the bank in respect of the loan that he had taken to purchase the property. As a consequence, the bank commenced proceedings to recover the farm. It is in those proceedings that the bank obtained judgment against Mr Langman for the sum of $123,074.30. I should say something about how that judgment was obtained. The bank moved for summary judgment. The application was heard by a master of the Supreme Court who refused the bank that relief. On the appeal, which was heard by Beach J, the bank succeeded in its claim for possession and also obtained judgment for the amount due to it. In the hearing both before the master and before Beach J, Mr Langman sought to resist the bank's claim on the basis of the facts relied upon now to resist the making of the sequestration order. Section 52(1) of the Bankruptcy Act 1966 (Cth) sets out the matters which a petitioner must prove before a sequestration order will be made. By that subsection, the court requires proof of the matters stated in the petition, of the service of the petition, and the fact that the debt on which the petitioning creditor relies is still owing. Here the bank has established each of those matters. Nevertheless, the court retains a discretion whether or not to make a sequestration order. Section 52(2) provides that a court may dismiss a petition if it is satisfied by the debtor that he is able to pay his debts, or that "for other sufficient cause" an order should not be made. Mr Langman contends that his claim against the bank justifies the dismissal or perhaps the adjournment of the petition. There is no doubt that if a debtor has a legitimate claim against his judgment creditor for an amount that is equal to or exceeds the debt due to the creditor that is often a good reason why a sequestration order should not be made: see generally Ling v Enrobook Pty Ltd (1997) 143 ALR 396 at 400. But the mere assertion of the existence of a claim will not usually be sufficient to avoid a sequestration order being made. Nor would it be sufficient for a debtor merely to show, as seems to have occurred in this case, that he has commenced a claim against his creditor in a court of competent jurisdiction. In Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116, Gibbs J said this: "Where, however, the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor, the position seems to me to be different. As a general rule this Court is not an appropriate forum to decide such a claim and is limited to forming a view as to whether it appears that there is sufficient validity in the debtor's claims to justify a dismissal or adjournment of the petition....Considerable evidence directed to this issue has been given before me and it seems to me that I ought to consider this evidence for the purpose of deciding only whether it is probable that the debtor has against the petitioning creditor a claim which is likely to succeed. If I am satisfied that the debtor has a claim against the petitioning creditor equal to or exceeding the amount of the judgment debt, I should not make a sequestration order. If, however, it appears that the debtor has a claim which is less than the amount of the petitioning creditor's judgment debt, the proper course would seem to be to require the debtor, if he desires to avoid a sequestration order, to pay the difference between the amount of the judgment debt and the amount which it seems probable to me that he will recover in the proceedings against the petitioning creditor." Accordingly, it is necessary to consider the viability of the claim Mr Langman asserts against the bank before the discretion in the Court can be exercised. In this regard it is necessary to form some view about the prospects of success of that claim; that is, is it a claim that is "likely to succeed", or is it a "real claim" in the sense of it being a bona fide claim on substantial grounds. Secondly, it is necessary to consider whether it is a claim that would satisfy the debt due to the bank. I will deal with the latter point first. The only evidence before the court that quantifies Mr Langman's claim is the particulars of damage in the statement of claim endorsed on the writ in the proceeding commenced against the bank. There are two categories of loss set out. First there is what I might describe as loss of profits by reason of the inability of Mr Langman to sell grain, hay and livestock. The particulars allege that Mr Langman has lost $147,500 over a five-year period; that is, during and including the financial years ended 30 June 1992 through to 30 June 1996. The particulars also assert that Mr Langman has suffered a diminution in the value of the farm as a result of his inability to properly develop it. The particulars of loss are neither verified in any affidavit, nor is their quantification properly explained. That is not sufficient for me to determine whether the claimed losses are reasonable. Leaving aside the fact that the trading losses are claimed for a period of five years and no explanation is given why Mr Langman did not find an alternative source of funding to operate the farm, (although I suppose it might be inferred that he was unable to do so) it would have been a relatively simple exercise for Mr Langman to explain from his own past experience how profits of the nature alleged could have been derived from the farm had it been properly developed. Mr Langman did rely on the evidence of two other witnesses in support of his case, one of whom, Mr George Hardwick, was a retired farmer who said that he had had extensive experience of the agriculture practised around Kerang. Mr Hardwick might have verified the quantum of loss suffered by Mr Langman or at least explained how profits might have been derived from the farm. While I might accept that Mr Langman may have suffered substantial losses as a result of his inability to fund his farming operations, the failure to tender proof to quantify those losses, even if that proof was in a brief or summary form, leaves me in real doubt as to whether Mr Langman has a claim of sufficient magnitude as would justify the dismissal or even an adjournment of the petition. Further, the cause for the diminution in the value of the land is also not explained. It could just as easily be that the loss suffered on the sale of the property (the evidence shows that it was sold in 1996 for a price of $96,000) was as a result of a fall in land values rather than a loss having been caused or attributed to any default by the bank. If this were not enough, I should also indicate that I am by no means satisfied that Mr Langman has a "real claim" against the bank; that is to say, I am doubtful whether Mr Langman has a cause of action against the bank which is likely to succeed. First, it is difficult to think the statement attributed to Mr Muir, namely that the bank or the Trading Bank would meet Mr Langman's costs of living and running and establishing the property for two years, was a statement intended to have contractual effect or, if it was, whether as a matter of law it could have that effect. The purported promise made by Mr Muir is indeterminate. Is there a limit to the money that the bank must provide? One answer might be that the bank was committed to the provision of all reasonable living, running and establishment costs. But for how long were those amounts to be advanced? On what terms were those amounts to be repaid? In what circumstances, if any, could the bank decline to make further funds available? For example, was the bank required to continue funding Mr Langman when it became apparent to the bank that he could not repay those advances? What interest was Mr Langman required to pay to the bank in respect of the loan? The failure by the parties to agree to any of these matters tends strongly to the conclusion that the bank did not make a binding promise as Mr Langman has alleged. Then there is the fact that the bank did provide an overdraft facility to Mr Langman which was drawn upon until 1992, when it became, to use his words, "exhausted". In other words, as a result of the discussions between Mr Langman and Mr Muir, the bank did provide a facility to Mr Langman, which he could draw upon to meet his living, running and establishment costs. The difference between the facility that was provided and the facility referred to in the conversation is that one was limited in amount and the other was open‑ended. The fact that a facility was granted that had a limit of some amount confirms my view that whatever Mr Muir said to Mr Langman, was not taken by the parties to be a binding promise, even if it otherwise could be. Nor was it a statement that was sufficiently clear to found a claim for misrepresentation. In reaching the conclusion that the evidence does not show a "real claim" of a claim against the bank, I have not taken into account the fact that Beach J formed the same opinion on the same evidence. However, his Honour's views do confirm the conclusion that I have reached. If a sequestration order is made, it is possible that upon a more detailed examination of the facts lying behind Mr Langman's claim, it may turn out that he has a good claim. In that event, the trustee in bankruptcy can pursue the claim. If the trustee refuses to do so, Mr Langman has recourse to the Court by way of appeal from any such decision. In the result, I am not satisfied that there is any good reason why a sequestration order should not be made. I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Finkelstein