Palicave Pty Ltd v O'Farrell [2009] FMCA 9 (5 February 2009)

Last Updated: 11 February 2009

FEDERAL MAGISTRATES COURT OF AUSTRALIA

PALICAVE PTY LTD v O'FARRELL

[2009] FMCA 9

BANKRUPTCY – Contested creditors petition – substituted debt contested by the debtor – whether the creditor estopped from claiming a debt additional to that sued for considered.

Bankruptcy Act 1966 (Cth), s.52 Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) Trade Practices Act 1974 (Cth), s.52

Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; (1946) 72 CLR 435 Boles v Esanda (1989) 18 NSWLR 666 Capital Finance Australia Pty Ltd v Nathan [2008] FMCA 1363 RHG Mortgage Corporation Limited v Araya [2008] FMCA 1324 White & Carter (Councils) Pty Ltd v McGregor [1961] UKHL 5; [1962] AC 413

Applicant:

PALICAVE PTY LTD

Respondent:

KARL JOHN O'FARRELL

Supporting Creditor:

NETWORK ENTERTAINMENT PTY LTD

File Number:

SYG 548 of 2008

Judgment of:

Driver FM

Hearing date:

10 November 2008

Date of Last Submission:

17 December 2008

Delivered at:

Sydney

Delivered on:

5 February 2009

REPRESENTATION

Counsel for the Applicant:

Mr S Golledge

Solicitors for the Applicant:

Polczynski Lawyers

Counsel for the Respondent:

Mr D Durston

Solicitors for the Respondent:

HWL Ebsworth

Counsel for the Supporting Creditor:

Mr E Finnane

Solicitors for the Supporting Creditor:

Slater & Gordon

ORDERS

(1) The estate of Karl John O’Farrell be sequestrated.
(2) The Court notes that the date of the act of bankruptcy is 29 January 2008.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

SYG 548 of 2008

PALICAVE PTY LTD ACN 080 402 535

Applicant

And

KARL JOHN O'FARRELL

Respondent

NETWORK ENTERTAINMENT PTY LTD
Supporting Creditor

REASONS FOR JUDGMENT

Introduction and background

1. The applicant is a company. For present purposes the company is represented by its director and secretary John Wilson, who is also known as Zeljko Tihomir Ranogajec. Both Mr Wilson and the respondent Mr O’Farrell are engaged in wagering on a large scale, particularly betting on horse racing internationally. Mr Wilson is a member of a syndicate which turns over around $1 billion each year. Surprisingly, the syndicate apparently makes most of its money by placing losing bets, through what are termed “loyalty payments” from bookmakers (and possibly others). There is also a supporting creditor which has made (but not pressed to date) an application for substitution pursuant to s.49 of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”).
2. The proceeding before me is a creditor’s petition. The proceeding commenced with the filing of a petition by Palicave against Mr O’Farrell on 6 March 2008. That petition asserted that Mr O’Farrell owed Palicave $399,131.33 under a judgment of the District Court of NSW for money loaned by Palicave to Mr O’Farrell in connection with their gambling activities. That debt has since been paid. However, Palicave asserts that other loan moneys are outstanding and now relies upon an amended petition filed in court on 26 September 2008. I permitted the amendment of the petition over the opposition of Mr O’Farrell. The amended petition asserts that Mr O’Farrell owes Palicave the amount of $2,380,727.90 pursuant to the same loan agreement entered into between them on 7 August 2004. Palicave continues to rely on the same act of bankruptcy as in the original petition, namely, a failure to comply with a bankruptcy notice served on 24 December 2007 which expired on 29 January 2008.
3. The amended creditors petition is opposed. Mr O’Farrell relies upon an amended notice of opposition filed on 7 October 2008. The grounds of opposition are:
   • 1. At the time of the alleged act of bankruptcy the Respondent:
     • (a) was not personally present or ordinarily resident in Australia;
     • (b) did not have a dwelling-house or place of business in Australia;
     • (c) was not carrying on business in Australia either personally or by means of an agent or manager; and
     • (d) was not a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager.
   • 2. The amended creditors’ petition was not validly served.
   • 3. The Applicant is estopped from claiming the debt alleged.
   • 4. The liability to pay the amount stated in the amended creditor’s petition is in dispute.
4. Ground 2 (that the amended creditors petition was not validly served) was not pressed.

