Ezekiel v Segal

[2012] FMCA 1231

FEDERAL MAGISTRATES COURT OF AUSTRALIA

EZEKIEL & ANOR v SEGAL [2012] FMCA 1231

BANKRUPTCY – Bankruptcy Notice – Where there exists an asset protection order – Whether this is a bar to execution so that the notice should be set aside pursuant to s.41(3)(b) of the Bankruptcy Act 1966 (Cth) – Alternatively whether the Bankruptcy Notice was issued for an improper purpose – Whether Bankruptcy Notice issued as a tool for debt recovery – Application dismissed.

BANKRUPTCY – Bankruptcy Notice – Whether an order to extend the time of compliance should be made – Extension granted.

Bankruptcy Act 1966 (Cth), ss.40, 41
Criminal Assets Recovery Act 1990 (NSW), s.10
Family Provisions Act 1982 (NSW), s.7
Proceeds of Crime Act 2001 (Cth), s.24

Boscolo v Botany Council [1996] FCA 897
Deputy Commissioner of Taxation v Stuart-Jones (2000) 102 FCR 296
Ling v EnrobookPty Ltd (1997) 74 FCR 19
National Australia Bank Ltd v Pollak (2001) 186 ALR 44
Ollis v Rayner (2007) 165 FCR 477
Rankine v Lord (2011) 121 ALD 258
Re Ling; Ex parte Enrobook Pty Ltd (1996) 142 ALR 87
Re Ousley; Ex parte Commissioner of Taxation (1994) 48 FCR 131
Sood v Crown Diagnostic Imaging Pty Ltd (2006) 156 FCR 240
Tobin v Ezekiel – Ezekiel Estate [2008] NSWSC 1108
Tobin v Ezekiel; Estate of Lily Ezekiel [2009] NSWSC 1313
Tobin v Ezekiel; Estate of Lily Ezekiel [2011] NSWSC 571
Tobin v Ezekiel [2012] NSWCA 285
Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572

First Applicant: MORRIS EZEKIEL

Second Applicant: ALBERT EZEKIEL

Respondent: ALAN LEWIS SEGAL

File Number: SYG 1788 of 2012

Judgment of: Lloyd-Jones FM

Hearing dates: 6 and 13 September 2012

Delivered at: Sydney

Delivered on: 19 December 2012

REPRESENTATION

Counsel for the Applicant: Mr T. S. Hale SC and Mr P. Macarounas

Solicitors for the Applicant: Diamond Conway Lawyers

Counsel for the Respondent: Mr P. O'Loughlin

Solicitors for the Respondent: Segal & Associates

ORDERS

1. The amended application filed in Court on 6 September 2012, seeking that Bankruptcy Notice BN 4516 against Morris Ezekiel and Albert Ezekiel issued on 23 July 2012 be set aside, is dismissed.

2. The time for compliance with Bankruptcy Notice BN 4516 issued 23 July 2012 is extended for a period of 21 days from the date of this judgment.

3. The parties have leave to file brief written submissions in respect to costs in these proceedings on or before 10 February 2013.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 1788 of 2012

MORRIS EZEKIEL

First Applicant

ALBERT EZEKIEL

Second Applicant

And

ALAN LEWIS SEGAL

Respondent

REASONS FOR JUDGMENT

The Proceedings

1. The applicants, Messrs Morris Ezekiel and Albert Ezekiel (collectively, the “Brothers”), seek an order to set aside a Bankruptcy Notice (BN 4516 of 2012) (the “Bankruptcy Notice”) issued against them by Alan Lewis Segal on 23 July 2012 on the following grounds:

   a)The debt is stayed within the meaning of Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572, such that the Brothers’ property cannot be realised due to the orders of Brereton J made 23 May 2011 which have the practical effect of preventing the Brothers from paying the debt in accordance with the Bankruptcy Notice. Accordingly, the Bankruptcy Notice should not have been issued under ss.40(1)(g) and 41(3)(a) and (b) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”); and

   b)The Bankruptcy Notice was issued in anger for an improper purpose as a tool of debt recovery on the Brothers and not for the administration of an insolvent estate. 

2. In the alternative, an order is sought to extend the time for compliance with the Bankruptcy Notice until after the NSW Court of Appeal (proceedings number CA2006/275504-002, heard in March 2012 with judgment reserved) gives judgment in those proceedings.  Mr Hale, appearing for the applicants, sought leave to file an amended application at the hearing as the original contained a typographical error rendering it incomprehensible.  There was no objection to this course and leave was granted.

Background

1. Mr Hale provided the Court with a brief background setting out the circumstances leading up to these proceedings.  Mr Segal was the former solicitor for the Brothers who was involved in proceedings in the Supreme Court of NSW concerning the last Will and Testament of their late mother, Lily Ezekiel.  In those proceedings the Brothers were the defendants and their two sisters Evelyn Tobin and Clara Ezekiel (the “Sisters”) were the plaintiffs.  The Brothers, under the last Will and Testament of their mother, were appointed executors of the estate, in which the only substantial asset was a house on Beach Road, Bondi (the “Bondi Property”).  At the time of the hearing, given the recent judgment of his Honour, Brereton J, the value of that house is in the order of approximately $2,500,000, but this was not supported by any formal valuation read into evidence.

2. The last Will and Testament was fully administered before commencement of the proceedings by the Sisters with the Brothers; the registered proprietors of that house.  The Sisters sought relief under the Family Provision Act1982 (NSW) to set aside the grant of probate. The Sisters action failed and the proceedings were dismissed (Tobin v Ezekiel – Ezekiel Estate [2008] NSWSC 1108 per Palmer J). During that action a number of interlocutory proceedings occurred. Mr Segal was then acting for the Brothers. The proceedings involved an order restricting the extent to which the Brothers could mortgage or charge the house, as they had initially mortgaged the house to the extent of $300,000 in order to pay the legal fees owed to Mr Segal and other outstanding liabilities.

3. There were subsequent proceedings before his Honour Palmer J to increase that amount to enable the financing of litigation but that application was refused.  Shortly after the decision made by his Honour Palmer J, there was a change of solicitors.  Mr Segal was owed a sum of money as a consequence of the earlier judgment of his Honour Brereton J, where there were orders made by the way of a stay, pending an appeal.  The Brothers were restrained from mortgaging or charging the property of which they were the registered proprietors to the extent of more than $1,100,000 without giving 28 days notice, in writing, to the Sisters. 

4. These were lengthy proceedings and there was considerable refinancing based upon the security not exceeding $1,100,000.  A consequence of those orders is that the Brothers are not in a position to pay the outstanding fees of Mr Segal in which he has an assessment in April 2010 of the sum of approximately $95,000.  Since that date there has been the addition of interest to that amount. 

5. Mr Segal, in respect to his fees, issued a Bankruptcy Notice on 23 July 2012, requiring compliance within 21 days for an amount of $117,228.63.  The argument advanced, on behalf of the Brothers is that the judgment of Brereton J restrained the Brothers from further charging the Bondi Property without giving 28 days notice to the Sisters.

Evidence

1. Mr Hale read the affidavit in support of the application to set aside the Bankruptcy Notice sworn by Michael John Zwar on 17 August 2012.  Annexed to that affidavit were the following exhibits:

   a)“A” – copy of an order made by Brereton J in the Supreme Court of NSW on 23 May 2011;

   b)“B” – copy of an affidavit sworn by Michael John Zwar, 7 April 2012;

   c)“C” – copies of correspondence passed in between Alan Lewis Segal and Michael John Zwar between 26 April 2012 and 16 August 2012; and

   d)“D” – copy of the Bankruptcy Notice BN 4576 issued on 23 July 2012 and served on the applicants on Saturday 28 July 2012.

2. Mr O’Loughlin, appearing for Mr Segal, read the affidavit of Alan Lewis Segal affirmed 30 August 2012.  Annexed to that affidavit is the following material:

   a)“A” – Certificate of Determination of Costs;

   b)“B” – Certificate of Determination of Costs of Costs Assessment;

   c)“C” – Judgment of Palmer J, Tobin v Ezekiel – Ezekiel Estate [2008] NSWSC 1108;

   d)“D” – Letter from Segal and Associates enclosing District Court judgment;

   e)“E1” – “E22” – copies of correspondence between Mr Segal and his solicitor, Mr Terence Stern and the solicitors acting for the applicants; and

   f)“F” – Judgment of Brereton J, Tobin v Ezekiel [2011] NSWSC 571.

