Etl v Cavoli
[2007] FMCA 356
•22 March 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| ETL v CAVOLI | [2007] FMCA 356 |
| BANKRUPTCY – Application to Set Aside Bankruptcy Notice – alleged assignment of debt to Creditor – no steps taken by Creditor to demand or recover debt from Debtor – deed of assignment not produced – whether issue of bankruptcy notice abuse of process – whether avoidance of consequences of s.44(3) of Bankruptcy Act 1966 – assignor at risk of losing secured Creditor status by issuing bankruptcy notice– whether untaxed bill of costs in favour of Debtor against assignor should be referred to by Creditor in bankruptcy notice – whether bankruptcy notice issued to “put pressure” on Debtor – bankruptcy notice set aside. |
| Bankruptcy Act 1966, s.44 |
| Etl v Lennon Settle [2004] FMCA 718 Maxwell-Smith v S & E Hall Pty Ltd, in the matter of Maxwell-Smith [2006] FCA 825 Australia & New Zealand Banking Group Pty Ltd v Foyster [2000] FCA 400 Slack v Bottoms English Solicitors [2002] FCA 1445 |
| Applicant: | KARL ETL |
| Respondent: | TONY CAVOLI |
| File number: | MLG 765 of 2006 |
| Judgment of: | McInnis FM |
| Hearing date: | 7 August 2006 |
| Date of last submission: | 15 November 2006 |
| Delivered at: | Melbourne |
| Delivered on: | 22 March 2007 |
REPRESENTATION
| Counsel for the Applicant: | Mr J. Selimi |
| Solicitors for the Applicant: | Starnet Legal |
| Counsel for the Respondent: | Mr M. Barrett |
| Solicitors for the Respondent: | Cavoli & Co |
ORDERS
The Bankruptcy Notice number VN796/06 dated 8 May 2006 be set aside.
The Respondent Creditor pay the Applicant's costs of and incidental to the application, including reserved costs, to be taxed in default of agreement pursuant to the Federal Court Rules.
Liberty to apply.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE |
MLG 765 of 2006
| KARL ETL |
Applicant
And
| TONY CAVOLI |
Respondent
REASONS FOR JUDGMENT
Introduction
In this matter Karl Etl (the Debtor) seeks to set aside a Bankruptcy Notice issued on 8 May 2006 on the application of Tony Cavoli (the Creditor). The Debtor, in the alternative seeks an order for extension of time for compliance with the requirements of the bankruptcy notice.
The bankruptcy notice claims that the Debtor owes the Creditor $21,638.30. That amount is referred to in the schedule as being "amount of judgments or orders."
The Debtor relies upon affidavits sworn by him on 15 June 2006 (the first Debtor affidavit) and 4 August 2006 (the second Debtor affidavit).
The Creditor relies upon an affidavit sworn by him on 6 July 2006 and gave oral evidence pursuant to a notice to attend for cross‑examination filed by the Debtor's solicitors on 4 August 2006.
In the first Debtor affidavit he deposes that the bankruptcy notice is founded upon what he describes as an alleged assignment of debt. Annexed to that affidavit is a photocopy of a document entitled, "Notice of Assignment of Debt." The document is addressed to the Debtor and is dated 1 May 2006. It is purportedly signed by "Lennon Settle Mazzeo" and the Creditor. The Notice of Assignment of Debt (the Assignment Notice) relevantly states the following:
ASSIGNMENT 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 Cavoli,
Level 9, 179 Queen Street
MELBOURNE 3000
DISCHARGE OF DEBT
You will receive from Tony Cavoli confirmation of the discharge of the Debt upon payment of same in full.
According to the Debtor's first affidavit, the assignor is a firm of solicitors previously acting on behalf of the Debtor in Family Law proceedings. Regrettably the affidavit material does not set out in clear terms the chronology of events, though it is noted that this court on a previous occasion has dealt with an application to set aside a bankruptcy notice where the Debtor was the Applicant and "Lennon Settle" the Debtor's firm of solicitors was the Respondent (see Etl v Lennon Settle [2004] FMCA 718 (Etl v Lennon Settle)).
It appears to be common ground that on 14 July 2004 the County Court ordered that the Debtor pay his former solicitors $87,488.98 plus interest of $14,127.06 together with indemnity costs. The Debtor lodged an appeal against the whole of the orders and sought a stay of those orders on 27 July 2006. The former solicitors sought security for costs. On 1 October 2004 the stay application and security for costs application were both refused with costs. On 12 October 2004 the Debtor's appeal was adjourned with costs against the Debtor on an indemnity basis. On 21 November 2005 the Debtor's appeal was dismissed with costs.
