BATHINI v Kumar
[2015] FCCA 1190
•17 April 2015
FEDERAL CIRCUIT COURT OF AUSTRALIA
| BATHINI & ANOR v KUMAR & ANOR | [2015] FCCA 1190 |
| Catchwords: BANKRUPTCY – Application to review sequestration order made by registrar – whether “other sufficient cause”. |
| Legislation: Bankruptcy Act 1966 s.52(2) |
| Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; (1981) ALJR 621; [1981] HCA 45; (1981) ALR 3 Totev v Sfar [2006] FCA 470; (2006) 230 ALR 236 |
| First petitioning creditor: | MALA BATHINI |
| Second petitioning creditor: | ANIL BATHINI |
| First debtor: | AAKASH KUMAR |
| Second debtor: | ALOKE KUMAR |
| File number: | MLG 1690 of 2014 |
| Judgment of: | Judge Riley |
| Hearing date: | 17 April 2015 |
| Date of last submission: | 17 April 2015 |
| Delivered at: | Melbourne |
| Delivered on: | 17 April 2015 |
REPRESENTATION
| Counsel for the applicants: | Peter Fary |
| Solicitors for the applicants: | CLH Lawyers |
| Counsel for the respondent creditors: | John Selimi |
| Solicitors for the respondent creditors: | Matthew James Lawyers |
ORDERS
The application for review dated 3 December 2014 be dismissed.
The orders of the registrar made on 27 November 2014 be affirmed.
The petitioning creditor’s costs of the application for review be taxed and paid in accordance with section 109(1)(a) of the Bankruptcy Act 1966.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 1690 of 2014
| MALA BATHINI |
First petitioning creditor
| ANIL BATHINI |
Second petitioning creditor
And
| AAKASH KUMAR |
First debtor
| ALOKE KUMAR |
Second debtor
REASONS FOR JUDGMENT
(Revised from transcript)
This is application to review a decision made on 27 November 2014 by a registrar to grant a sequestration order. The matter proceeded today as a hearing de novo. The formal proofs have been provided by the petitioning creditor. There is no dispute about any aspect of them.
The debtors, however, rely on s.52(2) of the Bankruptcy Act 1966 (“the Act”). That subsection provides that:
If the court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:
(a) that he or she is able to pay his or her debts; or
(b)that for other sufficient cause a sequestration order ought not to be made;
it may dismiss the petition.
The debtors say that there is “other sufficient cause” for the sequestration order to be set aside. The “other sufficient cause” is said to be a cross-claim against the petitioning creditors. It is said that there was an oral agreement for the petitioning creditors to pay the debtors a commission. The commission is said to be now worth about $1.2 million. The underlying debt in this case is $316,151.09. Therefore, the cross-claim is for considerably more.
The history of the matter is that the debtors and petitioning creditors had a commercial relationship. The petitioning creditors were involved in providing educational services. The essence of the claim, which resulted in the judgment debt the subject of the bankruptcy notice, was that the debtors had made a misleading and deceptive representation to the petitioning creditors, namely, that the debtors had bought a college, AITC, for $440,000. It was decided in the County Court by Shelton J that the debtors had made a misleading and deceptive representation in that regard. The debtors were ordered to pay the creditors $220,000 in damages, plus a further $20,000 which related to a loan, plus interest and costs. That judgment was handed down on 26 October 2012. The debtors appealed to the Court of Appeal. The appeal was dismissed on 16 April 2014. The debtors also sought special leave to appeal to the High Court. Special leave was refused on 15 October 2014.
The bankruptcy notice was served in about December 2012. Compliance with it was extended for a lengthy period to enable the Court of Appeal to hand down its decision. Eventually on 29 April 2014, a registrar refused to further extend the time for compliance with the bankruptcy notice. Application was made to review the decision of the registrar refusing to further extend the time for compliance with the bankruptcy notice. On that occasion, the court was asked to extend the time for compliance with the bankruptcy notice pending determination by the High Court of the special leave application. However, Judge Burchardt declined to do that. Ultimately, the debtors committed acts of bankruptcy on 29 April 2014.
The essential issue in this case is whether there is “other sufficient cause” to not proceed with sequestration based on the claim for commissions. The debtors filed a writ in the Supreme Court on
22 October 2014 against the creditors for the amount of the commissions. The writ has not been served. No explanation has been given to the court for not serving the writ.
The parties were in substantial agreement about the relevant law to apply in cases such as this.
The petitioning creditor relied on Totev v Sfar (2006) 230 ALR 236; [2006] FCA 470 at [44], where Allsop J (as his Honour then was) stated:
Nevertheless, what is clear is that the fact that there has been an act of bankruptcy does not make the claim by the debtor against the petitioning creditor irrelevant. It should be examined to assess whether it can be said that there is sufficient evidence to show that it is a real claim which is likely to succeed. Also relevant is the stage of the litigation, the length of time for its vindication and any other relevant matters. It goes without saying that solvency is a relevant consideration. In some circumstances, it may be difficult to assess the likelihood of success of the debtor’s claim. All the authorities show that central to the showing of “other sufficient cause” for the purposes of
s 52(2)(b) is the question of the prospects of success. The case is not tried in the bankruptcy court, but the material is examined for the purpose alluded to by Gibbs J in Re Schmidt. As Olney J identified in Re James, if a likelihood of success can be demonstrated, that may justify a refusal of a sequestration order. Alternatively, the circumstances may reveal a claim of a character and nature in which likelihood of success cannot be predicted with accuracy but in the circumstances the petition should be dismissed or an adjournment of the petition should granted: see the approach of Sundberg J in Ling v Commonwealth (1996) 68 FCR 180 at 195–196, with which Wilcox J and Whitlam J agreed. If the claim is one in which credit of witnesses will be involved, and a debtor sets out the nature and detail of the case and all his or her evidence the debtor may only be able to persuade the bankruptcy court that, if relevant criteria are believed, he or she has good prospects of success. What should be proved, or what is sufficient to be proved, in any given case will depend upon the circumstances. The context in which the issue arises is also important. The discretion involved in
s 52(2)(b) is a broad one, and, importantly, it is informed by public interest considerations concerned with the dealing with insolvents. It is to be distinguished from the task involved in deciding whether a claim exists that satisfied s 40(1)(g) of the Act. There, the task, prior to the commission of an act of bankruptcy, is the identification of a bona fide or genuine claim… (emphasis added)
The debtors relied on Totev v Sfar at [40], [43] and [44] as follows:
40.A claim sounding in money by the debtor against the petitioning creditor may amount to such other sufficient cause. The matter was examined by the Full court in Ling v Enrobook Pty Ltd [1997] FCA 226; (1997) 74 FCR 19. At 25-26, after referring to Cain v Whyte, the Full Court referred to the relevant authorities (in particular Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116 per Gibbs J, sitting in bankruptcy) and stated the principles. Despite the length of the passage it is appropriate to set it out.
A review of the authorities discloses that in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor's debt will amount to “other sufficient cause” not to make a sequestration order (Re Yeatman; Ex parte Yeatman (1880) 16 Ch D 283; Maddestra v Penfolds Wines Pty Ltd [1993] FCA 406; (1993) 44 FCR 303; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14; Ling v Commonwealth). The circumstance that the legitimate claim of the debtor is one against the judgment creditor is likely to be a significant circumstance for the purposes of s 52(2)(b). …
…
43.In St George Bank v Helfenbaum [1999] FCA 1337 at [13] Sundberg J summarised the authorities:
The existence of a cross-claim may be a `sufficient cause´ within s 52(2)(b) for declining to make a sequestration order: Ling v Enrobook Pty Ltd [1997] FCA 226; (1997) 74 FCR 19 at 25. It is for the debtor to establish the existence of `sufficient cause´: Cain v Whyte [1932] HCA 6; (1933) 48 CLR 639 at 645-646; Ling at 24. He must establish that he has a real claim against the creditor that is likely to succeed. If the Court is satisfied that there is such a claim, and that its quantum is likely to equal or exceed the creditor´s claim, it will not make a sequestration order. If the claim is likely to be less than the creditor´s claim, the Court will require the debtor, if he is to avoid a sequestration order, to pay the difference between the judgment debt and the amount he is likely to recover on his claim. See Re Player (1962) 19 ABC 277 at 282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116; Ling at 25-26; Commonwealth Bank v McDonald [1999] FCA 984. A debtor does not establish a real claim that is likely to succeed merely by producing a statement of claim in an action against the creditor: Re Rivett; Ex parte Edward Fay Ltd (1932) 5 ABC 182; Player at 282, or by pointing to the existence of current litigation against the creditor: cf Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19 at 23. While the Court does not try the cross-claim in advance, the debtor must adduce sufficient evidence to show that it is a real claim which is likely to succeed: cf Vogwell v Vogwell (1939) 11 ABC 83 at 88; Player at 282.
