CSR Ltd trading as CSR Building Materials v Muscat - [2002] FMCA 257

FEDERAL MAGISTRATES COURT OF AUSTRALIA

CSR LTD v MUSCAT & ANOR

[2002] FMCA 257

BANKRUPTCY – Creditors petition for sequestration – effect of stay of proceedings pending the hearing of an application to set aside a judgment –going behind a judgment – bankruptcy petition is not a method of enforcement of a judgment debt – application granted.

Local Courts (Civil Claims) Act 1970 ss.32, 44, 47, 58
Local Courts (Civil Claims) Rules 1988 r10.2
Bankruptcy Act 1966 (Cth) ss.40, 44, 52

Purdin v Registrar in Bankruptcy (1982) 43 ALR 512
Lancaster v Downes [2002] FMCA 40
Agrillo; ex PARTE Bankruptcy (1976) 29 FLR 484
Re Padagas; Ex Parte Carrier Air Conditioning Pty Limited (1977) 30 FLR 170
Re Seckold (1933) 5 ABC 195
Re Nath; Ex Parte Ghysels (1996) 63 FCR 523
Re Moss; Ex Parte Tour Finance Limited (1968) 13 FLR 101
Wren v Mahony (1972) 126 CLR 212
Re Kassab; Ex parte DCT (1994) 127 ALR 373
Re Gualtieri; Ex parte Martin & Savage Pty Lty (1995) 130 ALR 523

Applicant:

CSR LIMITED
T/AS CSR BUIDING MATERIALS

Respondents:

ALEXANDER MUSCAT AND SHARON PEARL MUSCAT

File No:

SZ 754 of 2002

Delivered on:

6 November 2002

Delivered at:

Sydney

Hearing Date:

28 October 2002

Judgment of:

Raphael FM

REPRESENTATION

Solicitors for the Applicant:

Ms S Nash of Sally Nash & Co

Solicitors for the Respondent:

Mr R Fester of Directlaw

ORDERS

Application for sequestration order allowed.
Respondents pay the applicant’s costs pursuant to the Federal Court Rules to be taxed if not agreed.
These orders, with the exception of the order as to costs, are stayed pursuant to s 52(3) for a period of fourteen days from today’s date.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SZ 754 of 2002

CSR LTD T/AS CSR BUILDING MATERIALS

Applicant

And

ALEXANDER MUSCAT & SHARON PEARL MUSCAT

Respondents

REASONS FOR JUDGMENT

Introduction

These applications for sequestration orders against the respondents, who are husband and wife and joint guarantors of a company known as Woodcrest Homes Pty Limited, are met by notices of opposition based upon the existence of a stay of proceedings issued out of the Local Court of New South Wales pursuant to s.32 of the Local Courts Act. The stay was given ex parte and connected to an application by the respondents to set aside the judgment referred to in the bankruptcy notice which grounded the petition.
It is the effect of the stay on these proceedings and in particular on whether the stay prevents the court being satisfied of the matters required in ss.44 and 52 of the Bankruptcy Act that forms the justiciable issue before the court.

History

Proceedings were commenced by the applicant creditor against Woodcrest Homes Pty Limited and the respondents in the Local Court on 17 April 2001. A default judgment was obtained on 31 October 2001. An application to set aside the default judgment was listed for hearing on 8 February 2002. Prior to that time Woodcrest Homes must have gone into administration because on 5 February 2002 a Deed of Company Arrangement was executed. The Notice of Motion to set aside judgment was actually heard on 15 March and was successful. The respondents were allowed in to defend. Notices of Grounds of Defence were filed but at a hearing before a Local Court Magistrate the defences of the second and third defendants, the two respondents to these proceedings, were struck out. The chronology provided by the respondents states in relation to that incident the following:
“7 Notice of Motion to Strike Out the Defences of the Second and Third Defendants listed on 8 August, 2002 and default judgment entered on that day.”
Ms Nash who appeared on behalf of the applicant produced for me a case inquiry document from the Local Courts Administration System. This indicates that the Notice of Motion was heard on 17 June. The court sheet states as follows:
“Notice of Motion – Hearing before a Magistrate.
1.   The Defendants’ Defence be struck out for failure to plead a proper defence.
2.   Judgment be entered for the Plaintiff against the Second and Third Defendants in the amount of $24,074.28.
3.   The Second and Third Defendants pay the Plaintiff’s costs of the proceedings (including reserved costs), and the costs of this motion.
4.   Such further or other orders as the court thinks fit.
5.   This motion returnable on 20/6/02 to be heard with 3088/01.”
The entry for 20/06/02 reads:
“Notice of Motion granted by a Magistrate (Court). Second and Third Defence S/O Judgment for Plt against Second and Third Deft in amount of $20,576.26 plus interest from 01/02/2001. Second and Third Deft to pay costs of motion $1,800.00 plus $179.00 in fees.”
It would appear that whatever the date upon which this matter was considered, it was considered by a Local Court Magistrate and the judgment that was entered could not be considered to have been a default judgment.
The judgment previously referred to, was made the subject of a bankruptcy notice, which was served upon the two respondents on 27 July 2002. The bankruptcy notice was not complied with and an act of bankruptcy was committed on 19 August 2002. On 28 August 2002 the current petition was presented to the court. I use the word “presented” with the meaning ascribed to it in Purdin v Registrar in Bankruptcy (1982) 43 ALR 512 and discussed by me in Lancaster v Downes [2002] FMCA 40.
The Creditors Petition was issued on 28 August 2002 and served on 19 September on both respondents. On 27 September the respondents filed with the Local Court a Notice of Motion for stay of proceedings and a Notice of Motion to set aside default judgment. On 4 October 2002 the Registrar of the Local Court, ex parte and in chambers, granted a stay of proceedings pending a motion to set aside judgment. The motion is due to be heard on 12 December 2002.
On 27 September 2002 the respondents each lodged a Notice of Intention to Oppose the Petition which was stated to be on the following grounds:
(i)The respondent to file [sic] with the Sydney Local Court an application to set aside this judgment;
(ii)The respondent has a capacity to pay the outstanding debt in full.

