Fox v Big Country Developments Pty Ltd
[2016] FCCA 2447
•11 October 2016
FEDERAL CIRCUIT COURT OF AUSTRALIA
| FOX v BIG COUNTRY DEVELOPMENTS PTY LTD | [2016] FCCA 2447 |
| Catchwords: BANKRUPTCY – Application to set aside bankruptcy notice – extension of the period within which to comply with the bankruptcy notice – consideration of relevant principles – application dismissed. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.40(1), 41(6A), 41 (6C), 43 Federal Circuit Court of Australia Act1999 (Cth), s.104(2) |
| Cases cited: Buckworth v Gladio Pty Ltd [2016] NSWCA 104 |
| Applicant: | JUSTIN ALEXANDER FOX |
| Respondent: | BIG COUNTRY DEVELOPMENTS PTY LIMITED (ACN 000 235 923) |
| File Number: | SYG 552 of 2016 |
| Judgment of: | Judge Smith |
| Hearing date: | 13 September 2016 |
| Date of Last Submission: | 13 September 2016 |
| Delivered at: | Sydney |
| Delivered on: | 11 October 2016 |
REPRESENTATION
| Counsel for the Applicant: | Mr J Baird |
| Solicitors for the Applicant: | Benjamin J Horne Lawyer |
| Counsel for the Respondent: | Mr J Horowitz |
| Solicitors for the Respondent: | & Legal |
ORDERS
The application for an interim order extending the period for compliance with bankruptcy notice BN 188586 be dismissed.
The application for review of the decision of District Registrar Wall made on 30 August 2016 be dismissed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT SYDNEY |
SYG 552 of 2016
| JUSTIN ALEXANDER FOX |
Applicant
And
| BIG COUNTRY DEVELOPMENTS PTY LIMITED (ACN 000 235 923) |
Respondent
REASONS FOR JUDGMENT
The respondent in these proceedings, Big Country Developments Pty Limited (“Big Country”), is the registered owner of land at Mulgoa Road, Penrith in Western Sydney which was leased to a company for the purposes of running a licensed restaurant in an existing purpose-built restaurant. The applicant, Mr Fox, was one of the guarantors of the lessee’s obligations to Big Country. On or about 16 March 2008 the lessee ceased paying rent under the lease and in 2011 Big Country commenced proceedings in the Supreme Court of New South Wales against the guarantors.
Those proceedings were heard by Kunc J who gave judgment on 7 September 2015 and ordered, amongst other things, judgment in favour of Big Country against Mr Fox and another of the guarantors jointly and severally in the amount of $664,613.
On 24 February 2016, bankruptcy notice BN 188586 (the “Notice”) was issued in respect of that judgment as well as accrued interest to date. The Notice was served on Mr Fox on 25 February 2016. On 11 March 2016, Mr Fox applied to this Court for an order setting aside the Notice and, in the alternative, that time for compliance with it be extended until the final determination of Mr Fox’s appeal from the judgment of Kunc J. At that time, Mr Fox had not brought an appeal from the judgment of Kunc J; however on 22 March 2016 the Court of Appeal made orders joining him as a co-appellant in an appeal that had been lodged by the other judgment debtor.
The appeal was heard by the Court of Appeal on 9 June 2016. On 19 July 2016, that Court handed down judgment dismissing the appeal: Duncan v Big Country Developments Pty Ltd [2016] NSWCA 163 (“Duncan”). In the meantime, orders were made in this Court extending the time for compliance with the Notice until final determination of the appeal, and finally, up to and including 22 August 2016.
On 16 August 2016, both of the judgment debtors lodged an application for special leave to appeal to the High Court from the judgment of the Court of Appeal.
On 30 August 2016, the application was heard by District Registrar Wall and was dismissed.
Mr Fox now seeks review of the Registrar’s decision pursuant to s.104(2) of the Federal Circuit Court of Australia Act1999 (Cth). Mr Fox seeks interim relief by way of an extension of time for compliance with the Notice until disposition of the application for special leave to appeal and, if that application is successful, the disposition of the appeal to the High Court. He accepts that the refusal of interim relief will mean that the application itself must be dismissed.
