IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 7249 of 1998 BETWEEN: FARROW MORTGAGE SERVICES PTY LTD (IN LIQUIDATION) (ACN 006 125 757) Petitioner AND: GEORGE BARRY EVERETT STONE Debtor JUDGE: EMMETT J DATE: 13 JULY 1998 PLACE: SYDNEY the court orders that: 1. The petition be stood over for directions on 9 October 1998. 2. The Debtor pay the costs of today. the court grants: 3. Leave to the Petitioner to tax forthwith the costs orders made against the Debtor in the Bankruptcy proceedings. 4. If the payment of those costs is not satisfied within 14 days of service of the certificate of taxation, leave to the Petitioner to restore the matter for directions on any Friday. 5. Leave to the Petitioner to restore the matter for directions if it wishes to contend that the Debtor's appeal to the Court of Appeal is not being prosecuted reasonably and diligently. 6. Liberty to the Petitioner to restore the matter for the purpose of imposing a further term concerning the payment of the costs order made by Giles J on 23 October 1996. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 7249 of 1998 BETWEEN: FARROW MORTGAGE SERVICES PTY LTD (IN LIQUIDATION) (ACN 006 125 757) Petitioner AND: GEORGE BARRY EVERETT STONE Debtor JUDGE: EMMETT J DATE: 13 JULY 1998 PLACE: SYDNEY EX TEMPORE REASONS FOR JUDGMENT HIS HONOUR: On 28 April 1998, I gave Mr Stone ("the Debtor") leave to make any further written submissions directed to demonstrating that there are prospects of success in the Court of Appeal. I said that any such written submissions must identify grounds relating to the lack of good faith in the exercise of the power of sale. On 10 June 1998, in purported pursuance of that leave, the Debtor filed a 39 page document in the form of an affidavit. That affidavit makes reference to a folder containing in excess of 290 folios of documents, some of which were not in evidence before Bainton J. In the course of the affidavit, the Debtor demonstrates what I consider to be a misapprehension of the nature of any submission which should be made to a Court of Bankruptcy in seeking an adjournment of a petition on the ground that the judgment debt on which the bankruptcy petition is founded is subject to appeal. For example, at paragraph 66 of the affidavit, the Debtor makes the following statement: I do not believe it was either ethical, logical, or prudent, for my legal counsel to have been persuaded by Farrow's counsel that the material was irrelevant, if that was the manner of its removal. Other documents which I believe were of the utmost relevance to the proper presentation of my case were also similarly put to one side, and marked, … not pressed. It is difficult to see how such a complaint, even if it were well founded, would be a ground of appeal. In any event, it does not appear to be a ground of appeal. The Debtor's affidavit does not address the issues in a way which is of assistance to me in deciding whether or not to adjourn the hearing of the bankruptcy petition pending the hearing of the appeal to the New South Wales Court of Appeal. That is clearly because of the Debtor's lack of understanding and experience in relation to the process in question. It is apparent that the Debtor has received no legal advice in relation to these matters. The essence of the Debtor's case before Bainton J is contained in paragraph 13 of the defence filed in the Supreme Court. The allegation is that Farrow Mortgage Services Pty Limited ("the Petitioner"), in exercising its power of sale in respect of the Debtor's property, failed to act reasonably and failed to act in good faith or to take reasonably adequate steps to ensure a sale at a fair price. It is alleged that the Petitioner failed to: (a) ascertain the value of the property before selling it; (b) promote and market the property for sale properly; (c) direct its agents to apply a proper and reasonable marketing period in order to promote the property for sale properly; (d) direct its agents to inform prospective purchasers properly as to the true and proper potential of the property; (e) direct, supervise and control the agent so as to ensure that a proper and fair auction of the property took place. The allegation made by the Debtor was that the sale of the property for $580,000 was a sale for less than its value. It appears that the issues thrown up by that allegation occupied by far the greater part of the hearing time before Bainton J. There was competing evidence from witnesses called by both Debtor and Petitioner as to the value of the property and as to the manner of sale. His Honour preferred the evidence given by the witnesses called by the Petitioner on questions relating to valuation and to the sale process. It may be thought that his Honour did not state in detail the basis upon which he preferred the Petitioner's evidence in that regard. His Honour did, however, say that he did not place any reliance on the Debtor's evidence on any matter in which there was controversy. His Honour formed the same view of the Debtor's brother, who also gave evidence. On the other hand, there does not appear to be anything in his Honour's reasoning on the question of alleged breach of duty by the Petitioner that depends upon the rejection of the evidence of the Debtor and his