Although not clear from the affidavit material, it is understood that it is common ground as set out in the respondent's outline filed in Court on 7 August 2006, that Master Bruce in the Supreme Court of Victoria taxed the former solicitors’ costs on 18 January 2006 at $21,638.30 (the debt). Those costs purport to refer to orders made on 12 October 2004 and 21 November 2004 being the date of adjournment of the Debtor's appeal and the date when the appeal was dismissed with costs respectively. This court has not had the advantage of receiving as exhibits documentary evidence consistent with the chronology.
Again, it appears to be common ground that the Debtor's summons for taxation dated 20 October 2005 has been adjourned sine die. At best it appears to be common ground that a draft of a bill of costs has been prepared by the Debtor for the purpose of taxation of costs ordered in favour of the Debtor against his former solicitors and that the total of that bill of costs is $6,133.60.
The issues
In the proceedings before this court, Counsel for the Debtor sought to argue that that amount set out in the bill of costs, albeit an amount of costs claimed by the Debtor against his former solicitors, should have been taken into account in the bankruptcy notice.
As I understand it, although orders were made in the Supreme Court that the Debtor pay the costs of his former solicitors, the further order that the former solicitors pay costs to be taxed to the Debtor was not set off. It was sought to be argued that the assignor, that is the former solicitors to the Debtors, cannot assign more than the net amount then due which would be the amount of the debt claimed in the bankruptcy notice, namely $21,638.30 less the maximum amount pursuant to the draft bill of costs in favour of the Debtor against the assignor of $6,133.60.
The second more substantive issue raised by the Debtor in this application, is that the bankruptcy notice ought to be set aside on the basis that it is an abuse of process. It was submitted that the bankruptcy notice was filed for the improper purpose of placing pressure on the applicant to pay the debt rather than to invoke the Court's insolvency jurisdiction.
It is the second issue which in my view has been correctly described as a substantive issue. For convenience it is appropriate to deal with the first issue as to whether or not the bankruptcy notice is defective as it fails to take into account a costs order in favour of the Debtor against the purported assignor. The costs order in favour of the Debtor is for an amount yet to be taxed, though an amount no higher than $6,133.60. That is a sum payable by order of a Court by the assignor in favour of the Debtor. It is not a sum certain, and in my view is not an amount which the assignor of the debt should have deducted assuming the assignment to be valid.
On the assumption that the assignment is valid, namely, assignment of a debt which is the subject of an order made on 18 January 2006 by Master Bruce of the Supreme Court in favour of the assignor against the Debtor, arising out of orders made on 12 October 2004 and
e21 November 2005 taxed in the sum of $21,638.30, then it is a sum certain which may be assigned.
I cannot find any authority to suggest that the assignor must deduct amounts which may in this case be the subject of a favourable order obtained by the Debtor against the assignor yet to be taxed. Until the sum has been determined or set off by order of the Court then the debts have an independent life, and assignee Creditor in my view is not required to deduct an uncertain amount from a taxed amount for costs which then purports to be the subject of an assignment.
Accordingly, I do not see any defect in the bankruptcy notice as a result of the claimed failure by the Creditor to deduct from the debt an amount yet to be taxed for costs in favour of the Debtor against the assignor.
Abuse of process
That leaves the Court to consider the more substantive issue of whether the bankruptcy notice in this instance could properly be regarded as an abuse of process.
Affidavit evidence
It is relevant to consider the Debtor's affidavit material in further detail.
In the first Debtor's affidavit after referring to the alleged invalidity of the assignment, and/or the bankruptcy notice in failing to take into account the cross-order for costs obtained by the Debtor against the assignor, the Debtor then further asserts that he is solvent specifically states as follows:
“10.Further, I state that I am solvent as my assets far exceed any liabilities which I owe to any person. I believe that the current Bankruptcy Notice filed against me together with any foreshadowed Creditor’s Petition against me would amount to an abuse of process in view of the fact that any such sequestration proceedings would be foredoomed to fail based upon my solvency. I have assets which exceed $1 million dollars in value and my liabilities are far less than that figure.”
The Debtor then states that in his view the bankruptcy notice is an abuse of process and deposes as follows:
“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 utilise this Court as a debt collector when there are ample alternative remedies available to any judgment creditor or assignee thereof to collect any judgment debt owed to me”.
In the Debtor's second affidavit he refers to the affidavit of the Creditor sworn 6 July 2006 and it is useful to set out a relevant extract from that affidavit in order to understand the reply of the Debtor in the Debtor's second affidavit.
