DM Developments Pty Ltd v Driscoll
[2013] FMCA 129
•6 February 2013
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DM DEVELOPMENTS PTY LTD v DRISCOLL | [2013] FMCA 129 |
| BANKRUPTCY – Sequestration application – appeal from primary judgment subject to unsuccessful appeal – fresh action – question of res judicata – order made to stay – appeal from stay – whether sufficient cause why a sequestration order ought not be made – state of general insolvency as a matter of fact – prospects of success on appeal and retrial of impacting that fact – sequestration order made. |
| Bankruptcy Act 1966 (Cth), ss.52(1), 52(2) Uniform Civil Procedure Rules 1999 (QLD) |
| Bryant v Commonwealth Bank (1996) 70 ALJR 306 Commissioner of Taxation v Cumins (2008) 101 ALD 78; (2008) 70 ATR 855; [2008] FCA 353 DM Developments v Driscoll (2011) 251 FLR 415; [2011] FMCA 464 St George Bank v Wright [2011] FMCA 351 |
| Applicant: | DM DEVELOPMENTS PTY LTD |
| Respondent: | LEE JOHN DRISCOLL |
| File Number: | BRG 65 of 2011 |
| Judgment of: | Burnett FM |
| Hearing date: | 4 February 2013 |
| Date of Last Submission: | 4 February 2013 |
| Delivered at: | Brisbane |
| Delivered on: | 6 February 2013 |
REPRESENTATION
| Solicitors for the Applicant: | Robert Bax & Associates |
| Counsel for the Respondent: | Ms Rudland |
| Solicitors for the Respondent: | Ace Solicitors |
ORDERS
(1)That a sequestration order be made against the estate of Lee John Driscoll.
(2)That the applicant creditor’s costs of and incidental to the petition be reserved.
(3)That order 1 be stayed for a period of 21 days.
THE COURT NOTES that the date of the act of bankruptcy is 12 January 2011.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
BRG 65 of 2011
| DM DEVELOPMENTS PTY LTD |
Applicant
And
| LEE JOHN DRISCOLL |
Respondent
REASONS FOR JUDGMENT
(Revised from Transcript)
On 8 February 2011, the applicant creditor filed a creditor's petition seeking a sequestration order against the respondent debtor. On 8 February 2012, the date for expiration of that petition was extended for 12 months. It is now due to lapse on 8 February 2013, that is, this coming Friday. The application has an extensive history which was partly relayed by me on an earlier occasion when the debtor unsuccessfully challenged service and the application was adjourned to permit the finalisation of other proceedings: see generally DM Developments v Driscoll (2011) FMCA 464.
To recapitulate, the petition is based upon a judgment the creditor obtained for $27,200.00 against the debtor on 30 November 2010 in the Magistrates Court of Queensland at Beenleigh. The judgment was one entered in default of compliance with an order by Magistrate McDougall dated 12 October 2010. The underlying cause of action had been a claim by the creditor against the debtor for rent due in respect of a residential tenancy. The debtor filed a defence and counterclaim. He claimed that no money was owing under any tenancy agreement as alleged by the creditor as free rent of a house was also a term of his contract. Accordingly he denied the creditor's claim. He also counterclaimed for a sum approximating $150,000.00. In particular, he claimed the alter ego of the creditor, a Mr Morteza Kashani-Malaki, had a contract with him, that is, the debtor, for the provision of accountancy services. He alleged the value of those services, to the point of termination of his contract with the creditor was in the sum of $131,790.98 together with the value of a vehicle, the value of which was not particularised, but which from a later claim appears to be approximately $20,000.00. In the course of the progress of that action, Magistrate McDougall made various orders, including orders that the debtor make disclosure, and that in default of such an order there would be judgment for the creditor.
Non-compliance with that order was demonstrated and upon application made by the creditor, a Deputy Registrar of the Magistrates Court of Queensland ordered judgment for the creditor in the sum of $27,200.00. He also dismissed the debtor's counterclaim. An application was subsequently made by the debtor to set aside the default judgment. It was determined by Magistrate Hutton on 3 February 2011 against the debtor. The debtor then sought to appeal the determination of Magistrate Hutton, and his order of 3 February 2011. On 14 December 2011, Judge McGill QC presiding in the District Court of Queensland dismissed the appeal.
Subsequently, the debtor commenced fresh proceedings in the Magistrates Court of Queensland at Brisbane to recover a sum of $131,790.98 together with $20,000.00 on account of the value of the motor vehicle which I earlier referred to and the rent in respect of which judgment had been earlier entered in the sum of $27,200.00. That action was commenced on or about 8 February 2012.
In response to the filing of that claim, an application was made by the creditor for a permanent stay, notionally on the basis that the new proceedings were infected by res judicata arising from the order of Magistrate McDougall and the related judgment against the debtor in default of compliance. The application came on for hearing on 3 April 2012 and was determined in favour of the creditor. Magistrate Springer gave reasons and pronounced judgment in that application on 10 July 2012.