44.It may be that the fourth sentence of the above passage in St George Bank Ltd v Helfenbaum is open to debate as to whether it states the matter slightly too unequivocally in the light of what was said in Ling v Enrobook. Nevertheless, what is clear is that the fact that there has been an act of bankruptcy does not make the claim by the debtor against the petitioning creditor irrelevant. It should be examined to assess whether it can be said that there is sufficient evidence to show that it is a real claim which is likely to succeed. Also relevant is the stage of the litigation, the length of time for its vindication and any other relevant matters. It goes without saying that solvency is a relevant consideration. In some circumstances, it may be difficult to assess the likelihood of success of the debtor’s claim. All the authorities show that central to the showing of "other sufficient cause" for the purposes of s 52(2)(b) is the question of the prospects of success. The case is not tried in the bankruptcy court, but the material is examined for the purpose alluded to by Gibbs J in Re Schmidt. As Olney J identified in Re James, if a likelihood of success can be demonstrated, that may justify a refusal of a sequestration order. Alternatively, the circumstances may reveal a claim of a character and nature in which likelihood of success cannot be predicted with accuracy but in the circumstances the petition should be dismissed or an adjournment of the petition should granted: see the approach of Sundberg J in Ling v Commonwealth [1996] FCA 1646; (1996) 68 FCR 180 at 195-196, with which Wilcox J and Whitlam J agreed. If the claim is one in which credit of witnesses will be involved, and a debtor sets out the nature and detail of the case and all his or her evidence the debtor may only be able to persuade the bankruptcy court that, if relevant criteria are believed, he or she has good prospects of success. What should be proved, or what is sufficient to be proved, in any given case will depend upon the circumstances. The context in which the issue arises is also important. The discretion involved in s 52(2)(b) is a broad one, and, importantly, it is informed by public interest considerations concerned with the dealing with insolvents. It is to be distinguished from the task involved in deciding whether a claim exists that satisfied s 40(1)(g) of the Act. There, the task, prior to the commission of an act of bankruptcy, is the identification of a bona fide or genuine claim: Ebert v Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd [1980] FCA 78; (1980) 44 FLR 135; Vogwell v Vogwell (1939) 11 ABC 83. Lindgren J summarised the position in relation to s 40(1)(g) in Glew v Harrowell [2003] FCA 373; (2003) 198 ALR 331 at [9]- [12] as follows:
[9]There are authorities suggesting that Glew and Tresidder must satisfy me of the following interrelated and sometimes overlapping matters:
• that they have a “prima facie case”, even if they do not adduce evidence which would be admissible on a final hearing making out that case (Ebert v The Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 (“Ebert”) at 350; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd [1980] FCA 78; (1980) 44 FLR 135 (“Brink”) at 141; Gomez v State Bank of NSW Ltd [2002] FCAFC 101 at [17], [18]);
• that they have “a fair chance of success” or are “fairly entitled to litigate” the claim: Brink at 141; Re Gould; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v The Owners – Strata Plan 11727 [2000] FCA 1262 at [11]); and
• that they are advancing a “genuine” or “bona fide” claim (Re Capsanis ... at [11]).
It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at 141) the reference to a “prima facie case” in Ebert as a reference to “a fair chance of success”.
[10]In Brink Lockhart J said (at 141) that the Court is not required to “undertake a preliminary trial of the counter-claim, set-off or cross demand”. But, clearly, the application of the criteria above requires the Court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross demand finally. And in Guss v Johnstone [2000] HCA 26; (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ stated (at 606):
“[40] The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim.”
[11]Plainly, in order to “satisfy” the court for the purposes of s.40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the court should be satisfied that the debtor has a claim deserving to be finally determined.
[12]Perhaps little more can usefully be said than that a debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.
