Bka Practice Co Pty Ltd v Nida
[2021] FCCA 334
•25 February 2021
FEDERAL CIRCUIT COURT OF AUSTRALIA
BKA Practice Co Pty Ltd v Nida [2021] FCCA 334
File number(s): MLG 712 of 2019 Judgment of: JUDGE A KELLY Date of judgment: 25 February 2021 Catchwords: BANKRUPTCY – application for review of registrar’s decision for sequestration of bankrupt’s estate – where petitioning creditor provided legal services to bankrupt – where proceeding brought for recovery of legal fees – where default judgment obtained – where protracted proceedings to set aside default judgment – where application for judicial review dismissed – where dismissal affirmed on appeal – applicable principles – de novo review – where debtor shown to have committed an act of bankruptcy at a time when personally present in Australia – where conditions upon which creditor may petition are satisfied – where proof of matters required for making of sequestration order satisfied – where Court not satisfied by bankrupt that she was able to pay her debts – whether Court should go behind judgment – applicable principles – where Court was not satisfied by bankrupt of genuine dispute as to warrant going behind judgment or of existence of any cross-demand or set-off – where Court not otherwise satisfied by bankrupt of other sufficient cause why discretion should be exercised to dismiss petition – application for review dismissed. Legislation: Bankruptcy Act 1966 (Cth), ss 5, 43, 44, 52, 109
Civil Procedure Act 2010 (Vic), ss 29, 31
Federal Circuit Court of Australia Act 1999 (Cth), s 104
Federal Circuit Court Rules 2001 (Cth), r 20
Federal Circuit Court (Bankruptcy) Rules 2016 (Cth), sch 1
Cases cited: Bryant v Commonwealth Bank of Australia (1996) 134 ALR 460
Culleton v Balwyn Nominees Pty Ltd (2017) 343 ALR 632
Francis v Eggleston Mitchell Lawyers Pty Ltd [2014] FCAFC 18
Nida v BKA Practice Pty Ltd [2020] VSC 158
Nida v BKA Practice Pty Ltd (No 2) [2020] VSC 770
Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132
Re Sarina, ex parte Wollondilly Shire Council (1980) 30 ALR 266
Re Sarina, Council of the Shire of Wollondilly (1980) 32 ALR 596
Sandell v Porter (1966) 115 CLR 666
Stratton v Bowles (No 2) [2015] FCA 43
Totev v Sfar (2008) 167 FCR 193
Number of paragraphs: 70 Date of hearing: 10 February 2021 Place: Melbourne Counsel for the Applicant Mr Edward Moon Solicitors for the Applicant Belleli King Respondent: Ms Roona Nida (In person) ORDERS
MLG 712 of 2019 BETWEEN: BKA PRACTICE CO PTY LTD
ApplicantAND: ROONA NIDA
Respondent
ORDER MADE BY:
JUDGE A KELLY
DATE OF ORDER:
25 FEBRUARY 2021
THE COURT ORDERS THAT:
1.The application for review filed on 12 January 2021 be dismissed.
2.The respondent pay the applicant’s taxed costs of the application for review, such costs to be paid pursuant to s 109(1)(a) of the Bankruptcy Act 1966 (Cth).
REASONS FOR JUDGMENT
JUDGE A KELLY
INTRODUCTION
On 12 January 2021, the respondent bankrupt, a barrister, filed an application for review of a registrar’s decision made on 3 December 2020. On that date an order was made for the sequestration of the bankrupt’s estate. The order was made on the application of the petitioning creditor which relied upon an act of bankruptcy constituted by a failure of the bankrupt to comply with a bankruptcy notice. An application by the bankrupt to further extend and set aside that notice had been dismissed by the Federal Court of Australia.
For the reasons that follow, the application should be dismissed. In short, I am satisfied that the applicant has committed an act of bankruptcy and that she did so at a time when she was personally present or ordinarily resident in Australia. Despite the bankrupt’s submissions to the contrary, I am satisfied that the petitioning creditor has established by judgment that there is a debt owing to it by the bankrupt in an amount greater than the statutory minimum, being a debt for a liquidated sum which was immediately payable within a period of six months before the presentation of the creditors petition. I reject the bankrupt’s submissions: that such judgment was obtained by fraud; that the bankruptcy notice upon which reliance was placed was defective, or; that she is owed monies by the petitioning creditor. Finally, I am not satisfied by the bankrupt of any other sufficient cause why the court should exercise its discretion to dismiss the petition including the existence of any genuine dispute as to her liability for the debt relied upon in this case or of any viable cross-demand, set-off or counterclaim.
