Alexa Enterprises Pty Ltd v Lal

[2010] FMCA 504

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ALEXA ENTERPRISES PTY LTD v LAL [2010] FMCA 504

BANKRUPTCY – Creditor’s petition – substituted petitioning creditor – where application to set aside judgment on which substituted creditor’s debt was based – relevance of proceedings against another creditor – sequestration order.

Bankruptcy Act 1966 (Cth), ss.44, 49, 52, 306
Uniform Civil Procedure Rules 2005 (NSW), rr.36.15, 36.16

Abignano; in the matter of Abignano v Wenkart [1999] FCA 1695
Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549; [1987] HCA 15
Cain v Whyte (1933) 48 CLR 639; [1932] HCA 6
Carver v de Robillard [2006] FCA 1041
Commissioner of Taxation v Cumins [2008] FCA 353
Commonwealth Bank of Australia v Casella [2000] FCA 1518
de Robillard v Carver (2007) 159 FCR 38; [2007] FCAFC 73
Hancock v Williams (1942) 42 SR (NSW) 252
In re Bristow (1867-68) LR 3 Ch. App. 247
Joossé v Deputy Commissioner of Taxation [2007] FCA 445
Lal v Surti Pty Limited [2009] FMCA 1229
Makhoul v Barnes (1995) 60 FCR 572
McDonald v McDonald (1965) 113 CLR 529; [1965] HCA 45
National Australia Bank Ltd v Zollo [2000] FCA 972
Petrie v Redmond (1942) 13 ABC 44; [1943] St R Qd 71
Re Ditfort; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347
Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163; [1980] FCA 66
Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111
Rigg v Baker (2006) 155 FCR 531; [2006] FCAFC 179
Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28
Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372; [1980] FCA 138
Totev v Sfar and Another (2008) 167 FCR 193; [2008] FCAFC 35
Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572
Wren v Mahony (1972) 126 CLR 212; [1972] HCA 5

Applicant:

ALEXA ENTERPRISES PTY LTD

ACN 100 432 817

Respondent: HASMUKH LAL

File Number: SYG 2726 of 2009

Judgment of: Barnes FM

Hearing date: 5 July 2010

Delivered at: Sydney

Delivered on: 16 July 2010

REPRESENTATION

Solicitors for the Applicant: Blackstone Waterhouse Lawyers

Respondent: In person

ORDERS

1. A sequestration order be made against the estate of Hasmukh Lal. 

2. The applicant creditor’s costs (including any reserved costs) be taxed (in accordance with the Federal Court Rules) and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.

3. Under the Bankruptcy Regulations a copy of these orders be given to the Official Receiver in Sydney within two (2) days. 

The court notes that:

1. The date of the act of bankruptcy is 16 September 2009. 

2. A Trustee Consent to Act as joint and several trustees Declaration has been signed by Andrew James Barnden and Daniel Peter Juratowitch and lodged with the Official Receiver in Sydney. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 2726 of 2009

ALEXA ENTERPRISES PTY LTD
ACN 100 432 817

Applicant

And

HASMUKH LAL

Respondent

REASONS FOR JUDGMENT

These proceedings

1. The applicant creditor, Alexa Enterprises Pty Ltd (Alexa), seeks that a sequestration order be made against the estate of the respondent debtor, Hasmukh Lal. 

2. The background to these proceedings is that Bankruptcy Notice NN3882 of 2009 was issued on 24 August 2009 on the application of Surti Pty Limited (Surti) claiming that Mr Lal owed Surti a debt of $47,909.84 based on a judgment of the Local Court of New South Wales.  Mr Lal brought proceedings in this court to set aside the Bankruptcy Notice which were dismissed by Registrar Hedge on 3 November 2009.  Mr Lal sought review of the decision of the Registrar on 23 November 2009.  His application for review was dismissed by Raphael FM on 1 December 2009 (see Lal v Surti Pty Limited [2009] FMCA 1229). In the meantime, on 9 November 2009 Surti had filed and presented a creditor’s petition.

3. On 23 March 2010 Registrar Hedge made orders that Alexa be substituted as the petitioning creditor in this matter.  Alexa then filed an amended and verified petition on 12 April 2010.  On 11 May 2010 (at a directions hearing at which Mr Lal was represented by counsel) Registrar Hedge ordered that Alexa have leave to file a further amended and verified creditor’s petition by 14 May 2010 and that it serve such petition on the respondent’s solicitor by 21 May 2010.  The respondent debtor was ordered to file and serve any notice of opposition to the further amended creditor’s petition with any further affidavits by 4 June 2010.  The matter was adjourned until 15 June 2010. 