The matter returned to this Court for further mention on 22 August 2012. At that time, the debtor informed the Court he intended to appeal the decision of Magistrate Springer. The debtor appeared by his solicitor who swore that at around the time he received those instructions he (being the debtor’s solicitor) was struck down with a flu-like illness. The solicitor swore that this delayed his filing of the notice of appeal until 8 August 2012. The debtor’s solicitor did not serve the notice until 21 August 2012, that is, the day before the creditor's petition was listed for mention before me. That appeal has now been listed for hearing on 20 February 2013. That is approximately one week after the due date for lapsing of the creditor's petition.
A significant feature of the long and convoluted history of this case, and arguably a significant cause of it, has been the conduct of the debtor. There have been numerous complaints about his dilatory approach to compliance with court ordered directions and timetables, and, indeed, the timetable and timeframes provided for by the Uniform Civil Procedure Rules 1999 (QLD) (“UCPR”). Except for the occasion when the debtor's solicitor was ill, no other reasonable explanation appears to have been forthcoming to explain the delays and/or non-compliance. In that regard, I note that the creditor's original judgment was ordered because the debtor failed in part to comply in a timely manner with the orders of Magistrate McDougall. Likewise, the appeal subsequently lodged against the order of Magistrate Hutton was out of time and the subject of an application for an extension of time for leave to appeal. That application was subject to adverse comment by Judge McGill. Since lodging the current appeal against the decision of Magistrate Springer, there have been numerous complaints by the creditor about the debtor's failure to comply with the practice directions in substance and procedure concerning timeframes.
The point now on appeal is an interesting and worthy point. However, all the facts appear to demonstrate that the debtor is largely responsible for the delay. The fact is that we are now almost two years down track and the original basis for the judgment arguably remains unresolved. In my estimation, based upon the facts, it is largely the debtors fault that we are here.
The creditor wishes to proceed to have the application determined, and given that the creditor's petition expires on Friday, the time has now come for its determination. The creditor has demonstrated all the matters essential for the making of a sequestration order as required by s.52(1) of the Bankruptcy Act 1966 (“the Act”). It has proven the matters stated in the petition. It has proven service of the creditor's petition, and it has proven indebtedness. It contends a sequestration order ought to be made.
The debtor submits pursuant to s.52(2) of the Act that for other sufficient cause the sequestration order ought not be made. The principle ground advanced by the debtor is that he has on foot an appeal that if successful will permit him an opportunity to progress a claim made by him for approximately $180,000.00. That sum, if successfully prosecuted, he contends, can be paid to discharge not only his indebtedness to the applicant creditor but also other creditors including the supporting creditor.
I have earlier observed the appeal is not without merit. Broadly, the appeal is covered by ground 4 of the grounds of appeal. It provides:
4. The Learned Magistrate, failed to apply the appropriate tests and or perform the appropriate balancing exercise having regard to all of the circumstances of the case and especially the substantial compliance by the Appellant/Defendant.
There appear to be grounds for the appeal to succeed. While her Honour, respectfully, in very detailed and well considered reasons determined the application upon the principles relevant to abuse of process, there is a basis to argue that her Honour did not give proper consideration to the question of whether or not his failure to comply with the order of Magistrate McDougall constituted contumacious conduct. Arguably that was a matter that had to be concluded before she granted the relief she ordered. While her Honour addressed a recalcitrant attitude of the debtor by reference to observations and findings of Judge McGill in the appeal then before him, his Honour was not considering the question of whether the debtor's conduct was contumacious. There his Honour was merely considering whether or not there had been compliance with the order of Magistrate McDougall. He determined there had not been, as was obvious in the case. The reliance by Magistrate Springer on the conclusions of Judge McGill without apparently recognising the reasoning behind his Honours conclusion may have resulted in her being misled in determining the issue of whether or not the debtor’s conduct had been contumacious.
In his reasons Judge McGill did note the debtor's purported efforts at compliance and failings before Magistrate McDougall. However that was a different issue. In fact his observation concerning the debtor’s dispute with the creditor on issues of compliance of themselves arguably militates against the finding of contumacious conduct. In my view the point is a fair point for appeal.
However, that is not the end of it. The creditor contends I ought to be guided by my earlier decision in St George Bank v Wright [2011] FMCA 351. While some of the observations there are helpful, they were made in the context of an application to adjourn or stay the hearing of a creditor's petition pending an appeal but not in the context of an application which had to be determined because of the immediate prospect of the creditor's petition lapsing.
Here there is no scope for a temporary stay as the creditor's petition is about to lapse. The petition is either to progress or it lapses and the creditor will be required to commence proceedings from the beginning.