BACKGROUND
By way of overview, the matter has a significant procedural history in this court, the Magistrates Court of Victoria and the Supreme Court of Victoria (including an appeal of the decision of an Associate Justice). While the dates of particular proceedings in various courts have overlapped in several instances, it is convenient to separate the proceedings below.
Bankruptcy proceedings
On 25 September 2018, the petitioning creditor issued a bankruptcy notice against the bankrupt, which notice was served personally on 26 September 2018.
The bankruptcy notice referred to a debt of $22,812.64 relating to a default judgment obtained by the applicant against the respondent in the Magistrates’ Court of Victoria on 4 September 2018 (judgment).
On 18 October 2018, the bankrupt instituted a proceeding in the Federal Court of Australia seeking orders that the bankruptcy notice be set aside. This proceeding was dismissed.
On 31 January 2019, a registrar dismissed the respondent’s application to set aside the bankruptcy notice and accordingly, she committed an act of bankruptcy on that day.
On 14 March 2019, the applicant presented its creditors petition in this court seeking an order for the sequestration of the bankrupt’s estate pursuant to s 43 of the Bankruptcy Act 1966 (Cth), which petition was served personally upon her on that date. The act of bankruptcy relied upon was her failure to comply with the requirements of the bankruptcy notice.
Since that date, the matter has been listed for hearing before a registrar of this court on 2 May 2019, 23 May 2019, 20 June 2019, 3 October 2019, 14 November 2019, 12 December 2019, 20 February 2020, 2 April 2020, 14 May 2020, 2 July 2020, 13 August 2020, 8 October 2020, and 3 December 2020 when the order was made for sequestration of the bankrupt’s estate.
I note that on 20 February 2020, an order was made extending the life of the petition for a period of 24 months from the date on which it was presented; namely, 14 March 2019.
Without descending into the detail of the circumstances giving rise to each of those hearings, suffice to say that registrars of the court had been satisfied from time to time that the bankrupt had instituted proceedings either to: (a) set aside the judgment; (b) seek judicial review of certain orders made in the Magistrates Court of Victoria; (c) appeal the refusal of the application for judicial review, and; (d) most recently, to recover compensation for alleged breaches of the Civil Procedure Act 2010 (Vic) by the petitioning creditor and its counsel.
Ultimately, on 3 December 2020, a registrar declined a further application for an adjournment and made an order for the sequestration of the bankrupt’s estate. The registrar did so in circumstances where the bankrupt had apparently all but exhausted the available challenges to set aside the judgment and held that the application for recovery of compensation pursuant to the Civil Procedure Act 2010 had not been brought during the pendency of the underlying civil proceeding and where no extension of time to do so had been granted.
On 12 January 2021, the bankrupt filed an application for the review of the registrar’s decision. On the same date the applicant also filed a notice to creditors of her application for review.
While the application for review as signed by the applicant was dated 24 December 2020, it was not filed for some weeks thereafter and, as the petitioning creditor submitted, was not served until Friday, 5 February 2021. After the close of business on 5 February 2021, the petitioning creditor was served with two affidavits sworn or affirmed (in different cases) by the bankrupt on 24 and 30 December 2020 respectively. On the face of her application, the application for review was listed for directions the following Monday, 8 February 2021.
On the morning of 8 February 2021, each of the parties filed written submissions.
On 8 February 2021, the matter came before me for directions. In the course of that hearing each of the parties confirmed that all of the material that was sought to be relied upon had been prepared. However, it also emerged that the bankrupt had, it was said, encountered difficulties in the filing of material electronically.
In the event, it was common ground that the parties agreed that the matter should be dealt with as expeditiously as possible and, upon the bankrupt’s application, an order was made for the application to be heard in open court. In those circumstances, the applicant was directed to file her material at the registry without delay.
Furthermore, and commendably, the petitioning creditor did not oppose an order granting the bankrupt an extension of time within which to file the application for review and with a view to expediting the final hearing, such order was made on 8 February 2021.
Later on 8 February 2021, the applicant delivered to the registry a folder containing several affidavits and voluminous exhibits.
Notwithstanding the bankrupts statement that all of the material on which she sought to rely had been prepared, on 9 February 2021 she made a financial statement of a kind ordinarily used in this court in the family law jurisdiction. The filing of that financial statement may be explained as having occurred in response to one of the petitioning creditor’s submissions; namely, that the bankrupt had not established her solvency. Given the late service of this financial statement, the petitioning creditor was given leave to file an answering affidavit.
Against that background it is convenient to identify the earlier proceedings between the bankrupt and the petitioning creditor and/or other parties.
Magistrates Court proceeding
On 19 September 2016, the petitioning creditor instituted a proceeding in the Magistrates Court of Victoria seeking judgment for recovery of a debt of $15,265.41 in respect of seven tax invoices addressed to the bankrupt in the period between December 2014 and June 2015. As appears from the various affidavits, these invoices were in relation to certain legal services provided for the proposed purchase of a ‘Sports Co’ franchise in Mornington, to be operated by the bankrupt’s son.As further appears, the bankrupt, her son and a company (which appeared to be a vehicle that was to be employed for the conduct of this franchise) became embroiled in litigation with the franchisee, including in proceedings in the Victorian Civil and Administrative Appeals Tribunal for non-payment of rent.
On 10 February 2017, judgment was entered against the respondent in default of defence. On 7 August 2017, this, the first default judgment, was set aside and the complaint was listed for hearing on 9 May 2018.
On 9 May 2018, the proceeding was listed for trial in the Magistrates Court. The bankrupt briefed counsel to appear on her behalf and sought an adjournment on the basis of matter set out in certain medical certificates. The proceeding was adjourned and orders were made that by 11 June 2018 the bankrupt pay the applicant’s costs in the sum of $1,476 in default of which her defence would be struck out.
While much of the bankrupt’s attention was focused in the course of oral submissions upon the nature of this order and in particular, whether it was self-executing, of more immediate relevance is that the bankrupt was represented by counsel when that order was made.
A cornerstone of the bankrupt’s substantive complaint in relation to the determination of the proceeding in the Magistrates Court was that, as she claimed, in the course of the hearing on 9 May 2018 the presiding magistrate made certain comments to the effect that he had previously had a negative experience in his dealings with the bankrupt apparently as a barrister. It was the making of those comments which grounded the bankrupt’s complaint of apprehended bias and upon which she relied in seeking, variously, to set aside, obtain judicial review and then appeal, the making of various orders including, in particular, the judgment.
The bankrupt did not pay the costs of $1,476 and her defence was struck out on 15 June 2018. The petitioning creditor subsequently obtained the default judgment on 4 September 2018.
On 30 January 2019, an application to set aside the default judgement was dismissed.
Supreme Court proceeding
Several months later, on 21 May 2019, the respondent commenced proceedings in the Supreme Court of Victoria seeking judicial review and challenging a number of orders made in the Magistrates Court proceedings, including the judgment obtained on 4 September 2018.
It is unnecessary to rehearse the detail of this proceeding which is sufficiently set out in the comprehensive reasons for judgment at first instance and on appeal: Nida v BKA Practice Pty Ltd [2020] VSC 158; Nida v BKA Practice Pty Ltd (No 2) [2020] VSC 770.
I observe that the bankrupt was represented by senior and junior counsel in the course of the two day hearing for judicial review that was conducted on 19 – 20 September 2019. Critically, as concerned the allegations of apprehended bias which were relied upon by the bankrupt, Mukhtar AsJ found that the magistrate had adopted the precaution, based upon pragmatism, of recusing himself from involvement in any final hearing: [45]-[47], [54]. His Honour found that, being a barrister and “surely knowing of the consequences”, the bankrupt had chosen not to pay the costs as ordered and then instituted the application for judicial review in the Supreme Court of orders that had been made up to 340 days beforehand. Mukhtar AsJ held that the bankrupt had fostered an intolerable delay including by failing promptly to seek judicial review in the face of counsel’s advice to do so: [84]. The court did not disregard the bankrupt’s submissions or evidence as to her domestic situation or personal problems but identified, as a strongly competing hypothesis, that the delay had been caused by her resentment towards the petitioning creditor for suing her in the face of a belief that they would act for her free of charge – a belief which found no justification in the evidence and was undermined by the delivery of a costs agreement. His Honour concluded that “to try and make sense of this case, I cannot help but think that as the venture failed or did not start, [the bankrupt] might think she ought be relieved from paying the legal fees to set it up”: [86]. On 3 April 2020, the application for an extension of time was refused with costs and the proceeding was dismissed.
On 20 November 2020, an appeal from that decision was dismissed by Ginnane J who examined in detail each of the grounds of appeal: Nida v BKA Practice Pty Ltd (No 2) [2020] VSC 770. In particular, as relevant to the question of apprehended bias, Ginnane J found that the bankrupt “was aware of the grounds of an apprehended bias application after the first order was made on 9 May 2018 because she was represented that day, but failed to do anything about it”: [88]. His Honour was not satisfied that any special circumstances were made out as to justify an extension of time and so dismissed the appeal: [90]-[91].