3. Mr Hale initially sought the following material to be “Marked for Identification” after cross examination of Mr Segal was complete. Mr Hale sought the material to be marked as exhibits;

   a)Exhibit A1 (MFI-1) – affidavit of Morris Ezekiel;

   b)Exhibit A2 (MFI-2) – affidavit of Albert Ezekiel;

   c)Exhibit A3 (MFI-3) – notice of motion, filed in the District Court of NSW #2010/00106835; and

   d)Exhibit A4 (MFI-4) – affidavit of Michael John Zwar, dated 6 September 2012.

Examination of Alan Lewis Segal

1. Mr Segal affirmed his affidavit, dated 30 August 2012, which had been filed and read in these proceedings.  In cross-examination Mr Segal stated that he had acted for the applicants in the Supreme Court proceedings in 2006 and continued acting for them until October 2008.  He was involved in the preparation of evidence in relation to the Supreme Court proceedings, and, part of those affidavits dealt with the financial position of both applicants.  The full details of the cross-examination are contained in the Transcript identified as Thursday, 6 September 2012, comprising of 40 pages.

2. The cross examination, of Mr Segal, commenced at 2.47pm and concluded at 4.18pm.  As counsel for both parties estimated that their respective delivery of oral submissions would require in the vicinity of 45 minutes to one hour the hearing required an adjournment.  The next available date convenient to the Court and the parties was 13 September 2012 at 10.15am.  The date of compliance for the Bankruptcy Notice was extended to that date, and subsequently, on 13 September 2012, to the date of this judgment being delivered.  

Supreme Court, Court of Appeal Judgments

1. At the commencement of the hearing on 13 September 2012, Mr Hale informed the Court that the judgment relating to the proceedings in the Court of Appeal was being delivered that morning, the same time as the hearing before this Court recommenced.  Mr Hale stated that his client formed the view that it did not make a fundamental difference to the application before this Court, as his clients contend that the Bankruptcy Notice is invalid, for the reasons advanced and nothing that happens in the Court of Appeal is relevant.  However, if his client fails on that point their additional argument is that there should be an extension of time for compliance until after the Court of Appeal gives judgment.  They would seek that claim to be amended and seek an extension of time for a further 28 days.  The reason for that application is that whichever way the Court of Appeal decision goes, it remains a contentious matter where questions of special leave to appeal to the High Court already have been mooted.  If the appeal is dismissed there is a strong possibility that a stay will be sought, pending an application for special leave.  Alternatively, if the appeal were allowed, almost certainly, the judgment would be complicated and take some time to resolve, such as requiring aspects being returned to the primary judge for further determination.  As the Court of Appeal decision did not directly impact the question in respect to the validity of the Bankruptcy Notice it was appropriate, in the circumstances, to proceed to hear submissions from both parties on that issue. 

2. At the end of the hearing on 13 September 2012, being aware that the Court of Appeal had delivered its decision in Tobin v Ezekiel [2012] NSWCA 285, I granted the parties leave to file supplementary submissions addressing the impact that the Court of Appeal decision may have on these proceedings. Both parties availed themselves of that opportunity.

3. To assist in the understanding of the Court of Appeal decision and its impact on these proceedings, I rely on the background material contained in the judgment of his Honour Meagher JA at [20]-[24]:

   20.  The appellants and respondents are the four children of Lily Ezekiel who died on 2 November 2005 and Abraham Ezekiel who died on 19 July 2000. It is convenient to refer to the family members by their first names. Probate in common form of Lily's Will dated 10 December 1997 (the Will) was granted to the respondents, Albert and Morris, on 3 February 2006. By that Will she appointed the respondents as her executors and left the family home at Beach Road, North Bondi, to her husband, Abraham, and in the event of his earlier death, to Morris and Albert as tenants in common in equal shares. By reason of Abraham's earlier death, the family home passed to Albert and Morris. On 14 February 2006 the transfer of that property to them was registered.

   21. On 2 May 2006, the appellants, Evelyn and Clara, commenced proceedings seeking an order that the grant of probate in common form of the Will be revoked. It was alleged that there were circumstances which raised doubt as to whether Lily had known and approved the contents of the Will and as to whether she had testamentary capacity. In the alternative, an order was sought under s 7 of the Family Provision Act 1982. In May 2008 Evelyn and Clara filed an amended statement of claim which also alleged that Lily did not have testamentary capacity at the time of preparation and execution of the Will and that it was executed as a consequence of undue influence exerted by Albert. Orders were sought that an earlier will dated 28 September 1977 be admitted to probate in solemn form. In December 2009, in the course of the hearing before Brereton J (the primary judge) a further amended statement of claim was filed seeking an order pursuant to s 18A of the Probate and Administration Act 1898 that the earlier will, because of irregularities, constituted her last will and an order designating the Beach Road property as notional estate of Lily.

   22. In his judgment delivered on 1 March 2011, the primary judge concluded that Lily did have testamentary capacity, that Evelyn and Clara had not proved that execution of the Will was procured by the undue influence of Albert and that Lily knew and approved the contents of the Will. He also concluded that no order for provision should be made under the Family Provision Act 1982 in favour of Evelyn and Clara. On 23 May 2011 the primary judge gave reasons for ordering that Evelyn and Clara pay the costs of Morris and Albert of the proceedings fixed at $100,000.

   23. By their amended notice of appeal, Evelyn and Clara appeal from the orders refusing the revocation of probate and relief under the Family Provision Act. They also appeal from the order for costs made in May 2011.

   24. The appellants do not challenge the primary judge's conclusion that Lily had testamentary capacity. Nor do they challenge his Honour's conclusion that they failed to establish undue influence. They argue that the evidence established circumstances giving rise to a suspicion of undue influence which required that the respondents, as proponents of the Will, dispel that suspicion. That argument is put in various ways. It is said the primary judge erred in not finding that there were suspicious circumstances and in not concluding that the respondents had failed to prove that the Will was the true expression of Lily's free testamentary wishes. Alternatively, the appellants argue that the primary judge erred in rejecting their claim for provision under the Family Provision Act. That argument turns mainly on findings of the primary judge concerning the financial positions of the respondents in circumstances where his Honour had concluded that they had failed to provide truthful and full disclosure on that subject.

4. Mr Hale, in his supplementary submissions, provides a convenient summary of the outcome of the Court of Appeal decision as follows:

   1.2  In the judgment one of the Sisters, Clara, has been successful in part in her appeal.  The other sister, Evelyn, wholly failed in her appeal.  To that end, Clara has been rewarded the sum of $225,000, which is to be paid out of Morris’ share of the notional estate.  The Court of Appeal ordered that the Sisters pay the Brothers costs of the appeal and of the court below quantified as $90,000.  The decision upheld the trial judges findings on Testamentary Capacity and Undue Influence, albeit for different reasons than those relied upon by the said trial judge.  The above sum was ordered under Clara’s claim under the Family Provisions Act 1982 (NSW). 

5. Mr Hale informed the Court that the Brothers do not intend to seek special leave in the High Court from the decision of the Court of Appeal, however, there is a potential that the Sisters will seek special leave to appeal the decision in the High Court.  Insofar as the orders of his Honour Brereton J made on 23 May 2011 are concerned the Brothers will give notice to the Sisters of their intention to vacate the orders.  Mr Hale believes there is no reason to see why his Honour Brereton J would not now vacate the orders.  There is, however, a possibility that if the Sisters seek special leave that they may persuade the Court of Appeal to make orders, similar to those made by Brereton J on 23 May 2011, pending the determination of the leave application. 

6. In Mr Hale’s supplementary submissions, he contends that from the Court of Appeal’s judgement there will be sufficient equity in the Bondi Property to satisfy the debt the subject of the Bankruptcy Notice.  That is, the property is worth in the order of $2,000,000 and the order for a provision in the sum of $225,000.  The property is currently encumbered in sum of $1,100,000; therefore there will be equity of roughly $1,000,000 to satisfy any debts from the estate.   That is, of course, subject to any variation of the judgment by the High Court if the Sisters successfully appeal the Court of Appeal decision.

