Cavoli v Etl

Case [2007] FCA 1191

FEDERAL COURT OF AUSTRALIA

Cavoli v Etl [2007] FCA 1191

BANKRUPTCY – Creditor served bankruptcy notice on Debtor – Creditor was assignee of a debt from firm of solicitors– no evidence that assignor had security over Debtor’s property – no evidence that bankruptcy notice was issued solely for purpose of securing payment of debt – no evidence of a collateral purpose in a contrived arrangement to avoid assignor giving up security

Held:  

1.No evidence that Creditor’s bankruptcy notice was issued as an abuse of process

2.Bankruptcy notice reinstated and time for compliance extended

Bankruptcy Act 1966 (Cth) s 44

Etl v Cavoli [2007] FMCA 356 reversed
Allesch v Maunz (2000) 203 CLR 172 cited
Minister for Immigration and Multicultural Affairs v Jia Legeng (2001) 205 CLR 507 cited
CSR Ltd v Della Maddalena (2006) 224 ALR 1 cited
Maxwell-Smith v S & E Hall Pty Ltd [2006] FCA 825 cited
Etl v Settle [2004] FMCA 718 cited
Schellenberg v Tunnel Holdings Pty Ltd (2000) 200 CLR 121 cited
King v Collins [2007] NSWCA 122 cited

TONY CAVOLI v KARL ETL
VID290 OF 2007

HEEREY J
SYDNEY (HEARD IN MELBOURNE)

16 AUGUST 2007


IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

VID290 OF 2007

BETWEEN:

TONY CAVOLI
Appellant

AND:

KARL ETL
Respondent

JUDGE:

HEEREY J

DATE OF ORDER:

16 AUGUST 2007

WHERE MADE:

SYDNEY (HEARD IN MELBOURNE)

THE COURT ORDERS THAT:

1.The appeal is allowed.

2.The order of the Federal Magistrate of 22 March 2007 is set aside.

3.The time for compliance with the Bankruptcy Notice is extended to 7 September 2007.

4.The respondent pay the costs of the appellant of the appeal and at first instance.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.


IN THE FEDERAL COURT OF AUSTRALIA

VICTORIA DISTRICT REGISTRY

VID290 OF 2007

BETWEEN:

TONY CAVOLI
Appellant

AND:

KARL ETL
Respondent

JUDGE:

HEEREY J

DATE:

16 AUGUST 2007

PLACE:

SYDNEY (HEARD IN MELBOURNE)

REASONS FOR JUDGMENT

  1. The appellant Tony Cavoli (the Creditor) appeals against a decision of the Federal Magistrates Court which set aside a bankruptcy notice served on the respondent Karl Etl (the Debtor): Etl v Cavoli [2007] FMCA 356.

  2. The Creditor was an assignee of debt from a firm of solicitors called Lennon Settle Mazzeo Lawyers (the Assignor). The learned Magistrate held at [62] that the bankruptcy notice was an abuse of process. His Honour found at [59] that it had been issued “solely for the purpose of securing payment of the debt”. The Creditor had failed to take “appropriate action to otherwise recover the debt or even make demand upon the Debtor” (at [59]). There was, his Honour found at [62], a collateral purpose in that the Creditor and the Assignor had a “contrived arrangement” to circumvent the operation of s 44(3) of the Bankruptcy Act 1966 (Cth). The Assignor was said to be a secured creditor for a much larger amount. By “syphoning off” a small debt to the Creditor, the Assignor…

Continue reading Cavoli v Etl

Sign in free to access the full text

Details
AGLC
Cavoli v Etl [2007] FCA 1191
Case
[2007] FCA 1191
Decision Date

CaseChat Overview and Summary

In the case of Cavoli v Etl, the appellant, Tony Cavoli, sought to have a bankruptcy notice set aside, which the respondent, Karl Etl, had challenged. The dispute centred on the validity and purpose of the bankruptcy notice issued by Cavoli, an assignee of a debt from Lennon Settle Mazzeo Lawyers. The Federal Circuit Court of Australia was tasked with determining the legitimacy of the bankruptcy notice and whether it constituted an abuse of process.

The primary legal issue was whether the bankruptcy notice was issued for a legitimate purpose or if it was an abuse of process. The Court had to consider whether the notice was issued solely to secure payment of the debt or if there was a collateral purpose involved, such as circumventing statutory provisions. Furthermore, the Court needed to assess if there was evidence of a contrived arrangement between the Creditor and the Assignor that aimed to avoid the consequences of specific sections of the Bankruptcy Act.