4. Alexa filed a further amended and verified creditor’s petition on 13 May 2010 on which it now seeks to proceed.  On 15 June 2010 Raphael FM ordered that, upon Mr Lal undertaking to proceed with the hearing of the petition on 29 June 2010 and not to request any further adjournments, the matter be adjourned into the Registrar’s list on 29 June 2010 for hearing by the duty Federal Magistrate. 

5. On 29 June 2010 the matter was referred to me by the Registrar.  In the absence of Mr Lal, who had provided a medical certificate, I listed the matter for hearing of the creditor’s petition on Monday, 5 July 2010. 

6. Mr Lal relied on the notice of opposition filed on 4 June 2010, two affidavits sworn by him on 12 February 2010 and 4 June 2010 and on a number of documents tendered during the hearing. 

7. The notice of opposition contains some 25 paragraphs.  Several of these paragraphs are in the form of submissions.  It is convenient to consider first the matters raised by Mr Lal in the notice of opposition and in oral submissions. 

The amount claimed in the petition

1. In paragraphs one and two of the notice of opposition the respondent debtor took issue with the “legitimacy” of the amount claimed by Alexa.  This contention appears to be based on the fact that in the amended creditor’s petition filed by Alexa it had been claimed that Mr Lal owed Alexa the amount of $82,846.00 in respect of a judgment entered on 20 August 2009 in matter number 1502 of 2008 in the District Court of New South Wales for the sum of $82,846.00.  The further amended creditor’s petition was amended to state that the amount owed was the sum of $71,346.00, reflecting payment of $11,500.00 after the date of judgment.  

2. The fact that the further amended creditor’s petition took into account a payment made after the date of the judgment is not such as to establish that the debt on which Alexa relies (less the amount of payment) is not still owing.  The broader issue of going behind the judgment obtained by Alexa is discussed further below. 

3. This ground is not made out. 

The Bankruptcy Notice and substitution of the petitioning creditor

1. Mr Lal also took issue with the fact that Alexa had not filed and served a bankruptcy notice on him.  He submitted that it was relevant that the Bankruptcy Notice relied on in the further amended creditor’s petition was more than 10 months old and had been filed and served by the initial petitioning creditor Surti and that Alexa “should not have been allowed” to be a substituted creditor. 

2. The order for substitution of the petitioning creditor was made by a Registrar of this court on 23 March 2010, as provided for in s.49 of the Bankruptcy Act 1966 (Cth) (the Act). The respondent did not seek review of that decision.

3. A substituted petitioning creditor stands in the shoes of the original petitioning creditor and the petition may thereafter be proceeded with as if the substituted petitioning creditor had been the original petitioning creditor.  In particular, the original act of bankruptcy, which in this case was a failure to comply with Bankruptcy Notice NN3882 of 2009, may be relied upon by the substituted creditor.  It was not necessary for Alexa to apply for or serve a further bankruptcy notice. 

4. The date of the act of bankruptcy relied on in the creditor’s petition and in the further amended creditor’s petition was 16 September 2009. The creditor’s petition was presented on 9 November 2009. Section 44(1)(c) of the Act, which provides that “[a] creditor’s petition shall not be presented against a debtor unless … the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition” is satisfied. 

5. The “grounds” in the notice of opposition in relation to the substitution of the petitioning creditor and the reliance of the substituted creditor on Bankruptcy Notice NN3882 of 2009 are not made out. 

6. I note also that I am satisfied that, as required by s.44(1)(a) and (b) of the Act, Alexa’s debt was a debt of more than $2,000 which was in existence and a liquidated sum that was owing at the time of the commission of the act of bankruptcy alleged in the petition. The judgment relied upon by Alexa was obtained and entered on 20 August 2009 in the District Court of New South Wales.

7. Given the order for substitution of the petitioning creditor, it was necessary that the material relied on by the substituted creditor be served on Mr Lal so that he had the opportunity to consider it and contest the basis on which the substituted creditor was proceeding (see In re Bristow (1867-68) LR 3 Ch. App. 247). I am satisfied that he had this opportunity. Mr Lal filed a notice of opposition and affidavit in support on 4 June 2010.

