Christou v Demandem Holdings Pty Ltd & Anor [2011] FMCA 36 (9 February 2011)

Last Updated: 11 February 2011

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CHRISTOU v DEMANDEM HOLDINGS PTY LTD & ANOR

[2011] FMCA 36

BANKRUPTCY – Bankruptcy notice – application to set aside – set off – where the judgment debt was assigned to the respondents on condition that one third of the net proceeds of the debt be held in trust for the debtor – whether debtor entitled to set off his share of the net proceeds against the outstanding debt – whether “net proceeds” amounted to future property and therefore not a valid subject of trust – where enforceability of arrangement as a contract to create a trust dependant upon existence of consideration – legal and equitable set off – proof of actionable debt required – second set off based on declarations of income owing to the debtor by the assignor – where the figures which were the subject of the declarations required further adjustment.

Bankruptcy Act 1966, ss.30, 40(1)(g), 41(6A), 41(5), 52 Property Law Act 1969 (WA), s.20 Federal Magistrates Court (Bankruptcy) Rules 2006

Demandem Holdings Pty Ltd & Anor v Christou [2010] FMCA 494 Corporate Systems Publishing Pty Ltd v Lingard (No.4) [2008] WASC 21 Corporate Systems Publishing Pty Ltd v Lingard [2009] WASCA 158 Kleinwort Benson Australia Ltd v Crowl [1988] HCA 34; (1988) 165 CLR 71 Re Rule’s Settlement [1915] VicLawRp 101; [1915] VLR 670 Norman v FCT [1963] HCA 21; (1963) 109 CLR 9 J & S Holdings Pty Ltd v NRMA Insurance Ltd [1982] FCA 78; (1982) 41 ALR 539 Food Channel Network Pty Ltd v Television Food Network GP (No.3) [2010] FCAFC 158 Dal Pont and Chalmers, Equity and Trusts in Australia (2007)

Applicant:

NICK CHRISTOU

First Respondent:

DEMANDEM HOLDINGS PTY LTD ACN 009 258 664

Second Respondent:

GLENLEA ENTERPRISES PTY LTD ACN 065 274 544

File Number:

PEG 187 of 2010

Judgment of:

Raphael FM

Hearing date:

24 November 2010

Date of Last Submission:

18 January 2011

Delivered at:

Sydney via videolink to Perth

Delivered on:

9 February 2011

REPRESENTATION

Counsel for the Applicant:

Mr A Rumsley

Counsel for the Respondents:

Mr M MacLennan

Solicitors for the Respondents:

Lavan Legal

ORDERS

(1) Application dismissed.
(2) Applicant to pay the Respondents’ costs to be taxed, if not agreed, pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

