Finikiotis & Anor v Sandhurst Trustees Ltd [2004] HCATrans 178 (28 May 2004)

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Finikiotis & Anor v Sandhurst Trustees Ltd [2004] HCATrans 178 (28 May 2004)

Last Updated: 11 June 2004

[2004] HCATrans 178

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Adelaide Nos A1 and A40 of 2001 and A57 of 2002

B e t w e e n -

EFSTATHIOS FINIKIOTIS

CHRISSAFINA ZERVOS

Applicants

and

SANDHURST TRUSTEES LTD

Respondent

Applications for special leave to appeal

KIRBY J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

FROM ADELAIDE BY VIDEO LINK TO CANBERRA

ON FRIDAY, 28 MAY 2004, AT 12.48 PM

Copyright in the High Court of Australia

MR E. FINIKIOTIS: I appear for myself and my sister.

MR D.G.W. HOWARD: If it pleases the Court, I appear for Sandhurst Trustees Ltd. (instructed by Lynch & Meyer)

KIRBY J: Mr Finikiotis, normally we have a time limit of 20 minutes in these matters and where they are interconnected as the three applications we have now are interconnected we normally combine the three and the person who is the applicant is confined to 20 minutes in all, but we think that it would be fair on the whole if you were given about half an hour for the purpose of developing the applications. Do you understand that? We are stretching the rules a little bit but not too much.

You can proceed, we have the application books and we have read them. The matter that we are inclined to deal with first is matter No A57 of 2002. That is the application for special leave to appeal from the Full Court of the Federal Court constituted by Justice North. That comes at the end of the litigation chronologically, but it is relevant in this sense that that is the application where you are challenging the sequestration order that is made against you. Do you understand that?

MR FINIKIOTIS: Yes, your Honour.

KIRBY J: You may remember that on a previous occasion I explained to you that there is a difficulty as I see it. If a sequestration order has been made against you and is not disturbed in your proceeding with the other applications, because at least on one reading of the Bankruptcy Act – and we will discuss this later - you cannot do that without the consent of the trustee in bankruptcy. Do you remember I raised this matter on the previous occasion?

MR FINIKIOTIS: Yes, your Honour, I remember it was raised because the trustees were present at the hearing although I had no notice that they were going to be present. I did not expect that they would be present and I did not see that it was right that they should be present because it was an appeal as of right that we as applicants have in relation to the fairness of the orders that were given. The sequestration orders - that was upon the orders of the other courts.

KIRBY J: Now, we have not commenced the time yet because I am just getting these preliminary matters out of the way and I would like to ask Mr Howard a question just to clarify the order of the proceedings and dealing with it in this manner. Mr Howard, you will remember on the previous occasion that the issue of the provisions of the Bankruptcy Act
relating to, I think, section 52(2)(b) and section 64 of the Bankruptcy Act was raised. Do you remember that I raised that on a previous occasion?

MR HOWARD: Yes, your Honour, I do not recall it in detail but I do recall you raising that issue.

KIRBY J: I am referring to section 60(4), which says:

Notwithstanding anything contained in this section, a bankrupt may continue, in his or her own name, an action commenced by him or her before he or she became a bankrupt in respect of:

(a) any personal injury or wrong done to the bankrupt, his or her spouse or a member of his or her family; or
(b) the death of his or her spouse or of a member of his or her family.

Now, the question is whether or not the proceedings which Mr Finikiotis and his sister wish to advance in this Court would fall within the category of a “personal injury or wrong done to the bankrupt”. If it does not then the consent of the trustee in bankruptcy must be obtained for him to prosecute the proceedings further. At least at this stage, the concern I have is that the proceedings he is bringing are proceedings which relate to the debts and the correctness of the judgments that have been entered in the Supreme Court of South Australia and the Federal Court and that they do not fall within the category of any personal injury or wrong.

Now, that being the case, the sensible course seems to be to take the application for special leave to appeal from Justice North’s judgment for the Full Court of the Federal Court because that is a proceeding which challenges the sequestration order that has been made and, as I understand the law, that can be challenged notwithstanding section 60 of the Act and, therefore, there is no procedural impediment to Mr Finikiotis proceeding with that application, but depending on the outcome of that application there will be a question as to whether or not section 60(4) provides an impediment to Mr Finikiotis and his sister proceeding with the other applications.

MR HOWARD: Yes, your Honour, I agree with that.

KIRBY J: Do you have anything to say concerning the order of proceedings, or not?

MR HOWARD: I agree with what your Honour is proposing, with respect.

KIRBY J: Yes, very well. You can just resume your seat and time will now commence, and it is back to you, Mr Finikiotis. Now, you have no impediment to challenging the order made by Justice North. There is no problem, I believe, under section 60 of the Bankruptcy Act in your saying that you should have had leave from the Federal Court and the orders of Registrar Baldwin and the Federal Magistrate should have been set aside. So you can just proceed to say what you want to say about that application and depending on how that is resolved we will have to have a discussion concerning section 60.

MR FINIKIOTIS: Yes, your Honour, thank you. I would like to turn to page 36 of the application book of A57 of 2002.

KIRBY J: Yes.