7. Mr Hale submits that the Brothers’ primary submission before this Court was that the Bankruptcy Notice is invalid and a nullity and, therefore, should be set aside.  The decision of the Court of Appeal is irrelevant to that primary submission.  If the Bankruptcy Notice is invalid it is a nullity and of no effect and there is no need to consider the Court of Appeal’s judgment. 

8. At the time of writing and with the knowledge of the outcome of the Court of Appeal proceedings, I will first address the primary issue in these proceedings which concerns the validity of the Bankruptcy Notice. 

Validity of the Bankruptcy Notice

Applicant’s Submissions

1. Mr Hale submits that the primary contention he makes is that the Bankruptcy Notice is invalid and relies upon two bases;

   a)The Wiltshire – Smith v Mellor Olsson (supra) line; and

   b)An abuse of process.

2. Mr Hale referred to the factual background, given in evidence, by Mr Segal during cross-examination on two affidavits, which were prepared under his instruction of the Brothers and addresses their financial position.  In particular:

   a)In the affidavit of Morris Ezekiel on 3 July 2006 where he details his financial capabilities at that time outside of the funds available from his mother’s house.  This includes paragraphs, to the effect, that Morris, a Commonwealth disability pensioner, is paid $400 a fortnight, has credit card debts of $18,399 and “[had] insufficient funds to pay [his] debts”; and

   b)In the affidavit of Albert Ezekiel on 3 July 2006 where he states that he lives on a Commonwealth disability pension of $505 per fortnight.  He indicated that both he and Morris had “insufficient funds to pay various debts”.

3. These affidavits were used early in the proceedings to remove a caveat over the Bondi Property: Tobin v Ezekiel; Estate of Lily Ezekiel [2009] NSWSC 1313. The caveat was removed to secure an advance to pay for various debts. On 12 July 2006 a mortgage was obtained in the sum of $300,000 over the Bondi property from which the sum of $82,469.05 was paid to Mr Segal for his legal fees. On 15 August 2006, Windeyer J granted the Sisters an injunction restraining the Brothers from encumbering the property in excess of $300,000.

1. Mr Hale submits that in 2008 Mr Segal made an application on behalf of the Brothers to vary the injunction which was granted by Windeyer J.  That application sought to increase the amount the property could be encumbered from $300,000 to $650,000.  On 20 August 2012, the application was heard by his Honour Palmer J and was refused, preventing the Brothers from further encumbering the property at that stage (Tobin v Ezekiel – Ezekiel Estate [2008] NSWSC 1108 – Annexure “C” to the affidavit of Alan Lewis Segal affirmed 30 August 2012). The application was made because Mr Segal knew that the Brothers could only pay for his legal fees by further mortgage of the property and that their income was insufficient to pay for the fees incurred. Shortly after Palmer J gave judgment, the relationship ended between the Brothers and Mr Segal. The Brothers sought and obtained new representation in the proceedings. At the time of his Honour Palmer J’s Judgment, Segal and Associates had issued over 70 subpoenas obtaining financial records relating to the Brothers over a considerable period of time. Those subpoenas were for the purpose of presenting to the Supreme Court the Brothers’ financial position in their Sisters claim under the Family Provision Act 1982 (NSW).

2. Mr Hale submits that as the litigation was approaching a hearing date, Segal & Associates refused to release the files and claimed a lien.  Agreement could not be reached at that stage between the Brothers and Mr Segal, despite correspondence between the parties.  The proceedings were heard in September and November 2009.  In the matter before this Court, under cross-examination, Mr Segal accepted that at times during the hearing he attended and observed the Supreme Court proceedings.

3. Mr Hale indicated that in late 2009 Mr Segal brought costs assessment proceedings against the Brothers.  The certificate of determination on costs was issued on 15 April 2010 in the sum of $95,252.17.  This was then listed as a judgment in the District Court on 30 April 2010.  On 16 June 2010, Mr Segal wrote to the Brothers in terms, inter alia, stating that he claimed a fruits of action lien over the property.  In response on 29 June 2010, the assertion of that lien was noted (albeit doubting the validity of the same) and Mr Segal was advised that he would be notified on the making of judgment where he could protect his interests.  No further action or steps were taken by Mr Segal to enforce his debt until 2012 and Mr Hale maintains that Mr Segal accepted this proposition in cross-examination. 

4. Mr Hale indicates that in the interim:

   a)On 1 March 2011 Brereton J gave judgment in favour of the Brothers.  In the proceeding the judgment gave the Brothers full entitlement to the Bondi Property; 

   b)The Sisters filed an appeal in respect of that decision; and

   c)An appeal was heard on 29-30 March 2012, which was reserved and delivered on 13 September 2012.

   Following the judgment in the proceedings on 23 May 2011, Brereton J made orders to reserve the assets in the estate, namely the Bondi Property, to prevent the appeal being rendered futile by dissipation or alienation of the assets.

5. Mr Hale indicated that the parties were back in communication as at February 2012 and remained so until 13 July 2012.  The communication was relatively innocuous and observed the effective status of the appeal proceedings which was, at that time, awaiting a judgment.  However, in a letter of 13 July 2012, Mr Segal asserted that the fruits of the action had been improperly disbursed and threatened to make a professional conduct complaint and “enforce that judgment by all appropriate means”.  On 23 July 2012, the same day as correspondence was received from Mr Zwar of Diamond Conway Lawyers that included some indication of the dispute between the Brothers, Mr Segal applied for and purported to obtain Bankruptcy Notice BN 4516 of 2012.  That notice was served on the brother on Saturday, 28 July 2012.  On 13 August 2012, Mr Segal advised the Brothers that a writ had been placed on the Bondi Property and on 17 August 2012 the Brothers made their application to set aside the Notice, which was brought in time.  On 5 September 2012 the Brothers brought an application in the District Court to stay the judgment obtained by Mr Segal.

Stay of Judgment - Wiltshire-Smith Line

1. In developing this argument Mr Hale relies on the following provisions of the Bankruptcy Act:

   a)Section 40(1)(g), a debtor commits an act of bankruptcy under a bankruptcy notice if he or she fails to comply with the notice and the notice is based on:

   If a creditor, who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed.

   b)Section 41(3)(a), proscribes the issue of a bankruptcy notice unless it is based on a final judgment or debt in accordance with s.40(1)(g); and

   c)Section 41(3)(b) proscribes the issue of a bankruptcy notice in respect of a judgment that has been stayed.

   Accordingly, if a judgment is stayed in the meaning of s.40(1)(g) or s.41(3)(b) then a bankruptcy notice shall not be issued in respect of that debt or any bankruptcy notice so issued is liable to be set aside.

2. Mr Hale submits that he relies on a body of jurisprudence that has culminated in the judgment of Wiltshire-Smith v Mellor Olsson (supra) where a judgment is considered “stayed” and consequently Mr Segal could be restrained from issuing a bankruptcy notice where orders of a Court prevent the debtor in a practical business sense from satisfying the judgment debt.  This argument is advanced on the basis that the orders of Brereton J made on 23 May 2011 have the practical effect of restraining, or preventing the Brothers, from paying or otherwise discharging the liability included by them in accordance with the purported Bankruptcy Notice.

3. Mr Hale indicated that he relied on the following passage from the decision in Wiltshire-Smith (supra) at 586-587 in support of his contention, which states:

   …Once it is recognised that a petitioning creditor may be disqualified from issuing a bankruptcy notice reason of a restraint imposed by order of a court on all of the property of the judgment debtor thereby removing his ability to make payment, there is no reason why a court order imposed on some only of the property of the judgment debtor which has the same practical effect should not be recognised as a relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution.  In our opinion such an order will have this consequence where in practical reality, although not strictly in law, the order “in any way prevent(s) the debtor from paying his debt” (Re Bond; Ex parte Capital and Counties Bank Ltd at 991) or where it “deprives or may well deprive the judgment debtor of assets which he could otherwise use to pay the judgment creditor and thus comply with the bankruptcy notice” (Wallace v Trade Credits LTD at 254).  To adapt the test proposed by Lord Esher MR in Re Sedgwick; Ex parte Sedgwick cited above, the factual inquiry to determine the practical effect of the order is whether in the eyes of ordinary fairness in business it will be said that the order has in a business sense prevented the debtor from paying.

