FEDERAL COURT OF AUSTRALIA Clapham v Commonwealth Bank of Australia [2012] FCA 1452 Citation: Clapham v Commonwealth Bank of Australia [2012] FCA 1452 Appeal from: Commonwealth Bank of Australia v Clapham [2012] FCA 1068 Parties: IAN ROBERT CLAPHAM and ELLEN PATRICIA CLAPHAM v COMMONWEALTH BANK OF AUSTRALIA File number: NSD 1456 of 2012 Judge: NICHOLAS J Date of judgment: 19 December 2012 Catchwords: PRACTICE AND PROCEDURE – application by respondent for security for costs of appeal – appeal against sequestration order pursuant to which appellants made bankrupt – where order for security would terminate appeal without determination of its merits – whether order for security for costs should be made – application dismissed. Legislation: Bankruptcy Act 1966 (Cth) s 40(1)(g) Cases cited: Commonwealth Bank of Australia v Clapham [2012] NSWSC 41 Clapham & Anor v Commonwealth Bank of Australia [2012] FMCA 498 House v The King (1936) 55 CLR 499 Hood Barrs v Heriot [1896] 2 QB 375 Date of hearing: 12 December 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 19 Counsel for the Appellants: The first appellant appeared in person and on behalf of the second appellant Counsel for the Respondent: D Sulan Solicitor for the Respondent: HWL Ebsworth Lawyers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1456 of 2012 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: IAN ROBERT CLAPHAM First Appellant ELLEN PATRICIA CLAPHAM Second Appellant AND: COMMONWEALTH BANK OF AUSTRALIA Respondent JUDGE: NICHOLAS J DATE OF ORDER: 19 DECEMBER 2012 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The interlocutory application filed 2 November 2012 is dismissed. 2. There be no order as to the costs of the interlocutory application. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1456 of 2012 ON APPEAL FROM THE FEDERAL COURT OF AUSTRALIA BETWEEN: IAN ROBERT CLAPHAM First Appellant ELLEN PATRICIA CLAPHAM Second Appellant AND: COMMONWEALTH BANK OF AUSTRALIA Respondent JUDGE: NICHOLAS J DATE: 19 DECEMBER 2012 PLACE: SYDNEY REASONS FOR JUDGMENT BACKGROUND 1 This is an application for security for costs in an appeal brought by the appellants, Mr and Mrs Clapham, against orders made by the primary judge on 28 August 2012. On that date his Honour made sequestration orders against the estates of Mr and Mrs Clapham and appointed the official trustee as trustee of their estates. 2 The respondent (the Bank) obtained a judgment against Mr and Mrs Clapham on 31 January 2012 in the Supreme Court of New South Wales for $1,396,115.16: see Commonwealth Bank of Australia v Clapham [2012] NSWSC 41. The Judge who entered judgment against them did so in the following circumstances. Mr and Mrs Clapham were being sued by the Bank under guarantees given by them in relation to advances made to a company with which they were associated and (in the alternative) under a written agreement of 29 December 2008. The Bank's claims under the written agreement involved a lesser sum than its claim under the guarantees. Mr and Mrs Clapham filed a cross-claim in the same proceeding seeking (inter alia) damages for misrepresentation, negligence and unconscionable conduct. His Honour entered judgment on the Bank's claim for the lesser sum and stood Mr and Mrs Clapham's cross-claim over for directions. It is apparent from his Honour's reasons for judgment that the Bank undertook that it would not seek to defend the cross-claim on the basis of any estoppel that might flow from a judgment in its favour pursuant to the written agreement of 29 December 2008. 3 Soon after the Bank obtained judgment on its own claim, it began taking steps to arrange for the issue of a bankruptcy notice, which it later served upon Mr and Mrs Clapham. A Federal Magistrate refused Mr and Mrs Clapham's application to set aside the bankruptcy notice: see Clapham & Anor v Commonwealth Bank of Australia [2012] FMCA 498. Her Honour's reasons for doing so reflected the view that regardless of how strong Mr and Mrs Clapham's cross-claim might be, it could not provide a basis for an order setting aside the bankruptcy notice, even though it might provide a basis for an order either dismissing or adjourning any creditor's petition that might later be issued. In particular, her Honour was not satisfied that Mr and Mrs Clapham could not have set up the cross-claim in the proceeding in which the judgment was entered: see s 40(1)(g) of the Bankruptcy Act 1966 (Cth) (the Act). Her Honour added (at paras [32]-[33]): [32] In some senses the Claphams may be seen as falling between two stools and to be quite understandably concerned at the fact that they have not yet had the opportunity to pursue the claim that they did raise at the time of the original proceedings. However, what is in issue in these proceedings is only whether the strict requirements of s.40(1)(g) of the Act are met. The debtors have not established that the cross-claim was a claim they could not have set up in the proceeding in which the judgment was obtained within s.40(1)(g) of the Act, notwithstanding that the counter-claim was not ultimately determined prior to the Bank being successful on the lesser basis of its claim. [33] The issues that the debtors raise in these proceedings may well be issues that are of some relevance if there is a creditor's petition and an issue arises as to whether the court