In his affidavit the Creditor recites the history of Court proceedings set out earlier in this judgment. He deposes that the deed of assignment dated 1 May 2006 assigned the debt from the assignors to him. He then relevantly deposes as follows:
“5.Etl has not paid, or offered to pay, the debt claimed in the bankruptcy notice or any part of it.
6.I deny that the bankruptcy notice has been filed to cause Etl stress and vexation knowing that he is solvent. I issued the bankruptcy notice in the hope that the Debt would be paid. If payment is not made, I intend to issue a bankruptcy petition.
7.Based on Etl’s failure to pay the amount set out in the bankruptcy notice, or even offer to pay what he admits to be the amount outstanding (approximately $15,500), I believe that he may be insolvent.”
By way of reply in the Debtor's second affidavit the Debtor relevantly deposes:
“3.I am aware that Mr. Cavoli is a solicitor who practices from the same office floor building which was previously occupied by the Assignor, Lennon Settle. I also believe that Mr. Cavoli is a personal friend of Mr. Mazzeo, a partner of Lennon Settle, who had the carriage of my matrimonial proceeding in the Family Court of Australia.
4.I believe that Mr. Cavoli has taken an assignment of the debt in order to create a “Chinese wall” between himself and Mr. Mazzeo in order to create the impression that he is ignorant of my asset position. I believe that Mr. Mazzeo has declined to institute bankruptcy proceedings against me personally because he knows that I am solvent.”
The Debtor annexes to his second affidavit a document he describes as a "true copy of statement of assets and liabilities." He lists the total estimated market value as at 4 August 2006 of three properties at $1,250,000. The three properties are 5 Richardson Street, Essendon (the Essendon property) with an estimated value of $600,000, unit 16/7-11 Federation Avenue, Broadbeach (the Broadbeach property) with an estimated market value of $350,000 and 149 Roberts Road, Niddrie (the Niddrie property) valued at $300,000. It should be stressed that the values placed on the properties are claimed to be estimated market values. The Debtor then refers to a motor vehicle purportedly valued at $14,000, property, plant and equipment of $45,000 with total cash at bank of 44,673.30. Superannuation is estimated to be $18,000. Whilst the Debtor claims in the statement of assets and liabilities that this leaves a total net asset of $1,416,346.60, it appears that it is an arithmetic error. The correct total should be $1,371,673.30. It is clear on my assessment of the material that the debtor has double added the amount of cash namely, $44,673.30 to arrive at the erroneous total of net assets. For the purpose of this judgment, however that error is not significant.
The liabilities of the Debtor set out in his statement of assets and liabilities includes accounts payable for legal costs to his former solicitors Lennon Settle in the sum of $235,631 and legal costs to Starnet Legal Pty Ltd of $100,000 making a total of accounts payable of $335,631. He claims to owe $300,000 to RAMS Finance Company as a secured loan.
The Debtor refers to liability for credit cards amounting to $19,000 making a total of liabilities of $654,631.
In the Debtor's second affidavit after referring to the statement of assets and liabilities, he then claims to have instructed an accountant to transfer the Niddrie and Broadbeach properties to a company purportedly operated by the Debtor, namely, Millhouse General and Mercantile Pty Ltd. He claims "that instruction was ignored."
To understand the nature of the dispute between the parties it is relevant to set out the following paragraphs from the Debtor's second affidavit:
“6.On 1st August, 2006, the Assignor of the debt, which forms the basis of the bankruptcy notice against me, procured the attendance of a Sheriff’s officer to execute a Warrant of Apprehension against me. I was taken to the police station and bailed to appear before the County Court of Victoria at Melbourne on 25th August 2006. On 30th June, 2006, Mr. Mazzeo swore an Affidavit in Support of the issue of a Warrant of Seizure and Sale out of the County Court of Victoria as part of his attempt to recover the debt from me. The Sheriff’s Officer attended my home on 1st August, 2006 and executed that warrant.
7.I believe that the Assignor and the Assignee know full well that I am a solvent person. I believe that the Bankruptcy Notice has been filed against me in order to cause me to suffer vexation and distress. Mr. Mazzeo knows full well that a sale of the real estate in which I have an interest would give rise to more than sufficient funds to discharge the entire debt which I owe to his firm. However, I am very angry with Mr. Mazzeo and I refuse to pay out the debt as I intent to file legal proceedings against his firm seeking substantial damages for negligence and conspiracy to cause me personal injury and loss and damage.
8.I believe that the Warrant of Seizure and Sale was issued with the clear intention of recovering a debt which exceeds $235,000.00. If that Warrant is executed, the Assignor would recover all of their judgment debt against me.
