Re RAJ Hannan, A Bankrupt Ex Parte: Kenneth John Levy and Stirling Horn As Trustee of the Estate of Ronald Hannan [1991] FCA 66 (7 March 1991)

FEDERAL COURT OF AUSTRALIA

Re: R.A.J. HANNAN, a Bankrupt
Ex parte: KENNETH JOHN LEVY and STIRLING HORN AS TRUSTEE of the estate of
Ronald Hannan
No. 1018 of 1987
FED No. 66
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA
Olney J.(1)

CATCHWORDS

Bankruptcy - application to review the decision of trustee to reject proof of debt - claim that bankrupt had agreed to indemnify creditor for liability under leasing agreement with a third party.

Bankruptcy Act 1966 - s. 104

HEARING

MELBOURNE
7:3:1991

Counsel for the applicant : Mr B. Hess

Counsel for the respondent : Mr R. Greenberger

Solicitors for the applicant : Herbert Geer and Rundle

Solicitors for the respondent : Cornwall Stodart

DECISION

The applicant Kenneth John Levy (Levy) sought to prove a debt in the bankrupt's estate. When the trustee rejected his proof, he applied to the Court pursuant to section 104(1) of the Bankruptcy Act for an order reviewing the trustee's decision.

2. The application is supported by two affidavits sworn by Levy (on 13 November 1990 and 20 February 1991) and affidavits of Ronald Andrew Miller (sworn 16 November 1990) and Helen Margaret Templeton (sworn 7 September 1990). By way of response to the application the trustee relied upon affidavits of the bankrupt (sworn 13 February 1991) and of Noel Alexander Howe (sworn 13 February 1991).

3. The matter came on for hearing on 20 February 1991 and continued on 21 February 1991 when judgment was reserved. All 5 deponents were produced for cross-examination and were in fact cross-examined.

4. The short facts, which are common cause, are as follows. At all relevant times the bankrupt (Hannan) was a director of companies named SOS Computer Pty Ltd (SOS) and System Operator Services Pty Ltd which carried on a business in which computer hardware was purchased, assembled, programmed, and then supplied to customers. In the first half of 1983 Hannan had discussions with Levy which resulted in an agreement being reached between SOS and Levy's company Onfield Marketing Pty Ltd (Onfield) whereby Onfield agreed to provide marketing services to SOS in relation to the sale of computer services. In or about July 1983 a formal agreement between SOS and Onfield (the agreement) was executed. On 25 October 1983 SOS invoiced a quantity of computer equipment to Westpac Banking Corporation (Westpac) for the sum of $72,955 and on 25 November 1983 Onfield entered into an agreement with Westpac to lease the same equipment for a term of 48 months. At the same time Levy and his wife guaranteed the performance of Onfield's obligations under the lease. Default was made under the lease and by notice dated 15 February 1985 Westpac terminated the lease. Subsequently Westpac took action against Levy and his wife, inter alia, to recover the amount claimed to be due pursuant to the lease. The action was settled in September 1988 by the payment of $95,000 to Westpac. It was this sum which Levy sought to prove as a debt due to him in Hannan's bankruptcy.

5. It is necessary now to consider the basis upon which it is said that Hannan's estate is liable to Levy. In Levy's affidavit sworn 13 November 1990 he deposed as follows (paragraphs 5 to 9):
5. In mid 1983, I had a discussion with one Noel Howe ("Howe")