MR FINIKIOTIS: The first page is just a title page with instructions of the first Knight Frank valuation. Page 37 is the - - -

KIRBY J: Can I get this clear? The Gallerie Investments Pty Ltd was the shopping centre whose debts you and your sister gave personal guarantees for. That is correct, is it not?

MR FINIKIOTIS: Yes, your Honour.

KIRBY J: Could you tell me this, what was your association with Gallerie Investments? Were you officers of that company? Were you and your sister directors of the company?

MR FINIKIOTIS: I was a director of Gallerie Investments and - - -

KIRBY J: So you were an investor in that company and you had some personal stake in it and that is why you gave the guarantee, is that correct?

MR FINIKIOTIS: Yes, your Honour, the personal stake that we had, myself and my sister, was through our other company Anacon Enterprises which owned 40 of the 60 units of Gallerie Investments. Both myself and my sister were directors of Anacon Enterprises, our share of the Gallerie Investments.

KIRBY J: I understand, and you were trying to develop the shopping centre in the name of Gallerie Investments, so that is why you applied for finance to Sandhurst Trustees. In order to get finance you needed a valuation and that is why you went and got the Knight Frank valuation which you have just taken us to on page 37.

MR FINIKIOTIS: Well, it was Eastern Equity, the broker who made the application to Knight Frank for a valuation who gave the instruction - - -

KIRBY J: You understand that it occurs to my mind that it was therefore in your interests and your sister’s interests, having the stake that you did and wanting to do what you wanted to do to get the biggest and best valuation that you could possibly get when you went to Sandhurst with the valuation to try and get money out of them in order to put the investment in the development of the shopping centre for Gallerie Investments.

MR FINIKIOTIS: It was based on the proposal by Jones Lang Wootten, who were the managers of the gallery centre on behalf of Gallerie Investments. Jones Lang Wootten were managers as well as leasing agents from 1994, your Honour, you see. It was their recommendation and their proposal that this change in the gallery centre be made to accommodate a major tenant which they were advocating from 1994 when we purchased the gallery because - - -

KIRBY J: I realise that, but you will understand that looking at it from outside you are now complaining that the valuation was too high and was carelessly given, but the valuation was for your benefit and it was in your interest to have the biggest possible valuation in order to get the loan from Sandhurst Trustees, so there seems to be a contradiction between – in short, you were willing to take the benefit of the valuation in order to get the money, but here you are years later continually arguing that the valuation was too high. At the time you would have been wanting the valuation to be as high as it could possibly be.

MR FINIKIOTIS: Yes, your Honour, but only insofar as it was recommended by Jones Lang Wootten that this was the best proposal. It would not have been our wish if a valuation was done improperly because the valuation and the proposal by Jones Lang Wootten we were led to believe was in our best interest, which it was not. It was - - -

KIRBY J: Yes, but assume the valuation had been 15 per cent or so lower. Valuations are imperfect things. It is not a scientific exercise, it is an art. Assume it had been lower, you still would or may have received the finance, maybe a bit less finance and that is what you wanted to do. You got the advantage of your investment, but now having done so and having guaranteed it you do not want to be responsible for it. It does not seem to gel.

MR FINIKIOTIS: Well, your Honour, the valuation, if it was as you say like 10, 15 per cent, even 20 per cent out, that would not have been something that we would have been fighting against. It was grossly overvalued and Jones Lang Wootten and Knight Frank together put unrealistically large values on the strength of the tenancies, consequently propping up the investment and blowing it up. It was to the degree that the recommended projected gross income was set at 1.5 million, but in reality in the later part of 1998, which was when we took over the management in frustration at what was happening by Jones Lang Wootten Managers, the gross income was only $300,000, your Honour, one fifth of what it should have been. So you can - - -

CALLINAN J: Mr Finikiotis, what was the price of the shopping centre? Was it 4.2 million? Can you remind me of that?

MR FINIKIOTIS: When we purchased it in 1994?

CALLINAN J: Yes.

MR FINIKIOTIS: Yes, 3.75 million.

CALLINAN J: Right, and what was the projected expenditure to alter the premises in order to get a bigger tenant? How much was going to be spent?

MR FINIKIOTIS: Well, it was 2.4 million to reinstate the loan and an extra 1.2 million was set aside for the refurbishment program, making a total of $3.6 million which we had to borrow then.

CALLINAN J: So that the total outlay was about 7.2 million, purchase price plus improvement.

MR FINIKIOTIS: No, that 2.4 of that 3.6 was already taken into account in the 3.75. That was borrowed right from the outset. It was an extra $1.2 million that was on top of the purchase - - -

CALLINAN J: So in round figures we are talking a maximum of 5 million, 3.6 plus 1.2.

MR FINIKIOTIS: Yes.

CALLINAN J: Well, any return, even gross return of 1.5 million on an outlay of 5 million must have seemed to you to involve an element of speculation as an experienced businessman surely. That is a gross return of more than 30 per cent.

MR FINIKIOTIS: The - - -

CALLINAN J: Rentals of 1.5 million over just under 5 million, that is 30 per cent gross return. Did that not strike you then necessarily, as an experienced businessman, a very, very speculative view to take, that you could get 30 per cent for a shopping centre? I know it is a gross return and there are outgoings to be deducted, but it is still a very, very high figure, is it not?