9.I believe that the Assignor and the Assignee have colluded with one another in order to abuse the process of this Court by filing the Bankruptcy Notice against me whilst simultaneously pursuing other enforcement remedies against me. I believe that this latter conduct is an admission of my insolvency.
10.I humbly request that the Bankruptcy Notice be set aside as an abuse of process.”
Oral evidence
The Creditor gave oral evidence and adopted his affidavit sworn 6 July 2006 referred to earlier in this judgment.
The Creditor gave evidence that he had practised as a solicitor for "about 19 years". He is a general practitioner with some commercial litigation experience, he has experience in the collection and enforcement of debts, he is familiar with a summons for oral examination and conceded that at no stage has he attempted to examine the Debtor regarding his affairs.
He claimed that the assignment of the debt of $21,638.30 was offered to him in April of 2006. He agreed in evidence that he had not ever taken an assignment of debts owed to fellow practitioners before this occasion. This was the first time he had taken an assignment of any debt from a fellow practitioner. Although he was curious as to why Mr Mazzeo was offering to assign the debt, he claimed that there was "never any discussion about why it happened."
Specific questions in cross‑examination were put to the Creditor concerning the issue of the bankruptcy notice. The following exchange is relevant:
“Now, it would be quite wrong, would it not, do you accept, to issue a bankruptcy notice merely for the purpose of seeking a judgment debtor to pay a debt? Do you accept that?---No, I don’t.
So you think it’s a proper purpose, do you, if the sole purpose of your bankruptcy notice – the sole purpose – is to put pressure on an individual to pay a debt? You think that would be a proper purpose, do you?---What I say is that it’s- - -
No, just answer my question. Would it be a proper purpose if your sole purpose for filing a bankruptcy notice was to put pressure on the individual to pay the debt? Would that be a proper purpose, yes or no?---No.
So you think it’s a proper purpose, do you, if the sole purpose of your bankruptcy notice – the sole purpose- is to put pressure on an individual to pay a debt? You think that would be a proper purpose, do you?--- What I say is that it’s- - -
No, just answer my question. Would it be a proper purpose if your sole purpose in filing a bankruptcy notice was to put pressure on the individual to pay the debt? Would that be a proper purpose, yes or no?---No.”
(Transcript p.18 lines 41-43 and p19 lines 1-9)
The Creditor further agreed in cross‑examination that if he knew a Debtor was solvent that it would not be appropriate to issue a bankruptcy notice. He made no inquiries concerning the Debtor's assets.
He was then asked a series of questions concerning the debt as follows:
“But at the time that you made your – when did you make your request for payment of the assigned debt?---Well, Mr Etl was served with a notice of the assignment of the debt on or about 1 May.
By whom?---By Mr Lennon Settle.
Yes, so did you make any effort to claim that debt, before issuing a bankruptcy notice?---Well, he didn’t pay. On being advised that - - -
No, just answer my question. Did you or did you not make any attempt to recover the assigned debt from Mr Etl before you issued a bankruptcy notice?---I relied on the notice given- - -
No, you’re not answering my question, I beg your pardon. You are a solicitor. You understand your obligation is to answer questions, unless there is a proper objection. Did you or did you not make any request for the payment of that debt yourself, after it was assigned to you, yes or no?---I made no direct request of Mr Etl.
(Transcript p.19 lines 34-44 and p.20 lines 1-14 page)
The following exchange is also relevant,
“Well, if you’ve made no effort to inquire what his asset position is, did you not regard the filing of the bankruptcy notice as somewhat of a speculative act?---I guess so, yes.
Yes, well, nothing to stop you from spending less than a hundred dollars on a summons for oral examination, to have him examined as to his affairs. Correct?---Nothing to have stopped me, no.
(Transcript p.20 lines 21-28)
The Creditor confirmed that he was not aware that the assignor had issued a warrant of seizure and sale in the County Court seeking recovery of the amount of $235,000 until he saw that in an affidavit on the morning of the hearing. He conceded that pursuant to s.44(3) of the Bankruptcy Act 1966 (the Bankruptcy Act), if a Creditor file a Creditor's petition then it may be required to surrender security status (Transcript p.20)
He agreed that Mr Mazzeo was a colleague and a friend. He further agreed that he did not personally hold any security as against the Debtor. He claimed not to have had any discussions with Mr Mazzeo at all in relation to the fact that Mr Mazzeo had security over the Debtor's property, and that the acceptance of the assignment was "a commercial decision." He claimed that he issued the bankruptcy notice "in the hope that I would get paid." He denied any intention to put any undue or improper pressure on the Debtor. He agreed that he had made no attempt to exhaust any other form of debt recovery before issuing the bankruptcy notice (Transcript p.23).