PEG 187 of 2010

NICK CHRISTOU

Applicant

And

DEMANDEM HOLDINGS PTY LTD ACN 009 258 664

First Respondent

GLENLEA ENTERPRISES PTY LTD ACN 065 274 544

Second Respondent

REASONS FOR JUDGMENT

1. This is an application said to be made under ss.30, 40(1)(g), 41(6A) and 52 of the Bankruptcy Act 1966 (Cth) (the “Act”) to set aside a bankruptcy notice issued on 17 September 2010 by the Official Receiver for the bankruptcy district of Western Australia. The notice claims that the debtor owes the creditors $40,902.82, made up of the balance of a judgment sum of $150,000.00 less a set off available to the debtor of $122,399.38 plus interest on the balance of $13,202.20. The manner in which the debt is calculated is set out in an addendum to the notice and in the schedule of post judgment interest calculation. The applicant debtor resists the notice on the grounds that it is an overstatement of the amount due by him to his creditors in respect of which a notice was served under s.41(5) of the Act. He also argues that the issue of the notice is in itself an abuse of process.
2. This is not the first time that the dispute between these parties has been before the Court. On 7 July 2010 I dismissed a creditor’s petition on the grounds that the bankruptcy notice on which it was based overstated the debt and that, as a proper notice had been given under s.41(5), the bankruptcy notice should be held to have been invalid. As the bankruptcy notice was invalid there had been no act of bankruptcy upon which the petition could be based; Demandem Holdings Pty Ltd & Anor v Christou [2010] FMCA 494. In that decision I found that the debtor was entitled to set off against the creditors an amount owed by the creditor’s assignor to the debtor:
   • “6. The assignment under which the creditors’ claim took place in 2005. At that time Mr Christou had a claim against SPA, which was the management company of the firm of accountants in which he was a partner, in respect of the 2001 and 2002 years. The amount of that claim was crystallised in the judgment of Beech J. The applicant accepts that, to the extent that the assignment was a legal assignment, it was governed by the provisions of s.20 of the Property Law Act 1969 (WA) which says, relevantly, in sub-s.(20)(1):
     • “Any absolute assignment by writing under the hand of the assignor (not purporting to be by way of charge only) of any debt or other legal chose in action of which express notice in writing has been given to the debtor, trustee or other person from whom the assignor would have been entitled to receive or claim that debt or chose in action, is effectual in law (subject to the equities having priority over the right of the assignee), to pass and transfer from the date of the notice:
       • (a) the legal right to that debt or chose in action;
       • (b) all legal and other remedies of the debt or chose in action; and
       • (c) the power to give good discharge for the debt or chose in action, without the concurrence of the assignor.” [emphasis added]
   • 7. The learned authors of Meagher, Heydon and Leeming, in their Equity: Doctrines and Remedies opine at [284]:
     • “A chose in action is, after all, the benefit of an obligation; and “equity” means in this context a defence, set off or counterclaim which the person subject to the obligation is entitled to oppose to the claim of the person entitled to the benefit. The effect of the rule is that the defence, set off or counterclaim is equally available against the assignee.”
   • At the time of the assignment from SPA to Demandem and Glenlea, Mr Christou had a counterclaim against SPA for his share of the distributions from SPA for the two years 2001 and 2002. That was “an equity”.
   • 8. When the creditors came to draft their bankruptcy notice they had the benefit of Beech J’s judgment and the crystallisation of the equity in favour of Mr Christou. It would have been appropriate at that time to have deducted from the amount owed by Mr Christou to SPA the amount that SPA owed Mr Christou and to have issued the bankruptcy notice for the lesser sum.”

The bankruptcy notice issued on 17 September 2010 effectively does this but it does not take into account certain other monies which Mr Christou says the assignor to Demandem and Glenlea owed him or a company from whom he had received an assignment. He says that these monies also constituted equities that would enable a set off under s.40(1)(g) and s.41(6A) of the Act to be invoked.

The first “set off”

3. There has been considerable litigation between these parties in the Supreme Court of Western Australia. On 21 April 2008, after a lengthy trial, Beech J gave judgment and made declarations and orders; Corporate Systems Publishing Pty Ltd v Lingard (No.4) [2008] WASC 21. Order 10 of his Honour’s orders was:
   • “10. The second plaintiff pay a sum of $150,000 to the fifth and sixth defendants together with interest thereon of 6% per annum from 20 August 2002 until judgment in the amount of $50,523.29.”

The fifth and sixth defendants are the respondents to this application and it is common ground that their right, title and interest in the $150,000.00 arose out of a deed of assignment dated 13 June 2005. The assignment is in writing, expressed to be a deed and I understand that notice thereof was given to Mr Christou. It has all the hallmarks of a legal assignment in respect of which s.20 of the Property Law Act 1969 (WA) applies. The operative provisions of the deed state as follows:

“2 ASSIGNMENT
2.1 The Assignor hereby assigns the debt to the Assignees.

• 2.2 The Assignees agree that they will hold one third of the net proceeds of the debt after deduction of all legal costs associated with the enforcement thereof in trust for Corporate Systems Pty Ltd ACN 009 412 6223.”

4. It is common ground that “the debt” is the $150,000.00 that Beech J ordered Mr Christou to pay to the assignors. It is defined in the deed as:
   • “The claim by Stanton Partners Australasia Pty Ltd against Nick Christou for payment of damages arising out of and in connection with the failure by Nick Christou to sell certain Telstra 2 investment receipts.”

It is also agreed that Corporate Systems Publishing Pty Ltd (ACN 009 412 622) (“CSP”) has assigned its rights in the one third of the net proceeds to Mr Christou. After the hearing, I noticed a discrepancy between the company named in clause 2.2 of the assignment deed and the company named in the decision of Beech J. In response to my request for clarification on the identity of this company, the parties agreed that clause 2.2 of the assignment erroneously adds a 3 onto the end of the ACN number and omits the word “Publishing”. I accept there is no issue in this regard and that the named companies are, in fact, the same.

5. The respondents accept that the SPA assignment is one of a chose in action and is subject to s.20 of the Property Law Act 1969 (WA). The respondents argue that the obligation in clause 2.2 of the deed does not constitute an equity in favour of Mr Christou because it only attaches to the net proceeds of the debt after deduction of legal costs and that means it only attaches to the amount that Mr Christou pays to the respondents after it has been calculated and he has paid it. I have not been addressed as to what the phrase “all legal costs associated with the enforcement thereof” means in the context of this deed. It is accepted that it has a very strong connection to the costs of the counter-claim in the proceedings before Beech J and I am aware that a bill in the sum of $20,084.20 has been prepared for taxation. But it has not yet been taxed and I do not know whether it is considered that “all legal costs” mean just those taxed or the actual sum paid by the creditors to their solicitor and counsel. The creditors argue that, because they have already taken into account the other set-off against the sum of $150,000.00 plus interest, one third of the balance in respect of which they stand as trustees for Mr Christou must be less than the total amount of his debt. He must, therefore, be indebted to them. That is as may be, but it is for the creditors to accurately state the figure they claim the debtor owes them. If what I would call the “trust monies” are capable of constituting a set-off then it is clear to me that the amount claimed under the bankruptcy notice is inaccurate, probably because of an overstatement in respect of which a proper notice has been served or because the applicant would be confused as to the amount which he owes his creditors; Kleinwort Benson Australia Ltd v Crowl [1988] HCA 34; (1988) 165 CLR 71.
6. This “inaccuracy”, which would invalidate the notice if found, is separate from the claim that the set-off may equal or exceed the amount claimed. Because it is said to arise from equities that existed at the time of the assignment the notice should only claim the net amount owing. This is what the current notice does, in contra-distinction to the first notice that I found invalid. But the calculation of the net may prove to be wrong thus involving the overstatement or confusion grounds. It is for the applicant to make this out and he seeks to do so by the arguments considered below.
7. The applicant submits that clause 2.2 of the deed of assignment is merely a reflection of the debtor’s pre-existing entitlement to one third of any judgment in SPA’s favour;
   • “the deed merely provides a mechanism for dealing with the equity by the parties that took the benefit of the assignment. In circumstances where Mr Christou was at all times entitled to one third of any judgment, that equity can properly be set off against any claim by SPA or any party taking the benefit of an assignment from SPA.”

The applicant’s submissions in relation to the first set-off are based on the assumption that, prior to the assignment of the chose in action, CSP was entitled to one third of the judgment debt. The applicant does not provide a reason for this though it is implicit that he is referring to the way in which SPA distributed income to the three partners. Although described by Beech J as a partner of SPA, Mr Christou was in fact a director and shareholder of that company. The income generated by SPA was distributed by the Stanton Partners Trust, a unit trust of which SPA was trustee. Under this trust CSP was entitled to one third of the income generated by SPA. At [11] of the decision on appeal from Beech J; Corporate Systems Publishing Pty Ltd v Lingard [2009] WASCA 158, Owen JA, with whom McClure and Buss JA agreed, explains that the partners received payments in two ways:

“drawings and distributions of income. The drawings were regular monthly payments which were made to the partners against anticipated profits. At the end of the financial year, accounts were drawn, loan account balances were calculated and net income was determined. The net income would then be distributed to the partners so as to take into account amounts that had already been advanced by way of drawings.”

8. It seems to me that the applicant has confused his entitlement to a third of the drawings and distributions of income of SPA with an entitlement to a third of the judgment debt. There is no direct relationship between the two. The company is entitled to decide how to use the $150,000.00. It may wish to distribute this sum as income but, equally, it may wish to reinvest this money. I am satisfied that Mr Christou did not have an entitlement to one third of the judgment debt prior to the assignment.
9. The next question to consider is the nature of the entitlement which was created by clause 2.2 of the deed of assignment and whether it can form the basis for a set off. The Respondent submits that the debtor’s entitlement to one third of the net proceeds of the debt cannot form the basis of a legal or equitable set off because the subject matter of the trust did not exist at the date of the deed. It is well established that a mere expectancy or “future property” cannot be the subject matter of a trust and a trust which purports to have property of this nature as its subject will be void for uncertainty; Re Rule’s Settlement [1915] VicLawRp 101; [1915] VLR 670; cf Dal Pont and Chalmers, Equity and Trusts in Australia (2007). The respondents rely on Norman v FCT [1963] HCA 21; (1963) 109 CLR 9 at 26 per Windeyer J:
   • “Assignment means the immediate transfer of an existing proprietary right, vested or contingent, from the assignor to the assignee. Anything that in the eye of the law can be regarded as an existing subject of ownership, whether it be a chose in possession or a chose in action, can to-day be assigned, unless it be excepted from the general rule on some ground of public policy or by statute. But a mere expectancy or possibility of becoming entitled in the future to a proprietary right is not an existing chose in action. It is not assignable, except in the inexact sense into which, again to use Maitland's words, lawyers slipped when it is said to be assignable in equity for value.”