4. Mr Hale argues that the central question is whether, in the eyes of ordinary fairness, this judgment had the practical effect of restraining the Brothers from dealing with the property (Wiltshire-Smith (supra); Boscolo v Botany Council [1996] FCA 897 per Jenkinson, O’Loughlin and Sackville JJ). Further, the above extracted passage has to read in light of cases dealing with Mareva type orders and proceeds of crime legislation where, in those cases, the parties could immediately apply to the Court for a variation of the orders (Sood v Crown Diagnostic Imaging Pty Ltd (2006) 156 FCR 240; Ollis v Rayner (2007) 165 FCR 477; National Australia Bank Ltd v Pollak (2001) 186 ALR 44).

5. Turning to the matters before this Court, Mr Hale submits that the Brothers are pensioners, whose sole asset that has any value is the Bondi Property.  Aside from this property, the Brothers do not have any capacity to satisfy the debt owing to Mr Segal.  Mr Segal was well aware of these facts, as was indicated in his evidence under cross examination.  The Bondi Property is subject to orders of Brereton J, made 23 May 2011.  Relevantly, those orders prevent the Brothers from dealing with or encumbering the property without giving at least 28 days notice to the Sisters.  The time for compliance with the Bankruptcy Notice was 21 days from the date the Bankruptcy Notice was served.  Clearly, at the time the Bankruptcy Notice was issued there was no way the Brothers could comply with Brereton J’s orders and with the Bankruptcy Notice.  Even if notice was given the purpose of Brereton J’s orders was to reserve the property for the purposes of the appeal proceedings.  Given the nature in which the proceedings were fought it is unlikely, in the highest, that an order varying Brereton J’s judgment would have been consented to.  It would require a full hearing itself to enable the order to be varied and there is no guarantee that the order would be varied if an application were made.  In the circumstances, the judgment was stayed in the manner described in Wiltshire-Smith (supra) and accordingly the Bankruptcy Notice ought to be set aside for non-compliance with s.40(1)(g) and s.41(3)(a) and (b) of the Bankruptcy Act.

Respondent’s Submissions

1. Mr O’Loughlin submitted that in relation to the Wiltshire-Smith argument, there are many cases where this has been applied.  There were applications or appeals in respect of the judgments being made, but in this case there is a clear concession that the amount of the debt is still owing.  The debt was properly and fairly conceded, therefore, any case which dealt with applications for stay or applications for appeals in respect of other judgments is not appropriate in the matter before this Court.  In respect of the Wiltshire-Smith point the Brothers could, at any stage prior to the issue of the Bankruptcy Notice, have applied to vary the orders of Brereton J as those orders were not set in stone. 

2. Mr O’Loughlin submits that although there is no evidence as to whether or not the Brothers might have been able raise the money by reference to other assets, Mr Segal’s evidence is that he expressed diffidence in relation as to whether or not the Brothers had disclosed all of their assets.  Mr O’Loughlin argues that the Brothers could have made some kind of an offer, or they could have made an application at any time prior to the service of the Bankruptcy Notice for Brereton J’s orders to be varied.  However, there is no explanation for why they did not.  Mr O’Loughlin argued that as a consequence the Wiltshire-Smith principle, such as it is, does not apply to affect the common law.

Consideration of the validity of the Bankruptcy Notice.

1. Mr Hale indicated to the Court that his clients relied upon the effect of s.41(3)(b) of the Bankruptcy Act. This section provides that a bankruptcy notice shall not be issued in relation to a debtor if, at the time of the application for its issue, execution of the judgment or the order to which it relates has been stayed. The contention advanced on behalf of the Brothers is that the restraining order made by his Honour Brereton J, in the NSW Supreme Court, Equity Division, Probate List entered on 24 May 2011, operated as a stay of execution of the judgment obtained by Mr Segal in the District Court on 30 April 2010, and thus rendering the Bankruptcy Notice invalid. The restraining order meant that Mr Segal was not in a position to issue execution upon his judgment which was therefore deemed stayed under s.41(3)(b) of the Bankruptcy Act.

2. On 1 March 2011 his Honour, Brereton J gave judgment in favour of the Brothers in the Supreme Court proceedings.  That judgment gave the Brothers full entitlement to the Bondi Property.  The Sisters filed an appeal in respect of that decision and as a consequence on the 23 May 2011, Brereton J made orders to preserve the assets of the estate being the Bondi Property to prevent the appeal being rendered futile by dissipation or alienation of that asset.  That order was made in the following terms:

   I order that upon the Plaintiffs by their counsel giving to the court the usual undertaking as to damages, and further undertaking that they will not without having given the Defendants’ solicitors 28 days written notice of their intention so to do, alienate or further encumber, in the case of the Plaintiff Evelyn, her interest in her Dover Heights home, and in the case of Clara her Randwick home.  Any such notice to specify the nature and quantum of and parties to the proposed dealing.  I order that the defendants be restrained from by themselves, their servants or agents, alienating or further encumbering the property situate at and known as [XX] Beach Road, Bondi Beach, except alienating or encumbering to the extent that it secures up to $1.1 million of the property except upon having given 28 days written notice of their intention so to do to the Plaintiffs’ solicitors, any such notice to specify the nature and quantum of and parties to the proposed dealing. 

   I reserve liberty to the parties to apply by arrangement with my Associate to vary this order or in the event of any notice of the type referred to in the above undertaking or order being given.

   I order that the plaintiffs to pay the defendant’s costs at $100,000. 

   (affidavit for the application to set aside bankruptcy Notice, sworn by Michael John Zwar, on 17 August 2012, Annexure “A”)

3. The evidence contained in the affidavit of Michael John Zwar sworn 17 August 2012 at [5] and [10] which states:

   5. Pursuant to Court Orders the Defendants are not permitted to pledge the security property for more than $1.1 million.

   …

   10. The Defendants do not dispute their liability to the Applicant herein, but are not able to make any payments until such time as the proceedings in the Court of Appeal have been finalised and the Defendants having made further application to the primary judge for an extension to the facility to be permitted to be pledge for more than $1.1 million.

4. At the time of hearing it follows that the Brothers were unable to do anything to satisfy the indebtedness to Mr Segal given the above Court orders and any application to vary them.  In cross-examination (Transcript 6 September 2012; p. 8-12) Mr Segal, in preparing affidavits for the Brothers in 2008, indicated that the Brothers had very limited income and Mr Segal was unable to identify any other basis for asserting any other source of income other than the value of the Bondi Property.  The Brothers were the registered proprietors; subject only to the mortgage which secured advances up to $1,100,000. 

5. Mr Hale relies, in particular, upon the judgment of the Full Court (Von Doussa, Moore and RD Nicholson JJ) in Wiltshire-Smith v Mellor Olsson (supra).  In that case a receiver and manager had been appointed by the Family Court, to a newsagency business operated by the applicant, Wiltshire-Smith. Following the applicant’s non-compliance with a subsequent bankruptcy notice, a sequestration order was made against him.  He applied to the Court to set aside the sequestration order upon the basis that the Family Court appointment of a receiver and manager operated as a stay of execution which invalidated the Bankruptcy Notice.  The Court found, as a matter of fact, that on the date the bankruptcy notice was issued there was no order of the Family Court which prevented the applicant, in any relevant way, from paying the judgment debt.  Accordingly, it was found that the sequestration order had been correctly made. 

6. The Wiltshire-Smith line of authority was applied in the Full Federal Court decision of Boscolo v Botany Council (supra) per Jenkinson, O’Loughlin and Sackville JJ.  In that matter the respondent debtor had been restrained by an order of the Family Court from “transferring, assigning or further encumbering” a particular parcel of land.  It was submitted that this constituted a stay of execution upon this property so as to invalidate the subsequently issued bankruptcy notice.  Jenkinson J with whom O’Loughlin J agreed referred to part of the judgment from Wiltshire-Smith with approval.  However, on the facts of the case it was found that the debtor had not established that at the time of the issue of the Bankruptcy Notice the restraining order prevented him from paying the amount claimed in the bankruptcy notice, this being a matter as to which the debtor bore the onus of proof. 