MR FINIKIOTIS: 1.5 million of - - -

CALLINAN J: These shopping centres sell on a capitalisation rate of about 9 to 12 per cent, do they not? Here we would be talking about a capitalisation rate after all expenses have been paid, probably of double that, 25 per cent, nearly treble it. It must have struck you at the time as an experienced businessman that this had to be a matter of speculation. Even if the valuation were wrong and the proper value were that the rents were going to be much, much lower than that, you still would have been getting at least a market capitalisation rate return, I would have thought.

MR FINIKIOTIS: You see, your Honour, it was Jones Lang Wootten’s recommendation based on the so-called major tenant that they were going to put in, but - - -

CALLINAN J: I understand that.

MR FINIKIOTIS: It was not a major tenant. They were more a warehouse type of operation which they purported to us to be a major tenant, but it was not so. They did not attract anywhere near the other tenants which they had been suggesting that they would. It was just a total collapse. It was like a house of cards that just fell down and it was - - -

CALLINAN J: But you would know, would you not, that until you have signed up a major tenant, till you actually have the signature on the dotted line, there are no certainties about valuation, no certainties whether the tenant would actually take it up. It is a business risk.

MR FINIKIOTIS: Well, I suppose, your Honour, that there is always a risk, yes, and we have had properties where we have had to accept the losses if we have made the wrong choice, but in this case we did not have that control. Jones Lang Wootten had all of the tenants’ details and accounts and it was their own system. They were managing it, they were recommending to the directors, to Gallerie, what should occur and that way we had no control. In fact, they were very arrogant.

CALLINAN J: You have taken proceedings, or you have attempted to take proceedings against Jones Lang Wootten. Have you done that?

MR FINIKIOTIS: Yes, your Honour, it commenced in 1998 in the District Court.

CALLINAN J: Yes, well that was your remedy, was it not? You had a remedy, that was your remedy.

MR FINIKIOTIS: No, your Honour, in fact, that was dismissed on the actual result - - -

CALLINAN J: I know it has been dismissed, but I say if you had your remedy that is what it would have had to have been. For various reasons the court has said that that has to be dismissed.

MR FINIKIOTIS: No, your Honour, it was not even heard because the other proceedings from Sandhurst came to bear and it was actually after the bankruptcy that the financiers took actions to dismiss that other claim together with the other - - -

KIRBY J: But Sandhurst was at arm’s length from the valuer Knight Frank. They were at arm’s length from them, were they not?

MR FINIKIOTIS: Well, they should have been, your Honour, under the rules. They should have been, particularly with regard to their dealings, they should have been at arm’s length, but they were not. They were very much involved with the work of Heine, the supposed mortgage manager, who was really another branch of the trustee, Heine Management Trustee, which under their custody agreement with Sandhurst it was specifically stated that Sandhurst as the custodian should be independent of the trustee, and - - -

KIRBY J: Now, let us get back to the judgment which is under consideration in this case. That was the judgment of Justice North who was sitting as the judge constituting the Full Court of the Federal Court. What is the error that you say that Justice North made that would warrant this Court’s granting special leave to appeal from him?

MR FINIKIOTIS: Well, your Honour, just going on from these valuation instructions from Eastern Equity, the broker. It was actually the counterclaim which Judge North got very wrong because he stated that the Magistrate Raphael decided that there was no credible counterclaim, but he was wrong because of what the lawyers for Sandhurst were telling him. The first valuation instructions were given to Knight Frank and on the next page, page 38, the first valuation was sent to Eastern Equity the entity that requested the first valuation properly, two copies. That is the first valuation, the Knight Frank valuation.

Turning over to page 39 is the valuation summary of the first Knight Frank valuation, and if you can see there where I have underlined “Client: Gallerie Investments” and then “Instruction Details . . . for mortgage security purposes”.

KIRBY J: Yes.

MR FINIKIOTIS: The next page, page 40 between 15 and 20 is “for mortgages re-financing purposes” underlined. At 35, down at the end of the page is:

Reliance on this report should only be taken upon sighting a signed original document that has been counter-signed by an executive of Knight Frank.

KIRBY J: Yes, but what is the error of Justice North, because it appears on its face simply to be a confirmation of the discretionary decision by Federal Magistrate Raphael in turn refusing to interfere with Registrar Baldwin’s order.

MR FINIKIOTIS: Because they all went on what the Sandhurst lawyers were telling them, that we had no justifiable counterclaim, but there was in law - according to the authorities there is a counterclaim because of what was done and I am just trying to explain that, your Honour, in relation to the valuations. If you bear with me a couple more minutes I can just go through that quickly. That was on page 41. It says there at 20:

private and confidential use of our client and his First Mortgagee.

If I can then turn to page 46, again that is a title page “INSTRUCTIONS”. That was the instructions for the second revised Knight Frank valuation.

Just turning again to page 47, the instruction from Heine, who is “Heine Mortgage Management Pty Ltd”, the mortgage manager of Sandhurst Trustees, the instructions on pages 47 and 48 are very detailed instructions and these instructions on behalf of Sandhurst, if you note at the top, your Honour, these were sent directly to Gary Taplin, the valuer of Knight Frank, not to the Eastern Equity, the broker who originally requested the valuation. These were sent directly to Gary Taplin, the Knight Frank valuer, by John Clothier –page 48 at the bottom - who was the “Business Development Manager”. The business development manager, John Clothier, with the executive director, Michael Iacobucci, and the executive director, Vincent Rusciano, lending manager, together the three of them constructed the requests to Gary Taplin for the instruction for the second revised valuation.