The Court found that the bankruptcy notice was indeed an abuse of process. It concluded that the notice was issued primarily to secure payment of the debt and identified a collateral purpose in the arrangement between the Creditor and the Assignor. The arrangement was designed to circumvent the operation of s 44(3) of the Bankruptcy Act, allowing the Assignor to avoid surrendering its security while still causing the Debtor’s bankruptcy. The Court determined that the use of bankruptcy proceedings in this manner was inappropriate and a blatant attempt to avoid the consequences of the statutory provision.

Consequently, the Court allowed the appeal, set aside the order of the Federal Magistrate, extended the time for compliance with the Bankruptcy Notice, and ordered the respondent to pay the costs of the appeal and the original proceeding.

Orders

Orders of the court

1. The appeal is allowed.

2. The order of the Federal Magistrate of 22 March 2007 is set aside.

3. The time for compliance with the Bankruptcy Notice is extended to 7 September 2007.

4. The respondent pay the costs of the appellant of the appeal and at first instance.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

The Creditor was an assignee of debt from a firm of solicitors called Lennon Settle Mazzeo Lawyers (the Assignor). The learned Magistrate held at [62] that the bankruptcy notice was an abuse of process. His Honour found at [59] that it had been issued “solely for the purpose of securing payment of the debt”. The Creditor had failed to take “appropriate action to otherwise recover the debt or even make demand upon the Debtor” (at [59]). There was, his Honour found at [62], a collateral purpose in that the Creditor and the Assignor had a “contrived arrangement” to circumvent the operation of s 44(3) of the Bankruptcy Act 1966 (Cth). The Assignor was said to be a secured creditor for a much larger amount. By “syphoning off” a small debt to the Creditor, the Assignor could bring about the Debtor’s bankruptcy without having to surrender his security, as required by s 44(3) had it been the petitioning creditor (at [61]). Evidence The debt the subject of the bankruptcy notice was $21,638.30 being the amount taxed by Master Bruce of the Supreme Court of Victoria as the costs of the Assignor pursuant to orders made against the Debtor in the Supreme Court in 2004 and 2005. The Master’s Certificate was issued on 18 January 2006. The notice of assignment dated 1 May 2006 was in evidence, although not the assignment itself. The notice of assignment was in these terms:“To: Mr Karl Etl (aka Karel Etl) Of: 5 Richardson Street, EssendonNOTICE OF ASSIGNMENT OF DEBTASSIGNMENT OF DEBT Notice is hereby given to you that Lennon Settle Mazzeo Lawyers (formerly Lennon Settle) has assigned to Tony Cavoli all its legal and beneficial rights, title and interest in the Debt in the sum of $21,638.30 plus interest pursuant to statute payable to Lennon Settle Mazzeo Lawyers and arising out of an Order made by Master Bruce of the Supreme Court of Victoria at Melbourne 18 January, 2006.DIRECTION TO PAY Accordingly, you are hereby irrevocably directed to pay the Debt to Tony Cavoli or as he may in writing direct.PAYMENT DETAILS Please remit the payment in the sum of $21,638.30 plus interest pursuant to statute to:-Tony CavoliLevel 9, 179 Queen StreetMELBOURNE 3000DISCHARGE OF DEBT You will receive from Tony Cavoli confirmation of the discharge of the Debt upon payment of same in full.Dated:1 May 2006.[sgd]……………………………… [sgd]…………………………………LENNON SETTLE MAZZEO TONY CAVOLI” On 8 May 2006 the Debtor was served with a bankruptcy notice in respect of the assigned debt. As required by the statutory form, the notice included the statement:“You are required, within 21 days after service on you of this Bankruptcy Notice: (a) to pay to the creditor the amount of the debt; or(b) to make an arrangement to the creditor’s satisfaction for settlement of the debt.”The notice also stated that payment could be made to the Creditor at Level 9, 179 Queen Street, Melbourne 3000. The Debtor swore an affidavit in support of his application. Leaving aside some grounds which were dismissed by the learned Magistrate and not raised on appeal, the Debtor deposed that he was solvent and that any creditor’s petition against him would amount to an abuse of process in view of the fact that any such sequestration orders would be “foredoomed to failure based upon my solvency”. He deposed that he had “assets which exceed $1 million in value and my liabilities are far less than that figure”. The affidavit continued:“11.Further I believe that the Bankruptcy Notice also amounts to an abuse of process by reason of the fact that the assignor of the relevant debt previously filed another Bankruptcy Notice against me in this Court arising out of another proceeding filed in the County Court and has not pursued any bankruptcy proceedings against me on the basis of that principal judgment debt. I believe it has not done so because it knows that I am a solvent person.12.The appeal proceedings brought against the assignor arose out of that principal County Court proceeding. The purported assignor of the debt was my previous solicitor in Family law proceedings, Messrs. Lennon Settle, and they know full well that I am a solvent person with ample assets. I believe that the Bankruptcy Notice has been filed as an illegitimate attempt to cause me stress and vexation, knowing full well that I am a solvent person. It smacks of an abuse of process designed to persecute me and designed to ulitise this Court s a debt collector when there are ample alternative remedies available to any judgment credit or assignee thereof to collect any judgment debt owed by me.”The Debtor’s speculation about the beliefs and motives of the Assignor and the Creditor would seem to be inadmissible. No objection was taken. However, as this is an appeal by way of rehearing, the judgment appealed from can be set aside where there is legal, factual or discretionary error: Allesch v Maunz (2000) 203 CLR 172 at [23] (a case which concerned the Family Court but is equally applicable to appeals in the Federal Court: Minister for Immigration and Multicultural Affairs v Jia Legeng (2001) 205 CLR 507 at [75]). It is not clear whether his Honour relied on this evidence, but if and to the extent that he did there would be an error of fact-finding: CSR Ltd v Della Maddalena (2006) 224 ALR 1 at [16]. Unsupported speculation of this kind has no probative value.