It follows the real issue before me is whether the appeal provides a discretionary basis to satisfy the onus upon the debtor to demonstrate that there is other sufficient cause as to why a sequestration order ought not be made. The relevant principles were articulated by Gilmour J in Commissioner of Taxation v Cumins (2008) 101 ALD 78; (2008) 70 ATR 855; [2008] FCA 353, where, commencing at paragraph [15], his Honour stated:
15. Section 52(2)(b) of the Bankruptcy Act is wide enough to entitle the court, in a proper case, to adjourn or dismiss a petition in the exercise of its discretion where the debtor demonstrates a genuine dispute as to the liability to pay the debt… The power is discretionary…
16. The court is entitled to inquire whether a judgment is founded on a real debt. In general, a court exercising jurisdiction should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings, provided that the appeal is based on genuine and arguable grounds….
17. The mere fact that an appeal has been lodged does not without more, give rise to a duty to postpone the hearing of the petition…. nor will the court as a matter of course, inquire into the validity of a judgment debt…
18. The test to be applied has been described variously. The judgment debtor must point to grounds that have "a real chance of success on appeal"… or ensure "that substantial reasons are given for questioning" whether there was in truth a debt… It is not enough to rely upon the mere assertion. The onus is on the applicant for a stay to show the existence of a genuine dispute by adducing evidence establishing the substantial nature of the grounds of challenge…
(Citation’s Omitted)
Although in that case his Honour was addressing the question of the principles appropriate to applications for stay, they apply equally in the context of what is effectively an application for dismissal of the application. In that case, his Honour found that the debtor had failed to demonstrate there were arguable grounds for concluding that the application for special leave to the High Court had prospects, and accordingly it was dismissed. Here, as I have indicated, I accept there is an arguable ground of appeal.
However, the inquiry does not conclude there. In Bryant v Commonwealth Bank (1996) 70 ALJR 306 at [17], Kirby J observed:
…it will be proper for the Federal Court to postpone making a sequestration order, founded ultimately upon a judgment in another court, until that judgment, where challenged, is ultimately upheld. In my experience, such a course is often taken. But it cannot amount to an absolute rule. Otherwise, taking advantage of the notorious delays of the appellate process, a judgment debtor could simply postpone a sequestration order by filing a notice of appeal. It is, therefore, necessary that in every case some estimate should be made of the utility and possible outcome of the appeal. As Hill J observed in the Federal Court in this case, such estimates involve an element of embarrassment in predicting what another court, with full argument and analysis, might do.
His Honour continued:
I agree that some caution is required. It is not feasible (nor would it be proper) for me to prejudge the outcome of his appeal (this appeal). The most that can be done is to secure a general impression of its prospects, having regard to the principal issues to be ventilated.
In my view, a real question here arises concerning utility. First, the effect of a successful appeal, ultimately, leaves the door open to a debtor to prosecute a claim for approximately $150,000.00, (accepting that the rental claim will be set off against the judgment). However, such a claim is fraught. All the parties to these transactions are at best nefarious. The alter ego of the creditor, its principal director, has been sentenced to 13 years in prison for drug offences. The debtor, an accountant, seems to be something of a forensic gun for hire and is apparently hired by those who like guns. Serious and difficult issues of credit will arise in any proceeding involving these parties. Perhaps it might be that neither party is believed when the matter ultimately comes on for trial, if it indeed does. It is against that background that I consider a real issue arises concerning the utility of the appeal.
In my view, this is also amplified in part by the debtor's general financial circumstances. It may well be that these matters have in the past impacted his capacity to prosecute the initial defence and counterclaim and the subsequent proceedings. I note, for instance, that he has been on Centrelink benefits since 2009, and in an affidavit filed by leave on the hearing of this application he indicated his financial circumstances had not improved. He swore an affidavit which was filed by leave at the hearing that should he be successful at the hearing, he would use the money to discharge all his outstanding debts. He stated, “If I am successful in my claim, it will reduce my outstanding debts to a manageable level, and I will remain solvent.”
The clear inference from his testimony is that presently his debts exceed his assets and they will continue to do so even if he enjoys complete success. These matters also raise the question of funding litigation and the prospect that even if successful, recovered costs will not totally indemnify the debtor for legal outlays. He claims that he had not disposed of any substantial assets in the 12 months preceding the filing of the creditor's petition which would suggest that there are unlikely to be any voidable transactions. His liabilities include the judgment debt and also other debts, including those which are pursued by the supporting creditor. While there is the distant prospect of success in the appeal as well as subsequent proceedings, that matter is questionable. This is particularly so given his dilatory conduct to date in terms of prosecuting proceedings before the courts. Ultimately as an issue of fact, I consider the evidence favours a finding that the debtor is currently insolvent. The appeal and any subsequent success in litigation is unlikely to affect that fact.
I am also mindful that by making orders staying the operation of any sequestration order by 21 days, he may well by then have an answer to his appeal although I don’t think a successful result will help him. If he is successful he can reconsider his position before active sequestration commences. Finally, if no answer is forthcoming in that time, but subsequently is favourable to him, he can then consider his position and if appropriate apply for an annulment.
However, cumulatively it seems to me that the debtor has failed to satisfy the Court that he has established any sufficient cause as to why a sequestration order ought not be made and such an order should be made.
I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Burnett FM
Date: 4 March 2013
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