If you can see your Honour that on page 47, the beginning of the instructions, particularly the sections that I have underlined, the request about the Homewares Store, which was the so-called major retailer, and also the request in relation to the other tenants at the middle, 30 – that is 3 of the text and 30 on the left-hand numbering, the many requests there of the details of the tenants and also at the bottom:

Describe your valuation rationale and show all calculations - - -

CALLINAN J: Mr Finikiotis, I am sorry to interrupt you, but where is all this leading? Do you say there is error in here?

MR FINIKIOTIS: Yes.

CALLINAN J: All right, now what do you say the error is?

MR FINIKIOTIS: Well, you see, your Honour, these requests show the - - -

CALLINAN J: Reliance upon wrong information provided by JLW, or is it something else?

MR FINIKIOTIS: No.

CALLINAN J: Well, what is the error? I need to know what you say is a valuation error. That is what you are saying, is there not? Just tell me what it is and then we can go to the report. Tell me what the valuation error is. What did the valuers do wrong?

MR FINIKIOTIS: Your Honour, have you - - -

CALLINAN J: No, do not ask me a question, Mr Finikiotis. What did the valuers do that was wrong? What was their mistake? What did they overlook?

MR FINIKIOTIS: There were many things they did wrong, I have detailed them in the summary of argument - - -

CALLINAN J: Tell me now what they are.

MR FINIKIOTIS: Okay, in the summary of argument, if you turn back to page 32, your Honour.

CALLINAN J: Yes, I am conscious of time passing and I am really trying to help you, Mr Finikiotis. You do not have unlimited time so we need to know exactly what you say the errors were.

MR FINIKIOTIS: The applicant’s summary of argument, page 32, just before 20, the introduction pertaining to the Homewares Store together with “describe your valuation rationale” and “show all calculations” - paragraph 8 of the instructions of 26 June 1997 direct to the Knight Frank valuer, which we were just talking about, that was Gary Taplin, show that grave concern by Sandhurst and the mortgage manager for the so-called major retailer Homewares Store as the excessive overestimate of $295,100 gross rental instead of the effective $145,000 was used in the capitalisation calculation, therefore inflating the final valuation estimate by an extra $1.25 million. So in the calculation they have used the gross figure instead of the $145,000 and that is only part of the gross overvaluation that they have made.

CALLINAN J: All right, let me assume for present purposes that errors were made by Knight Frank. Let me assume that what you have said there is correct, that they have made a number of errors. What flows from that? These valuers were engaged by you, were they not? You had to produce a valuation to get the loan, is that not correct?

MR FINIKIOTIS: They were recommended by Jones Lang Wootten, the managers, who were instructed by Eastern Equity, the brokers.

CALLINAN J: All right. Well, what flows from the fact, if anything, that the valuer was negligent? What happens?

KIRBY J: Specifically relating to Justice North’s orders, because that is what we are dealing with here.

MR FINIKIOTIS: Yes, I am referring to the counterclaim which was misinterpreted by Judge North, your Honour.

CALLINAN J: Yes, I understand that, but the counterclaim against whom and what was the cause of action? The counterclaim against Sandhurst Trustees Ltd, is that right, or is it a counterclaim against somebody else? Or was it a cross claim? Even lawyers use different terms. I take a counterclaim to be a claim by a defendant to meet a counterclaim against the claim that is made by the plaintiff against the defendant. Now, what counterclaim are you talking about, a counterclaim by you and your sister against Sandhurst Trustees based upon errors in the valuation. Is that right?

MR FINIKIOTIS: No, against Sandhurst Trustees the counterclaim is their cognisance of the risk factor of the proposal by Jones Lang Wootten and their - - -

CALLINAN J: Are you saying they should have told Jones Lang Wootten what the true rental situation was and that Jones Lang Wootten should have told Knight Frank what the true situation was? Is that what you are saying?

MR FINIKIOTIS: No, your Honour, I am saying that Sandhurst, according to the authorities, should have notified Gallerie Investments of their cognisance of the risk factors of the proposal.

CALLINAN J: What do you mean by risk factor?

MR FINIKIOTIS: Well, if I just go on then on the same page down to 40, the “‘Calculation Schedules’ as at 1. Nov. 1997” underlined, particularly that the net income of $766,000 upon which a capitalisation calculation of $6.3 million was made, should have been only $234,000 and a capitalisation calculation of $2 million. Imputed rent cannot be used in this calculation as it is not real.

What I am saying, your Honour, it was a very large error in the calculation of the valuation and Sandhurst Trustees were very much aware of the risk factor and that is what led to the second extensive and detailed request for details for information in relation to the valuation and the compiling of a second valuation which I believe was a special arrangement between Sandhurst, Heine and Knight Frank, a secretive agreement to a special arrangement for special indemnity. A breach of the party, that is what is the proper claim against Sandhurst.

The actual claim on the gross negligence of the valuation is against, of course, Knight Frank and then that follows on to Jones Lang Wootten because Jones Lang Wootten advised Knight Frank of the situation and Knight Frank did the calculation. You see, your Honour, the claim is against Sandhurst because of their knowledge of the gross risk factor and I have stated on page 33 of the summary of argument, I have shown in Australian Finance Law, 4th edition, Mallesons Stephen Jaques Solicitors, pages 470-471, unusual facts, guarantor under a misapprehension and multi-lender financing syndications, 15 to 30.

The authorities there do state if the lender knows or has reasonable grounds for knowing that the guarantor is under a misapprehension or misconception, then the lender must take steps to correct that misapprehension or misconception. Silence may be construed as a misrepresentation. That was 25.

On 20, unusual facts, failure to disclose to a guarantor that the guaranteed loan has a higher than usual chance of going into default may void a guarantee: Beneficial Finance Corporation v Adams; Goldsbrough v Ford Credit and Beneficial Finance v Karavas and - - -

KIRBY J: But all of this arose out of the refusal of the Registrar and of the Federal Magistrate to give you an adjournment on this basis. That is correct, is it not?

MR FINIKIOTIS: That is correct, your Honour, they dismissed the counterclaim because of what the Sandhurst lawyers were telling them which was not correct. They tried to prejudice them against - - -

KIRBY J: We have read the written submissions so we understand what you are putting. Just two little questions, first of all your sister, who is Chrissafina Zervos, she is aware that you are representing her today. Is that correct?

MR FINIKIOTIS: Yes, your Honour, I did ask her if she would come as you suggested, but she is a bit frightened of coming to the Court setting.

KIRBY J: Yes, I understand.

MR FINIKIOTIS: I always ask but she always wants me to do it for her. There is no problem there, your Honour.

KIRBY J: She knows that you are here today putting the case as best you can for her.

MR FINIKIOTIS: Yes, your Honour, yes. I always ask her to come, but she is just frightened about it, you know.

KIRBY J: Very well. Now, secondly, the trustees were present on the last occasion, but are they present today at the Court? Have you seen the trustees there?

MR FINIKIOTIS: Yes, they are, your Honour, they are here again.

KIRBY J: Did you ask them for their consent to your bringing these applications to the Court, or not?

MR FINIKIOTIS: Well, I have not spoken to them since the last time, but I thought I did not need to do that, your Honour, I did not know.

KIRBY J: No, but do you have their consent, or not?

MR FINIKIOTIS: I have not spoken to them, no, since that last time. I do not speak to them very much at all, they do not really have a lot to - - -

KIRBY J: Well, they are probably waiting for these proceedings to be concluded, but in any case you cannot put before us any proof that the trustees are backing and supporting your applications.

MR FINIKIOTIS: Well, no, your Honour. Since the last hearing, as you remember, you gave the directions that I should combine the three applications and put the – and there was nothing to suggest that I had to say anything.

KIRBY J: I remember that well.

MR FINIKIOTIS: There was nothing to suggest that I had to concur with the trustees. If there was I would have, but I - - -

KIRBY J: You would understand that you must comply with the law and this Court has to comply with the law and the law does make provision for people bringing proceedings relating to their property without the involvement of the trustee in bankruptcy. Otherwise, as you would understand, people who are made bankrupt could just spend all the property fighting cases and that would be to the disadvantage of creditors, which is the whole point of bankruptcy, to protect.

MR FINIKIOTIS: Yes, your Honour, there is nothing done irresponsibly. It is very serious points that Sandhurst are trying to cover up - - -

CALLINAN J: Mr Finikiotis, you tell me if I am wrong about this, but is it not right that your counterclaim was not against Sandhurst, it was against Esanda, JLW, Knight Frank, Heine and some other people, but you never, in fact, tried to counterclaim against Sandhurst. The counterclaim that you did make which was not against Sandhurst was struck out, and you sought to appear against that on many occasions. Leaving that aside, you have never had a properly constituted counterclaim against Sandhurst, have you?

MR FINIKIOTIS: Yes I have, your Honour. It was - - -

CALLINAN J: No, you made some allegations, but Sandhurst was not a party in the proceedings. I know you alleged that there was a secretive agreement between Sandhurst and other people but Sandhurst was not actually a party to the counterclaim. Is that not right?

MR FINIKIOTIS: Well, there was a party to the defence and counterclaim. It was not a party to the counterclaim which was in addition to the defence and counterclaim especially against Knight Frank and Heine. There is also a claim against Sandhurst in the action under the Trade Practices Act 1976 - - -

KIRBY J: Yes, we know of that. Now, I notice that your time has expired and we have given you an extra 10 minutes. I think I will just ask Mr Howard to tell us a few things now. You can just sit down for a moment, Dr Finikiotis, and we will ask Mr Howard.

MR FINIKIOTIS: Thank you, your Honour.

MR HOWARD: Yes, your Honour.

KIRBY J: Now, Mr Howard, first of all in relation to that last point that Justice Callinan raised, that was my impression too, that certainly in the original proceedings that were brought the counterclaim was not against Sandhurst Trustees. Is that correct or not?

MR HOWARD: That is correct, your Honour.

KIRBY J: They were the proceedings in the South Australian State Court.

MR HOWARD: That is so. Those were the proceedings which led to the summary judgment upon which the bankruptcy proceedings were subsequently based.

KIRBY J: Secondly, are you aware of the trustees having in any way given their consent to the bringing of the applications in this Court?

MR HOWARD: I am not aware of the trustees having consented to the bringing of the proceedings in this Court.

KIRBY J: If, in fact, the trustees have not consented, leave aside the present application which challenges the sequestration order itself, what do you say in relation to the application of section 60 of the Bankruptcy Act if there is no consent by the trustees and if the action is not an action relating in the words of the Bankruptcy Act to:

personal injury or wrong done to the bankrupt -

as that has been explained to exclude property-type claims as distinct from personal injury and reputational claims. What is the basis of the applicants’ proceedings in this Court?

MR HOWARD: Your Honour, I am unable to see any proper basis for the proceedings in this Court.

KIRBY J: Have you had any discussion with the trustee in bankruptcy today or between the last proceeding and these proceedings?

MR HOWARD: There has been no discussion, I am instructed, your Honour.

KIRBY J: And you can tell the Court that as far as you are aware and the trustee apparently is there, the trustee has not given consent to the prosecution of the proceedings in this Court.

MR HOWARD: That is so.

KIRBY J: Yes, very well. Thank you very much. There are no further questions that we have of you at the moment, Mr Howard.

MR HOWARD: Thank you.

KIRBY J: Now, Dr Finikiotis, that really brings it back to you and I did read out earlier in these proceedings the terms of the federal Bankruptcy Act and essentially it says that unless it is a personal injury or wrong done to you or a spouse or a member of your family you cannot prosecute property claims after you are made bankrupt. The reason for that is in order to defend the combined assets of the bankrupt for the creditors, that is the reason behind it. It is a very ordinary provision of bankruptcy law. It is in the English Bankruptcy Act. It is in all the Bankruptcy Acts I know and most relevantly it is in the federal Bankruptcy Act of this country.

Now, if you do not have the consent of the trustees to bring the claim, how can you proceed with the claim, having been made bankrupt? I did raise this, you will remember, on the last occasion when you were before the High Court.

MR FINIKIOTIS: Yes, your Honour, but I believe it was only because the trustees were present, which I did not have any knowledge that they would be present at the time - - -

KIRBY J: Well, you understand, the theory of bankruptcy law is that when you are made bankrupt the property belongs to the creditors and is administered for the creditors by the trustee. So that unless you had a provision like that in section 60 of the Bankruptcy Act, bankrupts, and I am not referring to you for the moment, could just go on spending money and fruitless litigation and that means there is less money at the end of the day for the creditors. That is why that provision is in the Act and there is the exception for personal injury or wrong done to the bankrupt, his spouse or member of his family and that has been interpreted to mean non-property type claims, motor car accidents and things of that kind which are separate from the property that is available for the creditors. Now, how do you get over that hurdle?

MR FINIKIOTIS: Well, in the other application book of A40 of 2001, your Honour, at page 23, if I could ask you just to look at that one.

KIRBY J: Yes, this is the application for special leave to appeal from the Full Court of the Supreme Court of South Australia?

MR FINIKIOTIS: Yes, at page 23 just before the middle of the page – it is on the bottom right-hand corner the numbering, 4(b):

The Bankruptcy Act S60 [4] states that a bankrupt may continue an action commenced before bankruptcy in respect of [a] any personal injury or wrong done to the bankrupt or his or her spouse -

as you have just said before -

[b] the death of his or her spouse or a member of his or her family.

What I go on to say was that the wrong done to myself and my family and my sister and her family by Jones Lang Wootten and Knight Frank and also the wrongs done by Heine and Sandhurst, the liquidation of the companies, both Gallerie Invesments and subsequently Anacon Enterprises, were in the early part of April 2000 and June/July 2000. I go on to say there:

Anna Finikiotis the mother of the applicants and appointor and beneficiary of the F.K.Z. family trust died of cerebral stroke on 21 Sept.2000 – the stress caused by the wrongful entry into possession and forceful closure of the medical centre and food court by Heine -

that is the mortgage manager of Sandhurst –

and Knight Frank was a major contributing factor.

And the actions I believe initiated by Heine and Sandhurst were actions which they did wrongfully, deceitfully knowing that the proposal which I was describing earlier carried a huge risk factor and they made a special arrangement with Knight Frank for a special indemnity that Knight Frank would not be sued by neither Sandhurst or Knight Frank in exchange for the indemnity that they have given to Sandhurst and Knight Frank.

Knight Frank as well getting the benefit that the proposal went through also got a benefit that Sandhurst and Heine would not pursue them as usually happens in this type of situation. That was shown by their close co-operation. In fact, Knight Frank was appointed right from the point of taking possession as the manager of the gallery. Now, there was a blatant conflict of interest which is in breach of the code of ethics of the Australian Institute of Valuers and Land Economists.

KIRBY J: Well, that is not really relevant to the issue that we are dealing with now. If, in fact, the Court dismisses the application for special leave to appeal from the Full Court of the Federal Court constituted by Justice North, then the only matters that are before us are applications for special leave to appeal against a decision of the Full Court of the South Australian Supreme Court, that is A40 of 2001 and the application for special leave to appeal against the Full Court of the Federal Court on appeal from Justice von Doussa, that is A1 of 2001.

