FEDERAL COURT OF AUSTRALIA Commonwealth Development Bank of Australia Ltd v Kok, in the matter of Kok [2003] FCA 90 BANKRUPTCY – petition – petition for sequestration order – existence of debt – release of securities – effect of deed of release between receiver and creditor – whether release of securities for consideration released personal covenant of debtor. Bankruptcy Act 1966 (Cth) Grant v John Grant & Sons Pty Limited (1954) 91 CLR 112 applied Grundy v Ley [1984] 2 NSWLR 467 considered IN THE MATTER OF BERNARD CORNELIS KOK; COMMONWEALTH DEVELOPMENT BANK OF AUSTRALIA LIMITED v BERNARD CORNELIS KOK NO. N 7200 OF 2002 BEAUMONT J 14 FEBRUARY 2003 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 7200 OF 2002 IN THE MATTER OF: BERNARD CORNELIS KOK BETWEEN: COMMONWEALTH DEVELOPMENT BANK OF AUSTRALIA LIMITED APPLICANT AND: BERNARD CORNELIS KOK RESPONDENT JUDGE: BEAUMONT J DATE OF ORDER: 14 FEBRUARY 2003 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. A sequestration order is made against the estate of the respondent debtor. 2. Costs reserved. 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 N 7200 OF 2002 IN THE MATTER OF: BERNARD CORNELIS KOK BETWEEN: COMMONWEALTH DEVELOPMENT BANK OF AUSTRALIA LIMITED APPLICANT AND: BERNARD CORNELIS KOK RESPONDENT JUDGE: BEAUMONT J DATE: 14 FEBRUARY 2003 PLACE: SYDNEY REASONS FOR JUDGMENT BEAUMONT J: INTRODUCTION 1 By its creditor's petition presented on 4 July 2002, Commonwealth Development Bank of Australia Limited ("the applicant creditor") has applied under s 43 of the Bankruptcy Act 1966 (Cth) ("the Act") for a sequestration order against the estate of Bernard Cornelis Kok ("the respondent debtor"). 2 The applicant creditor claims, and I am satisfied of it, that on 11 June 2002, the respondent debtor committed an act of bankruptcy by failing to comply with the requirements of a bankruptcy notice served on him on 18 May 2002 in connection with the balance of a judgment debt of $23,951.92 including interest due under a final judgment recovered in a Local Court in the sum of $27,691.36 (having allowed for the receipt of the sum of $5,000 on 12 February 2002 in the circumstances explained below). 3 The respondent debtor appeared in person and opposed the petition on one substantive ground, explained below. 4 I am satisfied that the applicant creditor has proved all formal statutory requirements. I note also that the respondent debtor has stated (and there is no dispute) that he has no assets and as an unemployed pensioner is unable to pay the judgment debt. BACKGROUND FACTS 5 In order to explain the ground of the respondent debtor's opposition, it will be necessary to explain some of its background (none of which is, or could be, disputed) as follows. 6 On 24 May 1995, the respondent debtor and Winnie Sina Kok-Sinisa, Sione Lava Leota and Satua Leota applied to the applicant creditor for accommodation in the form of a loan of $85,000, agreed by the applicant creditor in July 1995 to be made available for the following purposes: "Purchase dry-cleaning and laundromat business to cost $215,000 Less equity contribution $130,000 Balance $85,000 7 Instalments of $1,950 (later $1,465) covering both principal and interest were to be payable monthly, commencing in August 1995, with any balance and interest payable in July 2000. 8 The borrowers' liability was expressed to be joint and several. 9 The loan was to be secured by registered bills of sale and equitable mortgages over the assets (including leases) of the borrowers' laundromat and dry-cleaning businesses. Those securities were granted on 4 August 1995. The securities, which also included personal covenants by the borrowers to repay the loan and interest, were expressed to be immediately enforceable in certain events, including default in repayment, or appointment of a receiver, or any change in the composition of the partnership. The securities also contained a provision (cl F(21)) to the effect that, in any event, as "a separate and independent stipulation", the borrowers agreed to be liable "as sole or principle debtor" in the events there specified. The securities further authorised (cl F(24)) the applicant creditor to release the borrowers (etcetera) without affecting liability under the security. 10 By June 2001, loan repayments were $4,395 in arrears. 11 By letter dated 29 June 2001, the applicant creditor threatened to obtain a monetary judgment against the borrowers. 12 By letter dated 20 August 2001, the applicant creditor, noting that the borrowers were in default, demanded payment of $26,147.73 within seven days. 13 Although the applicant creditor was not then informed, in September 2001 an application was made by the borrowers to the Supreme Court of New South Wales for an order dissolving their partnership. On 13 September 2001, that court made by consent that order together with orders that the partnership business be wound up under the court's direction; that William James Hamilton be appointed receiver and manager of the partnership, with power to carry on its business; that the borrowers deliver to the receiver the assets of the partnership; and that the receiver be paid such remuneration as the court deemed appropriate. 14 On 13 September 2001, the receiver informed the applicant creditor by facsimile of his appointment, and that he had advertised the businesses for sale, and requested the applicant creditor's "payout figure" under the securities which, he believed, was approximately $25,000. 15 By letter dated 19 September 2001, the applicant creditor informed the receiver that the amount of its debt was $26,605.22 (with a daily interest accrual of $8.41), and provided copies of its Bills of Sale. 16 Thereafter, as will be seen, the receiver and the applicant creditor negotiated in this connection. 17 By facsimile to the applicant creditor dated 19 October 2001, the respondent debtor proposed a variation of the loan repayment schedule. By facsimile of even date, the applicant creditor rejected the proposal, informing the respondent debtor that it would seek default judgment against the borrowers. 18 By letter to the applicant creditor dated 1 November 2001, the receiver reported on his administration and added: "The position has been made more serious in one way by Bernard Kok walking out on Sunday 21st October, and attempting to contact the agents to take the business for himself. An order was made on my application by the Supreme Court, copy attached, which has the effect of restraining him. I have appointed a manager, Mr Len Place, being the past General Manager of Operations at Boral who has made a report concerning upgrading the plant so that it is fully operational. It was impossible to sell the business with Bernard Kok there as manager as any buyer who inspected it was given reasons for why they should not buy it if he claimed to be an interested party." 19 By letter to the receiver dated 23 January 2002, the applicant creditor invited an offer of settlement. Responding by letter dated 24 January 2002, the receiver stated: "I am prepared to offer the cost of my applying to the Supreme Court of New South Wales Equity Division, assuming I make the application myself without using a Solicitor or Counsel. I offer the sum of $5,000. You will appreciate that I stand to lose the whole of my remuneration, out of pocket expenses and I will be personally liable for costs incurred in obtaining goods and services after 13 September to some degree." 20 By letter dated 24 January 2002, the applicant creditor made a counter offer of $20,000 "to discharge its securities", which was rejected by letter dated 25 January 2002, the receiver adding: "I give you notice that I intend to make application to the Supreme Court of New South Wales Equity Division seeking a declaration that my costs incurred as described by you in your letter 8 January 2002 and assumably proved to your satisfaction, rank prior to your security ... . I repeat my open offer in the sum of $5,000 in exchange for the release of your security. I give you notice that the costs of my application to the Supreme Court in the circumstances will be sought on an indemnity cost basis." 21 The applicant creditor replied by letter dated 30 January, 2002, saying, inter alia: "The Bank is not presently challenging the costs you have incurred during the course of the receivership but it expressly reserves the right to do so if the matter progresses to a hearing. The Bank's primary concern at this point is that when you took on the role of receiver, it should have been apparent to you almost from the start given that you now tell us that significant losses were mounting from week to week that the business was not viable as a going concern. What you should have done, particularly given your experience and first-hand knowledge of the trading performance of the business, was to close the doors and move to sell the assets and if necessary seek directions from the Court to enable you to do so. Instead you chose to trade on and you now say that the Bank is left without any security as a result. To the extent that you were under a duty to consider the Bank's interests as the holder of a first ranking charge, the Bank does not believe that you have discharged that duty adequately and that the Bank should be entitled to maintain the paramountcy of its charge over your equitable lien." 22 By letter dated 6 February 2002, the applicant creditor made a further counter-offer of $10,000 "to discharge its securities". 23 However, by letter dated 7 February 2002, the applicant creditor wrote again to the receiver as follows: "The Bank is prepared to accept the sum of $5,000 in exchange for a discharge of its securities subject to the following conditions: Settlement being effected within normal commercial time frames. Mutual Releases being given by yourself and the Bank from any future claims." 