The present proceedings

Although the major part of the argument before me centred on the effect of the stay of execution, the respondents also suggested that I should look behind the judgments against them as well as considering their solvency. In regard to the latter matter, lengthy affidavits were filed by the respondents, but these affidavits were not read. The respondents relied on the fact that another debt owed to a different division of the creditor had been paid by bank cheque as recently as last week. I am not prepared to find that on the basis of this evidence alone the respondents are solvent so that s.52(2)(a) is complied with.
In so far as going behind the judgment is concerned, whilst the court has the power to do this, it is a power which should be exercised judiciously and only on the basis of some real indication that something was awry with the judgment itself. This principle was stated by Barwick in Wren v Mahony (1972 ) 126 CLR 212 at 224:
“The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor’s debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the court of Bankruptcy can no longer accept the judgment as satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration.”
In this case the information (I hesitate to call it evidence) which I have is that the ground for impugning the Local Court judgment against the respondents is that the principal debtor (the company) does not owe a debt to the applicant. It is argued that if the judgment against the principal debtor is set aside then it must follow that the judgment against the guarantors will be set aside. The information concerning the judgment against the company involves alleged inability to give proper instructions, alleged misunderstanding by the court of the effect of a Deed of Company Arrangement and a failure by the court to take into account the true defence of prior payment. I was given even less information about the hearing in which the defences of the two respondents were struck out and judgment entered against them. Noting that a hearing took place and having been advised that the parties were represented, I am not prepared, without more, to go behind this judgment and decline to make a sequestration order pursuant to s.52(2)(b).
The real issue that was joined between the parties and which was well argued by Mr Fester and Ms Nash was the effect of the stay, which was granted by the Local Court on 4 October 2002.
Mr Fester’s argument was that in order to be satisfied of those matters required by s.52, I must also be satisfied of the matters contained in s.44(1) the relevant parts of which are set out below.
44(1) A creditor’s petition shall not be presented against the debtor unless:
(a)There is owing by the debtor to the petitioning creditor a debt that amounts to $2,000.00…
(b)That debt, or each of those debts, as the case may be:
(i)is a liquidated sum due at law or in equity or partly at law and partly in equity; and
(ii)is payable either immediately or at a certain future time; and
(c)…”
Although at first sight, it would appear that this section is of no relevance to this dispute because the petition was “presented” at the time of its filing on 28 August 2002 prior to the stay being granted, there is authority that a petitioning creditor’s debt must answer the description contained in s 44(1)(a) and (b) not only at the date of the presentation of the petition but also at the date of its hearing (Agrillo; Ex Parte Bankrupt (1976) 29 FLR 484 and Re Padagas; Ex Parte Carrier Air Conditioning Pty Limited (1977) 30 FLR 170). Mr Fester argues that at the time the petition was being heard before me the debt was subject to a stay and was therefore not a debt which could be described as “payable either immediately or at a certain future time.”
It is settled law that the fact that a debt immediately payable is converted by a court order to one payable in future by regular instalments does not make the debt any less payable at some certain future time (Re Seckold (1933) 5 ABC 195; Re Agrillo supra; Re Padagas supra; Re Nath; Ex Parte Ghysels (1996) 63 FCR 523). Ms Nash argues that a stay of proceedings which has effect whilst an instalment order is in operation and which does not prevent a sequestration order being made, is no different from a stay of proceedings pending the hearing of an application to set aside a judgment. Mr Fester argues that a stay of this type under s.32 of the Local Court Act sets the debt outside s.44(1)(b)(ii).
Section 32 of the Local Courts Act is in the following form:
[s32] Power to Stay Proceedings
32(1) A court may order, on such terms as it thinks fit, that any proceedings in any action or matter before that court be stayed at any stage of the proceedings.
(2)…
(3)…
(4)The power conferred by subsection (1) to order a stay of proceedings includes power to order a stay of enforcement of a judgment.
(4) …
(5) …”
Mr Fester argues that the stay granted under s.32:
“Is a stay of proceedings. It brings proceedings to an end until the stay is lifted.”
The first point to make about this submission is that the stay can only apply to the enforcement of the judgment. It cannot apply to the proceedings generally because the proceedings generally have ended. They ended when the applicant obtained judgment against the respondents following a hearing of a Notice of Motion before the Magistrate. That judgment was not appealed. To my mind there are no other proceedings. I would venture that the applicant’s motion to set aside this judgment is misconceived because the judgment was not one obtained in the absence of a party or otherwise falls within the provisions of Rule 10.2 of the Local Courts (Civil Claims) Rules 1988:
[Rule10.2] Setting aside order
(1)An order for judgment against a defendant:
(a)may set aside, on terms, by order of the court at any time before judgment’ and
(b)shall, without order, be set aside on the filing of a notice of grounds of defence by that defendant under Part 9 rule 1 (1) or 6(1).
(2)….
(3)….”
A defence was filed. It was struck out after a hearing.
In any event the stay of the proceedings is only a stay before the Local Court. It is not a stay of other proceedings before another court. The stay would have been sufficient to prevent the issue of a bankruptcy notice because of s 40(1)(g) of the Bankruptcy Act (Re Moss; Ex Parte Tour Finance Limited (1968) 13 FLR 101) but it was not in effect at that time.
A judgment of the Local Court is enforced in that court by various procedures, outlined specifically in Part 5, Divisions 2, 3 and 4 of the Local Court (Civil Claims) Act 1970, namely:
(a)Order an examination of the judgment debtor (s44)
(b)Make a garnishee order (s47)
(c)Execute the debt (s58)
One thing that is not a method of enforcement of a judgment debt is a bankruptcy petition. This was confirmed by Tamberlin J in Re Gualtieri; Ex parte Martin & Savage Pty Ltd (1995) 130 ALR 523, where His Honour says that a bankruptcy notice cannot be described as a ‘process’ for the enforcement of a judgment. In his judgment he relied on a statement taken from Re Kassab; Ex parte DCT (1994) 127 ALR 373 at 377-8:
“The construction so contended for could not in our opinion, extend to the service of bankruptcy notices. In Re Maddox; Ex parte the Debtor (1978) 24 ALR 279; 36 FLR 392 Lockhart J held that the issue of bankruptcy notice is a ministerial or administrative act and not part of the judicial process. It was therefore held not to be an act within the meaning of the word ‘proceedings’…”
The stay in this case could be distinguished from Agrillo and the other cases because in those cases the effect of the Local Court order was to turn a debt payable immediately into a debt payable over a period of time. That did not avail the debtors in their bankruptcy. In this case the order merely prevents the enforcement of the judgment under the Local Courts Act for a short period of time. The underlying debt remains and remains payable. It is because of this that Ms Nash’s client provided a standard affidavit of continuing debt required by s.52(1)(c).
Mr Fester submits that I should exercise my discretion under s.52(2)(b) not to grant the sequestration order on the grounds of the existence of the stay proceedings. I can see that there would be circumstances in which the court would be minded to grant an adjournment of an application for a sequestration order pending the outcome of proceedings upon which a stay had been granted. I would not do so in this case for several reasons. The first is that the respondents have not shown much diligence in resisting the claims of the applicant. This may be due to the reasons put forward by Mr Muscat in his affidavit but it does appear that the serious activity only took place after the petition had been filed. Secondly, I have very grave doubts that the application to set aside judgment can possibly succeed. On the information supplied to me an appeal should have been made if it was considered that the decisions of the Magistrate was wrong and the application made is misconceived. Thirdly, the application is due to be heard almost on the last day of hearing before the summer vacation. It would not take much for it not to be reached or for some reason to be given why it should not proceed on that day. A further delay would then ensue. There is a public policy imperative in ensuring that the bankruptcy proceedings are concluded one way or another speedily and that petitions are not held over the head of debtors for lengthy periods. Fourthly, the respondents have indicated that if they are unsuccessful in their opposition to the petition they will pay the judgment debt within seven days. I have indicated that I would propose to stay any order that I made so that this could be done. The effect would be that the judgment creditors would be paid and the judgment debtors would have their day in court. It is notorious that the judgment creditor is a public company listed on the Australian Stock Exchange with assets in the many hundreds of millions of dollars. It is unlikely not to repay the judgment debtors if the judgment against them was overturned. In this regard I would note that the application so far is to set aside judgment. Setting aside judgment does not mean that a debt is not owed, only that the creditor must prove his debt again.
At the commencement of the proceedings before me Ms Nash filed the appropriate affidavits required by s.52. I am satisfied of the other matters required by that section and I make a sequestration order against the estate of Alexander Muscat and Sharon Pearl Muscat. I note that Scott Darin Pascoe has consented to act as trustee and I so appoint him. I order that the respondents pay the applicant’s costs pursuant to the Federal Court Rules to be taxed if not agreed. These orders with the exception of the order as to costs are stayed pursuant to s.52(3) for a period of fourteen days from today’s date. If the respondents pay the amount due to the applicant within that time I will, on notification of that fact, vacate all those orders save the order as to costs.

I certify that the preceding twenty-five (25) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: