Duhs v Pettett - [2009] FMCA 1310

FEDERAL MAGISTRATES COURT OF AUSTRALIA

DUHS v PETTETT

[2009] FMCA 1310

BANKRUPTCY – Adjournment of Creditors Petition – appeal pending against judgment upon which Bankruptcy Notice based.

Ahern v Federal Commissioner of Taxation (1987) 76 ALR 137
Glentham Pty Ltd v McPhee (2007) FMCA 1939
Commonwealth Development Bank of Australia Ltd v Kerr (2009) QSC 234

Applicant:

WILFRED HENRY DUHS

Respondent:

TREVOR PETTETT

File Number:

BRG 595 of 2009

Judgment of:

Wilson FM

Hearing date:

5 October 2009

Date of Last Submission:

5 October 2009

Delivered at:

Brisbane

Delivered on:

5 October 2009

REPRESENTATION

Counsel for the Applicant:

N/A

Solicitors for the Applicant:

Ferguson Cannon

Counsel for the Respondent:

N/A

Solicitors for the Respondent:

Lillas & Loel Lawyers

ORDERS

That the hearing of the Creditor’s Petition be adjourned to 9:30am on 6 November 2009.
That the respondent debtor pay the applicant creditor’s costs incurred by reason of the adjournments, to be taxed if not agreed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
BRISBANE