7. Mr Hale, in his oral submissions, acknowledged that the Wiltshire-Smith line of authority should be read in light of cases dealing with Mareva orders and proceeds of crime legislation.  In those cases, the parties could immediately apply to the Court for a variation of the orders.  The existence of a Mareva injunction will not operate as a stay of execution under s.41(3)(b). In Re Ousley; Ex parte Commissioner of Taxation (1994) 48 FCR 131 the issue arose as to whether a Mareva injunction obtained by a petitioning creditor prevented the debtor from applying his property towards satisfaction on a warrant of seizure issued by the creditor.  His Honour Heerey J observed at 138:

   The existence of the Mareva injunction does not, in my opinion, imposed similar restrictions on execution… 

   “the principle underlying the Mareva injunctions is to prevent the court’s process being frustrated or abused by the dissipation of assets so as to affect the enforcement of orders lawfully made by the court.  This description emphasises the limited scope of the Mareva injunction which exists to enable a court to protect its process from abuse in relation to the enforcement of its orders and not to create additional rights…

8. Similarly,  in Re Ling; Ex parte Enrobook Pty Ltd (1996) 142 ALR 87, his Honour Lehane J, concluded that the issue of a Mareva injunction did not constitute a stay of execution under s.41(3)(b) so as to invalidate a subsequent bankruptcy notice. The debtor in Re Ling (supra) unsuccessfully appealed to the Full Court: Ling v EnrobookPty Ltd (1997) 143 ALR 396 per Davis, Wilcox and Branson JJ. The Court quoted from the judgment in Wiltshire-Smith at 586-587 (reproduced at [31] above) and then made the following observation:

   However, the comments of their Honours should be read in the context with which their Honours were dealing.  Their Honours were considering a receivership.  This had been brought about by a creditor other than the judgment creditor.  Thus no “equity” arose by reason of the conduct of the judgment creditor.  However, as their Honours pointed out, once the receiver had been appointed, the judgment creditor could not levy execution upon the assets which were in the receiver’s hands.  The particular point with which their Honours dealt, in the passage we have cited, is that, although the receiver had not been appointed to take control of all of the assets of the debtor, the receivership covered sufficient of the debtor’s assets to prevent payment of the judgment debt.

9. In Deputy Commissioner of Taxation v Stuart-Jones (2000) 102 FCR 296 her Honour Mathews J considered whether a restraining order made pursuant to s.10 of the Criminal Assets Recovery Act 1990 (NSW) acts as a stay of execution of the judgment under s.41(3)(b) of the Bankruptcy Act.  After reviewing the authorities in respect of a stay of execution her Honour made the following comment:

   25.  A "proceeds assessment order" is, under s 27 of the Assets Recovery Act, an order that the person pay to the Treasurer an amount assessed by the Court as the value of the proceeds derived by the person from an illegal activity which took place within the preceding six years.

   26 It is, in my view, at least arguable that a restraining order under s 10 will have the effect of preventing the levying of execution against the person's property in circumstances outside those described in subs(8). If this were so, the existence of a restraining order against the whole of a debtor's property would mean that a judgment creditor was not in a position to issue immediate execution upon it. As such, a restraining order would bear a closer resemblance to the appointment of a receiver or trustee than to a Mareva injunction, with the result that it may well constitute a stay of execution under s 41(3)(b) of the Act. However, it is not necessary for present purposes to reach a concluded view on this matter. For, as the judgment creditor points out, the restraining order taken out in this case applied to part only of the debtor's property, namely her interest in the property at 368 Bronte Road, Bronte. Put at its highest this might, in accordance with the majority judgment in Boscolo, operate as a stay of proceedings so long as, in a practical and business sense, it prevented the debtor from paying the judgment debt. The onus of proving this matter lies squarely upon the debtor.

1. In Sood v Crown Diagnostic Imaging Pty Ltd (supra) his Honour Gyles J considered whether a restraining order over a debtor’s property is effectively a stay of execution of judgment.  However, in the circumstances where the debtor has the ability to seek an order permitting payment of a judgment debt pursuant to s.24 of the Proceeds of Crime Act 2001 (Cth) it means that the execution is not stayed.  In Ollis v Rayner (supra), her Honour Bennett J considered the effect of a restraining order made under s.10 of the Criminal Assets Recovery Act 1990 (NSW) against the debtor’s property. The creditor sought a sequestration order against the debtor’s estate and the question that arose was whether a restraining order operated as a stay for purposed of s.41(3)(b) of the Bankruptcy Act. However, the restraining order and the Criminal Assets Recovery Act 1990 (NSW) gave the debtor liberty to apply to amend that order and her Honour found that there was no reason why the debtor could not have made an application to vary the order in order to pay the debt.

2. In National Bank of Australia Limited v Pollak [2001] FCA 1408 his Honour, Madgwick J, considered the situation where a Mareva injunction had been ordered over all of the debtor’s property and assets on the application by the bank. The question then arose of whether the Mareva injunction prevented the debtor from complying with the Bankruptcy Notice.  Dr Pollak contended that the Mareva injunction, which was imposed, had the effect of staying the judgment under which the Bank issued the bankruptcy notice and, therefore, the notice should never have been issued.  The onus of establishing that the Mareva injunction prevented Dr Pollak from complying with the bankruptcy notice and, thereby, effectively staying the judgment debt lies upon him.  His Honour referred to the decision of Heerey J in Re Ousley (supra) where he noted that the principle underlying a Mareva injunction is to prevent an abuse of the Court’s process by the dissipation of assets, preventing the enforcement of the Court’s orders and that the purpose of such injunction was to aid in execution.  Madgwick J noted that a distinction is made between an order which removes the debtor’s capacity to pay a judgment debt as by providing for the pro tem transfer of the control of the property to a third party, and an order such as a Mareva injunction, which merely prevents the debtor from dealing with his or her property without giving the requisite notice.

3. His Honour addresses this issue at [52]-[53] in the following terms:     

   52 The order made by consent by Tamberlin J was that:

   "Until further order, Dr Pollak be restrained from selling, disposing of or dealing with any interest in any assets whatsoever and wheresoever situated in which he has any interest without giving the solicitor for NAB at least 19 days prior notice."

   What was said in Ling, Ousley and Boscolo is to be applied. In my opinion, seen through the eyes of ordinary fairness in business, there is nothing in this order that in a business sense practically prevented Dr Pollak from paying the debt he owed to the Bank within 21 days of the bankruptcy notice being served upon him. I do not doubt that the existence of the Mareva injunction would have tended to make compliance with the bankruptcy notice more difficult. However, as the authorities make clear, this in itself does not provide a basis to say that execution of the judgment should be deemed to have been stayed. The mere existence of a Mareva injunction obtained by the judgment creditor is not conduct of such a nature by the Bank that it should be regarded as having prevented Dr Pollak from paying the debt he owed.

   53 Further, Dr Pollak has not satisfied the onus he bears of proving that, in fact, in the way matters transpired, the Bank should be deemed by its conduct, in a practical business sense, to have prevented him from, or even to have materially hindered him in, paying the debt. There was no evidence that Dr Pollak had assets which he could have used to satisfy the debt. On the contrary, the transcript of his examination before a Registrar of this Court, which was admitted into evidence, indicated that he had no asset of any substantial value whilst owing, in addition to the debt owed to the Bank, over $1,400,000 to other creditors. There was also no evidence to suggest that Dr Pollak would have been able to raise funds to meet the debt, subject to his dealing with his property in a certain manner, or that he had approached the Bank with a plan which would allow him to meet the debt, or that he had approached the Court to vary the notice requirement. Accordingly, this challenge to the validity of the bankruptcy notice, and/or to the justice of acceding to the petition founded upon that notice, fails.

4. I have considered the form of order which I have extracted earlier in these reasons at [37]. I am of the view that an order of the Supreme Court of NSW should be given a purposive reading. If that is done it is quite clear that the reason for restricting the ability of the Brothers to deal their only substantial asset is to prevent its dissipation prior to the determination of the proceedings in the NSW Court of Appeal settling the dispute between the Brothers and Sisters over their mother’s will and the determination of a provision out of the estate under s.7 of the Family Provisions Act 1982 (NSW).  Therefore, the injunction issued by Brereton J on 23 May 2011 was to prevent the appeal being rendered futile by dissipation and alienation of that asset.  I am satisfied that the authorities referred to above may be distinguished from the particular circumstances of this matter because of the existence of third parties, namely, the Sisters, Evelyn Tobin and Clara Ezekiel who are not parties to the bankruptcy proceedings.  This approach was referred to by her Honour Mathews J in Deputy Commissioner v Stuart Jones (supra) at [26] (see [44] above) but wasn’t required to be resolved because the restraining order only applied to part of the debtor’s property.  However, injunction issued by Brereton J “preserved liberty to the parties to apply… to vary this order” which gives it the characteristics of other Mareva injunctions and in the words of his Honour Madgwick J in Pollak (supra) at [52];

   …[W]ould have tended to make compliance with the bankruptcy notice more difficult.  However, as the authorities make clear, this is itself does not provide a basis to say that execution of the judgment should be deemed to have been stayed.

5. I acknowledge that there may be some merit in the argument that the authorities referred to above may be distinguished on the basis that the notice period of the injunction (28 days) is longer than the compliance period of the Bankruptcy Notice (21 days).  If an application was made to vary Brereton J’s orders there is no guarantee the order would be varied and a full hearing would properly be required.  I do not believe that this argument has been sufficiently developed to take this approach.  No authorities on this aspect were referred to or tendered.  Nor was I able to locate any case where this issue has been addressed.  In these circumstances the application to set aside the Bankruptcy Notice, based on the authority in Wiltshire-Smith, cannot be sustained.

Abuse of Process

Issue of Bankruptcy Notice as an Abuse of Process

1. An abuse of process can occur when a Court’s process is employed for an ulterior or improper purpose, or in an improper way, or in a way that would bring the administration of justice into dispute among right thinking people.  The argument advanced, in this matter, is that if a bankruptcy notice is issued for a purpose other than that for which the legislation provides then it is an abuse of process. 

Applicant’s Submissions

1. Mr Hale drew the Court’s attention to the letter from Mr Segal to Mr Zwar dated 26 April 2012 (affidavit of Alan Lewis Segal, affirmed 30 August 2012; Annexure “E15”; p. 49).  That letter was written subsequent to the hearing in the Court of Appeal whilst the decision was reserved by the Court.  Mr Segal made the following enquiry:

   We further note your Mr Zwar’s comments that you hold the Title Deed for the Bondi property.  We understand that you gave an undertaking that you would not part with possession of the Title Deed without given us prior notice.  Could you please confirm that? 

   We understand that the property is unofficially on the market and that steps are going to be taken to sell the property in the near future. 

   Could you please inform us as to what is proposed in relation to the sale and relation to the payment of our fees.

   In the same affidavit on the following page; p. 50, is Mr Zwar’s reply, in which he attaches a copy of the affidavit that was prepared for the Court of Appeal and sets out the position at that particular time.   

2. This is then followed at p. 52 (Annexure “E17”) with a letter dated 13 July 2012 from Mr Segal to Mr Zwar.  Mr Segal makes a number of assertions.  Mr Hale contends that some of those statements appear to have been made in haste, for example, the statement that the costs are in excess of $1,000,000 when, at that stage, they added up to approximately $800,000.  On the second page of that letter (Annexure “E17” p. 53 and identified as “Thirdly”)  the following issue was raised:

   In our letter to you of 16 June 2010 we made our position clear in relation to our lien or fruits of any action lien in respect to any Judgment in relation to the Estate.

   Mr Hale argued that this statement simply cannot be correct if properly analysed because the position of the Brothers in the Court of Appeal proceedings were defendants.  At p. 3 of that letter (Annexure “E17”, p. 54) the following appears:

   Accordingly, and in view of the above and the history of this matter, generally we advise that:

   a) We are making a written complaint to the legal services commissioner.

   b) We will proceed to enforce our Judgment by all appropriate means.

   Mr Hale argues that this was written in anger and Mr Segal accepted in cross-examination that the anger which partly motivated him at that time resulted in those comments.

3. Mr Hale then referred the Court to a letter dated 18 July 2012 addressed to Segal and Associates being the response from Diamond Conway (Annexure “E18”; p. 55).  That letter is stamped “Received, 23 July 2012”, which is the same day that Mr Segal issued the Bankruptcy Notice.  Mr Hale argues that the issue of the Bankruptcy Notice was partly motivated by anger.  It is argued that Mr Segal was discontent and this was evidenced by Mr Segal’s cross-examination on this issue (Transcript 6 September 2012, p. 29-30).  Mr Segal, in cross-examination, accepted that a reason for issuing the Bankruptcy Notice was to put pressure on the applicants to reach some accommodation for the outstanding fees.  Mr Hale claimed that when the question, “what other reasons motivated Mr Segal at that time” was asked, there was a considerable lapse in time before responding and Mr Segal was unable to identify any other motivating factor which led him to issue the Bankruptcy Notice that day.

4. Mr Hale argues that in those circumstances consistent with the authorities it establishes that the Bankruptcy Notice was issued as an abuse of process and not for its purpose.  Mr Segal was certainly aware of the Brothers’ financial capacity, as this information had been disclosed to him while preparing affidavits in 2008.  Mr Hale submits that in cross-examination Mr Segal sought to accept this proposition, however, it is quite apparent that when acting for the Ezekiel Brothers in proceedings he did so on the basis that they were not in a position to pay their legal fees out of income and the only means for which those legal fees would be paid would be out of the assets, mainly their entitlement to their mother’s house left to them as a legacy.  Alternatively, the Brothers could a raise a loan secured on those assets and that was the position when Mr Segal ceased to act for the Brothers in October 2009.

5. Mr Segal, during cross-examination, said that he made no claim that the Ezekiel Brothers immediately pay their debt.  It clearly was recognition by Mr Segal that the bankruptcy proceedings were the means by which he was going to receive payment.  The notice was issued to put pressure on the debtor to come to some arrangement outside the orders of Brereton J.  The Bankruptcy Notice was issued in anger and partly motivated by revenge.  In those circumstances Mr Hale submits that the Bankruptcy Notice was an abuse of process.

Respondent’s submissions

1. Mr O’Loughlin submits that it is in the public interest that the Brothers be made bankrupt.  That is regardless of whatever concession Mr Segal might have made as to his motivation to issue the Bankruptcy Notice.  Mr O’Loughlin maintains that it would be surprising if the motivation of any creditor in issuing a Bankruptcy Notice would not be to try to secure some kind of payment or terms of payment.  It would be unusual for any honest creditor to concede that was not part of his motivation.

2. Mr O’Loughlin drew the Court’s attention to some of the evidence relevant to this point.  In the affidavit in support of the application to set aside the bankruptcy notice sworn by Michael John Zwar on 17 August 2012 at [10] it states:

   10.  The Defendants do not dispute their liability to the Applicant herein, but are not able to make any payment until such time as the proceedings in the Court of Appeal have been finalised and the Defendants having made further application to the primary judge for an extension of the facility to be permitted to be pledge for more than $1.1 million.

   Mr O’Loughlin contends that this is an important concession that there is a debt due to Mr Segal.  It is not disputed and although it has been in existence for some time, it has not been paid.  No particular arrangements in relation to payment have been made, and apart from the evidence that was given by Mr Zwar, together, with the material from the various judgments, there is no evidence from the Brothers in relation to any reason they might have had not to pay the debt or to approach Mr Segal with some plan.  Further, because there is no evidence as to the current asset income position of the Brothers there is no basis on which it can be properly assessed that the Brothers are not now insolvent.  It is up to the Brothers to demonstrate that aspect to the Court as it is not up to Mr Segal to demonstrate the reverse.  This application is dealing with the matter of public interest and it demonstrates by the failure of the Brothers to give any evidence that they are not prepared to have tested their own solvency.        

3. In Mr Zwar’s affidavit, sworn 17 August 2012, at [11], he states:

   If the Defendants are permitted to draw to pledge the property for more than $1.million, then there will be sufficient funds to discharge the obligation to Alan Lewis Segal.