In both of those, those applications relate or appear to me to relate to the property that is the subject of the bankruptcy and not to any personal injury or wrong done to the bankrupt, his spouse or member of his family. If that is so then what basis can you suggest to overcome the rule which is established by the Bankruptcy Act, that in those cases unless you have the election of the trustee to proceed with the matter then you cannot proceed with those matters in your own name. Your property belongs to the trustee on behalf of the creditors.

MR FINIKIOTIS: Your Honour, in the last hearing that you sent me the transcript of, there was nowhere in the transcript, and I do not remember any direction from you in relation to getting anything from the trustee, even contacting them. The directions were given that I should get the applications together as quickly as possible, which I have done so - - -

KIRBY J: That is true, yes, you have got them together and we have read them but you are bound by the law and we are bound by the law.

MR FINIKIOTIS: Yes, but your Honour, you have made no direction in relation to that and if it was going to be such an important part of it, as you are suggesting now, then you should have at least given me some indication of this so I could have, at least, had some communication with them. It is very harsh to say that now, to put it to me in those terms where this is influencing whether we can make a fair application to the Court.

KIRBY J: Dr Finikiotis, I know it is very difficult for you appearing here in your own interest, but the fact of the matter is that your attention was drawn to section 60 of the Bankruptcy Act. The problem of having the trustees’ consent was specifically drawn to your notice. The trustees were there on the last occasion. I am sitting here, as Justice Callinan is, as a judge. We are not your advisers. We are judges to deal with your application. The matter was drawn to your notice and if you have not taken the matter up and got the consent of the trustee for bringing the proceedings then it is a matter of the law taking its course. It is not our choice. It is the law made by the Parliament of Australia. Once you are made bankrupt you cannot intermeddle in the property because the property is then in the hands of the trustee for the benefit of the creditors.

MR FINIKIOTIS: Well, your Honour, there seems to be a misunderstanding in relation to property. All of the property of the family company, Anacon, was taken by the liquidators. The only thing left is just our share of our houses, just a half share of a house myself and my sister that even Centrelink, in giving us the benefit, did not make any claim. I fail to see how fairly that could be looked at by the trustees as property for the creditors.

KIRBY J: Yes.

MR FINIKIOTIS: There is nothing your Honour. You see, we both get benefit from Centrelink, the social security at the present time.

KIRBY J: Yes, I understand that.

MR FINIKIOTIS: There is not any property that is to be divided, I think that somehow that has been given to you wrongly, that impression. It is only a share of meagre houses - - -

KIRBY J: No, but every time you come to Court, costs are incurred. Costs are incurred by Sandhurst. Presumably some cost is incurred, though no application is made for an order for costs, by the trustee by sending somebody along here.

MR FINIKIOTIS: Yes, but your Honour, I am not doing it - - -

CALLINAN J: Public money and public time by establishing this Court and are now sitting here are also heavily involved.

MR FINIKIOTIS: Yes, your Honour, but I am not doing it at all irresponsibly because if this was done fairly and honestly it should have been determined in our favour in December 1999/January 2000 when it was originally heard. It was the fact that the - - -

KIRBY J: Most litigants think that. Most litigants think that they must win and they never accept that somebody else must win. But we just have to deal with the matter according to the law. Is there anything else that you wish to say?

MR FINIKIOTIS: Just as I said from the outset, it should have been determined in our favour and it was because the Sandhurst lawyers and Heine lawyers collaborated with people who had vested interest to influence
the people hearing the matters, the judges from the Supreme Court and others in the courts to prejudice them against us, you see, your Honour. It was Sandhurst that was doing it, not myself, the delays.

KIRBY J: Thank you, Dr Finikiotis.

Sandhurst Trustees Ltd (“the respondent”) is a financier. In 1997, it provided finance for a shopping centre redevelopment by a company with which Dr Efstathios Finikiotis and Mrs Chrissafina Zervos, his sister, (“the applicants”) were associated. The respondent relied on a valuation by Knight Frank. The valuation had initially been submitted to the respondent by the company. The purpose of submitting the valuation was to persuade the respondent that finance should be provided to the company. Obviously, it was in the company’s interests to maximise the valuation of the property.

The applicants gave personal guarantees for the loan which was duly made by the respondent. By 1998, the company was in default to the respondent. The respondent called on the guarantees. The applicants alleged that the valuation given was negligent and defective. They commenced a long series of litigation. By it, the applicants have sought to resist the clear obligations incurred by them under the loan to the company which they had supported by their guarantees. The male applicant, Dr Finikiotis, was a director of the company concerned.

By March 2000, towards the end of the litigation, after judgment had been entered against the applicants in the Supreme Court of South Australia for a large sum, the respondent served bankruptcy notices on the applicants following their default on the demand on the guarantees. The applicants applied to the Federal Court of Australia to have the bankruptcy notices set aside. They also sought to bring proceedings against the respondent in the Federal Court under the Trade Practices Act 1974 (Cth). However, in the Federal Court, Justice von Doussa dismissed the application to set aside the bankruptcy notices.

In February 2001, a registrar of the Federal Court made a sequestration order against the estate of each of the applicants. He refused to adjourn the creditors’ petition. The applicants sought to have that decision reviewed. Their application came before the Federal Magistrates’ Court. Federal Magistrate Raphael heard the application. He did so in a proceeding which was a hearing de novo. However, in August 2001, he came to the same conclusion as the registrar. He rejected the applicants’ contentions.