No evidence was given by the Creditor as to the commercial benefit he might have received for accepting the assignment. No details were provided as to any payment he might have made to the assignor which appears to be a firm, though it is noted his dealings were with a person who presumably was a partner of the assignor firm. Regrettably no details were given in evidence about the assignor. No issue was taken as to whether a firm of solicitors is able to execute an assignment in the name of the firm, signed in the firm name, and not countersigned by any partner of the firm. In re-examination the Creditor confirmed that he intends to issue a Creditor's petition if the debt is not paid. (Transcript p.23) He did not seem to be aware during the course of his evidence that the Debtor had disclosed that he had an amount of cash with the National Bank of Australia of $44,673.30. The assignment of debt was not produced.
Submissions
Debtor's submissions
Counsel for the Debtor referred to the Debtor's affidavits and notes from the material that the bankruptcy notice refers to a debt of approximately $21,000 and on the basis of the Debtor's statement of assets and liabilities, given an amount of approximately $45,000 he has referred to as cash, that that debt could be paid. Reference was made to there being a warrant of seizure and sale which it is claimed appears to be issued by the assignors at the same time that the assignee purports to rely upon the bankruptcy notice. It was submitted that the assignor and the assignee know each other and doubt was raised as to why the assignment occurred given the assignor appears to be owed an amount by the Debtor of approximately $235,000.
It was noted that in Etl v Lennon Settle reference was made by the Court to a charge over property as follows:
“40.In the present case a distinguishing feature of this application is clearly the question of security provided by the deed of charge. I accept the submissions of the respondent that the mere assertion of equity in various properties, albeit somewhat inaccurately described and without the benefit of expert evidence as to valuation, is not of itself determinative of this application. It is relevant to note, however, that the properties do exist and, as found earlier, I am prepared to conclude that at least on the material before me it would appear they have a value exceeding the current debt claimed by the respondent. That does not mean of course the current value of the property will be sufficient to meet any other debts incurred as a result of the appeal proceedings in the Supreme Court, though in my view that future indebtedness is not a matter which I should properly take into account in determining this application. It is only mentioned in passing as illustrating perhaps the uncertainty and unpredictability of the current equity held either by the applicant or his company in the properties described earlier in this judgment.”
Reference to that extract from the Court's decision then led to the following submissions on behalf of the Debtor:
MR SELIMI: Your Honour will see the assignor, being Lennon Settle, have a deed of charge. Now, getting to the nub of the matter, your Honour, rather than as it were playing around the issue, the real point is this – and it simply adds weight to the fact that this bankruptcy notice ought to be set aside not only because it’s seeking to pull illegitimate pressure upon the applicant to pay a debt by going for the jugular, but also equally important, it has the ulterior purpose of assisting the assignor by escaping or evading the operation of section 44(3) of the Bankruptcy Act, which of course relates to the relinquishment or surrender of security.
So therein lies the real reason, I respectfully submit, for this assignment, because if the assignor doesn’t file the bankruptcy notice – or the creditors petition rather, more importantly – then he doesn’t have to relinquish the security or surrender the security. Rather, they simply have the front person – if I can say that with all due respect to the respondent – being Mr Cavoli, to present his bankruptcy notice and creditors petition supposedly without being constrained or in any way inhibited by the provisions of section 44(3).
So we have a bankruptcy notice here issued for the collateral purpose of escaping the operation of section 44(3), in addition to the first improper purpose that I’ve referred to…”
(Transcript p.14 lines 3-23)
It was submitted on behalf of the Debtor that the Creditor had not been full and frank in relation to the reason for the assignment of debt and the filing of the bankruptcy notice. It was open to the Court to find that the bankruptcy notice was issued for the purpose or hope of collecting the debt.
It was noted that there was no evidence before the court as to why the assignor assigned the debt of $21,638.30 whilst still owed approximately $235,000 over which security was held. It was noted that although the court has earlier dismissed in other proceedings an application to set aside a bankruptcy notice by the assignor, the court must then consider what was described as "a far wider picture to this case."
Specific reference was made to s.44 of the Bankruptcy Act and in particular sub-ss.(2), (3) and (5) which provide as follows:
“(2) Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security.
(3) A secured creditor may present, or join in presenting, a creditor's petition as if he or she were an unsecured creditor if he or she includes in the petition a statement that he or she is willing to surrender his or her security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.
…
(5)Where a secured creditor has presented, or joined in presenting, a creditor's petition as if he or she were an unsecured creditor, he or she shall, upon request in writing by the trustee within 3 months after the making of a sequestration order, surrender his or her security to the trustee for the benefit of the creditors generally.”
It was submitted that apart from putting pressure upon the Debtor to pay the debt, the inference which the court should draw is that the bankruptcy notice had an extraneous and improper purpose, namely, to avoid the operation of sub-s.44(3) of the Bankruptcy Act. This enabled the assignor with the assistance of the assignee, that is the Creditor , to obtain a sequestration order against the Debtor without the assignor surrendering security pursuant to s.44(3) of the Bankruptcy Act. It was argued that that is the true underlying purpose of the process.
Reference was made to the decision of the Federal Court in Maxwell-Smith v S & E Hall Pty Ltd, in the matter of Maxwell-Smith [2006] FCA 825 (Maxwell-Smith). In that case there was an application to set aside a bankruptcy notice on the basis, inter alia, that it was an abuse of process. The Court was referred to paragraphs 41-52 of the decision of Jacobson J in Maxwell-Smith which helpfully set out the relevant legal principles as follows:
“41The Court’s power to set aside a bankruptcy notice arises from s 30 of the Act. But the Act confers no general discretion to set aside a bankruptcy notice that is valid in form and not an abuse of process; Re Briggs; Ex Parte Briggs v Deputy Commissioner of Taxation (1986) 12 FCR 310 at 311 - 312; Re Athans; Ex Parte Athans (1991) 29 FCR 302 at 310; Australian Securities and Investments Commission v Forge (2004) 48 ACSR 474 at [27].
42It follows from this that the Court does have power to set aside a bankruptcy notice which can be characterised as an abuse of process; Amos v Brisbane TV Limited (2000) 100 FCR 82 at [21].
43If it is apparent to the Court that the purpose of a bankruptcy notice is to put pressure on a debtor to pay a debt, rather than to invoke the Court’s insolvency jurisdiction, the issuing of the bankruptcy notice will be an abuse of process; Brunninghausen v Glavanics [1998] FCA 230; see also Re Sarina; Ex parte Wollondilly Shire Council (1980) 43 FLR 163 at 166.
44However, it is not an abuse of process if a creditor genuinely intends to pursue the matter if there is default in complying with the notice and there is no evidence of collateral purpose or undue pressure; Slack v Bottoms English Solicitors [2002] FCA 1445 at [15] – [21].
Whether the bankruptcy notice constitutes an abuse of process
45In my view, it is to be inferred from the factual matrix set out above that S & E Hall’s purpose in issuing the bankruptcy notice was to put pressure on Mrs Maxwell-Smith to pay the debt rather than to genuinely invoke the Court’s bankruptcy jurisdiction. This inference arises from the following.
46First, the bankruptcy notice seeks payment of a debt for a small amount of money based on a judgment debt which is over 5 years old. No satisfactory explanation has been given as to why the notice was issued after such a lengthy delay. It is true that the debt is not statute barred, but the right to pursue it by invoking the Court’s processes must be subject to the operation of the principles respecting abuse of process; Batistatos at [62] – [65].
47 Second, the observations made by Moore J in July 2004 make it plain that S & E Hall was aware at that time of the probability that Mrs Maxwell-Smith was solvent.
48Third, the letter from S & E Hall’s solicitors states in unequivocal terms that Mr and Mrs Maxwell-Smith owned assets the value of which greatly exceeded their debts. In my view it is clear from this letter that S & E Hall was aware of Mrs Maxwell-Smith’s ability to meet her liabilities in August 2004.
49It seems to me that what was required of S & E Hall was some evidence to dispel the natural inference arising from lengthy delay and knowledge of solvency, that the bankruptcy notice was issued for a purpose collateral to that of pursuit of insolvency proceedings. Instead, there was no evidence from S & E Hall explaining the delay or demonstrating that Mrs Maxwell-Smith’s financial position had deteriorated since 2004.
50Curiously, Mr S J Hall, a director of S & E Hall, has sworn an affidavit of 23 May 2006 denying Mrs Maxwell-Smith’s suggestion that he is aware of her solvency. However, Mr Hall’s affidavit made no effort to meet the suggestion other than to say that Mr and Mrs Maxwell-Smith have not paid amounts due to his company under the order of the Consumer Claims Tribunal or the various costs orders.
51In those circumstances I am entitled to reject Mr Hall’s evidence, even though he was not cross-examined on it; Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 at
587-588.