In that case the High Court held by majority that yet to be declared dividends from shares could not be the subject of a voluntary equitable assignment as the sum of money did not exist at the time of the assignment and was dependant upon the affairs of the companies in question. I am of the view that the subject matter of the trust in the instant case falls into this same category of “future property”. The subject of the trust is not a third share in the debt but rather a third share in the net proceeds of the debt. This is a sum which could not be ascertained with any certainty at the time of the assignment.

10. The next issue raised by the respondents concerns the potential enforceability of clause 2.2 of the assignment as a contract to create a trust. As there was no present right to enforce the trust, it would fail unless it was supported by valuable consideration in the eyes of equity. The assignment deed which creates the “trust” in clause 2.2 nowhere mentions consideration, not even “in consideration of these presents”. I am satisfied that no consideration was expressed to pass for the “trust” purportedly created.
11. Even if the assignment did give rise to an obligation to create a trust in favour of CSP and hence Mr Christou, I am of the view that this would not form the basis of a legal or equitable set off:

“...for a legal set-off, both claims must be due and payable at the date of the action. A future or contingent debt will not support a legal set off; Fromont v Coupland [1824] EngR 650; (1824) 2 Bing 170; 130 ER 271; Leman v Gordan (1838) 8 Car & P392; [1838] EngR 163; 173 ER 546; Smith, Fleming & Co’s Case (1866) LR 1 Ch App 538.”

Both at common law and in equity, the right of set-off depends upon proof of an actionable debt; J & S Holdings Pty Ltd v NRMA Insurance Ltd [1982] FCA 78; (1982) 41 ALR 539 at 554. In this case, Mr Christou has no legal or equitable right to enforce the contract until the net proceeds of the debt come into existence. The only way he could come into possession of this right is by first paying the outstanding judgment debt.

12. After the hearing, Mr Christou referred the Court to the decision in Food Channel Network Pty Ltd v Television Food Network GP (No 3) [2010] FCAFC 158 in which the applicant sought the imposition of a costs order of $8,039.90. In that case the Court was also aware of the respondent’s entitlement to $16,415.95 from the applicant for costs in another Federal Court matter:
    • “In these circumstances, whether or not TFN is strictly entitled to set the sum of $8,039.90 off against FCN’s debt of $16,415.95, the Court’s discretion is broad enough to recognise that substantial justice is best done by leaving FCN indebted to TFN in the sum of $8,376.05, rather than to compel TFN to pursue FCN for the recovery amount of $16,415.95.”

I do not agree that the same exercise of discretion is appropriate in the instant case. After having regard to the equities between the parties, I am of the view that there would be no unfairness in allowing the respondents to recover the outstanding debt without regard to Mr Christou’s claim for one third of the net proceeds. As already noted, it is not clear what is meant by the phrase “all legal costs associated with the enforcement thereof” and whether it includes the costs of the present proceedings. As such, there is no way for me to determine the sum of the net proceeds to which Mr Christou may be entitled.