The debtors also submitted that:
6.Further, “other sufficient cause” may exist even if the cross demand has no connection with the cause of action out of which the creditor’s judgment arose: Re a Bankruptcy Notice (1934) 1 Ch 431; Re Brink; Ex parte Commercial Banking Co. of Sydney Ltd [1980] FCA 78; (1980) 44 FLR 135, Re Judd; Ex parte Pike [1924] NSWStRp; (1924) 24 SR (NSW) 537; Re Ronald Wallace Gould, Elaine Margaret Gould and Julie Gay Gould Ex Parte: Ian Robert Skinner and Dayle Kerry Smith [1983] FCA 68; (1983) 72 FLR 393 (19 April 1983).
7.It is conceded that the evidential burden of proof lies upon the applicants to show that they have a “prima facie case” against the respondents and that the court must be satisfied they have a “fair chance of success” on their commission claim as filed in the Supreme Court of Victoria: Re Brink; Ex parte Commercial Banking Co. of Sydney Ltd [1980] FCA 78; (1980) 44 FLR 135, followed Ebert v Union Trustee Co. of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346, referred to. In Ebert v Union Trustee Company of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 (9 August 1960), Dixon CJ, McTerinan and Windeyer JJ said:
Perhaps the standard may be expressed by saying that the debtor must show that the has a prima facie case, even if then and there he does not adduce the admissible evidence which would make out a prima facie case before a court trying the issues that are involved in his counter-claim, set-off or cross demand.
The debtors argued that they have a good claim. The evidence upon which they rely is set out in the affidavit of Aakash Kumar sworn on 28 April 2014. That affidavit sets out the history of the matter and it said at paragraph 7:
In or about June, 2008, my brother and I entered into an oral agreement with the respondents whereby the respondents granted us exclusive marketing rights in relation to their company, Chelsea International College Pty Ltd (“CIC”) (“the Commission Agreement”). Pursuant to that agreement, we agreed to procure foreign students to be referred to CIC for enrolment at that college in consideration of a promise to pay us commission in accordance with the following formula:
(a)30% commission for each student directly referred to CIC by us;
(b)10% commission for each other student enrolled at CIC as a result of a referral by other agents or as a result of “walk-ins” to CIC.
The affidavit included reference to a separate and distinct written partnership agreement dated 1 October 2008 between the debtors and the creditors. It then said, at paragraph 8 that:
… since August, 2008, we had agreed to waive commissions which were due to us pursuant to the Commission Agreement on the basis of an agreement with the respondents that we would pool all of our resources together and work as partners. The partnership agreement was formalised by the document executed 24 October, 2008 and backdated to 1 October 2008.
The debtors argued that, because the County Court found that the partnership agreement was void, they are now able to claim all the commissions that were owed to them under the agreement. They say that they did not file proceedings earlier because they hoped to have the partnership agreement upheld. The debtors actually claimed in their original defence in the County Court filed on 9 December 2009 that they had the commission agreement with the petitioning creditors and said it constituted a setoff against the claim brought against them by the petitioning creditors. However, in an amended defence filed on 1 October 2010, the debtors abandoned the commission claim.
The trial in the County Court commenced on 3 October 2012 and ran for 12 days. The debtors in the preparation for the hearing were represented by a particular solicitor who filed on their behalves both the defence and the amended defence. However, they were not represented at the commencement of the trial. Part way through the trial, they gained legal representation. Their counsel sought on two occasions to be permitted to re-amend the defence to include the commission claim. The County Court refused that application on both occasions.
The appeal to the Court of Appeal does not appear to have included any ground of appeal in relation to the County Court’s refusal to allow the reinstatement of the commission claim. There is a copy of the special leave application to the High Court before this court. It did not raise as an issue that the County Court erred in not permitting the reinstatement of the commission claim.
The Court of Appeal noted that the debtors conceded before the Court of Appeal that they were not legally entitled to bring the claim for commission. Counsel for the debtors before the court today said that that concession had been made because the debtors were aware that leave had not been granted to revive the commission argument and so, on that basis, they were not legally entitled to claim commission. As I have mentioned, there was no appeal ground that leave should have been granted for the commission claim to be revived.
The debtors rely particularly on a passage from Totev v Sfar at [44], which said that:
Alternatively, the circumstances may reveal a claim of a character and nature in which likelihood of success cannot be predicted with accuracy, but in the circumstances the petition should be dismissed or an adjournment of the petition should be granted: see the approach of Sundberg J in Ling v Commonwealth (1996) 68 FCR 180 at 195-196, with which Wilcox J and Whitlam J agreed.