Service of the further amended creditor’s petition

1. In submissions Mr Lal took issue with service of the further amended creditor’s petition on the basis (not supported by any evidence) that the solicitors on the record were not in fact his solicitors at the time at which they were served with a copy of the further amended creditor’s petition in accordance with the orders of a Registrar of this court.  However Mr Lal did not dispute that he had received a copy of the further amended creditor’s petition and attachments and appeared at the hearing. 

2. On 10 May 2010 a notice of appearance was filed by a Mr Kingsley Liu of The People’s Solicitors as solicitor for Mr Lal.  This was prior to 11 May 2010 when the Registrar had ordered that any further amended creditor’s petition be served on Mr Lal’s solicitors and counsel had appeared for Mr Lal. 

3. The further amended creditor’s petition was filed on 13 May 2010.  I am satisfied on the basis of the affidavit of service of Nikolai Haddad, affirmed and filed on 11 June 2010, that the further amended creditor’s petition (with attachments and including the affidavit of service of Bankruptcy Notice NN3882 of 2009 sworn on 27 August 2009 by James Greig) was served on Mr Liu, Mr Lal’s solicitor, by facsimile on 14 May 2010 in accordance with the orders made by the Registrar on 11 May 2010. 

4. Subsequently Mr Lal emailed Mr Haddad (the solicitor for Alexa) asking for a copy of the further amended creditor’s petition.  Mr Haddad advised Mr Lal by email of 20 May 2010 that in accordance with the orders of 11 May 2010 service had been effected on his solicitor on 14 May 2010 and asked that further communications be through the solicitors. 

5. On 24 May 2010 Mr Liu filed a notice of intention to withdraw as Mr Lal’s lawyer, which was said to have been served on Mr Lal.  A notice of withdrawal as lawyer was filed on 1 June 2010. 

6. On the evidence before the court I am satisfied with service of the petition in accordance with the orders of 11 May 2010. Even if I were not so satisfied, I would regard any defect in service as a technical defect which could be cured under s.306 of the Act, as I am satisfied that the further amended creditor’s petition and the documents attached to it actually came to Mr Lal’s attention. Mr Lal filed a notice of opposition and affidavit in support on 4 June 2010 and attended the hearing on 5 July 2010. In these circumstances the debtor has suffered no prejudice by any deficiency in service of the further amended creditor’s petition (see Re Ditfort; Ex parte Deputy Commissioner of Taxation (1988) 19 FCR 347 and Carver v de Robillard [2006] FCA 1041 and on appeal in de Robillard v Carver (2007) 159 FCR 38; [2007] FCAFC 73).

Decision of Raphael FM

1. Mr Lal submitted that his application to set aside the Bankruptcy Notice issued by Surti had been dealt with by Raphael FM, that all creditors should have been treated equally and that they had to abide by the decision of Raphael FM, insofar as his Honour had stated that any application for a sequestration order should be brought back before him for hearing. 

2. Mr Lal’s application to set aside the Bankruptcy Notice was dismissed by Raphael FM on 1 December 2009.  His Honour was not satisfied that the cross-claim which Mr Lal claimed he had against Surti could not have been raised in the Local Court proceedings between Surti and Mr Lal on which the Bankruptcy Notice was based (see Lal v Surti at [6] – [8]).

3. It is apparent that Mr Lal had brought to his Honour’s attention the fact that he had commenced proceedings against Surti in the District Court of New South Wales on 13 October 2009 and asked Raphael FM to extend the time for compliance with the Bankruptcy Notice until after the hearing of those proceedings.  While Raphael FM was of the view that this was not appropriate, his Honour also stated at [10]:

   However, I am of the view that provided the District Court proceedings are going ahead at a proper rate and the matter is likely to be given a reasonably early hearing date then it may not be appropriate for the Court to make a sequestration order. In these circumstances I will order that any application for a sequestration order be brought back before me for hearing and would indicate that if that happens then, provided I am satisfied that the District Court proceedings are being prosecuted expeditiously, it is unlikely that I would make a sequestration order pending the outcome of those proceedings.

4. As indicated above, consistent with such order, Alexa’s application for a sequestration order was brought before Raphael FM on 15 June 2010.  However, his Honour then ordered that the matter be adjourned to a date before a Registrar and that it be heard by the duty Federal Magistrate.  Hence, the issue taken by Mr Lal with the fact that these proceedings are not before Raphael FM does not establish a basis on which the sequestration order should not be made. 