Sequestration order
Following publication of the reasons for judgment dismissing the appeal from the refusal of the application for an extension of time in which to seek judicial review, a registrar of this court heard the application for the making of a sequestration order against the bankrupt.
At that hearing on 3 December 2020, the bankrupt sought a further adjournment in order to prosecute a summons filed in the Magistrates Court proceedings on 2 December 2020 seeking compensation and costs from the petitioning creditor and its barrister as a result of alleged breaches of the Civil Procedure Act 2010 (Vic).
The registrar observed that the application was bought under s 29 of the Civil Procedure Act which required that any such application be made prior to the finalisation of the civil proceeding to which it related and that an extension of time may be sought under s 31 of that Act (which had not been granted). The registrar noted that in the Magistrates Court summons, which was returnable on 8 December 2020, the bankrupt had neither quantified the amount of her claim, nor supported it by any affidavit. The registrar also identified that the bankrupt now claimed, amongst other things, that she had not been served with court documents relied upon by the petitioning creditor in support of the application to obtain the default judgement and that the petitioning creditor had falsely claimed that those documents had been served.
The registrar accepted the principles upon which it may be appropriate to adjourn a petition in circumstances where a debtor had a cross-claim against the creditor which, if successful, would exceed the judgment debt and cited Stratton v Bowles (No 2) [2015] FCA 43 (Stratton). As concerned such principles, the registrar correctly recognised that the debtor must establish that he or she had a bona fide and reasonably arguable claim which was not established merely by the production of a statement of claim in a separate proceeding or by pointing to such litigation. The registrar recognised that there must be sufficient evidence or other material to show that it satisfied both criteria to justify an adjournment and that to “demonstrate that it is reasonably arguable or of sufficient substance may require prima facie verification of the key factual elements as well as demonstrating legal tenability”: Stratton, [2015] FCA 43, [42] (Beach J).
The registrar was not satisfied that the bankrupt’s evidence demonstrated she had a claim of sufficient legal tenability to justify an adjournment of the petition and found that there was no evidence as would enable the Court to make an assessment of the value of such claim. The registrar correctly observed that the bankrupt had had an ample opportunity to file evidence and noted that her most recent complaints had not been raised in the Supreme Court proceedings for judicial review, either at first instance or on appeal. The registrar concluded that the bankrupt had failed to prosecute such claim with due diligence and, even if so satisfied, did not accept that such claim would have had an appreciable impact upon her solvency.
As to the question of solvency, the registrar observed that in the course of a hearing on 23 May 2019, the bankrupt had been informed by the registrar of the need to file material in relation to solvency without delay. Being otherwise satisfied as to the matters required in order that the petition might be granted, the sequestration order was made.
CONSIDERATION
This is a de novo hearing. The application for review for the review of the registrar’s decision was framed as seeking an order pursuant to s 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth) (FCCA) together with an order that the creditors petition be dismissed.
As a party to the proceeding in which the order was made for the sequestration of her estate, the bankrupt may apply to this court for a review of the exercise of power as exercised by a registrar: FCCA, s 104(2). The power to make a sequestration order under the Bankruptcy Act is a power delegated to a registrar: Federal Circuit Court (Bankruptcy) Rules 2016 (Cth), r 2.02(1)(a), Sch 1, Pt 1, Item 5. Although the right to apply for review is conditioned upon the application being made within the time prescribed by the Rules of Court, or within any further time allowed in accordance with those rules, an extension of time has been granted.
The court may review the exercise of power and may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised: FCCA, s 104(3). The court is required to conduct a rehearing de novo: Federal Circuit Court Rules 2001 (Cth), r 20.03(a). In conducting that review, the court may receive as evidence any affidavit or exhibit tendered before the registrar and may, with leave, receive further evidence: r 20.03(b)-(c).
The bankrupt relied upon her affidavit affirmed on 24 December and her affidavits sworn on 30 December 2020 and 8 January 2021 together with the exhibits thereto. In the course of her oral submissions, the bankrupt made plain that she wished to focus upon the matters in the first of those affidavits. Although she did so, I have examined each of the affidavits relied upon by her for the purposes of this application. However, it is not necessary to rehearse much of the detail contained in them or the matters disclosed by the exhibits thereto. A great deal of the bankrupt’s affidavits took the form of submission and argument, each of which I have reflected upon. The voluminous exhibits were frequently of marginal relevance. The facts critical to the present application are set out above. I have also examined her financial statement made on 9 February 2021 and the responding affidavit filed on behalf of the petitioning creditor.