the Manager of the Westpac Bank at Clarendon Street, South
Melbourne which was financing SOS's activities. Howe told
me that Hannan and his related companies had overdrawn their
accounts with Westpac and that he, Howe, was in serious
trouble unless Hannan could bring the accounts back under
the authorised credit limits. I was sympathetic to his
position and agreed that I would assist Hannan or Howe if I
could.
6. About the same time Hannan approached me and said that
because of Onfield's relationship with him and SOS it would
be desirable if SOS were put in funds to continue operation.
Hannan suggested that the best way to do this was for SOS to
sell and lease back some of its computer equipment with
Westpac and to put the funds from the sale into SOS to
create the necessary liquidity for it to continue its
marketing operations with Onfield. He said that because of
SOS's liquidity position, Westpac would not lease the
equipment to SOS. However, SOS needed the computer
equipment for its own operation, and he said that if I
agreed it would be desirable for the computer equipment to
be leased from Westpac to Onfield for the use of SOS
although both he, I and Westpac would know that the real
lessee would be SOS. I agreed to assist on receiving his
assurance that either he personally or SOS would meet all
future lease payments and that neither Onfield not (sic,
nor) I would have any financial responsibilities under the
lease to Westpac.
7. Some time afterwards, I went with Hannan to the South
Melbourne Branch of the Westpac Bank and met personally with
Howe. Hannan related to Howe the proposal he had previously
put to me. Howe already seemed to be familiar with the
details of it because he asked very few questions. During
the conversation, Hannan told Howe that the Lease was to be
in Onfield's name and Hannan said to Howe words to the
effect "you know the reason for that". It was apparent to
me that Howe had detailed knowledge of Hannan's financial
affairs and the sale and leaseback proposal.
8. During the discussion referred to in the last preceding
paragraph, Hannan again stated in Howe's presence that he
(Hannan) personally or SOS would be responsible for all
payments under the Lease. I confirmed with both Howe and
Hannan that under no circumstances was Onfield or myself to
be responsible for any payments or default under the lease.
Both Hannan and Howe agreed to this.
9. Howe then informed me that it would be necessary for my wife
and I to sign a Guarantee of the Lease. During that
discussion and at subsequent times both Howe and Hannan said
there would be no risk in relation to me or my assets under
the Guarantee. They said that the Bank would only look to
Hannan and SOS for payments under the Lease and Guarantee as
agreed.

6. In his final address counsel for Levy, in response to a question from the bench, said that Levy's case was that either Hannan or SOS would indemnify Levy and Onfield against their liability under the lease and guarantee. This is not the case advanced by Levy in paragraphs 8 and 9 of his affidavit.

7. In the course of his evidence Levy seems to have supported both approaches. At one stage he said that he took it that he would be indemnified whereas later he asserted that Howe had agreed to the proposal in terms of paragraph 8.

8. In view of counsel's response during his final address, I will approach the matter on the basis that Levy claims that Hannan and SOS agreed to indemnify him against all liability arising under the lease and guarantee.

9. Hannan denies that he, or indeed SOS, ever made such an agreement. Apart from his own evidence, the substance of which is quoted above, Levy relies upon the evidence of Miller and Ms Templeton.

10. Miller had known Hannan since about 1970 and Levy since 1980. He was already working for SOS when Levy joined the company on a part-time basis in April 1983. In his affidavit he said (paragraphs 3 and 4):

3. I was aware that Hannan arranged for Levy's company, Onfield
Marketing Pty. Ltd., ("Onfield") to lease computer equipment
from the Westpac Bank on the basis that the equipment would
remain entirely within the possession and control of SOS and
would be used entirely for its benefit. I was also aware
that Hannan proposed that Levy would guarantee Onfield's
obligations under the lease to meet Westpac's requirements
in such matters.
4. I specifically recall a discussion between Hannan, Levy and
myself before the lease was entered into. In that
discussion Hannan stated to Levy and myself that, despite
the fact that Onfield was to be lessee and Levy guarantor,
the lease was for the benefit of SOS and himself. He then
said that he personally or SOS would make all lease payments
and that both he personally and S.O.S. separately undertook
that Levy and Onfield would be covered completely if there
were default in the lease arrangements with Westpac.

11. It emerged in cross-examination that Miller and Hannan had been associated in business for about 5 years from 1980. Their relationship deteriorated over time and ultimately there was a falling out and Miller ceased to be involved with Hannan and SOS. He admitted to not seeing "eye to eye" with Hannan but denied holding any grudge against him.

12. Ms Templeton commenced employment with Hannan and SOS in April 1984 as a bookkeeper. Her husband was also employed by an associated company as an engineer. In her affidavit she said (paragraph 2):

On many occasions Mr Hannan said to me that although Onfield
Marketing Ltd was the Lessee and Ken Levy had guaranteed Onfield's
obligations to Westpac under the Lease, he (Ron Hannan) or SOS
Computer Pty Ltd would make the lease payments and ensure that Mr
Levy or Onfield Marketing Pty Ltd would be indemnified completely,
as it was he (Hannan) who obtained the benefit from the leased
equipment.

13. Under cross-examination she agreed that towards the end of 1984 there had been a disagreement between herself and her husband on the one hand and Hannan on the other. She said she would never work for Hannan again but denied any malice towards him.

14. Hannan denies all of the relevant allegations made in both Miller's and Ms Templeton's affidavits.

15. Apart from Hannan, the only other witness was Howe, the Westpac bank manager. So far as it is relevant to the basic issue in the application, Howe's affidavit evidence is as follows (paragraphs 3 to 5 and 7):

3. I recall that I first met the Applicant, Kenneth John Levy,
in 1983 when Ronald Hannan brought him to see me at the
South Melbourne branch of the Westpac bank. Mr Hannan
introduced Mr Levy to me, and then left us to discuss a
proposed lease which Mr Levy's company Onfield Marketing Pty
Ltd wished to enter into in order to finance the acquisition
of computer equipment by that company.
4. In substance, Mr Levy stated that Onfield Marketing Pty Ltd
required certain computer equipment which was to be supplied
by Mr Hannan's company SOS Marketing Pty Ltd, and that he
wanted the bank to provide the finance for the computer
equipment, on the basis that his company would lease the
goods from the bank. He stated that the computer equipment
was required for use by his company. I stated that the bank
would require security over and above its interest in the
computer equipment under the lease, in order to provide the
finance which was being sought. We discussed the question
of what further security might be available, and in the end
I stated the bank would require the personal guarantees of
Mr Levy and his wife, as well as a second mortgage over
their home. Mr Levy agreed to this.
5. Thereafter, there was a considerable delay in finalising the
lease arrangement owing to the length of time that it took
to prepare the appropriate security documentation in
relation to the second mortgage on Mr Levy's home. In due
course the lease was executed by Onfield Marketing Pty Ltd,
the guarantees were signed by Mr and Mrs Levy, and the
second mortgage was executed by Mr and Mrs Levy.
6. ..........
7. I refer to the affidavit of Kenneth John Levy sworn the 13th
November 1990 and filed herein, and I deny the allegations
contained in paragraph 7, 8, and 9 thereof. I never
participated in any discussion with Mr Levy and Mr Hannan in
which Mr Hannan proposed that Westpac should lease goods to
Onfield Marketing Pty Ltd which goods were in reality to be
used by SOS Marketing Pty Ltd. There was never any
conversation in which Mr Hannan stated to Mr Levy in my
presence that he personally or SOS would be responsible for
all payments under the lease. There was never a
conversation in which Mr Levy confirmed with Mr Hannan and
me that Onfield and Mr Levy were not to be responsible for
any payments or default under the lease. I never had any
discussions with Mr Levy in which I said that there would be
no risk in relation to Mr Levy or his assets under the
guarantee, or that the bank would only look to Hannan and
SOS for payments under the lease and guarantee.

16. (I have omitted paragraph 6 of the affidavit as it deals with the suggestions, not pursued, that Onfield would not be liable to Westpac under the lease and that the Levys would not be liable under the guarantee and second mortgage).

17. In further evidence-in-chief given at the trial Howe confirmed that paragraph 5 of his affidavit was incorrect in that the mortgage security in question was already in existence, having been registered in 1980 to secure another liability, since satisfied. No new second mortgage was executed as indicated in the affidavit. Apart from that one point, Howe's evidence in cross-examination supported his own affidavit evidence and contradicted Levy's on a number of points. In particular he said that Hannan did not say that the lease deal was to help finance SOS, nor did he hear Hannan say that he (Hannan) or SOS would look after the lease payments.

18. Confronted with such diametrically opposed assertions the Court must look to whatever objective facts are available to guide it in drawing inferences as to what is on balance, the most probable explanation. Unless of course the evidence of one or some of the witnesses is so patently unreliable that it can be rejected out of hand. My observation of the witnesses during the hearing does not lead to any such conclusion, although in the end, the result will be that I do not accept certain parts of their testimony on the ground that viewed in the context of the proven facts, it cannot be treated as being reliable. I put the evidence of Miller and Ms Templeton into this category.

19. In the following paragraphs I will explain the reasons why I reject Levy's version of the facts in favour of Hannan's.
1. The agreement which was the basis for the business arrangement between Onfield and SOS and which was entered into well before the lease was negotiated, provided inter alia,

1. Marketing Support
(a) SOS shall pay or cause to be paid to Onfield a fee of
$20,000.00 per annum or at such higher rate as may be
negotiated after the expiry of twelve (12) months from
the date of this Agreement ("the marketing fee"). The
marketing fee shall be payable by equal monthly
instalments in advance.
(b) SOS shall pay or cause to be paid, to Onfield on the 30th
June in each year or as soon thereafter as the necessary
accounts have been completed, a commission equal to 10%
of the annual net profit for the preceding 12 months (or
in the first year from the date of commencement of this
agreement to the 30th June 1984) earned on all new sales
of computer hardware by SOS.
(c) Onfield shall in consideration of the marketing fee:-
(i) Provide management and marketing skills together
with all necessary sales support and guidance to
SOS staff.
(ii) Market and sell SOS systems to achieve profit
objectives as laid down by directors of SOS from
time to time.
2. Processing Support
(a) SOS shall provide support to Onfield as follows:-
(i) provide a guarantee to enable Onfield to lease a
computer system up to a maximum value of $120,000
("the computer system") which guarantee shall be
limited to $60,000 or half the cost of the computer
system, whichever is the greater.
(ii) during the period of the agreement provide the
operational and application software together with
trained operators necessary to operate the computer
system.
(iii) provide the premises to house the computer system.
(b) Onfield shall pay or cause to be paid to SOS a monthly
fee of $550.00 or such higher fee as may be agreed to
cover the services and premises provided by SOS pursuant
to clauses 2(a)(ii) and (iii) above.

20. The subsequent conduct of Onfield in leasing a computer was consistent with its contractual obligations with SOS. It is highly improbable that SOS or Hannan would undertake full liability for the purchase of the equipment when the only obligation under the agreement was to provide a partial guarantee to Onfield's financier. There is no evidence upon which I can find that SOS was in financial difficulties at the relevant time and I reject the suggestion that the leasing of the equipment was merely a device whereby funds could be injected into the business.

21. The first two lease payments, that is payments for the months of November and December 1983, were debited to Onfield's bank account by the bank. Howe says that this was done pursuant to a periodic payment order signed by Levy on behalf of Onfield. Levy denies signing any such order. Howe says that deductions were no longer made after Levy cancelled the order. It is highly improbable that Westpac made two successive periodical payment deductions from Onfield's account without any authority to do so. Further, if as Levy claims, he protested on each occasion and was told that the debits had been made by mistake, the most probable action would have been for the bank to reverse the entries. I reject Levy's statement that he did not sign a periodic payment order and accept Howe's evidence that he did. The signing of such an order by Levy is consistent with his contractual obligations and inconsistent with his claim that SOS or Hannan would be liable under the lease. In this context Levy said that Hannan or SOS had refunded the two lease payments that had been debited to Onfield's account but Hannan denied this. If there had been a refund I would have thought that some corroborative evidence in the form of cheques or bank statements would be readily available but none was produced.