The evidence and submissions

5. Palicave relies upon the affidavit of Mr Wilson verifying the petition filed on 6 March 2008, the affidavit of Robert Oswaldo Reinoso verifying paragraph 4 of the petition filed on the same day, the affidavit of service of the bankruptcy notice of David Leon Penkin filed on the same day, a second affidavit of David Leon Penkin filed on 3 April 2008 (relating to substituted service of the creditors petition), the affidavit of Robert Reinoso filed on 26 September 2008 verifying compliance with substituted service orders made by Registrar Hannigan on 24 April 2008, the affidavit of service of various documents of Andrew Ng-Saad filed on 26 September 2008, the affidavit of final search of David Penkin filed on 7 November 2008 and the final affidavit of debt of John Wilson filed on 10 November 2008.
6. In relation to the grounds of opposition to the petition and generally, Palicave relies upon the affidavit of John Wilson filed on 31 July 2008. Mr Wilson was cross-examined on his affidavit. I also received a number of documents tendered as exhibits.
7. Mr O’Farrell relies upon his own affidavit sworn on 14 October 2008 in New York, USA, to which were exhibited a substantial volume of documents. Mr O’Farrell was cross-examined on his affidavit by videolink to New York. I also permitted Mr O’Farrell to tender additional documents through his legal representatives.
8. Palicave submits that it has met all of the formal requirements for the making of a sequestration order. In relation to the grounds of opposition, Palicave submits:
   1. Mr O’Farrell continues to be a resident of Australia although he has lived for a significant period in the United States and he also carries on a property rental and investment business from premises at 40 Macleay Street, Potts Point;
   2. there is no estoppel against the debt now relied on by Palicave because the proceedings instituted in the District Court were only in respect of unpaid instalments, not the entire debt. It was not unreasonable for Palicave to sue in respect of four unpaid instalments rather than to claim the whole of the loan debt;
   100. there has been no waiver or forgiveness or release of the debt now relied upon and Mr O’Farrell’s evidence in relation to that debt is unreliable and should be rejected; and
   4. Palicave should recover its costs of the petition if successful, and if unsuccessful should nevertheless recover its costs of the proceedings until the date of service of Mr O’Farrell’s affidavit which was served late. There should be no order as to costs thereafter and in particular the creditor should not bear any part of the costs of the videolink to New York.
9. Mr O’Farrell relevantly submits:
   1. it was open to Palicave to sue for the entire debt in its proceedings in the District Court which were, however, restricted to four unpaid instalments, thus giving rise to an Anshun estoppel;
   2. the second loan agreement between the parties is unenforceable in any event because of misleading and deceptive conduct by Mr Wilson in misrepresenting to Mr O’Farrell the level of betting that would be maintained by Palicave; and
   100. Mr O’Farrell reserves his position on costs until judgment is handed down.
10. Palicave submits in reply as follows:
    1. whether or not there was repudiatory conduct by Mr O’Farrell, Palicave did not accept that repudiatory conduct prior to the commencement of the District Court proceedings. The agreements between the parties remained on foot and Palicave reasonably only sought to enforce what it saw as then due to it;
    2. as to the existence of the debt, Mr O’Farrell does not dispute the loan advance which is the subject of the claim. The alleged misrepresentation is unclear but if Mr O’Farrell seeks to advance a claim of a false and misleading representation for the purposes of s.52 of the Trade Practices Act 1974 (Cth) (or its state equivalents) then there is evidence that the level of betting was increased following the loan and maintained for a considerable period before reducing in late 2005. Whatever pre-contractual discussions may have occurred between the parties do not affect the enforceability of the contract; and
    100. Mr Wilson’s evidence and the documentary evidence establishes that “loyalty payments” were due to Palicave from Mr O’Farrell as a liability and those payments were not met, which was the justification for the reduction in betting by Palicave.

Reasoning

11. I accept that Palicave is, prima facie, entitled to a sequestration order. The formal requirements for the making of that order have been met. There has been sufficient compliance with the Bankruptcy Act and the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth). There is no issue of service.
12. There is also no issue of jurisdiction. Mr O’Farrell’s submissions concede that he is carrying on business within the jurisdiction. The issues to resolve in this case are whether Palicave is estopped from claiming the debt relied upon in the amended petition or whether there is some other basis for Mr O’Farrell to resist that claim, which would lead the Court to determine, pursuant to s.52(2)(b) of the Bankruptcy Act that a sequestration order ought not to be made. It is not in my view seriously disputed that a debt exists. Mr O’Farrell does not dispute that loan funds in the amount asserted were advanced to him pursuant to an agreement between the parties, and that those funds have not been repaid as and when required pursuant to the agreement. Mr O’Farrell’s assertion, as I understand it, is that the agreement is unenforceable by reason of estoppel or by reason of false and misleading representations which induced him to enter into it.