I have also examined the parties’ written submissions and reflected upon their oral addresses.
Section 43
Jurisdiction to make a sequestration order is conferred by s 43 of the Bankruptcy Act. Subject to the Act, where a debtor has committed an act of bankruptcy and, relevantly, at the time when that act was committed, the debtor was personally present in Australia, the court may, on a petition presented by a creditor, make a sequestration order against the debtor’s estate.
The circumstances leading to the issue of a bankruptcy notice for a sum in excess of the statutory minimum have been set out above. I am satisfied that bankrupt committed an act of bankruptcy in failing to comply with the bankruptcy notice: Bankruptcy Act, s 40(1)(g). The bankruptcy notice was served on the respondent on 26 September 2018. While an extension of time was initially granted to 29 November 2018, and then to 31 January 2019, on the latter date a registrar of the Federal Court dismissed the application with costs.
Upon expiry of the time for compliance with the bankruptcy notice, the bankrupts failure to comply with its requirements constituted an act of bankruptcy on 31 January 2019.
Section 44
The conditions on which a creditor may seek the sequestration of a debtor’s estate proscribe that no petition may be presented unless, as material to the present application: (a) the debtor owed the petitioning creditor an amount greater than $10,000; (b) such debt is for a liquidated sum which is immediately payable; (c) the act of bankruptcy upon which the petition is founded was committed within six months before the presentation of the petition: Bankruptcy Act, s 44.
On the evidence adduced on this review, on 4 September 2018 a judgment was entered in favour of the petitioning creditor against the bankrupt in the sum of $22,682.14. The debt as established by that judgment was for a liquidated sum that was immediately payable. The petitioning creditor issued its bankruptcy notice on 26 September 2018 and the act of bankruptcy was committed on 31 January 2019 upon the dismissal by a registrar of the Federal Court of Australia of the application for a further extension of time. As it had been presented on 14 March 2019, such petition was presented within 6 months of that act of bankruptcy.
Section 52
The Court may, at any time before the expiration of the period of 12 months commencing on the date of presentation of a creditor’s petition, order that the period at the expiration of which the petition will lapse, be such period, relevantly, being a period not exceeding 24 months commencing on the date of presentation of the petition and as specified in the order. The power to extend such period is conditioned upon the court being satisfied that it is just and equitable to do so, including that conditions may also be imposed: Bankruptcy Act, s 52(5).
As noted, on 20 February 2020, a registrar made an order that the life of the creditors petition be extended for a period of 24 months from the date of its presentation. Such petition had been presented in this proceeding on 14 March 2019.
At the hearing of a creditor’s petition, the court shall require proof of the matters in s 52(1)(a)-(c) of the Bankruptcy Act. In the present case, I am satisfied of each of those matters. I am further satisfied that the creditor has complied with the requirements of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) by exhibiting a search of the National Personal Insolvency Index conducted in respect of the respondent on 5 February 2021.
It follows that the petitioning creditor has established a prima facie entitlement to the making of a sequestration order against the bankrupt’s estate.
As was common ground, the power to make a sequestration order is framed in permissive terms. Where it is satisfied of the matters of which proof is required at the hearing, the Court may make a sequestration order against the estate of the debtor: Bankruptcy Act, s 53(1).
Solvency
By par 52(2)(a) of the Bankruptcy Act the court may dismiss a creditors petition if it is satisfied by the debtor that he or she is able to pay their debts. Here, solvency is of central importance.
A person is solvent, if and only if, the person is able to pay all of his or her debts as and when they fall due and payable. Further, a person who is not solvent is insolvent: Bankruptcy Act, ss 5(2)-(3). However, for the purposes of the Bankruptcy Act, the concept of insolvency is to be construed in a practical way. It is not limited to the debtor’s own monies and cash resources. Rather, solvency may extend to what can be procured by realisation, by sale, or by mortgage or pledge of assets if that can be done within a relatively short time: Sandell v Porter (1966) 115 CLR 666, 670-1 (Barwick CJ). Further, the “conclusion of insolvency ought to be clear from a consideration of the debtor's financial position in its entirety and generally speaking ought not to be drawn simply from evidence of a temporary lack of liquidity. It is the debtor's inability, utilising such cash resources as he has or can command through the use of his assets, to meet his debts as they fall due which indicates insolvency”: see Bryant v Commonwealth Bank of Australia (1996) 134 ALR 460, [21] and cases cited, (Kirby J); Francis v Eggleston Mitchell Lawyers Pty Ltd [2014] FCAFC 18, [36] (Rares, Flick and Bromberg JJ).