should exercise its discretion not to make a sequestration order or to adjourn, particularly if there was, at that time, an ongoing claim which had not been resolved. That is, however, a matter for another day, as Mr Bartrop for the Bank quite rightly pointed out. It is relevant to note however that the fact that the debtors have not satisfied me that the grounds for setting aside a bankruptcy notice have been made out does not determine how a court would exercise its discretion, were it confronted by a creditor's petition while there was an ongoing counter-claim. I should add that her Honour also rejected an argument advanced by Mr Clapham that the Bank was or had engaged in an abuse of process. Her Honour observed that there was no evidence to support such an argument. In the result, the Federal Magistrate declined to set aside the bankruptcy notice. THE hearing of the CREDITOR'S PETITION 4 A creditor's petition was issued at the request of the Bank on 10 May 2012 based upon the judgment obtained on 31 January 2012 and Mr and Mrs Clapham's non-compliance with the bankruptcy notice. At the hearing of the creditor's petition Mr and Mrs Clapham were represented by counsel, but it appears that neither of them was present at Court on that day. On the present application, Mr Clapham (who resides in the country) gave unchallenged evidence that he had been advised by his lawyers that he need not attend. It appears from the primary judge's reasons for judgment that counsel for Mr and Mrs Clapham sought an adjournment of the hearing of the creditor's petition so that they could prosecute their cross-claim in the Supreme Court. 5 It appears from the primary judge's reasons for judgment that the evidence relied upon by Mr and Mrs Clapham in opposition to the creditor's petition included an affidavit affirmed by Mr Clapham on 3 June 2011 and filed in the Supreme Court proceeding as well as the cross-claim filed in the same proceeding. It is not suggested that the Bank required Mr Clapham to attend the hearing for the purposes of cross-examination. 6 It also appears that the Bank tendered various documents at the hearing of the creditor's petition which, as will be seen, were considered by the primary judge to be of particular significance when assessing the prospects of success of Mr and Mrs Clapham's cross-claim. THE PRIMARY JUDGE'S REASONS 7 The primary judge gave ex tempore reasons for judgment prior to making the sequestration orders. In the reasons for judgment his Honour explained why he declined to adjourn the hearing of the creditor's petition and why sequestration orders should be made. 8 The primary judge's reasons for judgment refer to the contents of the cross-claim and to Mr Clapham's affidavit. His Honour noted that Mr and Mrs Clapham had entered into an agreement with the Bank in which they agreed not to defend or resist any claim by the Bank for orders for possession of certain properties, for monetary judgments in particular amounts or for the appointment of receivers to a company with which Mr and Mrs Clapham were associated. His Honour also noted that there was no reservation of any right to claim that the transactions in question had been entered into as a result of misrepresentation or negligent advice on the part of the Bank. In the course of referring to Mr Clapham's account of his dealings with Mr Chapman (who Mr and Mrs Clapham maintain was an agent for the Bank) the primary judge referred in some detail to various written communications between Mr Clapham and Mr Chapman. 9 The primary judge then said (at paras [37]-[40]): [37] It is against the background of that material that it is necessary to consider whether or not there is sufficient cause for dismissing or adjourning the petition. A debtor, in order to rely on s 52(2) [of the Act], must establish that he has a real claim against the creditor that is likely to succeed. A likelihood of success may justify a refusal of a sequestration order. Alternatively, if the circumstances reveal a claim of a character and nature such that the likelihood of success cannot be predicted with accuracy, then the petition should be dismissed or an adjournment of the petition should be granted. [38] If the claim is one in which the credit of witnesses will be involved and a debtor sets out the nature and detail of the case and all his or her evidence, the debtor may only be able to persuade the Bankruptcy Court that, if relevant witnesses are believed, he or she has good prospects of success. What should be proved and what is sufficient to be proved in any given case will depend upon the circumstances. The discretion is a broad one, but it is informed by public interest considerations concerning the activity of persons who are insolvent. Quite clearly, Mr and Mrs Clapham are insolvent and cannot meet the debts presently owing to them [sic], quite apart from the debt owing to the Bank. [39] The contemporaneous communications to which I have referred suggest to me that it is quite unlikely that Mr and Mrs Clapham will be able to establish that representations were made as alleged, such that Mr Clapham was induced in reliance upon them to cause Yarralumla to enter into the transactions and for him to give the guarantee. It may be that Mrs Clapham was not involved to the extent that Mr Clapham was. However, it is clear enough