5. Mr Lal also seemed to suggest that, based on the remarks of Raphael FM about expeditious prosecution of the District Court proceedings against Surti, a sequestration order should not be made pending the outcome of those proceedings. 

6. There was some evidence before the court as to the status of those proceedings in Mr Lal’s affidavit of 12 February 2010 and copies of the further amended statement of claim and notices of motion filed in those proceedings were annexed to that affidavit.  No further affidavit evidence as to progress in those proceedings was filed, except that Mr Lal referred in his affidavit of 4 June 2010 to the fact that there had not been any “outcome”.  Contrary to Mr Lal’s affidavit evidence of 12 February 2010, the matter was not heard on 27 April 2010.  Mr Lal told the court in oral submissions that his claim against Surti had been listed for hearing later this month and subsequently advised that the hearing had been adjourned until 19 August 2010. 

7. In any event, the remarks of Raphael FM do not “bind” all the creditors or the present parties to these proceedings in the manner suggested by Mr Lal.  The creditor’s petition was brought before Raphael FM (albeit there was a substituted petitioning creditor).  His Honour chose not to deal with it, but to adjourn it for hearing by another Federal Magistrate. 

8. The decision of Raphael FM of 1 December 2009 (Lal v Surti) does not compel a conclusion that there should be an adjournment of the hearing of the further amended creditor’s petition relied on by Alexa until the resolution of the proceedings between Mr Lal and Surti. Surti is not the petitioning creditor and, as discussed below, the evidence before this court in relation to those proceedings is not such as to clarify Mr Lal’s prospects of success and establish that if successful Mr Lal would be able to pay his debts in the s.52(2) sense. I also note that the two week adjournment ordered by Raphael FM on 15 June 2010 was on the basis that Mr Lal not request any further adjournments of the hearing of the creditor’s petition. I am not satisfied that there should be an adjournment on any basis arising out of the decision of Raphael FM. Other issues relating to Mr Lal’s claim against Surti are discussed below.

Alexa’s District Court judgment

1. Annexed to the affidavit verifying the further amended creditor’s petition is a copy of the sealed orders of the District Court of New South Wales referred to in the further amended creditor’s petition. 

2. Those orders were made and entered on 20 August 2009 in proceedings between Alexa as plaintiff and Ajay Kumar as first defendant and Hasmukh Lal as second defendant.  The District Court ordered in relation to the plaintiff’s notice of motion filed on 7 August 2009 that the amended defence filed on 17 July 2009 be struck out, that the cross-claim had no standing and be struck out, that there was to be “judgment for the Plaintiff against the Second Defendant for $82,846.00” and that the second defendant, Mr Lal, “pay the Plaintiff’s legal costs of the action”. 

3. Mr Lal took issue with the District Court judgment obtained against him by Alexa on 20 August 2009 in a number of respects.  In effect, he sought that these proceedings be adjourned until his application to set aside the judgment of the District Court was determined (or until resolution of any future appeal if he were to be unsuccessful in that application), or that the court go behind the judgment of the District Court, or that the court decline to make a sequestration order on the basis of the existence of such proceedings. 

4. On 7 June 2010 Mr Lal filed a notice of motion in the District Court to set aside the judgment of the District Court.  A stamped copy of the notice of motion was tendered in evidence during the hearing on 5 July 2010.  It was at that point that it became apparent that the notice of motion was listed for hearing in the District Court at 9.30 am on 9 July 2010.  In that notice of motion Mr Lal sought that the judgment for Alexa be set aside, that Alexa be ordered to produce a settlement agreement with the first defendant Mr Kumar and to be “transparent” in its dealings and that he be allowed to file “a grounds to dismiss the judgement (sic) based on the above disclosure” from the settlement agreement.  He also sought leave to file a fresh statement of claim against Alexa in the District Court alleging “misrepresentation and conduct” and a breach of the Trade Practices Act 1974 (Cth) “for unfair contract and Deed”. 

5. Insofar as can be determined on the material before this court, it appears that Mr Lal’s liability to Alexa that formed the basis for the District Court judgment arose as guarantor of a loan.  The documents under which such liability arose are not before the court.  The District Court judgment forms the basis for the debt claimed by Alexa.  It was obtained against Mr Lal, as second defendant, for $82,846.00.  Insofar as Mr Lal takes issue with the extent to which Mr Kumar should be liable for any debt to Alexa, the orders made by the District Court on 20 August 2009 did not address the liability of Mr Kumar. 