It is also well established that the meaning of the expression “able to pay his or her debts” as employed in par 53(2)(a) of the Bankruptcy Act does not mean willing and able to pay. It is not open to make a sequestration order where a finding of solvency has been made. Expressed in different terms, a creditor is not entitled to a sequestration order against a recalcitrant debtor whose default in payment of the debt is not the result of any deficiency in means but rather “notwithstanding that he has the necessary funds, the debtor simply refuses to pay the relevant amounts to the petitioning creditor.” Further, it is not a policy underlying the Bankruptcy Act that “a creditor should be entitled to make a recalcitrant debtor bankrupt even though the debtor satisfies the court that he is plainly solvent and able to pay his debts.” In such cases, where solvency is established, the creditor is to be left to the ordinary remedies of execution, including by way of garnishee proceedings: Re Sarina, ex parte Wollondilly Shire Council (1980) 30 ALR 266, 268-269 (Deane J); Sarina, Council of the Shire of Wollondilly (1980) 32 ALR 596, 599 (Bowen CJ, Sweeney and Lockhart JJ); Culleton v Balwyn Nominees Pty Ltd (2017) 343 ALR 632, [40]-[46] (Allsop CJ, Dowsett and Besanko JJ). In the latter appeal, the Full Court emphasised the centrality of solvency to the jurisdiction in bankruptcy.
Notwithstanding the registrar’s statement to the bankrupt’s counsel in the course of the hearing on 23 May 2019, and despite the bankrupt’s submission to this court on 8 February 2021 that all material upon which she sought to rely had been prepared, it was not until 9 February 2021 that she filed her “financial statement” in apparent proof of her solvency. I have examined that document which is notable for its incompleteness. Beyond supplying details of her personal name, address and the fact of her being self-employed, no details whatsoever were supplied in items 2-4, 7, 9-34, 37, 38-41, 43, 44, 45, 47-54, or 56-60. The paucity of detail otherwise provided did not satisfy me in all of the circumstances of her solvency. To the contrary, as the submissions of Mr Moon of counsel on behalf of the petitioning creditor demonstrated, there is good reason to question the veracity of much in that statement. I was fortified in that view by the further matters deposed to by the affidavit in reply to that financial statement.
The discretion conferred by par 52(2)(a) is enlivened where the Court is satisfied by the debtor of his or her solvency. The bankrupt’s financial statement was wholly silent as to her income, whether from her endeavours as a barrister or otherwise. It made no disclosure of income from any other source. Nothing was said in relation to the applicant’s expenditure or, beyond a reference to a mortgage liability, any other liabilities. The financial statement contained a bare assertion that she has a 35.9% interest in a property with a “current value” of $700,000. Assuming that value, such an interest equates to a supposed value of $251,000. It also discloses that there is a mortgage debt of $251,000. In the present case I am disposed to infer that the bankrupt is jointly and severally liable with all other mortgagors for that debt. The financial statement also discloses that the bankrupt has a personal liability of $145,000 which is described as a liability for her son’s home loan. Annexed to the financial statement were two ANZ statements #6112 and #2803 respectively which also disclosed current liabilities of: (a) $450,000 (of which 0.30% has been repaid), with a stated current balance of $448,645; and (b), $138,000 (of which 5.09% has been repaid), with a stated current balance of $145,030.
More particularly, nothing was said, whether by the financial statement or in any other evidence to indicate that the bankrupt had an ability to realise within a relatively short period the sums needed to repay the judgment or her liabilities. Finally, I do not ignore that in May 2019, the registrar had emphasised to the bankrupt the need to address her solvency and she made no attempt to do so until the day immediately before the final hearing. To adapt the reasoning in Culleton, the centrality of the question of solvency or insolvency may, in a given case be a reason why an adjournment is not granted notwithstanding that solvency is asserted: (2017) 343 ALR 632, [45]-[48]. The bankrupt plainly knew of the importance of establishing her solvency. The failure to address the issue by cogent evidence is all the more notable on the face of the clear and express warnings that had been given of the need to establish solvency.