The debtors submitted that this is such a case because here there is simply oath against oath. The debtors and creditors respectively have said on affidavit that there was and was not an oral agreement regarding the commission. The debtors submitted that, in such circumstances, the court should allow the matter to be determined by the Supreme Court. The debtors submitted that this court should not be making judgments about the credibility of the debtors’ claim.
The petitioning creditors argued against that. They said that there are many features of this case which reveal the character and nature of the commission claim and which indicate that the commission claim is not likely to succeed. They said that there is an Anshun[1] estoppel argument. They said that there is an overwhelming likelihood that, if this matter were to go to the Supreme Court, it would be immediately rejected on Anshun principles. The debtors said that Anshun does not apply because they tried to run their argument, but were not permitted to do so. They said that takes them outside the normal range of Anshun cases.
[1] Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589; (1981) ALJR 621; [1981] HCA 45]; (1981) ALR 3
The position is that this court cannot determine definitively whether Anshun estoppel would apply in this case or not. That would be a matter for the Supreme Court. However, there are a number of features already mentioned which suggest that there is a solid basis to the Anshun arguments. The commission claim was raised in the County Court. It was abandoned in the County Court. The debtors had the same lawyers acting for them when both of those steps were taken. It is true that the debtors attempted to reinstate their commission claim in the County Court without success. Although they appealed against the County Court judgment, they did not appeal the refusal to allow the commission claim to be run. The other telling point is that, although the Supreme Court writ regarding the commission claim was issued on 22 October 2014, it has not been served.
Counsel for the debtors disputed a claim by counsel for the creditors that the matter would not be heard in the Supreme Court until next year. Counsel for the debtors said that the Anshun point could be heard and determined in weeks in the Supreme Court. That may be true, but it cannot be determined until the writ is served. It seems to me that it is extremely telling that the debtors chose not to serve the writ.
There was some debate about why it had taken so long for the writ regarding the commission claim to be filed at all in the Supreme Court. Counsel for the debtors explained that they did not wish to set aside the partnership agreement because it would have given them a one-third share in the college and they perceived that as being more valuable than their $1.2 million commission claim. That might explain the delay between the judgment of the County Court on 22 October 2012 and the refusal of special leave on 15 October 2014. However, it does not explain the delay in serving the writ.
It seems to me that in the context of this case there is a reasonable prospect that the Anshun argument will be resolved in favour of the creditors. However, it also seems to me that there are surrounding circumstances in this case which support a decision that the sequestration order should not be set aside. The decision of Allsop J, as his Honour then was, in Totev v Sfar said that the discretion in s.52(2) of the Act should be informed by a number of factors, including public interest considerations. There has been a very long history to this matter. The bankruptcy notices were issued in 2012. There has already been protracted litigation in the County Court, Court of Appeal and the High Court.
Another factor is the stage of the litigation. As I have said, the writ was issued on 22 October 2014, but it has not been served. The litigation at an extremely early stage.
The next factor is the length of time for the vindication of any claim. The parties were in considerable dispute about how long it might take for the Supreme Court proceeding to come to a conclusion. I am not in a position to determine that matter, other than to say, again, that the litigation is at an extremely early stage.
Allsop J said in in Totev v Sfar that what the debtors needed to show was that there was a real claim, which is likely to succeed. There is other authority to the effect that the claim does not need to be more likely than not to succeed, rather, that there be a prima facie case. However, even on the lower test, it seems to me that there is no real reason to consider that this is a real claim which has reasonable prospects of success. The claim is based on an oral agreement. There is no evidence, other than the debtors’ assertions, of the existence of that agreement. The creditors point out that the alleged agreement seems odd in that, if it concerned marketing rights for Chelsea International College, it would be expected that Chelsea International College would have been party to the agreement. Moreover, there is the Anshun argument.
Taking into account all the matters referred to by Counsel, I do not consider that there is “other sufficient cause”, such that the sequestration order made by the registrar ought to be set aside. There will be orders accordingly.
I certify that the preceding twenty-seven (27) paragraphs are a true copy of the reasons for judgment of Judge Riley.
Associate:
Date: 8 May 2015
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