6. Mr Lal contended that the basis for judgment against him was that his defence and cross-claim had been struck out on the motion of Alexa and that there had been an “unfair trial for a summary judgment” in the District Court. 

7. Mr Lal asserted that Alexa’s claim was not legitimate.  He appears to take issue with the settlement between Alexa and Mr Kumar.  He suggested in oral submissions that there was some doubt about the authenticity of the copy of the deed of settlement between Alexa and Mr Kumar produced by Alexa in these proceedings in answer to a subpoena, apparently on the basis that it bears page numbers up to “ten of eight”.  The evidence before the court does not support the allegations made by Mr Lal.  The deed is dated 25 September 2009, which is after the date of the judgment obtained by Alexa against Mr Lal.  It refers to the fact that a guarantee given by Mr Lal was a continuing guarantee in respect of a balance owing by Mr Kumar and by H Lal & Associates Pty Ltd.  Alexa agreed to discontinue the proceedings against Mr Kumar on payment of an agreed amount and to covenant not to sue Mr Kumar for all claims it might otherwise have had against him in relation to the proceedings on the basis of the truth of certain representations by him and his undertaking to comply with certain obligations.  Importantly, the Deed is expressed not to release Mr Lal from the proceedings or his obligation under the Deed of Loan or to affect any claims Alexa may have against Mr Lal in respect of the Deed of Loan or judgment order. 

1. Mr Lal appears to consider it unfair that he should be liable for an amount as guarantor in circumstances where the principal debtor (or at least one of the principal debtors) has reached a settlement with the creditor.  However the debt claimed in the further amended creditor’s petition was reduced by an amount reflecting the amount apparently paid by Mr Kumar at the time of the deed of settlement. 

2. Mr Lal took issue with Mr Kumar’s involvement in the resolution of the District Court proceedings.  However in his affidavit of 4 June 2010 he acknowledged that he had guaranteed the loan repayments by Mr Kumar to Alexa. 

3. Mr Lal claimed that Alexa took advantage of his financial difficulties and that it misled the District Court.  He also contended that as there were two defendants he should only have been liable at most for 50 per cent of the amount claimed and that as Alexa had mortgages over two properties the debt should have been divided equally between the two properties. 

4. There is no basis in the evidence before the court for such a claim.  While Mr Lal made submissions in relation to the nature and extent of the guarantee given by him, he did not put the guarantee before the court to support his contentions or the proposition that the court should go behind the judgment of the District Court since he allegedly did not owe the debt on which Alexa relies. 

5. Mr Lal also took issue with what he said were contractual provisions for payment of penalty interest in his transactions with Alexa which he claimed were harsh, unfair and unreasonable.  He contended generally that Alexa had engaged in misleading conduct or misrepresentation and unfair conduct in the transactions in question (involving the purchase of properties which led to loans and the guarantee).  He took issue with the fact that Alexa had refused to accept offers made by Mr Lal to settle the proceedings or to consent to sale of the properties in question.  Copies of affidavits relied on by Mr Lal in the original proceedings before the District Court and his proposed statement of claim were before the court. 

6. In essence Mr Lal contended that the judgment that Alexa had obtained was “like” an uncontested default judgment as his defence and cross-claim had been struck out and the judge had not allowed further time to amend the pleadings.  He acknowledged that it was not a judgment made in his absence. 

7. In oral submissions Mr Lal indicated that he had prepared a draft statement of claim which he intended to seek leave to file in the District Court alleging misrepresentation by Alexa about the profitability of certain property investments, exorbitant penalty interest (which was said to be a breach of the “Fair Trading Act Rules”) and contending that Alexa had induced him to enter into a transaction to meet the settlement shortfall and had refused to remove the second mortgage when there was a potential buyer.  He claimed he had suffered loss and damage for misleading conduct and misrepresentation by Alexa.  Mr Lal tendered a sworn but unfiled affidavit which he said he intended to file in the District Court proceedings, in which he suggested that Alexa had “induced” Mr Kumar “to give evidence contrary to the facts…to clear his name from any bed (sic) credit effects”.  In that affidavit Mr Lal acknowledged that in August 2009 the District Court dismissed his amended defence and cross-claim on the basis of “incorrect pleading” and failure to comply “on time”. 