Insofar as the bankrupt made an oral submission that she would submit to an order for the amount of the judgment debt to be paid into court “but not to the creditor”, I accept the submission of counsel for the petitioning creditor that such a proposal cannot be adopted. Having regard to the centrality of solvency upon the determination of a creditor’s petition, and as Deane J observed in Re Sarina, where solvency is established such monies ought be returned to the debtor: (1980) 30 ALR 266, 270. The bankrupt’s belated submission served only to distract from the consideration of the question of solvency as to which I was not satisfied.
Other sufficient cause
The court may also dismiss the petition where it is satisfied by the debtor that for other sufficient cause a sequestration order ought not to be made: Bankruptcy Act, par 53(2)(b). As material to this application, the power to dismiss the petition for other sufficient cause should be read with par 40(1)(g) of the Bankruptcy Act which provides that a debtor commits an act of bankruptcy where, a creditor who has obtained a final judgment (being a judgment or order, the execution of which has not been stayed), has served on the debtor a bankruptcy notice and the debtor does not comply with the requirements of such notice within the specified time or satisfy the court that he or she has a counter-claim, set-off or cross demand, equal to or exceeding the amount of such judgment or order.
It is an essential obligation in the bankruptcy jurisdiction for the Court to be satisfied that there is a debt upon which a sequestration order can be made: Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132, [39] (Kiefel CJ Keane and Nettle JJ). In that context, where the debt is established by final judgment, the court will usually have no occasion to investigate whether the judgment debt is a true reflection of indebtedness. However, where “the merits of a claim and counterclaim have not been tested in adversarial litigation, a judgment debt will not have this practical guarantee of reliability:” Ramsay Health Care (2017) 261 CLR 132, [54], [68] (Kiefel CJ Keane and Nettle JJ). As the plurality held, where a substantial question is demonstrated as to whether a debt is owing, the court should proceed to investigate that question in order to decide whether it is open to it to make a sequestration order.
I reject the bankrupt’s submission that she does not owe the money claimed by the petitioning creditor or that the judgment was obtained by fraud. Equally, the contention that the bankruptcy notice was defective has been addressed by the order made refusing the bankrupt’s application to set aside that notice. I also agree in the analysis of Mukhtar AsJ that any complaint grounded upon service of process was quelled by the filing of a defence. And as his Honour observed, the nature of the bankrupt’s defence to the claim was ‘dubious’.
In Stratton, Beach J examined the principles relevant to the making of a sequestration order including that, once proof of the matters as required by s 52(1) had been satisfied, the petitioning creditor had a prima facie right to such an order but that, nonetheless, the Act reserved a discretion in the court to refuse an order for other sufficient cause. His Honour noted that it was inappropriate to catalogue or circumscribe the infinitely variable circumstances which may constitute “other sufficient cause” in a particular case, but that even if such other sufficient cause was shown, this merely engaged the discretion to refuse to make the order. Beach J held that since the power not to make a sequestration order was expressed in permissive, not mandatory terms, the circumstance that a debtor had demonstrated the existence of some other sufficient cause within the meaning of par 52(2)(b) “does not entitle him or her to have a sequestration order refused” [2015] FCA 43, [27]-[30].
His Honour also examined in some detail the circumstances in which it may be appropriate to “go behind” a judgment including where such judgment was the subject of an appeal and where a debtor demonstrated the existence of a cross claim against the petitioning creditor: [2015] FCA 43, [33]-[42]. As noted, it may be appropriate to adjourn a petition in circumstances where a debtor has a claim against the creditor which, if successful, would exceed the judgment debt. In the present case, I am not satisfied by the bankrupt that she has demonstrated a bona fide or reasonably arguable claim. It is clear that the satisfaction of those criteria is not established merely by the production of a statement of claim in a separate proceeding or by pointing to such litigation. As before the registrar, so too, there is no sufficient evidence or other material to show that the bankrupt has satisfied either of the criteria as would justify an adjournment. To adapt Stratton, here the evidence neither demonstrates that there is a claim that is reasonably arguable (or of sufficient substance), nor does it provide verification of the key factual elements or demonstrate the legal tenability of a claim: [2015] FCA 43, [42]. The terminal point of par 40(1)(g) is that the asserted counter-claim, set-off or cross demand is for a sum equal to or exceeding the judgment and I am not satisfied of that in this case.