Decision

Reasons for decision

HEEREY J
His Honour at [57] thought that the Creditor had been “less than frank” with the Court in divulging the true circumstances leading up to the execution of the assignment. He noted that the assignment itself had not been produced and there might have been formal defects in it. His Honour continued:“58.In any event, applying the authorities to which reference has been made, I am satisfied that the bankruptcy notice has been issued as a means to secure payment of the debt and further that it has a collateral purpose. On that basis, I am satisfied it is an abuse of process and should be set aside.59.It is clear on the evidence before me that the Creditor has issued the bankruptcy notice solely for the purpose of securing payment of the debt and has failed to take any appropriate action to otherwise recover the debt or even make demand upon the Debtor for payment of the debt. The demand made on the Debtor was a demand made by the assignor prior to the assignment of the debt.60.The collateral purpose in my view having regard to the history set out in the court’s earlier decision in Etl v Settle [[2004] FMCA 718] was to circumvent the operation of s.44 of the Bankruptcy Act. I am satisfied that the close relationship between the Creditor and the assignor illustrates that this procedure undertaken for the first time by the Creditor was a procedure which had as its collateral purpose a benefit to the Creditor’s friend and professional colleague of avoiding the operation against the assignor of s.44 of the Bankruptcy Act. 61.I am satisfied on the material before me, including the history set out in the Court’s earlier judgment to which I have already referred, that there was a benefit to the assignor of ‘syphoning off’ a small part of the total debt allegedly owed by the Debtor to the assignor in a manner that would enable the current Creditor to pursue a sequestration order after the issue of a bankruptcy notice in a manner which would not attract the operation of s.44 of the Bankruptcy Act to the detriment of the assignor.62.The use of bankruptcy proceedings in this contrived manner in my view is an abuse of process, as it has clearly been undertaken at least in part to satisfy [the] collateral purpose of obtaining a benefit to the assignor of becoming a Creditor without sacrificing security. This contrived arrangement is an inappropriate use of bankruptcy proceedings and a blatant attempt to avoid the consequences of the operation of s.44 of the Bankruptcy Act.”Conclusion on appeal There was no evidence to base the finding in [59] that the Creditor issued the notice “solely” for the purpose of securing payment of the debt. Even if the Magistrate did not find him a credible witness, disbelief of him could not found a positive conclusion as to the existence of the relevant purpose, proof whereof lay on the Debtor: Schellenberg v Tunnel Holdings Pty Ltd (2000) 200 CLR 121 at [53], King v Collins [2007] NSWCA 122 at [42]. To the extent that the finding was based on an alleged failure to take “appropriate” action or “even make demand”, the notice of assignment to the Debtor demanded payment to then Creditor, as did the bankruptcy notice itself. In any event, a prior demand is not a statutory precondition for the issue of a valid bankruptcy notice. Before a bankruptcy notice is issued there must be a judgment of a court in favour of a creditor, which is sufficient to put the debtor on notice that he or she is legally obliged to pay the debt claimed.

Ratio Decidendi

Legal Principle Established

Established by: HEEREY J

Full text does not contain this section.