Estoppel

13. Mr O’Farrell’s objection is based on the proposition that by obtaining judgment in the District Court for four missed instalments under the loan agreement, rather than for the entire debt due pursuant to the agreement, Palicave is now estopped from recovering the balance. I accept Palicave’s submission that, at the time of the District Court proceedings, it had elected not to terminate the contract as it did not regard the missed instalment payments as a repudiation of the loan agreement.
14. The cause of action asserted in the District Court proceedings was a claim for breach of contract – the breach being a failure to pay four separate loan instalments due under the second of two loan agreements (exhibit C3). The loan agreement (which appears at page 15 and following of the affidavit of Mr Wilson sworn on 25 July 2008) did not contain any acceleration clause which made the whole debt due and payable upon the happening of an event of default or failure to pay a single instalment. There was, in Palicave’s view, no repudiation of the agreement by Mr O’Farrell. The notice of defence filed in the District Court proceedings (exhibit C4) was to the effect that the non payment complained of in those proceedings was justified by an oral agreement made between Mr Wilson and Mr O’Farrell. There was no suggestion that Mr O’Farrell’s non payment of the four instalments was an indication by him of an intention to no longer be bound by the agreement. To the contrary, his assertion was that the agreement remained on foot, albeit that it had been varied. I accept that the right to claim the whole debt had, therefore, not arisen at the time those earlier proceedings were taken. I further accept that they concerned a different cause of action than a claim for the whole of the debt – a claim which could only be made at the end of 2006[1].
15. I accept Palicave’s submissions concerning estoppel. A res judicata only applies if it could be said that the earlier judgment is to be taken as determining all claims which might be made by the lender under or in relation to the second loan agreement. Thus no cause of action estoppel or res judicata prevents Palicave from asserting an outstanding debt in these proceedings. The more significant question is whether the wider principle of Anshun estoppel applies in this case. Two recent decisions of this Court have considered the operation of that principle: Capital Finance Australia Pty Ltd v Nathan [2008] FMCA 1363 and RHG Mortgage Corporation Limited v Araya [2008] FMCA 1324. To make out this argument Mr O’Farrell must demonstrate that it was unreasonable for Palicave to sue for the four instalments rather than to maintain a claim for the whole of the loan debt. See Boles v Esanda ibid at 673C and following; Capital Finance v Nathan ibid at [29] and RHG Mortgage Corporation v Araya at [57]. The latter case approved at [56] those decisions which state that the rule will only apply after there has been a scrupulous analysis of the circumstances of the earlier proceedings so as to properly inform the Court’s assessment of whether the failure to raise the argument or cause of action in the earlier proceedings can be said to have been “unreasonable”.
16. Mr O’Farrell submits:
    • In Afovos Shipping Co SA v Pagnan[2] the House of Lords dealt with a charterparty a payment due on 14 June 1979. At 4.40pm on that day the owners issued a notice requiring payment within 48 hours. It was held that the notice was not valid. One can well see why notice for one payment not yet due did not give rise to a repudiation but in the instant case it is not a case of a payment late by hours or days but the first payment overdue by four months, the second by three months and no payment for four consecutive payments. The assertion that there was an element or risk in accepting the non-payment as repudiation is clearly untenable.
    • In Boles v Esanda[3] the relevant facts were that the appellant was a party to chattel lease agreements. Esanda had sued previously for one instalment. The case failed because there was no obligation to pay instalments[4]. What was clearly in issue in the first proceedings was whether there was any obligation to pay by instalments.
    • Samuels JA, with whom Priestley and Meagher JJA agreed, said at page 674:
      • In my opinion, upon the facts here, it was not unreasonable for the respondent to have advanced the claim it did in the first proceeding. It enabled a succinct analysis to be undertaken of the rights and obligations arising from the contract, without the factual and legal complications which would have been presented by the defences then (but not now) to be deployed in answer to a claim for the entire rent. There were tactical considerations favouring a claim for an instalment of which the appellants’ lawyers must have been aware and which therefore disposed of any contrary expectation.
17. Mr O’Farrell’s submissions make the point that the statement of claim in the District Court proceedings only required a quite minor amendment to claim the entire amount, and that there were no particular factual or legal complications which might have precluded suing for the entire debt. It does not follow, however, that the failure to sue for the entire debt was unreasonable. First, Palicave did not treat the missed instalments as an anticipatory breach of the obligation to repay the whole debt. At the time, Palicave apparently took the view that there was insufficient evidence of an intention by Mr O’Farrell to abrogate his contractual obligations.
18. I accept Palicave’s submission that conduct which amounts to repudiation of a party’s contractual obligations does not, of itself, bring an end to a contract, unless that repudiation is accepted by the promisee who can then terminate the contract. (Automatic Fire Sprinklers Pty Ltd v Watson [1946] HCA 25; (1946) 72 CLR 435; White & Carter (Councils) Pty Ltd v Mc Gregory [1962] AC 413). Repudiatory conduct, which is not accepted by the promisee, is “a thing writ in water”.
19. Where the contract was not terminated as at the date of the commencement of the previous proceedings, there can be no question of the plaintiff, in those proceedings, acting unreasonably in failing to bring a claim for the whole of the amount due under the loan contract – no cause of action of that type had by that time arisen. That the creditor might have chosen, if it wished, to act in a different way, by, for instance, accepting the repudiatory conduct, terminating the contract and then suing for the whole of the outstanding balance is not to the point.
20. Palicave did not accept the repudiatory conduct of Mr O’Farrell prior to the commencement of the District Court proceedings. It was therefore not open to Palicave to effect a simple minor amendment to the District Court statement of claim as alleged by Mr O’Farrell. The entitlement to be paid the principal debt only arose six months after the commencement of the District Court proceedings and could not be claimed in those proceedings. Palicave, as it was entitled to do, elected that the loan agreement remain on foot and the principal debt only became due and payable six months after the commencement of the proceedings.