Accepting that the court may go behind a judgment and enquire into the validity of a debt in cases of fraud, collusion or a miscarriage of justice, (particularly in the case of consent or default judgements), the court will not examine every judgment that is sought to be impugned. Special circumstances must be established before it will do so: Ramsay Health Care Australia (2017) 261 CLR 132, [69], [92], [111]. This does not in any way detract from the court’s undoubted jurisdiction to go behind a judgment. In appropriate cases, it will scrutinise the circumstances leading to a judgment, including one obtained by consent or default. Indeed, it may also do so where the parties have been legally represented. Equally, it is clear that the court will not embark upon this process as a matter of course. Critically, as a sequestration order effects a change in status for the bankrupt, entails quasi-criminal consequences, and directly affects the rights of third parties (vis, other creditors to sue for and recover debts by ordinary execution), where it is satisfied by the debtor that it should do so, the court will investigate whether a genuine dispute exists as to the debtor’s liability to the petitioning creditor in its consideration of whether other sufficient cause is made out why a petition ought to be dismissed: Ramsay Health Care Australia (2017) 261 CLR 132, [48]-[60].
Contextually, the troubled history of the Magistrates Court proceeding should not be ignored, including that the bankrupt was permitted to set aside the first default judgment. When later orders were made, the magistrate about whom the bankrupt made complaint was found on judicial review to have effected recusal for pragmatic reasons. And as events evolved, the magistrate was also found to have had no relevant involvement in a judicial determination of liability. Insofar as the bankrupt claims that she has her own claim against the petitioning creditor for money which, as she deposes, it owes to her, I cannot be satisfied that there is any substance in that submission. While the bankrupt’s folder of materials contains a statement of claim signed by the applicant and dated 23 December 2020, it appears that this pleading was not filed in the Federal Court of Australia until late on Friday, 5 February 2021 (being the business day immediately before the first directions hearing of her application for review of the registrar’s decision). It was unclear from the bankrupt’s oral submissions whether that proceeding has in fact been commenced. Assuming in her favour that it has been so commenced, a number of brief observations may be made in relation to that pleading. First, the principal applicant is the bankrupt’s son while the second applicant is the bankrupt herself. Secondly, the pleading names four proposed respondents: the petitioning creditor, the solicitors acting for, or being members of, the petitioning creditor, and counsel who represented the petitioning creditor in the Magistrates Court proceeding. Thirdly, the substantive claims made against the respondents relate to advice given in 2014 respecting certain features of a commercial lease, disclosure of costs and/or alleged professional misconduct in the Magistrates Court or later proceedings. Fourthly, the claims are variously framed as involving contraventions of the Competition and Consumer Act 2012 (Cth), Legal Profession Uniform Law General Rules 2015 (Vic), Civil Procedure Act 2010 (Vic), Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015 (Vic), in negligence and for breach of fiduciary duty. Fifthly, the content of the statement of claim contains matter which reformulates many of the substantive complaints that had been raised in earlier applications and proceedings or which could and should have been raised in answer to the original claim for recovery of the debt. Finally, as concerns the substantive overriding complaint of negligent advice, the six year delay in the pursuit of this proceeding may be noted.
Standing back from the matter and having regard to the history of all of the proceedings above, I am not satisfied by the bankrupt that there is a genuine dispute about her liability under the judgment that ought to be further investigated further before the making of a sequestration order. Nor am I satisfied that that the matters relied upon by the bankrupt would suffice to demonstrate a viable factual or legal basis for any counter-claim, set-off or cross demand for a sum equal to or exceeding the amount of the judgment in this case. The bankrupt has accordingly not satisfied me of the existence of a claim against the petitioning creditor of the kind required to engage the discretion conferred by par 52(2)(b) of the Bankruptcy Act. Nor has she otherwise demonstrated there is some other sufficient cause why the order should not be made: cf Re Sarina (1980) 30 ALR 266, 267-268 (Deane J).
For the avoidance of doubt, had I otherwise been satisfied by the bankrupt that there was other sufficient cause why a sequestration order ought not to be made, I would not in all of the circumstances of this case have been persuaded to exercise the discretion conferred by s 52(2) of the Bankruptcy Act to make an order to dismiss the petition.
CONCLUSION
For the foregoing reasons, the application must be dismissed. The life of the petition has been extended pursuant to s 52(5) of the Bankruptcy Act and it has not yet lapsed. Accordingly, the present case is not one in which the review of the registrar’s decision has been completed outside of the 24 month period of that extension of time. Despite the helpful submissions of Mr Moon of counsel respecting this issue, principles of the kind which may require consideration where the de novo review proceeds after the expiry of that 24 month period do not arise in this case: cf Totev v Sfar (2008) 167 FCR 193, [57], [64].
I certify that the preceding seventy (70) numbered paragraphs are a true copy of the Reasons for Judgment of Judge A Kelly. Associate:
Dated: 25 February 2021
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