An appeal was then lodged to the Full Court of the Federal Court of Australia. The appellate jurisdiction of the Federal Court was exercised, under delegation, by a single judge, Justice North. His Honour dismissed the appeal. He held that the grounds raised by the applicants had no legal merit. Accordingly, the sequestration orders stand affirmed.

The applicants are, in effect, challenging a discretionary decision of the registrar, as reviewed by a federal magistrate, and as further considered by the Full Court of the Federal Court of Australia. The Full Court found that the federal magistrate had acted on correct legal principles and that no sufficient cause existed to show why the registrar should have refrained from making the sequestration orders under the Bankruptcy Act 1966 (Cth), s 52(2)(b). No error was shown to suggest that a substantial, genuine or arguable basis existed upon which an appeal was likely to succeed, so as to justify adjournment by the registrar of the creditors’ petition.

We are conscious that the sequestration orders affect the status of the applicants and must therefore be considered carefully on that ground. The principles restraining disturbance of discretionary decisions involved in adjournment applications have been stated many times by this Court in well-known decisions such as House v The King [1936] HCA 40; (1936) 55 CLR 499 at 504 to 505, and, in the specific matter of the application of federal legislation, in Australian Coal and Shale Employees’ Federation v The Commonwealth [1953] HCA 25; (1953) 94 CLR 621 at 627. We are bound by that authority. It is regularly applied by this Court.

We have listened carefully to the matters put to us by Dr Finikiotis on behalf of the applicants in his challenge to the orders made by Justice North for the Full Court of the Federal Court. However, we see no prospect of success in any appeal to the Full Court of this Court from Justice North’s orders. Accordingly, special leave to appeal against the Federal Court’s orders is refused. It must be refused with costs.

Once this stage is reached, the position established is that the applicants are bankrupt within the meaning of the Bankruptcy Act, s 60. By that section of the Act, it is provided, in s 60(2):

An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.

In s 60(3) it is provided:

If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.

And s 60(4), which is most important, says:

Notwithstanding anything contained in this section, a bankrupt may continue, in his or her own name, an action commenced by him or her before he or she became a bankrupt in respect of:

(a) any personal injury or wrong done to the bankrupt, his or her spouse or a member of his or her family; or
(b) the death of his or her spouse or of a member of his or her family.

The reason for the foregoing restraint on bankrupts’ pursuing claims in relation to their property which they owned before a sequestration order is well explained in the cases. In the standard text, Lewis’ Australian Bankruptcy Law, 11^th edition, it is correctly stated (deleting citations):

Claims that are not stayed include actions for damages for assault or defamation, actions for trespass to land or goods in the plaintiff’s actual possession where the only substantial damage is annoyance or personal inconvenience to the plaintiff, and actions for breach of promise of marriage.

If the action is partly in respect of personal injury or damage (including defamation) and partly based on a property claim, it will be stayed so far as it relates to the latter but may continue so far as it relates to the personal injury.

Claims for fraud, negligence, wrongful dismissal or conspiracy are stayed if they are based on business or property interests, notwithstanding that some of the alleged damage is mental or physical suffering or loss of reputation.

There is no evidence that the trustee has elected in writing or otherwise to continue with the applications brought by the applicants to this Court. The trustee, we were informed, is present in court today. The trustee came to the Court on a previous occasion, apparently at the request of a Registrar of the Court. The matter relating to the impediment created by s 60 of the Bankruptcy Act was specifically drawn to the attention of Dr Finikiotis, appearing for the applicants on the last occasion.

The applications are undoubtedly, and all or them, concerned with the financial disputes that lie at the heart of the cause of the applicants’ bankruptcy. They are not concerned with any of the statutory exceptions relating to personal injuries or wrongs. Nor do the other applications concern a challenge to the sequestration orders themselves, which, by convention, the courts have treated as necessarily exempt from the prohibition in the statute on the prosecution of proceedings once the sequestration order is made.

The rule to which I have referred is a rule that the Parliament of the Commonwealth has made. The courts are obliged to obey it. It defends the interests of creditors. In earlier proceedings, the applicants were warned about it. The result is that the other two applications cannot succeed as purportedly brought in the name of the applicants. In any case, the Court has examined the other two applications. In our view, even if the bar created by s 60(4) of the Bankruptcy Act could in some way be overcome, there would be no prospect of success were an appeal permitted. They therefore must also be dismissed. The applicants must be ordered to pay the costs of the respondent.

CALLINAN J: I agree.

KIRBY J: The orders of the Court are that in matter No A57 of 2002, the application for special leave to appeal from the Federal Court constituted by Justice North: the application is dismissed; the applicants must pay the respondents’ costs.

In matter No A1 of 2001, the application for special leave to appeal from the Full Court of the Federal Court on appeal from Justice von Doussa: the application is also dismissed; the applicants must pay the respondents’ costs.

In matter No A40 of 2001, the application for special leave to appeal from the Full Court of the Supreme Court of South Australia: the application is likewise dismissed; the applicants must pay the respondents’ costs.

The Court would expect that there be an appreciation of the fact that the matters have been dealt with together, effectively as one proceeding, so that the costs orders should be applied and executed with that fact in mind.

The Court will now adjourn.

AT 1.58 PM THE MATTERS WERE CONCLUDED