52Accordingly, I propose to set aside the bankruptcy notice as an abuse of process.”
Applying the authority of Jacobson J it was submitted that in the present case the purpose of filing the bankruptcy notice was not to invoke or attempt to invoke the jurisdictional of this court, but rather to avoid the operation of the relevant provisions of s.44 of the Bankruptcy Act or otherwise place undue pressure on the Debtor. Bankruptcy, it was submitted, is not a proceeding designed for the recovery of debts.
Reference was made to another decision in the Federal Court in Australia & New Zealand Banking Group Pty Ltd v Foyster [2000] FCA 400. In that case Hely J set out the relevant principles which appear in the following paragraphs:
“16 The Bank has made out the elements which prima facie entitle it to the making of a sequestration order. However,
s 52(2) of the Act provides that if the Court is satisfied that the debtor is able to pay his debts, or that for other sufficient cause a sequestration order ought not to be made, then the Court may dismiss the petition.
17The onus of proving sufficiency of assets lies on the respondent. It is not sufficient for the respondent simply to establish that he has assets which exceed his liabilities in value. It must also be established that the assets are available to be realised and that they are capable of ready realisation. If a debtor is able to pay his or her debts, but is recalcitrant, the creditors may resort to other remedies, such as execution against property and garnishee proceedings, but not to sequestration. Bankruptcy is not a proceeding designed for the recovery of debts: see Re Sarina; Ex Parte Wollondilly Shire Council (1980) 32 ALR 596, 599.
18Although a sequestration order will not be made against the estate of a debtor who is recalcitrant but plainly solvent, the Bank submitted, on the basis of Trojan v Corporation of Hindmarsh (1987) 16 FCR 37, 46-48, that the discretion under s 52(2)(a) should not be exercised unless the debtor demonstrates that the petitioning creditor will be satisfied from the ordinary remedies such as execution and guarantee. Trojan decides that even if a debtor establishes solvency, the Court retains a discretion whether or not to dismiss the petition. The Full Court said, at p 48:
"... the principle laid down in the Sarina case would not necessarily be satisfied by a sterile demonstration of an ability to achieve a payment which was not in reality at all likely to be compelled. Section 52(2)(a) envisages a situation which will probably bear fruit in payment. It is not easy to see any other reason why the legislature saw fit to make a demonstration of ability to pay only a discretionary ground of dismissal of a petition, and not an absolute bar to its success.”
19Under s 52(2)(a) the respondent must satisfy the Court that he is "able to pay his ... debts", including liabilities: s 5(1). In my view, the subsection refers to a state of affairs which requires account to be taken of debts which will fall due in the reasonably immediate future pursuant to existing obligations: Bank of Australasia v Hall (1907) 4 CLR 1514, 1527-1528 as well as debts which are presently due and payable. However, whether that is so or not, for the reasons explained by Katz J in International Alpaca Management Pty Ltd account needs to be taken, if not in assessing solvency, then in the exercise of the discretion whether or not to dismiss the petition, of liabilities which will become payable in the reasonably immediate future.
Creditor's submissions
At the commencement of submissions for the Creditor the Court raised the issue of the existence of the assignment between the assignor and the assignee. It was indicated that the only document available was a document exhibited to the affidavit of the Debtor which is the document entitled, "Notice of Assignment of Debt". That is the document dated 1 May 2006 purportedly signed by "Lennon Settle Mazzeo". Counsel referred to that document as being a document "that was attached to the bankruptcy notice" (Transcript p.28). There is no evidence that it was an attachment. Rather it appears as a separate exhibit to the Debtor's second affidavit. Counsel for the Creditor then, after taking instructions, was not able to produce evidence of the assignment of debt.
After dealing with the question of a set off, which I have already determined, Counsel then submitted that there is no abuse of process in issuing the bankruptcy notice in the present case. He relied upon paragraph 44 of the decision of Jacobson J in Maxwell-Smith set out earlier in this judgment. Counsel referred to a decision of the Federal Court in Slack v Bottoms English Solicitors [2002] FCA 1445. In particular, reference was made to paragraph 21 of that decision where Spender J states:
“21It seems to me to be quite unarguable that the issuing of a bankruptcy notice as a means to secure payment of a debt and, in the event of default, to proceed by way of petition for sequestration is an abuse of process. It seems to me to be simply unarguable in the circumstances of this case that the issue of the bankruptcy notice with the intention, or hope, that the debt would be paid, but that if it was not paid then bankruptcy proceedings would issue, is an abuse of process.