   Mr O’Loughlin submits that there is no evidence of any further application.  It is acknowledged that an application to his Honour Brereton J had a 28 day time limit and the Bankruptcy Notice had to be complied with in 21 days.  However, there is no evidence to suggest why, prior to that date, whilst Mr Segal was pressing for payment of his debt, there was no application by the Ezekiel Brothers to extend the charge to enable them by whatever means to pay the debt owed to Mr Segal. 

4. Mr O’Loughlin then referred the Court to Annexure “C” of Mr Zwar’s affidavit (sworn 17 August 2012) at p. 12, which contains a letter dated 29 May 2012 from Mr Zwar addressed to Segal and Associates.  At [3] it states:

   Indeed, our total costs are in excess of $800,000, taking into account counsel’s fees and disbursements.  I have approached the entire matter on the basis to be as fair as possible to all solicitors and that is that each firm of solicitors is paid approximately 50% of its solicitor/ client costs.  Clearly I had to ensure that Counsel was paid and in order that they would finalise the matter, including the hearing in the Court of Appeal.

   Mr O’Loughlin indicates that it is clear that, in addition to the $800,000 paid, there is still a substantial amount owed to the solicitors.  In addition to the amount identified by Mr Zwar there is an additional, substantial, unascertained amount which has to be paid which impinges upon the general ability of Ezekiel Brothers to pay their debts as and when they fall due and that is a matter of some significance.

5. In the next paragraph of Mr Zwar’s letter he states:

   As discussed on the telephone, I have grave concern as to the outcome of the proceedings, having regard to the attitude of the Court of Appeal.  The approach of the Court of Appeal was to treat Morris and Albert Ezekiel as complete liars and that no reliance whatsoever should have been placed upon their evidence by Brereton J at first instance.  In the context of the Family Provision Claim, this of course is dangerous, notwithstanding the fact that Brereton accepted on the balance that both the plaintiffs were substantially better off than Morris and Albert.  In our opinion it is likely that the women will be awarded a substantial amount by way of Family Provision Claim, which of course will necessitate a further hearing as to the proper apportionment of costs.

   Mr O’Loughlin submits that it is clear that Mr Zwar is making the point that he does not know how much of the estate will be left to meet costs.  Mr O’Loughlin maintains that the above comments strongly suggest, at least, the possibility of insolvency.

6. In Mr Zwar’s affidavit of 17 August 2012, Annexure “C”; p. 17 is another letter from Diamond Conway to Segal & Associates dated 18 July 2012 which contains the following material, in [3] of that letter:

   The Affidavit was sworn as we indicated in our covering letter to you on 29 May 2012 to explain why a very significant portion of the estate, namely, [xx] Beach Road, had effectively been utilised in the context of this litigation…

   Mr O’Loughlin submits that again this is clearly indicative of the possibility that the applicants are or could be insolvent and that it is in the public interest that they be made bankrupt as there may not be sufficient amount in the estate for the Ezekiel Brothers to meet any judgment at all.  The applicants have not gone into evidence to suggest why that is or is not true.

7. In the fourth paragraph of the same letter at sub-paragraph (a), the following appears:

   …Patently it did not occur and nobody denies your entitlement to exercise a lien…

8. Then at sub-paragraph (b), it states:

   As you well know, our clients would not countenance any arrangement with you including a standard tripartite Deed of Agreement.

   Mr O’Loughlin submits that it is quite clear that the relationship of the Brothers to Mr Segal is such that they were not going to make any offer to him at all and that the only way he was to get his money was by enforcement proceedings. 

9. At sub-paragraph (c) it states:

   …our clients would not countenance any proposal to grant you a Deed of Charge which effectively would have elevated you to some form of security over and above that of being an unsecured creditor…

10. At sub-paragraph (d) it states:

    There were no fruits of litigation, as the expression is commonly used, available in these proceedings.  The fruits of litigation such as they were, were only available to the Plaintiffs.

11. At sub-paragraph (g) it states:

    Again, nothing in the Affidavit of 7 April 2012 is designed in anyway to deprecate your input in this litigation, notwithstanding the very strong views held by the Defendants that you did not act in accordance with their interests. It should be said that these views have been maintained all the way through this litigation to the point were there is almost outright hostility on the part of the Defendants towards you…

12. At sub-paragraph (h) it states:

    However there is no doubt that your conduct did materially cause costs of litigation to increase.

1. At sub-paragraph (j) it states:

   There is no doubt, again at the risk of being repetitious that there is extreme antipathy on part our clients in respect to your handling of the proceedings.  They maintain they were inveigled to swear Affidavits which they knew to be false on the basis, so it is asserted, that you maintained it was in their interest to do so…

2. Mr O’Loughlin submits that the contents of the above letter obviously provoked a reaction from Mr Segal and he should not be criticised for that especially in respect to the words which Mr Segal used during his cross-examination.  Mr O’Loughlin referred the Court to Mr Segal’s response, which is set out in his affidavit of 30 August 2012 at [9] stating:

   9.  Furthermore, since such time neither of the Applicants have made any proposal that would secure payment of such costs, and in particular refuse to grant a charge over their interest of the estate and as set out in the letter from MacLachlin Chilton dated 12 August 2009.

3. Mr O’Loughlin drew the Court’s attention to the dispute in the course of Mr Segal’s cross-examination about the distinction between a charge over the applicant’s interest in the estate and a charge over the property which was subject to his Honour Brereton J’s order.  That distinction was made.  In Mr Segal’s affidavit of 30 August 2012 at [14](b) he states:

   … the Court found that the $300,000.00 that the Applicant’s had raised by way of mortgage over the estate assets, $28,025.00 was used for the “Purpose of administration” and the balance spent on personal debts of the applicant including $83,469.00 in legal fees (as paid to this firm). 

   Mr O’Loughlin submits that a large sum was spent on personal debts of the applicants.  In relation to the solvency of the applicants this is addressed in his Honour Brereton J’s decision of Tobin v Ezekiel; Estate of Lily Ezekiel [2011] NSWSC 571 where at [3] his Honour states:

   3. Evidence placed before the Court on the present application suggests that the property located at Beach Road Bondi Beach - being the only significant asset - is now worth about $2.5 million…

   Mr O’Loughlin indicated that Mr Segal was asked some questions about the Bondi Property that this estimated value provided evidence of solvency or as to the value of that asset is inappropriate because the valuation itself was not produced.  Mr Segal gave some evidence that the value may very well have been on the basis of the Bondi Property having development consent.  However, no steps in this respect have been taken.  It is submitted that in this application it is for the applicants to prove the value of that asset.

4. Mr O’Loughlin referred the Court to the decision of his Honour Marshall J in Rankine v Lord [2011] FCA 478 at [24] where he states:

   His Honour referred to various authorities at [27] and [28] and then said at [29]:

   The proper purpose of seeking a sequestration order against the estate of a debtor is so that a debtor, who is unable to pay his debts as and when they fall due, should have his affairs controlled for the benefit of all his creditors and not just specific ones. Allied to this purpose is the prevention of the debtor incurring further obligations which he will not be able to meet. It is a public purpose. The bankruptcy process is not to be used for private ends.

   Then at [25]:

   The Federal Magistrate referred to the “course of dealings” between the parties and in particular to the events of 18 May 2010 referred to at [16] above. His Honour then said at [29]:

   ...this course of dealings and the failure of the respondents to take any other steps to execute upon their judgment is indicative of an intention to utilise the bankruptcy process for reasons other than securing the orderly distribution of the debtor’s estates.

   Then at [31]:

   The appellants next submit that the solvency of a debtor is not a ground to set aside a bankruptcy notice. They rely on Re Athans; ex parte Athans (1991) 29 FCR 302 at 310, per Hill J. At 310 in Athans Hill J said that:

   The mere fact that the debtor is solvent is not a ground for the court to set aside a bankruptcy notice.
   (Emphasis added.)

   At [32]:

   Justice Hill is not to be taken as saying in Athans that a bankruptcy notice being issued will not be an abuse of process by reason of the solvency of a debtor. The solvency of a debtor and the attributes of the particular debtor and his or her history with the creditor will be relevant to the issue of bona fides of a bankruptcy notice. So much is so as a matter of practical commonsense. Nothing in the judgment of Drummond J in Amos v Brisbane TV Land [2000] FCA 825; (2000) 100 FCR 82, especially at [21], as relied on by the appellants, stands to support a contrary proposition.