that she left to Mr Clapham the business arrangements from which she stood to benefit. [40] It has not been suggested that an adjournment would enable Mr and Mrs Clapham to explain the contemporaneous communications to which I have been taken. As I have said, the evidence that is put forward consists of an affidavit filed in the Supreme Court proceeding some 14 months ago. There has been ample opportunity for any evidence to be put on to explain the communications to which I have referred. As I understand the position, that material was put before the Supreme Court and it cannot be suggested that Mr and Mrs Clapham have been taken by surprise by reason of the tender of the material on the hearing of this petition. In all of the circumstances, I am not persuaded that there is sufficient cause for either dismissing or adjourning the present petition. It follows that there should be orders as claimed in the petition. 10 It is not suggested by the Bank that the written agreement included a release of any description or any other term that impacted upon the rights of Mr and Mrs Clapham to commence or maintain their cross-claim. As I have mentioned, the primary judge noted that there was no reservation in the written agreement of any right to claim that the transactions in question had been entered into as a result of misrepresentations or negligent advice on the part of the Bank. Of course, it does not follow that the written agreement precluded a claim for monetary remedies under either the general law or one or more of the statutory provisions relied upon by Mr and Mrs Clapham for negligent advice or misrepresentation. Consideration 11 It must be accepted that Mr and Mrs Clapham's appeal concerns orders made as a result of an exercise of discretion to which the principles discussed in House v The King (1936) 55 CLR 499 apply. The difficulties involved in challenging orders that involve the exercise of such a discretion are not to be underestimated. 12 On the other hand, Mr Clapham suggests that the primary judge's exercise of discretion was predicated upon a particular view of the facts which Mr Clapham says was in turn based upon a mistaken view of the evidence. It is not possible, on the material before me, to express a view as to the correctness of this contention or, more generally, as to the strength of Mr and Mrs Clapham's appeal. 13 The Bank submitted (by reference to the notice of appeal) that Mr Clapham was doing no more than inviting the Full Court to consider the question determined by the primary judge de novo without identifying any error in his Honour's reasoning. There is considerable force in this criticism. However, the Bank stopped short of submitting that the appeal was not brought bona fide or that it lacked any prospects of success. I am satisfied that the appeal is bona fide. I am not satisfied that it has no prospects of success. 14 Aside from the matters just discussed, there are a number of other factors which are relevant to the question whether Mr and Mrs Clapham should be required to provide security for costs of their appeal. There are three considerations that I think are of particular significance in this context. 15 First, the principal order appealed from is a sequestration order. Such an order results in a change of legal status that affects the person against whom it is made in various ways. This is an important matter that should be taken into account when determining whether to require an appellant wishing to appeal such an order to provide security for costs: Hood Barrs v Heriot [1896] 2 QB 375. 16 Secondly, it is not in issue that Mr and Mrs Clapham could not comply with an order for security for costs if one was made. Counsel for the Bank accepted (quite properly) that, one way or another, an order for security for costs will bring Mr and Mrs Clapham's appeal to an end before there has been any determination of its merits. 17 Thirdly, Mr Clapham has given evidence by affidavit (not the subject of cross-examination) that he and his wife's present financial situation is the result of the Bank's wrongdoing, and that if they are successful in their cross-claim against the Bank they will be able to meet all of their debts in full. The evidence relied upon by the Bank indicates that Mr and Mrs Clapham's other creditors are owed about $145,000. About a third of this amount appears to be owed to a family member. In substance, Mr Clapham says that, but for the wrongdoing of the Bank, he and his wife would never have become insolvent. 18 With regard to the last matter, there is nothing before me to establish that the Bank has engaged in any wrongdoing aside from Mr Clapham's bare assertion to that effect. However, I infer from the primary judge's reasons for judgment that there was sworn evidence before him which was at least capable, if accepted, of showing that the Bank had engaged in wrongdoing of the kind alleged against it in the cross-claim. DISPOSITION 19 In all the circumstances, I am not satisfied that it is in the interests of justice to make an order for security for costs. I will order that the interlocutory application filed 2 November 2012 be dismissed. I will also order that there be no order as to the costs of the interlocutory application. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Nicholas. Associate: Dated: 19 December 2012