It was argued that in the present case the Debtor needs to provide further evidence beyond the statement by the Creditor that he issued the bankruptcy notice in the hope that the debt would be paid and if not was going to proceed with a petition.
It was submitted that if the Debtor's evidence concerning solvency was accepted, then the demand for payment of approximately $21,000 should not present any pressure at all. Likewise if the Debtor had access to the resources to pay debts, then he would have no difficulty paying the debt and accordingly the bankruptcy notice could not be claimed to cause undue pressure or stress. Issues concerning solvency should be raised, it was submitted, at the hearing of any petition, and the financial information provided is currently inadequate. It was submitted that whilst reference is made to accounts, details concerning the accounts has not been provided, nor are there any precise details concerning the properties but instead simply "estimated market value".
Specific reference was made to a further statement annexed to the Debtor's second affidavit from the company "Millhouse General and Mercantile Pty Ltd" and it was submitted that no details of shareholding or control of that company had been provided in the manner that would be normally expect in a financial statement if the evidence is to be relied upon to establish solvency. The cash amount of approximately $44,000 referred to by the Debtor it was claimed was not enough to meet liabilities to "Lennon Settle of $235,631 or the liability to Starnet Legal Pty Ltd of $100,000." Again it was submitted that the issue of solvency was a matter that should be determined at the hearing of the petition. The mere production of a balance sheet is not sufficient, according to the Creditor's submissions.
An attack was made on the submissions of the Debtor concerning the lack of explanation as to the reason for the assignment of the debt. It was argued that this effectively seeks to reverse the onus. It was submitted that if the Debtor wishes to establish the transaction was an abuse of process, or the assignment is void, then the Debtor has the onus of proving that assertion. It was noted that no subpoena was issued to the assignor firm. If the Debtor wishes to go beyond the explanation of the Creditor that he took the assignment of debt as a commercial decision, then it was submitted it was a matter for the Debtor to prove.
Criticism was made of the evidence concerning any security held by the assignor beyond reference to the earlier decision of this court. It was argued that any collateral purpose would be a collateral purpose of the assignor, and submitted that this "can't necessarily be attributed to the assignee". It was submitted there was no evidence that the Creditor has issued the bankruptcy notice at the behest of the assignor. It was conceded during the course of submissions that there was also no evidence of what the Creditor might get out of the assignment apart from his statement that he might be remunerated in some way.
Reasoning
In my view the state of the evidence produced by both parties in this application is inadequate. The Debtor has sought to produce evidence of solvency which I find is clearly deficient for the reasons advanced for and on behalf of the Creditor.
The Creditor has been less than frank with the Court in divulging the true circumstances leading up to the execution of the assignment. The failure to produce in evidence the assignment, is a failure on the part of the Creditor and not the Debtor. If the Creditor seeks to rely upon the assignment as being a genuine assignment entered into for commercial reasons, then at the very least the Court should expect that a proper copy of the assignment be produced rather than simply a document entitled "Notice of Assignment of Debt" apparently forwarded to the Debtor by the Creditor and not in my view forming part of the bankruptcy notice. Although not argued, it may well be the case that the bankruptcy notice in any event is deficient as a result of its failure to recite the deed of assignment and/or attach that deed to the bankruptcy notice.
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.
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.
The collateral purpose in my view having regard to the history set out in the court's earlier decision in Etl v Lennon Settle 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.
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.
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 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.
After the hearing of this matter it is noted that the parties sought to reopen the hearing in order to bring to the attention of the court matters which have occurred since the hearing date. Ultimately the parties filed a document entitled "Agreed Facts 14th November 2006". The agreed facts relevantly state:
“2.On 26 April 2006 in the Magistrates’ Court an order was made that Karl Etl pay Kliger Partners $853 with a stay of 7 days. Mr Etl appeared on the day.
3.On 23 May 2006 in the Magistrates’ Court an order was made that Karl Etl pay Kliger Partners $9,098.63 with a stay of 30 days. Mr Etl attended Court.
4.On 2 August 2006 a bankruptcy notice was issued on the application of Kliger Partners against Mr Etl based on both judgments.
5.Mr Etl has not paid the debts.
6.On 30 August 2006 Mr Etl made application to set aside the bankruptcy notice referred to in paragraph 4.”
Whilst those proceedings clearly indicate other claims against the Debtor, the mere existence of those proceedings as yet unresolved does not encourage the court to alter its decision.
Accordingly, it follows that the bankruptcy notice should be set aside and that the Creditor should pay the Debtor’s costs.
I certify that the preceding sixty-five (65) paragraphs are a true copy of the reasons for judgment of McInnis FM
Associate:
Date: 22 March 2007
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