5. Mr O’Loughlin acknowledges that it is quite clear that a Bankruptcy Notice ought not to be submitted for the main purpose of securing a payment.  However, in the matter before this Court, because of the absence of evidence of solvency or the Brothers’ ability to make a payment, this is a matter of public interest.

Consideration - Issue of Bankruptcy Notice as an Abuse of Process

1. In the material before the Court I am not satisfied that the issue of the Bankruptcy Notice by Mr Segal on 23 May 2012 was an abuse of process.  Nor am I inclined to change that view now having available the NSW Court of Appeal judgment (Tobin v Ezekiel [2012] NSWCA 285) as the value of the only viable asset of the Brothers is the Bondi Property, which is only an estimate. There is no recognised valuation produced in these proceedings In addition there are various statements in the affidavit material identifying possible liabilities which all have to be met out of the balance of the Bondi Property either by sale or further mortgage.

2. Coupled with this is the legislative intention of sequestration of a debtor’s estate being for the benefit of all creditors and not just one individual party.  After detailed consideration of both counsels’ submissions on this issue, I am satisfied that it is not appropriate to set aside the Bankruptcy Notice. 

3. Significantly, on the morning of the resumption of this adjourned hearing, Mr Hale advised the Court that the Court of Appeal was to deliver its judgment in the last Will and Testament dispute between the four siblings in which he appeared for the Ezekiel Brothers.  At the end of the submissions made by both parties, I granted leave to prepare written submissions advising the Court of their respective positions in light of the decision by the Court of Appeal identified as Tobin v Ezekiel [2012] NSWCA 285. In that judgment, Evelyn Tobin wholly failed in her appeal, while her sister, Clara Ezekiel was successful in part of her appeal and was awarded the sum $225,000 which was to be paid out of Morris Ezekiel’s share of the notional estate under the Family Provisions Act 1982 (NSW).  The Sisters were ordered to pay the Brothers costs of the appeal and of the Court below quantified as $90,000.  The Court of Appeal comprising of Basten, Campbell and Meagher JJA upheld Brereton J’s findings on testamentary capacity and undue influence, albeit for different reasons than those relied upon by Brereton J.

4. As at 21 September 2012, the supplementary submissions prepared on behalf of the Brothers by Mr Hale indicated that it was not the intention of the Brothers to seek special leave in respect of the decision of the Court of Appeal.  However, there was a potential that the Sisters may seek special leave from the High Court.  In respect the orders of Brereton J make 23 May 2011, the Brothers intended to give notice to the Sisters of their intention to seek to vacate those orders.  If the Sisters do seek special leave they may apply to the Court of Appeal to make orders similar to those made by Brereton J on 23 May 2011, pending determination of the leave application.

5. Mr Hale informed the Court that as a consequence of the Court of Appeal judgment there would be sufficient equity in the Beach Road property to satisfy the debt that is the subject of the Bankruptcy Notice.  Based on the property being worth in the order of $2,000,000 less the order in favour of Clara Ezekiel and the previous encumbrance of $1,000,000 there will be a residual equity of approximately $1,000,000 to satisfy any debts from the estate.  That is to be subject to any variation of the judgment should an application to the High Court by the Sisters be successful.

6. Mr O’Loughlin, in his supplementary submissions, has prepared a review of the Court of Appeal findings (“CA Judgment”) in respect of the amounts owing:

   a)The Court referred to the value of the property at Beach Road as being $1,900,000 to $2,300,000 (CA Judgment at [13]);

   b)The Court said that as at April 2012, the total amount secured by the mortgage was $1,090,000 (CA Judgment at [13]);

   c)The Brothers’ equity is between $800,000 and $1,200,00 (CA Judgment at [121]);

   d)This contrasts with a finding of Brereton J on the application for preservation of the status quo that the value was $2,500,000 (Segal affidavit; p. 66);

   e)In the absence of proper valuation evidence the lower value should be assumed, notwithstanding the Court of Appeal averaged the difference to $1,000,000 (CA Judgment at [121]);

   f)The Court of Appeal made reference to the Brothers’ legal costs, as follows:

   i)The cost incurred or estimated to be incurred by the respondents in defending these proceedings (including the appeal) were approximately $915,000 (there was no argument before the primary judge of this Court as to whether any of these costs should not be paid out of Lily’s estate).  Although the evidence is not clear about this, it appears that approximately $100,000 of that amount has not been paid;

   g)Mr O’Loughlin contends that the liability of the Brothers for outstanding legal costs is critical, particularly having regard to the extent of such costs in the circumstances of this matter.  The Brothers did not adduce any evidence in these proceedings, as to such liability.  The affidavit of Michael Zwar, sworn 17 August 2012, has Annexure “B” (Affidavit of Michael Zwar, 7 April 2012).  Neither affidavit discloses what costs are outstanding and payable by the Ezekiel Brothers.  However, the letter of Mr Zwar to Segal Associates dated 29 May 2012 refers to each solicitor being paid approximately 50% of its solicitor/ clients costs (Annexure “C”; p.12).  The Brothers have not made any disclosure of their financial position before this Court;

   h)The Court of Appeal notes that the applicants are liable to pay an additional $100,000 in costs (CA Judgment at [13] & [16]);

   i)Morris Ezekiel has to pay the legacy of $225,000 to Clara Ezekiel.  On that basis Morris Ezekiel’s share of the net equity of $400,000 should be reduced by his share of the costs of $50,000 and his obligation to meet the payment to Clara of $225,000 leaving his net entitlement to an amount of $125,000.  His share could be further reduced by debt to Elsternwick College of $315,000 if that debt were to be forced or improved by the value of his interest, if any, in the Caulfield property (CA Judgment at [85]);

   j)Albert Ezekiel’s share is reduced to $350,000; and

   k)An amount of $90,000 in costs is payable by the Sisters to the Brothers (CA Judgment at [129]).

7. Mr O’Loughlin indicated that he wished to draw to the Court’s attention that there was no evidence about the following matters;

   a)The current liability of the Brothers for costs over and above the $100,000 referred to by the Court of Appeal, including the costs of this application;

   b)The total of the holding charge said by Mr Zwar to be accumulating at the rate of $10,000 per month and whether that figure took into account arrears or penalties for late payment of interest;

   c)Statutory charges on the Bondi Property;

   d)The terms of the mortgage to secure the $1,090,000 debt, which is presumably jointly and separately liable and for which either could be called upon; and

   e)The asset position of the Brothers due to the uncertainty of the above issues.

   This position could be further exacerbated if an application for leave to the High Court was granted and was subsequently successful.  This is in contrast to the position of Mr Segal who has a District Court judgment.

8. Since the filing of supplementary submissions by both parties, there are a number of other issues which may or may not have occurred that could have an eventual outcome on these proceedings.  These include:

   a)The time to apply for special leave has expired but the Court is not aware of the outcome if an application has in fact been made;

   b)Whether the orders made by his Honour Brereton J on 23 May 2011 have been varied or rescinded; and

   c)That on 19 September 2012 the Ezekiel Sisters filed a Notice of Motion in the Court of Appeal seeking a variation of the judgment and that application was returnable on 22 October 2012.

9. In the circumstances of the material before the Court, I am satisfied that the Bankruptcy Notice, BN 4576, issued on 23 July 2012, served of the applicants on Saturday, 28 July 2012 is valid.  Further, there are a number of issues that arise as a consequence of the Court of Appeal’s decision in Tobin v Ezekiel [2012] NSWCA 285 and the Court has not been advised as to whether those steps have occurred. Finally, although the impact of the Court of Appeal’s decision on the liabilities of the four siblings has now been established, subject to any avenue of appeal, the critical value of the Bondi Property remains as estimates and whether it will yield sufficient funds by further mortgage or sale has not been provided to this Court.

10. Consequently, I will extend the time for compliance with the Bankruptcy Notice for a further 21 days from the date of this judgment and grant a liberty to apply to make a further application for extension of time to take account of any developing circumstances on the avenues of appeal that are yet to be finalised.  I will also grant leave to the parties to file and serve brief written submissions on costs on or before 10 February 2013.

I certify that the preceding eighty-two (82) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM

Date:  19 December 2012