24 The receiver replied by letter dated 7 February 2002 as follows: "I refer to your facsimile dated 7 February 2002 and reply as follows: I accept your offer in the sum of $5,000 on the terms as set out therein. Insofar as the date of settlement under the present contract with Han Wah Golden Pty Limited, this was scheduled to be settled today being twenty eight (28) days after 10 January 2002. The purchaser is baulking at settling, herewith copy letter from his solicitor Gary Pickering dated 4 February 2002 due to the letter written by Bernard Kok to the agents, a copy of which you have. The information is not correct in so far as loss of agents and I have replied to Gary Pickering, a copy of my letter attached dated 4 February 2002 with the attached details of agents invoices since the agreement. There has been no loss of agents and in fact two have been gained and the letter of Bernard Kok has had no influence at all in that respect. However, the purchaser has only recently arrived in Australia and is not used to the likes of Bernard Kok and does not wish to have his normal, peaceful hardworking days complicated by having to fight a rearguard action against Mr Kok all the time. This may sort itself out hopefully. A Notice to Complete is to be given, seven (7) days, being Friday 15 February 2002. In any event, I am happy to pay out of the business account of Hamilton's the sum of $5,000 and complete the deal with you as this will at least enable me to have that aspect taken care of in what may be future dealings with other purchasers should the completion not take place on 15 February 2002. Please forward the Deed of Release and on execution and payment of $5,000 and the discharge of the Bill of Sale." 25 The applicant creditor responded by letter dated 11 February 2002 as follows: "I refer to your facsimile dated 7 February 2002 and our subsequent telephone conversation. As discussed a Deed of Release will not be prepared as you have confirmed that the terms and conditions for the release of the Bank's security have been accepted. It is confirmed that settlement is to be effected at this office on Tuesday 12 February 2002 at 10.00 am. The sum of $5,000 is to be handed over to the bank at settlement in exchange for a release of its security." 26 By letter dated 12 February 2002, the receiver forwarded to the applicant creditor a bank cheque in the sum of $5,000 "in full and final settlement of release of the Commonwealth Development Banks' [sic] security over the property of the above partnership". 27 This is the sum of $5,000, mentioned at the commencement of my reasons, for which credit has been allowed by the applicant creditor. 28 At the same time, the receiver executed a document, in evidence acknowledging receipt of the securities and their respective discharges. However, neither of the present parties sought to tender the discharge instruments themselves. 29 The litigious history between the present parties is described by John Morris Lanser in his affidavit sworn 3 December 2002 relevantly as follows: "(1) I am employed in the office of the solicitor for the applicant creditor (the Bank) and, together with Antony Solomon, have the carriage of Local Court proceedings 12281 of 2001 (the Local Court proceedings) on behalf of the Bank. (2) In the Local Court proceedings the Bank as plaintiff, claims moneys payable by Bernard Cornelis Kok (Mr Kok), being the balance of funds advanced to the Roma partnership of which Mr Kok was a member, by term loan account no. 2064 1000 8324. (3) The Bank obtained default judgment against Mr Kok in the Local Court proceedings on 26 November 2001 (the default judgment). The bankruptcy notice issued in these proceedings is based on the default judgment and was served on Mr Kok on 18 May 2002. (4) An application to set aside the default judgment was not filed by Mr Kok until 16 July 2002. That application came before the Local Court on 5 September 2002 when Mr Solomon appeared for the Bank. It was dismissed. (5) A second application to set aside the default judgment was filed by Mr Kok and listed for hearing before a magistrate on 5 September 2002. The court refused Mr Kok leave to appear for three other judgment debtors and the motion was adjourned to 19 September when, after about an hour's hearing it was further adjourned part heard to 31 October 2002. On that day after a hearing exceeding two hours (which included cross-examination of the Bank's principal witness by Mr Kok) the magistrate reserved for about 90 minutes before dismissing the application to set aside default judgment and ordering Mr Kok to pay the Bank's costs. (6) After the magistrate delivered his judgment Mr Kok said to him: 'I intend to take this matter further'. (7) I heard nothing further from Mr Kok for a period of four weeks. Then, at 9.20 am on 29 November 2002, I was served at my office with a document styled 'summons', unfiled but (more or less) in Supreme Court form. I was informed by Mr Kok that he had arranged to have the summons returnable before the Duty Judge at 10.00 am that day. (7) The matter came before Greg James, J later that morning. Mr Kok made a submission, the gravamen of which was that the magistrate who heard the motion to set aside judgment had not given him 'natural justice' because he had declined to enforce the attendance, for cross-examination by Mr Kok at the hearing of the motion, of the receiver to the Roma partnership. His Honour, without calling upon me to respond to any substantive matter put by Mr Kok, then delivered a short judgment in which (having outlined the background) he said (according to my note) 'there is nothing before me to suggest that the magistrate's decision not to let the liquidator [sic] be called was wrong as there was nothing to suggest that the liquidator could assist Mr Kok's case'. (9) His Honour then indicated to Mr Kok (without giving a formal judgment) that, on the material before him, he could see no basis to overturn the magistrate's decision to refuse to set aside the judgment. (10) Mr Kok sought an adjournment to obtain legal advice. I did not oppose an adjournment and told his Honour the Bank is ready to proceed with the appellant hearing ... ." 30 It should be noted in this connection that the substantial defence "on the merits" sought to be raised by the respondent creditor in the local court proceedings was expressed in the following terms: "(5) ... [The] dealings between the Plaintiff's representatives and the person acting in the capacity of the Liquidator of the partnership called 'Roma Partnership' in relation to this matter, were contrary to normally accepted business principles and practices relating to payment of certain moneys to the Plaintiff and later recovery of Liquidator's costs from the Plaintiff in relation to the property covered by the partnership and the Plaintiff's security documentation, to such an extent that the said Defendant should not be held liable for the amount currently being sued for. (6) The effect of the dealings were to the disadvantage of the Defendant. (7) That it would therefore be inequitable to allow the Plaintiff to rely on such dealings to enforce this balance of liability against the Defendant." 31 A further matter of background concerns significant changes in the composition of the borrowers (dissolved) partnership. I was informed by the parties that over the last twelve months, the respondent creditor has purportedly increased his interest in the borrowers' (dissolved) partnership from a 40 per cent share to a substantial majority share. The respondent's ground of opposition to this petition 32 The respondent debtor has expressed his opposition in this way: "A That the Commonwealth Development Bank of Australia Limited committed collusion with the liquidator (annexure 'E') of the former partnership (being the four respondent debtors) and ... , as follows: (1) By releasing the Registered Bills of Sale of the former operations/business (being a laundromat shop and a dry-cleaning shop) owned [by] the four respondent debtors. (2) By releasing the mortgages of lease over 141 and 143 Avoca Street, Randwick NSW. (3) By accepting $5000 (five thousand dollars) in lieu of number one and two while registered valuations show a value of not less than $71,940 (seventy one thousand, nine hundred and forty dollars) (annexure 'D') and as high as $130,000 to $180,000 (one hundred and eighty thousand dollars) (annexure 'C'). (4) The applicant creditor has had 100 per cent security over the property of the first, second, third and fourth respondent debtors." CONCLUSION ON THE ISSUE raised in opposition to the petition 33 In my opinion, the issue now sought to be agitated by the respondent debtor can constitute no answer in law to the petition. 34 In the first place, it is a settled principle of interpretation that general words in an instrument of release are limited always to that thing, or those things, which were specially in the contemplation of the parties at the time when the release was given (see Grant v John Grant and Sons Pty Limited (1954) 91 CLR 112 at 126). 35 As the correspondence cited previously indicates, what was specially in contemplation between the receiver and the applicant creditor was, as the receiver stated in his letter dated 25 January 2002, whether the receiver could obtain from the Supreme Court a declaration that his costs had priority over the securities held by the applicant creditor. It was that issue, one of priority of security, which was then compromised. The personal liability of the borrowers stood outside this settlement and, of course, they were not parties to the arrangement between the applicant creditor and the receiver. 36 Nor, in my view, did the discharge of the securities, without more, operate to release that liability (see Grundy v Lea (1984) 2 NSWLR 467 per Kearney J at 473). DISCRETION 37 Finally, in all the circumstances, including the respondent's concession that he is insolvent, there is, in my view, no discretionary consideration why I should refuse to make a sequestration order. ORDER 38 Accordingly I make the following orders: 1. A sequestration order is made against the estate of the respondent debtor. 2. Costs reserved. I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Beaumont. Associate: Dated: 20 February 2003 Solicitor for the Applicant: L E Taylor Solicitor for the Respondent: Respondent appeared in person Date of Hearing: 12 February 2003 Date of Judgment: 14 February 2003