brother. The principal evidence on behalf of the Debtor was that of Mr Peter Phippen, who said that the fair market value of the property as at 31 December 1990 was $1,065,000. His Honour rejected that evidence. His Honour's reasons for rejecting Mr Phippen's evidence were said to be as follows: (a) Mr Phippen assumed the market in Balmain was stronger than elsewhere in Sydney because there were more sales there than in other areas, but it did not occur to him that that might have been because of a greater number of forced sales in that area. His Honour, however, made no finding as to the number of forced sales; (b) Mr Phippen, though he knew that the property had been listed with four real estate agencies, did not know at what price it had been offered and did not consider that the valuation of the property had anything to do with what real estate agents were asking for it. His Honour did not explain why that was an erroneous approach; (c) Mr Phippen valued the property as a development proposition in circumstances where at the time, to use his Honour's words, developers were not rushing in to invest. However, no specific finding was made on that question by reference to the evidence; (d) For the purposes of the analysis, Mr Phippen relied on construction cost figures obtained from the Debtor but there was no evidence to indicate that the Debtor had any expertise in estimating construction costs. His Honour found, however, that the Debtor was an architect by profession, having attained a Bachelor's Degree in Architecture in 1968. It may well be thought that an architect would have knowledge of those matters. Those grounds for rejecting Mr Phippen's evidence do not necessarily depend upon his Honour's assessment of the credibility of Mr Phippen. Further, it is not self evident that his Honour's reasoning is correct and it is at least arguable that they are not reasons for rejecting Mr Phippen's valuation. They are matters about which it may be open to an appellate court to take a different view. I, of course, express no view about them one way or the other. His Honour said that he preferred the evidence of Mr Geoffrey Warren Hayden, a valuer called by the Petitioner. His Honour preferred the methodology adopted by Mr Hayden which consisted of an analysis of comparable sales. His Honour observed that Mr Hayden indulged in criticism of a deal of Mr Phippen's evidence that his Honour considered as well founded. However, his Honour did not set out that criticism in his reasons. The essence of the Debtor's complaint is that inadequate marketing resulted in a sale at an undervalue. If the evidence demonstrated that the property was in fact sold at a fair value and not at an under value, such an allegation may lead nowhere because there would be no loss. However, if it be the fact that there was inadequate marketing, a higher price may have been achieved. That may then raise a question as to what is the precise content of the duty which a mortgagee owes to a mortgagor when marketing a property in the exercise of a power of sale. The Debtor's defence alleges that the five matters which I have summarised above constitute a breach of such a duty. That is a matter which the Debtor would be entitled to have determined and, notwithstanding that I have had submissions made to me on behalf of the Debtor as to the content of the duty, it is not for me to resolve that question. It is a matter of some complexity and involves questions which are not without doubt. The Debtor also called valuation evidence from Mr Malcolm Gardner. His Honour recorded that Mr Gardner expressed the opinion that the date chosen for public auction of the property "was not ideal". That evidence was apparently not challenged in cross-examination but his Honour did not accept it for reasons which are not explained. His Honour observed that he was much more impressed with the evidence "on this question" called by the Petitioner. The Debtor also adduced evidence from Mr M.J.G. Hennessey, a real estate auctioneer since 1964. Mr Hennessey's view, according to his Honour, was that the advertising did not give sufficient time for a "full listing and awareness of the market". However, Mr Hennessey also was not cross-examined. Nevertheless, his Honour said that he was much more impressed by the evidence "on the question" called by the Petitioner. Again, his Honour did not say what the evidence was. The evidence called by the Petitioner, to which his Honour appears to have been referring, was that of one Mark Douglas Coleman who had been an employee of Elders Real Estate at the time of the exercise of the power of sale by the Petitioner. Mr Coleman became involved in the endeavours of Elders to market the property. His Honour recounted the steps which had been taken both by the Debtor and subsequently by Elders to sell the property which culminated in a contract for sale in February 1991, after an abortive auction on 13 December 1990. His Honour accepted Mr Coleman's "valuations and his evidence generally", although his Honour does not actually indicate what evidence there was from Mr Coleman by way of valuation. While there is nothing in his Honour's findings concerning the steps taken to effect the sale which suggest anything untoward, Mr Coleman does not