8. Mr Lal contended that he became aware of the judgment order dated 9 October 2009 when the plaintiff produced it as evidence.  It appears that this is a reference to the certificate of judgment issued by the District Court on 9 October 2009, rather than to the judgment of 20 August 2009.  It is not in dispute that Mr Lal was present when the District Court ordered that his amended defence and cross-claim be struck out and gave judgment for Alexa against him for $82,846.00 plus costs. 

9. Each of the parties addressed me as to whether or not the judgment of the District Court was a default judgment.  It is not in dispute that the judgment was not made in the absence of Mr Lal, but at the same time there is no evidence that there was a real trial of the substantive issues as Mr Lal’s amended defence and cross-claim were struck out.  The judgment of the District Court which led to these orders is not before the court.  There is no evidence before this court as to the basis on which the amended defence and cross-claim were struck out, other than Mr Lal’s admissions about defective pleadings and being out of time.  His submissions do not constitute evidence.  I have, however, borne in mind that the court “looks with suspicion on consent judgments and default judgments” (Petrie v Redmond (1942) 13 ABC 44; [1943] St R Qd 71) and that it is relevant to have regard to whether the debtor has attempted to have the judgment set aside.  In this respect the debtor filed an application to set aside the judgment of the District Court on 7 June 2010.  There was however some considerable unexplained delay in filing this application after the decision of the District Court on 20 August 2009 (see National Australia Bank Ltd v Zollo [2000] FCA 972 at [33] – [35]).

10. In an appropriate case an adjournment can be allowed to enable a debtor to pursue an application to reopen proceedings in circumstances where the debtor can demonstrate a genuine and arguable case that leave to reopen will be granted and that there is a real prospect of achieving a different result in that action (see National Australia Bank Ltd v Zollo, although as stated in that case at ([19] – [21]), due regard must be had to the low likelihood of a court permitting a concluded proceeding to be reopened in all but an exceptional case. As pointed out by the solicitor for Alexa, the grounds on which the District Court could set aside its orders are in the circumstances of this case limited (see rr.36.15 and 36.16 of the Uniform Civil Procedure Rules 2005 (NSW). The application of those rules was not addressed by Mr Lal in these proceedings.

11. While the delay in the applicant filing the application to set aside the orders made by the District Court and the limited prospects of success in an application of that nature are factors of significance, upon being informed in the hearing that Mr Lal’s notice of motion to set aside the District Court judgment was before that court on 9 July 2010 I considered that it was appropriate to reserve my judgment until after the notice of motion was considered by the District Court on 9 July 2010 and invited the parties to inform the court as to the result of the proceedings before the District Court, on the basis that if the District Court had set aside the judgment this would be a matter to be taken into account by this court in determining what orders should be made and, in particular, whether there should be any further adjournment. 

12. On 9 July 2010 the solicitors for Alexa advised that Mr Lal’s motion to set aside the judgment in proceedings number 1502 of 2008 had been heard on 9 July 2010, that the notice of motion was dismissed and that Mr Lal was ordered to pay Alexa’s costs of the motion. 

13. Mr Lal also advised the court by letter dated 13 July 2010 of the orders made by the District Court on 9 July 2010.  He claimed that he intended to appeal that decision and reiterated his application for an adjournment for such an appeal to be heard and until after his proceedings against Surti were resolved (the hearing of which was said to have been adjourned until 19 August 2010). 

14. Insofar as Mr Lal relied on the existence of his notice of motion to seek an adjournment of the petition or that a sequestration order not be made, given that the notice of motion has been heard and dismissed it provides no basis for any further adjournment or reason to dismiss the petition. I am not persuaded that any prospect of future appeal from the decision of the District Court is such as to warrant further adjournment in all the circumstances, having regard to the delay in institution of the motion to set aside the judgment, the limited basis for any such proceedings, the absence of evidence to demonstrate a real prospect of achieving a different result, the prima facie right of a petitioning creditor to obtain sequestration and the importance of avoiding or minimising delay once bankruptcy proceedings have been instituted (see Abignano; in the matter of Abignano v Wenkart [1999] FCA 1695).

15. Importantly, as I drew to Mr Lal’s attention, on a debtor’s application for an adjournment of the petition the court should be put in possession of all possible information as to the position of the debtor including his financial circumstances.  That has not been done in this case.  It is a factor that weighs strongly against any further adjournment. 