Is the petitioning creditor a creditor?

21. I accept Palicave’s submissions on this issue. Palicave accepts that before the Court makes a sequestration order under s.52 of the Bankruptcy Act, it must be satisfied that it is a creditor of Mr O’Farrell for an amount of not less than $2,000. However, it is obviously not a necessary condition of such proof, that the petitioning creditor’s claim be based upon a judgment.
22. By the last served affidavit, Mr O’Farrell seeks to put in issue Palicave’s claim that there is presently a debt due to it under the second loan agreement. It does so not by denying that the debt under the second loan agreement arose but by asserting that it has been waived or forgiven or, perhaps, discharged by an accord and satisfaction or that there has been some misrepresentation which, in some way, deprives Palicave of the status of a creditor with a presently enforceable debt against Mr O’Farrell.
23. Although Palicave bears the onus of satisfying the Court that the debt on which it relies is still in existence (Bankruptcy Act s.52(1)) the approach of Mr O’Farrell means that unless he satisfies the Court that a waiver or release has been agreed, the ground of opposition will not be made out – because absent a release or wavier or discharge by reason of a misrepresentation the efficacy and enforceability of the second loan agreement is not challenged.
24. The onus faced by Mr O’Farrell has two aspects – a requirement that there be adequate proof that a discharge or waiver/release agreement was agreed or that a misrepresentation occurred and, secondly, that the consequence of all of this is to preclude Palicave from asserting it is presently due money from Mr O’Farrell.
25. As noted above, The loan agreement in question was the second of two loan agreements between the parties. The recitals to the second loan agreement establish that, at the time the agreement was entered into, Mr O’Farrell was indebted to Palicave for the amount of $1,250,000 pursuant to the first loan agreement which was apparently entered into in April 2003. The recitals also record that no interest or capital repayments had been made under the first loan agreement by Mr O’Farrell. Mr O’Farrell acknowledged that debt and also sought additional funds. The recitals state that Palicave wished to see the debt repaid in full by 31 December 2006 and that Mr O’Farrell intended to meet that deadline[5].
26. It was the evidence of Mr O’Farrell that he borrowed funds from Mr Wilson (or more accurately, his company) for the development of a business of a company known as Capital Play to enable it to receive wagers for horse racing in North America. I accept from his evidence, and the oral evidence of Mr Wilson under cross-examination that another factor involved the need to “clean up” the share register of Capital Play in order to remove another company called Mountain Lake in which Mr Wilson (and it appears others in his betting syndicate) had an interest. It appears that Palicave advanced funds to Mr O’Farrell so that he could acquire the shares in Capital Play held by Mountain Lake in order to avoid the necessity of making disclosures to the ACT authorities about individuals associated with Mountain Lake.
27. I accept that Mr O’Farrell thereby incurred a very significant debt to Palicave. I also accept from Mr O’Farrell’s evidence that his capacity to repay the debt was substantially dependent upon the Wilson syndicate remaining an active customer of Capital Play by wagering large amounts of money in horse racing and other events which Capital Play took bets on internationally. Further, I accept from the evidence of Mr Wilson that the willingness of Mr Wilson’s betting syndicate to continue betting large sums with Capital Play in turn depended upon the “loyalty payments” made by Capital Play for their customers. Mr O’Farrell gave evidence that the loyalty payments were discretionary but the accounts of Capital Play put in evidence[6] establish that they were treated in the company accounts as a liability. In any event, I accept from Mr Wilson’s evidence that the willingness of the syndicate to “bet big” depended upon the loyalty payments being made which offset losses on unsuccessful bets. It appears to me that a certain amount of slight of hand was involved between the parties here. I accept Mr O’Farrell’s evidence that his company’s contracts with US racing tracks would have been voided if he had entered into a legally binding agreement to pay rebates other than discretionary loyalty payments. Therefore, the payments had to appear to be discretionary. Nevertheless, there must have been some form of agreement or understanding between (on Mr Wilson’s evidence which I accept) the betting syndicate and Capital Play that loyalty payments would be made because the betting syndicate made most of its profit from those payments and the syndicate would not continue to bet if it lost money.