13. For the above reasons, I am satisfied that there is no right of set off in regard to the “trust monies”.

The second “set off”

14. Another of Beech J’s orders of relevance in these proceedings was order 5:
    • “The plaintiffs are entitled to a distribution of their respective shares of the income of SPA and SAA for the following financial years in amounts which total the following sums:
    • 2003 $183,650.32
    • 2004 $151,608.90
    • 2005 $145,075.87
    • 2006 $152,157.40
    • 2007 $115,461.70”

It is noteworthy that his Honour made a declaration about these sums and did not give Mr Christou or his trustee company (the first plaintiff) a judgment for them. Any rights that the first plaintiff, CSP, had in respect of this declaration were assigned to Mr Christou. Mr Christou argues that these monies constitute a set off against SPA and SAA that existed, so far as the years 2003 to 2005 are concerned, at the time of the assignment to the current creditors and are thus an equity in respect of which they are burdened. The respondents argue that the orders of Beech J constitute no obligation of that type, that they are no more than a declaration by his Honour of amounts which will be taken into the partnership accounts for the relevant years and against which deductions may be made before a final distribution amount is known. They argue that the figures do not constitute an obligation of the creditor companies’ assignor to Mr Christou and that, before there can be said to be such an obligation, further proceedings must be taken. Against this, the applicant cites the views of Owen JA with whom McClure and Buss JA agreed in the appeal against the decision of Beech J; Corporate Systems Publishing Pty Ltd v Lingard [2009] WASCA 158 at [176-177]:

“In my opinion, the trial judge did not err when he ordered the payment of the shortfall between the appellants' entitlement to 50% of Christou's collections and what they actually received. There are several reasons for this conclusion. First, the trial judge formed the view that issues concerning the entitlements under the 50% of collections formula for the financial years 2001 and 2002 were fully joined and argued. His Honour took a different view of the entitlements for 2003 and following (see supplementary reasons [30] - [32]) and hence made order 5, which is limited to declarations as to fee collections under the 50% formula for those years. But in relation to 2002 the evidence was led and the issues fought out. It is uncomfortably clear that this judgment may not resolve all the issues between the parties and that further litigation is likely. Nonetheless, where issues have been aired and decided there ought to be finality. These proceedings have been on foot for more than five years; they need to be resolved. The award of a fixed monetary sum is more likely to serve that end, at least in respect of one issue.
Secondly, the respondents had the opportunity to adduce evidence of adjustments that ought to be made to Christou's loan account, or debts that were owed by him to the partnership. It should have been apparent to the respondents that if they were to rely on the 24 January 2002 agreement as a defence, they would need to show that they had paid the appellants their entitlements under that agreement. Similarly, if there were issues that justified the non-payment to the appellants of what would otherwise have been their full entitlements it would have been necessary for the respondents to prove those matters. They have not done so and they cannot now say that they should not pay sums owing under that entitlement because there might be adjustments that need to be made to Christou's loan account.”

15. It seems to me that the appeal judgment establishes the respondent’s case. Beech J deliberately did not make orders entitling CSP to any sums certain and the appeal court recognised that further litigation was necessary for all years after 2002. I am of the view that their Honours were only referring to the 2002 year in the paragraph commencing with the word “secondly”. This view is supported by the supplementary reasons for decision of Beech J at [32]:
    • “...At trial less attention was directed to the accounts of SPA to the 2004 and subsequent financial years, because no claim of breach was made in relation to those years...nonetheless, had I found that the agreement did not give rise to a defence of consent, I would have been inclined to make a declaration that the plaintiffs were entitled to a one-third share of the income of the trusts of which each was a beneficiary...for corresponding reasons I would make a declaration in respect of the 2004 and subsequent years in terms similar to that of the 2003 year. I note that the accounts for SPA for those years suggest or may suggest that the distribution to corporate systems exceeded the amount to which it was entitled under the 50% formula. The making of declarations should not be thought to cast any doubt on whether that is so. I do not consider that issue was joined at trial in respect of the amount of distributions in the financial years 2004 onwards, so I do not make any findings in that regard.”
16. Besides the declarations in Order 5 of Beech J’s judgment, the applicant has not advanced any other evidence to enable the Court to determine his cash entitlements from the income of SPA and SAA. I am, therefore, unable to find that there is a set off available on account of these sums which is equal to or exceeds the amount claimed in the bankruptcy notice.
17. The findings made above mean that the applicant has not satisfied me that there was an overstatement of the debt, that the amount claimed in the notice was liable to cause confusion or that he had a cross-claim, cross-demand or set-off equal to or exceeding the amount of the claim. The set-offs he now contends for are not actionable at this time although it may well be that he is entitled to some further monies from the accounting practice. The application must be dismissed and the applicant shall pay the respondents’ costs to be taxed, if not agreed, pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006.

I certify that the preceding seventeen (17) paragraphs are a true copy of the reasons for judgment of Raphael FM

Date: 9 February 2011