16. Moreover, insofar as Mr Lal relied on his application to set aside the judgment of the District Court as a basis on which the court should decline to make a sequestration order, I am not satisfied that the existence of such proceedings or the possibility of future proceedings in that respect is a basis on which to decline to make a sequestration order.  Nor is the material Mr Lal intended to rely on in the District Court such as to justify dismissing the petition. 

17. Insofar as the issues raised by the respondent may be seen as inviting the court to go behind the District Court judgment of 20 August 2009, I am not satisfied that substantial reasons have been given to question whether there was in truth and reality a debt due to the petitioner behind that judgment in the sense considered in Wren v Mahony (1972) 126 CLR 212; [1972] HCA 5. As stated in Wren v Mahony, the court has a discretion to accept a judgment as satisfactory proof of a creditor’s debt, but that discretion is not well-exercised where substantial reasons are given for questioning whether behind the judgment there was in truth and reality a debt due.  Special circumstances must exist before the court will go behind a judgment and it will not be done as a matter of course (see Petrie v Redmond and Makhoul v Barnes (1995) 60 FCR 572 at 581).

18. The evidence before the court does not raise an issue that the District Court judgment was obtained by fraud, collusion or a miscarriage of justice, such as to constitute substantial reasons for questioning whether behind the judgment there was in truth and reality a debt due, notwithstanding the very general allegations that Mr Lal makes in this respect, in particular by reference to the fact that after the judgment was given against him as guarantor, the creditor, Alexa, settled its proceedings against Mr Kumar the principal debtor. Nor does the copy of the deed of settlement amount to fresh evidence of such probative value and significance or materiality that it warrants going behind the judgment obtained against Mr Lal. I note in that respect, that where there is an allegation of fraud it must be clearly alleged and proved. Neither in the submissions to this court, nor in the documents which Mr Lal indicated he intended to rely on in the District Court proceedings, is any allegation of fraud made with specificity and particularity (see McDonald v McDonald (1965) 113 CLR 529; [1965] HCA 45 and Commonwealth Bank of Australia v Casella [2000] FCA 1518 at [38]).

19. Insofar as Mr Lal may intend to submit that the judgment was obtained through an error of law resulting in a miscarriage of justice (see Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572) the submissions he makes in this respect do not establish that the action against him was not maintainable as a matter of law or that he had a good defence and do not raise sufficient doubts in that respect to warrant going behind the judgment.

20. Further, the evidence does not support Mr Lal’s claim that his obligations under the guarantee (which is not before the court) or the judgment of the District Court have been discharged by the deed of settlement between Alexa and Mr Kumar as he submitted generally (see Hancock v Williams (1942) 42 SR (NSW) 252). Nor is there evidence to support the claim that Alexa’s agreement with Mr Kumar thereby altered the nature of Mr Lal’s obligation without his consent in the manner discussed in Ankar Pty Ltd v National Westminster Finance (Aust) Ltd (1987) 162 CLR 549; [1987] HCA 15 as contended in the notice of opposition.

21. I have had regard to all the material before the court and the matters which Mr Lal claims cast doubt on the existence of the judgment debt and I am not satisfied on the evidence before the court that there is the requisite doubt as to the existence of the debt (see Joossé v Deputy Commissioner of Taxation [2007] FCA 445 at [15]). In all the circumstances I am not persuaded that the court should go behind the judgment of the District Court.

Pending District Court proceedings between Mr Lal and Surti Pty Ltd

1. As set out above, Mr Lal commenced proceedings against the original petitioning creditor, Surti Pty Ltd, in the District Court on 13 October 2009.  Mr Lal told the court that the matter was to be heard by the District Court this month.  After the hearing he advised that the hearing had been adjourned until 19 August 2010. 

2. Insofar as he raises this matter as a basis on which the court should decline to make a sequestration order, relevant to the exercise of discretion under s.52(2)(b) of the Act, the debtor must show that the claim is a genuine and serious one he has not reasonably been able to litigate and that it has “sufficient validity … to justify a dismissal or  adjournment of the petition” (Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116). The prospects of success of such proceedings should be considered to the extent that is possible on the material before the court (see Commissioner of Taxation v Cumins [2008] FCA 353 at [31] and Totev v Sfar and Another (2008) 167 FCR 193; [2008] FCAFC 35).