28. Mr O’Farrell asserts that he is not liable for the debt claimed under the second loan agreement because he relied upon a misrepresentation by Mr Wilson, at the time he entered into the agreement, about the level of betting that the syndicate would put through Capital Play. Because Mr Wilson’s syndicate was the main customer of Capital Play it could determine the profitability of Capital Play, and the capacity of Mr O’Farrell to repay the debt he was entering into. There is no reliable evidence that Mr Wilson made any representation about betting being maintained at any particular level but I accept that it was probably a representation that substantial bets would continue to be made. At the same time, there was an understanding that the willingness of the syndicate to continue betting at a high level would be supported by the loyalty payments. I accept the evidence of Mr Wilson that the level of betting was not only maintained but increased after the second loan agreement was entered into and only tapered off in the second half of 2005 after Capital Play began withholding loyalty payments. The representation, if it was made, was conditional upon the maintenance of the loyalty payments and when those loyalty payments began to be withheld, the level of betting necessarily fell. The representation, if it was made, was not misleading or deceptive because both parties understood the elements of it and both parties understood that if the loyalty payments were not maintained, neither would the level of betting be maintained.
29. If Mr O’Farrell had sought to resist recovery of the debt in court proceedings he would have faced the difficulty that there is no documentation supporting his contention about the representation. The loan agreement is silent and neither is there any documentary evidence of any complaint made by Mr O’Farrell about the eventual decline in the level of betting.
30. I reject Mr O’Farrell’s contention that he is not indebted to Palicave under the second loan agreement because of the representation said to be made by Mr Wilson at the time Mr O’Farrell entered into the second loan agreement.
31. The other contention of Mr O’Farrell is that he was released by Mr Wilson (on behalf of Palicave) from obligations under the second loan agreement in a conversation in March 2006. Mr O’Farrell’s evidence concerning this allegation was unsupported by documentary material. Mr Wilson expressly denied the asserted release.
32. I prefer the evidence of Mr Wilson. The alleged concession was said to have been made by Mr Wilson in return for an undertaking by Mr O’Farrell to make the loyalty payments due to Palicave. Palicave’s position was that it was entitled to those loyalty payments in any event. Further, Mr Wilson filed a defence in the District Court proceedings which asserted that there was an agreement to defer the obligations under the second loan agreement. I do not rule out the possibility that there was some discussion between Mr O’Farrell and Mr Wilson about the balance due under the second loan agreement and that there was some agreement or understanding that the balance would not be pursued until some later date. That would be consistent with the conduct of Palicave in only pursuing the four missed instalments in the District Court proceedings and also consistent with the recitals which disclose a mutual expectation that the total amount due under the second loan agreement would not be repaid until the end of 2006. It is hard to understand, if Palicave had agreed to waive all liability under the second loan agreement, why Mr O’Farrell did not more vigorously resist the District Court proceedings.
33. I reject the contention that the liability of Mr O’Farrell under the second loan agreement was waived by Mr Wilson on behalf of Palicave.
34. I am satisfied that Mr O’Farrell committed the act of bankruptcy alleged in the amended petition. I am satisfied with the proof of the other matters of which s.52(1) of the Bankruptcy Act requires proof. I reject the grounds of opposition advanced by Mr O’Farrell.
35. I will hear the parties as to costs.

I certify that the preceding 35Error! Style not defined.!Syntax Error, !Error! Style not defined.Error! Style not defined.!Syntax Error, !thirty-fivethirty-five (35) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate:

Date: 5 February 2009

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[1] Carter on Contract at [43-050] and the cases cited at fn 14 as well as the NSW Court of Appeal decision in Boles v Esanda (1989) 18 NSWLR 666 at 673A.
[2] [1983] 1 WLR 195
[3] 18 NSWLR 666
[4] at 668C-D
[5] page 16 of the annexures to the affidavit of John Wilson filed on 31 July 2008
[6] Annexures to the affidavit of Mr O’Farrell, pp94-109