22. Lease payments due for the months of January, February and March 1984 were paid by cheques drawn on an account styled "SOS Computer Pty Ltd Trust A/C". The undisputed evidence is that all proceeds from sales were paid into this account and all expenses and outgoings in relation thereto were debited to it. It follows that the account would contain the net profits arising from sales and thus would include commission due to Onfield under its contract with SOS. Hannan says that payments were made from the trust account on behalf of both Miller and Levy and were to be debited to their accruing entitlement to commission. Although no commission account appears to have been prepared (at least so far as Levy is concerned) there is no reason to doubt Hannan's evidence, which is uncontradicted. Certainly neither Ms Templeton (who was the bookkeeper and presumably would have known about these things) nor Miller (who was for part of the time working with Levy) gave any contradictory evidence. I do not regard the payment of the 3 lease payments out of the trust account as evidence supporting Levy's case. Indeed, accepting as I do Hannan's evidence that Onfield had earned substantial commissions by reason of sales it had made, it seems more probable that the payments were made on account of accruing commissions.

23. The lease payment due for the month of April 1984 was drawn on Onfield's own account. Levy says that this was done because neither Hannan nor Miller (who was co-signatory with Levy on the SOS trust account were available and Hannan had asked him to make the payment in anticipation of Hannan (or SOS) refunding the money later. No such refund was ever made and Hannan denies having agreed to make one. I accept his denial. He said that if there was no money in the trust account, Levy and Miller would pay their own expenses. On a previous occasion the bank had met a cheque drawn on the trust account which Levy alone had signed and there seems to be no reason why the same would not have occurred again. The fact that the payment was made by Onfield does not support an inference that SOS or Hannan would indemnify the company but the refusal of Hannan to refund the money is consistent with him not being liable.

24. A payment of $6081.48 (equivalent to 3 monthly lease payments) was made to the credit of Onfield's lease account by cheque dated 25 July 1984 drawn on the account of System Operator Services Pty Ltd. The cheque was signed by Hannan and was payable to "Onfield Marketing Pty Ltd - lease 3026700". The cheque form was not from the drawer's normal cheque book but was a counter cheque. Howe said, and I accept, that some person would have attended at the bank in order to obtain the cheque. Both Hannan and Levy deny having obtained it. They both may be correct as it is possible that a third party could have done so. Hannan said that Levy presented the cheque to him for signature but Levy denies this and says that he did not see the cheque before it was paid to the bank. No explanation has been offered as to why a counter cheque was required. Hannan's explanation for having paid this sum is that it was treated as an advance against commission due to Onfield under the marketing agreement between Onfield and SOS. There seems to be no reason to treat this payment any differently from the 3 payments made from the SOS trust account. It is not suggested by Levy that Systems Operator Services Pty Ltd ever undertook any liability in relation to the lease. Hannan's evidence is that the latter company did in fact finance the business operation and I can find nothing in the evidence that enables any inference to be drawn from the fact that the cheque was drawn on System Operation Services Pty Ltd's account rather than on the trust account except that there was not sufficient money in the trust account to meet it.

25. On all of the major issues upon which Levy relies to support his claim he has failed. There are a number of minor issues, which occupied some time during the trial which went to questions of credibility more than to the substance of the case upon which I will make only passing comment.

26. Howe's error in stating that Levy executed a second mortgage at the time the lease was executed has already been referred to. Howe admits his error. He did not have the original bank records before him when he made his affidavit and the mistake is understandable. I do not think that his credibility is affected by the mistake.

27. There was some contention as to when Howe and Levy first met one another. Howe said he had not met Levy before the occasion when they met in his office to discuss the lease proposal. Levy did not assert to the contrary but in evidence Hannan said the two would have met earlier albeit socially, at Fitzroy Football Club functions. Howe was not cross-examined on this issue and I accept his statement. The point has no relevance to the issues raised in the proceedings.

28. Another issue canvassed at some length was the question of the period of time Hannan, Levy and Howe had spent together in Howe's office on the occasion of the lease first having been discussed. In my opinion nothing turns upon this question and it is unnecessary to consider it further.

29. I have reached the conclusion that no agreement was made between Onfield and Levy on the one hand and Hannan (either on his own behalf or on behalf of SOS) on the other that Hannan or SOS would indemnify Onfield and Levy against liability arising under the lease between Onfield and Westpac and under the guarantee given by Levy as security for that liability. The applicant has failed to establish that he has a debt provable in Hannan's bankruptcy.

30. The application will be dismissed.