3. In this case the evidence before the court as to those proceedings includes Mr Lal’s pleadings and a copy of an affidavit of 1 December 2009 filed in relation to Mr Lal’s application to set aside the Bankruptcy Notice.  The affidavit evidence filed in the District Court proceedings against Surti is not before the court, other than affidavits verifying the pleadings.  Mr Lal has put before the court copies of his statement of claim and amended statement of claim alleging breach of contract by Surti Pty Ltd and Surti’s notice of motion that the proceedings be dismissed as frivolous or vexatious, as not disclosing a reasonable cause of action or as an abuse of process that Mr Lal says was dismissed.  There is some evidence as to the steps taken in those proceedings and that Mr Lal was pursuing those proceedings. 

4. Mr Lal claimed that he had reasonable prospects of success in those proceedings and that the debts he owed to Alexa and Surti would be accommodated by the funds available were he to succeed in the proceedings against Surti. He claimed generally that he would be able to pay “all legitimate creditors”. I note that two other supporting creditors have appeared in these proceedings. However, Mr Lal did not put any evidence before the court as to the extent of his debts and liabilities and assets.

5. The evidence before the court is not such as to establish that such claim has sufficient validity to justify dismissal of the petition or a further adjournment. Even if the evidence were such as to establish that Mr Lal has an arguable claim against Surti, the mere existence of an “arguable” claim does not by itself necessarily constitute “other sufficient cause” to dismiss a creditor’s petition (see Rigg v Baker (2006) 155 FCR 531; [2006] FCAFC 179). Surti is no longer the petitioning creditor. Critically, there is no evidence as to Mr Lal’s overall financial position such as to enable the court to be satisfied that if he were to succeed against Surti he would be able to pay his debts in the s.52(2) sense. There is simply no evidence before the court as to the extent of Mr Lal’s indebtedness or that is otherwise relevant to his solvency. While Mr Lal suggested that he would be able to borrow money to pay his debts were he to succeed in the action against Surti Pty Ltd, there is no evidence before the court to show that he has assets capable of sourcing or raising the money he suggested he could borrow within a relevantly short time or that he has any capacity to pay for or secure or otherwise satisfy any such proposed new debt (see Sandell v Porter and Another (1966) 115 CLR 666; [1966] HCA 28). The onus of proving an ability to pay debts within the meaning of s.52(2)(a) lies on the debtor. On the evidence before the court I am not satisfied that Mr Lal has established that there is sufficient validity in his claim against Surti such as to override the rights of the substituted petitioning creditor in circumstances where there is no evidence before the court as to his overall financial position. In these circumstances, I am not persuaded on the evidence before the court that the existence of the proceedings against Surti, a third party albeit the original petitioning creditor, constitutes other sufficient cause for dismissal of the further amended creditor’s petition under s.52(2)(b) of the Act.

Section 52 issues

1. I am satisfied with proof by Alexa of the matters specified in s.52(1) of the Act, including the fact that the debtor committed the act of bankruptcy alleged in the further amended creditor’s petition and that the date of the act of bankruptcy is 16 September 2009.

2. Mr Lal has not satisfied me that he is able to pay his debts in the sense provided for in s.52(2)(a) of the Act. As indicated, Mr Lal has not put evidence as to his solvency or financial position before the court. The existence of his claim in relation to Surti is not such as to establish that he is able to pay all the debts he owes within a reasonable time in the absence of evidence as to his financial position (see re Re Sarina; Ex parte Council of the Shire of Wollondilly (1980) 43 FLR 163; [1980] FCA 66 and Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372; [1980] FCA 138).

3. Nor has Mr Lal satisfied me that for other sufficient cause a sequestration order ought not to be made (see s.52(2)(b) and Cain v Whyte (1933) 48 CLR 639; [1932] HCA 6). As indicated, the mere existence of an arguable claim against a third party does not by itself necessarily constitute “other sufficient cause” to dismiss the creditor’s petition.  The fact of those proceedings and all the other matters relied on by Mr Lal (including his asserted claims against Alexa, and in relation to the District Court proceedings) are not such as to warrant dismissal of the petition or any further adjournment. 

4. Accordingly a sequestration order should be made against the estate of Hasmukh Lal with the usual order as to costs. 

I certify that the preceding sixty-eight (68) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate: 

Date:  16 July 2010