BRG 595 of 2009

WILFRED HENRY DUHS

Applicant

And

TREVOR PETTETT

Respondent

REASONS FOR JUDGMENT

The applicant creditor seeks a sequestration order. The respondent debtor seeks an adjournment of the creditors’ petition. The respondent debtor accepts that if an adjournment is not allowed there is no basis for opposing the making of a sequestration order.
The creditors’ petition is based on an act of bankruptcy created by the failure of the respondent debtor to comply with a bankruptcy notice served on 16 July 2009. The creditors’ petition was filed on 7 September 2009 and served the following day.
The respondent debtor did not file any notice of grounds of opposition, or any evidence in support thereof until the hearing date of the petition, at which time he relied upon a voluminous affidavit of his solicitor, who appeared on his behalf. That affidavit, in turn, exhibited a number of affidavits filed in the Supreme Court proceedings, to which I will shortly refer.
No application was made for an adjournment by the petitioning creditor, on account of the late service of material, no doubt because to do so would grant the respondent the relief he sought by default.
The bankruptcy notice was issued on 14 July 2009, in reliance on a judgment of the Supreme Court of Queensland, given on 19 June 2009, in favour of the applicant creditor against the respondent debtor in the sum of $2,852,382.30. On 3 August 2009 the respondent debtor applied to set aside the bankruptcy notice. That application was dismissed by consent on 6 August 2009.
On 6 May 2009, in the Supreme Court of Queensland, Applegarth J heard and determined an application brought by the petitioning creditor for summary judgment in the proceedings that it had brought against the respondent debtor and two other defendants seeking to recover the sum of $2,700,000 that had been paid by the applicant creditor to the respondent debtor. The terms on which that money were paid have not yet been determined by a court.
Applegarth J refused to grant summary judgment, and gave the respondent leave to defend the proceedings, but made the continuation of the proceedings conditional upon the respondent paying into court the sum of $540,000, failing which the applicant creditor was at liberty to enter judgment against the respondent debtor. The respondent debtor failed to make the payment into court, and consequently on 19 June 2009 the order to which I have referred was made.
On 3 June 2009 the respondent filed an appeal against the interlocutory decision of Applegarth J, granting what I will refer to as conditional leave to defend. Subsequently, and after the making of the order for final judgment, that notice of appeal has been amended so that an appeal has now been brought against both the interlocutory order and the judgment itself. However, as was pointed out by counsel for the applicant creditor, no additional grounds are relied upon by the respondent debtor on the appeal as to the entry of judgment itself. It seems that the respondent debtor relies entirely on his appeal against the making of the order for conditional leave to defend.
In that regard, in his reasons for judgment, Applegarth J says at paragraph 36:
Whilst Duhs has established that he has a strong case for restitution, he has not satisfied me that this is a case in which summary judgment should be given for the full amount claimed by him. A trial is necessary to determine whether any order for restitution should be for the amount claimed or for some lesser sum. Accordingly, I decline the application for summary judgment.
At paragraph 37, after referring to the power given by Uniform Civil Procedure Rule 298 to impose conditions on the future conduct of the proceedings, his Honour said:
Such an order should not be made if it would be tantamount to giving judgment on the basis that such an order could not be met. Duhs sought the imposition of a condition for payment into court in the event that I did not order summary judgment. Pettett did not dispute the power to impose such a condition, and did not make submissions as to the terms of any such condition. He did not submit that such an order would frustrate the action, and the material read before me does not make me reach this conclusion.
At paragraph 40 his Honour said:
In circumstances in which Pettett does not swear or submit that an order of the kind sought would frustrate the litigation, I am disposed to make an order under UCPR 298.
At paragraph 42 of his Honour’s reasons he ordered the respondent debtor to pay 20 per cent of the amount claimed against him into court as a condition of the future conduct of the proceeding.
In argument before me, no specific reference was made to any evidence that there was material before Applegarth J that called into doubt the correctness of paragraph 37 of his Honour’s reasons, to which I have made reference. The outlines of argument of both parties in the Queensland Court of Appeal have also been put into evidence. In them there is no specific reference to evidence which calls into doubt his Honour’s reasons.
In this court there is a discretion to adjourn the hearing of a petition, or indeed to dismiss a petition, notwithstanding the fact that the petitioning creditor has a judgment against the respondent debtor. In Ahern v Federal Commissioner of Taxation (1987) 76 ALR 137, the Full Court recognised that:
The decision as to whether or not to adjourn the hearing of the petition is a discretionary one. The fact that an appeal is pending against the judgment upon which reliance is placed by the petitioning creditor is a relevant consideration but that fact does not, of itself, provide a right to an adjournment of the petition.
At page 248 the Full Court said:
It is also well-established that in general a court exercising jurisdiction in bankruptcy 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 … these cases rest on the broad principle that before a person can be made bankrupt, the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor, it ought be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi penal consequences.
As to what constitutes a genuine and arguable appeal, the cases were usefully digested by Luvec FM in Glentham Pty Ltd v McPhee (2007) FMCA 1939, in particular at paragraphs 8 to 20 thereof.
In summary, an appeal can be genuine, notwithstanding the fact that on balance it is likely to fail, provided it is not frivolous or spurious. It is not the function of this court to determine an appeal in another court on its merits. Rather, the function of this court is to look to see whether an appeal that has been brought is one which can be said to be arguable and not frivolous, vexatious or spurious.
In that regard, the respondent’s solicitor has helpfully extracted in his outline of submissions various passages from the reasons for judgment of Applegarth J, which seem to raise an inconsistency in terms of the ability of the respondent debtor to pay the moneys required into court. Reference was made both by his Honour in his reasons for judgment and by the solicitor for the respondent in his outline, to the decision of Daubney J in Commonwealth Development Bank of Australia Ltd v Kerr (2009) QSC 234, as supporting the proposition that an order imposing conditional leave to defend should not be made if it would be tantamount to giving judgment, on the basis that such an order could not be met.
It will be a matter for the Court of Appeal to determine whether his Honour’s observation at paragraph 37 of his reasons, to which I have already made reference, withstands scrutiny. I am unable, on the evidence presently before me, to conclude that the appeal is either spurious or frivolous.
Counsel for the applicant creditor submitted that the respondent’s material does not aver to there being genuine and reasonable grounds of appeal. In my view, it is not necessary to include some ritual incantation in affidavit material to that effect if the material relied upon by the respondent gives rise to that conclusion. In this case the court has the benefit not only of the reasons for judgment of Applegarth J, but also a notice of appeal, an amended notice of appeal, both parties’ outlines of argument and indeed the whole appeal record. This court can determine whether the appeal is frivolous or vexatious or spurious by itself having regard to the material and not simply dependent upon some statement in the respondent’s affidavit material.
It is also pointed out by counsel for the applicant creditor that there are no additional grounds for appeal argued against the entry for judgment on 19 June 2009. It is submitted that it does not necessarily follow that if the order made by his Honour on 6 May 2009 is set aside, that the judgment will also be set aside.
It seems to me that in circumstances where the only reason judgment was entered was because of a failure to comply with the order of 6 May 2009, there must at least be a strong possibility that the judgment will go if the appeal by the respondent debtor is successful. After all, his Honour has found that there is a triable issue necessary to be determined in the proceedings, and that is the reason why his Honour refused the application for summary judgment.
There has been no meaningful delay in the bringing of the application in this court. Indeed, both parties have acted with promptitude through the proceedings. The bankruptcy notice was issued very shortly after the expiration of the appeal period in respect of the judgment at first instance. The notice of appeal brought by the respondent debtor was in fact filed on 3 June 2009. The appeal, I am told, is to be heard on 30 October next. An adjournment of the creditors’ petition will therefore not mean that the applicant creditor’s remedies will be delayed for any prolonged period of time.
Against the granting of an adjournment is the fact that on 31 July 2009 Byrne J refused a stay of the judgment pending the appeal. However, when regard is had to the terms of his Honour’s order, his Honour refused the stay on the basis of an undertaking given by the applicant creditor not to enforce its judgment except to pursue these bankruptcy proceedings. There is therefore no determination on the merits by his Honour as to the merits of the respondent’s appeal.
In November 2008 a freezing order was made by A. Lyons J in the Supreme Court of Queensland. That order was continued by Byrne J in December 2008. On 16 July 2009 an order in aid of execution, freezing the assets of the respondent debtor, was made by White J. It is contended by the applicant creditor that the respondent debtor is in contempt of that order, and such contempt proceedings are to be heard on 3 November next. They were to be heard by now, but were adjourned as a result of the respondent debtor suffering an injury in an accident on 4 September 2009.
I mention the pre-judgment and post-judgment freezing orders because it seems to me that they provide a measure of protection to the applicant creditor. They do so because if the creditors’ petition is adjourned, the respondent debtor will not be permitted to deal with his assets otherwise than in accordance with leave given by the Supreme Court of Queensland, in breach of which he faces the consequence of being dealt with by that court for contempt.
In balance, therefore, it seems to me that an adjournment ought be allowed. If I refuse the adjournment and make a sequestration order today, that will inevitably have severe consequences in respect of the prosecution of the appeal in the Queensland Court of Appeal. The respondent debtor will effectively be precluded, or at best substantially delayed, in pursuing that relief until his trustee in bankruptcy is able to make a decision as to whether or not to prosecute those proceedings on his behalf.
The applicant creditor, as I have said, is not prejudiced, other than as to delay, in terms of there being a freezing order in place in the Supreme Court, that the appeal is to be heard in the very near future, and that the respondent debtor has, it seems prosecuted his appeal diligently. In those circumstances I am prepared to make an order adjourning the petition and I will hear the parties as to the appropriate return date.

I certify that the preceding twenty-eight (28) paragraphs are a true copy of the reasons for judgment of Wilson FM

Associate: Lynnette Chin

Date: 25 January 2010