appear to have answered expressly the complaint concerning the timing of the auction and the advertising campaign which led to it. The property was in fact sold to the highest bidder, although some two months elapsed before the Petitioner entered into a contract of sale. Nevertheless, it would appear to be open to the Debtor to argue before the Court of Appeal that his Honour erred in rejecting the evidence of Messrs Gardner and Hennessey and it would appear to be open to the Court of Appeal to reach a different conclusion. That is to say, the principles outlined by the High Court in Abalos v Australian Postal Commission (1990) 171 CLR 167 do not necessarily preclude a different finding in the circumstances of this case. If the Court of Appeal were to conclude that Bainton J wrongly rejected Mr Phippen's evidence of value, the sale of the mortgaged property for 55 per cent of its market value may well be a basis for scrutinising very carefully the steps taken by the mortgagee in the exercise of a power of sale. If the Court of Appeal were disposed to reach that conclusion, a careful analysis of the evidence of Messrs Gardner and Hennessey may indicate that the steps taken by Elders left something to be desired. It is not the function of this Court to attempt to predict the outcome of the appeal. However, if the grounds relied on by the Debtor are reasonable and arguable, he should be given the opportunity of prosecuting the appeal. I have said on an earlier occasion that if I were satisfied that there are reasonable and arguable grounds, then I would adjourn the hearing of the petition to enable the Debtor to prosecute the appeal. On the other hand, the fact that an appeal is current is not the only matter which should be taken into account in the exercise of a discretion such as that which I am being asked to exercise. Pincus J, in Adamopoulos v Olympic Airways SA (1986) 95 ALR 525 at 526, observed that there are a variety of factors which may have an important bearing on the exercise of the discretion. It could be influenced, for example, by evidence that the judgment debtor is in any event insolvent, or by the Court's forming an opinion that the appeal, though arguable, has little chance of success. It would indeed be unfortunate if the general principle to be found in Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 were to be applied too rigidly, particularly where execution on a judgment has not been stayed, so that a judgment creditor may have a debtor's assets sold pending the appeal. There is certainly no general rule that a money judgment should be stayed pending an appeal (see Re Lewin v Glasson; Ex parte Milner (1986) 67 ALR 591). It seems to be accepted that the Debtor has no funds with which to employ legal advisers in the prosecution of the appeal. He proposes to conduct the appeal himself. Thus, if an order for costs is made against him following dismissal of the appeal, he would not be in a position to meet the order for costs. That, of course, is a matter for the Court of Appeal. It may be possible for the Petitioner, as respondent in the Court of Appeal, to seek an order for the provision of security for the costs of the appeal. As I understand the position, however, no such application has been made at this stage. It is not for me to speculate as to the likely outcome of any such application. On the other hand, if it is the case that the Debtor has no funds, the prosecution of the appeal would not result in any dissipation of funds which might otherwise be available to meet the judgment debt and to be available for creditors generally in the event of a sequestration order. There is in fact no evidence before me at all that there are funds available for creditors which could be dissipated by the prosecution on the appeal. Further, by making a sequestration order I could well deprive the Debtor of the opportunity of prosecuting the appeal. Even if I were to conclude that the prospects of success of the appeal were not strong - and I do not make such a conclusion at this stage - I would be reluctant to deprive the Debtor of the opportunity of prosecuting the appeal if the grounds are nonetheless reasonable and arguable. For the reasons which I have indicated, I consider that there are reasonable and arguable grounds available to the Debtor. The present pleading before the Court of Appeal formulates numerous grounds which are neither reasonable nor arguable. Nevertheless, it is possible to find in the detailed complaints made in the successive pleadings in the Court of Appeal the essence of the grounds which I have endeavoured to summarise above. Accordingly, I consider that it would be appropriate to defer the hearing of the bankruptcy petition, at least for some period of time, but only on conditions which are adequate to ensure that no injustice is done to the Petitioner. I am told that the final version of the appeal index in the Court of Appeal is to be filed and served by 21 July 1998 and that any objection to the contents of the final version are to be filed and served by the respondent to the appeal on 4 August 1998. The Debtor has been directed to confer with the Registry of the Court of Appeal regarding arrangements for the printing of the appeal books, although the printing of the appeal books has been deferred until after the status of the bankruptcy proceedings is known and, if need be, after a trustee has had an opportunity to make an election concerning the appeal if appropriate. It is, of course, unfortunate that in a case like this two courts are dealing with similar issues on the basis that one defers making orders until the other has had an opportunity of considering the matter. I propose to adjourn the hearing of the petition for a period of some weeks to enable the Debtor to satisfy me that all arrangements for the prosecution of the appeal have been put in place and that there is no reason why the appeal would not continue with diligence. In addition, in this Court, at least two orders have already been made against the Debtor for costs in favour of the Petitioner. I consider that as a term of any further adjournment, any costs ordered should be paid by the Debtor. Accordingly, I propose to give leave to the Petitioner to tax forthwith any costs ordered to be paid by the Debtor. If any such costs are not paid within 14 days of service of a certificate of taxation, the Petitioner is to have leave to restore the petition for hearing forthwith. There is also a question of an order for costs made by Giles J in the Commercial Division of the Supreme Court which has not been satisfied. I am told that that was previously the subject of a bankruptcy notice. However, Burchett J set aside that bankruptcy notice because at the time the proceedings before Bainton J had not been resolved. As I understand the position, without having seen Burchett J's reasons, the bankruptcy notice was set aside because of a contention that the Debtor had a cross-claim before Bainton J. The material before me is unclear as to the nature of any cross-claim which may have been made in the Supreme Court and which may be the subject of the appeal. I have before me the defence filed in the Commercial Division on 16 February 1995. That appears to be the only defence in the proceedings. In form it does not appear to be a cross-claim. In particular, there are no prayers for relief. I indicated in the course of argument that I would be disposed to impose as a term of any lengthy adjournment the payment of that order for costs or the obtaining of a stay. However, I will not do that until I have had the opportunity of considering Burchett J's reasons for setting aside the bankruptcy notice which was based on that order. A further question which arises is the costs of the further hearings before me in relation to the adjournment of the petition. When the matter was last before me, I directed that the Debtor file and serve any written submissions in response to submissions made on behalf of the Petitioner no later than 10 July 1998. A further document, again in the form of an affidavit, by the Debtor was filed on 10 July 1998. It contains some 154 paragraphs. Once again the affidavit went into the evidence in considerable detail. Again the Debtor made references to complaints which he may have concerning the conduct of the proceedings by his counsel. For example paragraphs 121 and 122 of that document say as follows: 121. I also add that if my application was… "not being prosecuted with precision and focus.." it more than probably is in part the result of some 42 letters being removed from my original evidence before Justice Bainton, as the result of an agreement being made between Farrow's counsel, and my counsel, without any consultation with me. 122 I refer to this issue in my Amended Affidavit filed with the Federal Court on 10th June 1998, page 11, paragraphs 64 to 71. The point I am now making is that if Farrow's own Counsel hadn't been so successful in convincing my counsel of the need to remove a large part of evidence that I thought was relevant, but they didn't, and Justice Bainton then found in favour of Farrow because of the paucity of evidence, on the grounds that "Mr Stone is unable to corroborate", this case might not have been still being contested. What I am saying, is that had all my letters been allowed to remain as evidence, Justice Bainton may have favoured my case instead of Farrow's. That sort of observation is not of any assistance. On the other hand it indicates the degree to which the Debtor may be under some misapprehension as to the issues which he would be entitled to ventilate before the Court of Appeal. My present view is that a great deal of the Court's time which has been taken is the result of the Debtor's misapprehension of the nature of the function which I am performing. It has been necessary for the Petitioner to come back on several occasions to deal with a matter which need not have taken the time and effort which has been required. In the circumstances, I consider that it is appropriate that I order the Debtor to pay the costs of today. I propose to give the Petitioner leave to tax those costs forthwith and it will be a condition of any further adjournment that the costs be paid within 14 days of service of the certificate of taxation. I certify that this and the preceding eight (8) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett Associate: Dated: 13 July 1998 Solicitor for the Applicant: Abbott Tout Date of Hearing: 13 July 1998 Date of Judgment: 13 July 1998