A review of a decision of a Registrar is by way of a hearing de novo and, as such, the Court is required to determine on the basis of the material before it, whether it ought to exercise the discretion to extend the time for compliance with the bankruptcy notice: see Zdrilic v Hickie [2016] FCAFC 101 at [16] – [32] and the cases cited there.
The Court’s power to extend time for compliance with a bankruptcy notice
A person who has committed an act of bankruptcy is liable to be made a bankrupt: s.43 of the Bankruptcy Act 1966 (Cth). A debtor commits an act of bankruptcy if he or she does not comply with the requirements of a bankruptcy notice within the time specified in the notice: sub-s.40(1)(g). However, the Court has the power to extend the time for compliance with a bankruptcy notice.
Section 41(6A) of the Act provides:
(6A)Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:
(a)proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b)an application has been made to the Court to set aside the bankruptcy notice;
the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.
There is no issue in these proceedings that both sub-ss.41(6A)(a) and (b) have been satisfied. There is also no question that s.41(6C) is not applicable. That section provides:
(6C)Where:
(a)a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and
(b)the Court is of the opinion that the proceedings to set aside the judgment or order:
(i) have not been instituted bona fide; or
(ii) are not being prosecuted with due diligence;
the Court shall not extend the time for compliance with the bankruptcy notice.
(Emphasis in original)
There is a significant body of authority considering the power to extend time for compliance with a bankruptcy notice under s.41(6A). The following principles can be discerned from all of the authorities:
a)the discretion conferred upon the court is at large: Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264; [1997] FCA 151 (“Byron”); Re Taylor; Ex parte Deputy Commissioner of Taxation (1983) 74 FLR 377; [1983] FCA 316; Sharpe v W H Bailey & Sons Pty Ltd (2014) 317 ALR 738; [2014] FCA 921 (“Sharpe”);
b)as such, the discretion is not one which should be fettered and should be exercised based upon the facts and circumstances of the particular case: Kakavas v Paradise Enterprises Ltd (2010) 8 ABC(NS) 363; [2010] FCA 915; Warner v Frost [1999] FCA 830 (“Warner”);
c)the principles to be applied on an application to adjourn the hearing of a creditor’s petition are different to those applicable to the discretion to extend time for compliance because the commission of an act of bankruptcy is of a different order of gravity from the change of status brought about by the making of a sequestration order: Sharpe at [28] citing Byron at 270; Taubert v Eddaglide Pty Ltd [2001] FCA 567; Shepherd v Chiquita Brands (South Pacific) Ltd [2001] FCA 1394; and Hovan v Goycolea–Silva [2003] FCA 234;
d)the following matters are considerations relevant to the exercise of the discretion (McPhee v Glentham Pty Ltd [2006] FMCA 1508):
i)the interest of the judgment creditor and other creditors of the judgment debtor in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs earlier rather than later;
ii)whether any stay has been granted of the judgment supporting the bankruptcy notice;
iii)whether an appeal has already been dismissed and the proceeding in question is an application for special leave to make a further appeal;
iv)prospects of the relevant application;
v)prejudice to the debtor;
vi)whether or not undertakings have been given or conditions can be imposed in relation to, for example, non-disposal of assets by the debtor; and
e)while there is some difference between the authorities on the question of the weight that should be given to the absence of an order for stay of the judgment underlying the bankruptcy notice, the balance of authority is that the failure to apply for a stay is a significant but not decisive matter in the exercise of the discretion: Warner; O’Loughlin v Glenmont Investments Pty Ltd (2001) 191 ALR 336; [2001] FCA 925.
Consideration
Mr Fox relied on a number of matters to argue that the Court ought to exercise its discretion to extend the time for compliance with the Notice.
First, the Notice was issued at the request of Big Country at a time when it knew that the primary judgment was under appeal to the Court of Appeal. I do not give this consideration any weight. The fact is that at the time the Notice was issued, Mr Fox had not brought any appeal from the judgment of Kunc J. Mr Fox was only joined to the appeal brought by the joint judgment debtor after these proceedings were commenced.
Secondly, Mr Fox relies on the fact that on 19 August 2016, the day on which the time for compliance with the notice was due to expire, (after several extensions by the Court) the solicitors for the respondent, in answer to a request from Mr Fox’s solicitor, advised the applicant’s solicitor by email, that the respondent consented to a further adjournment of the application pending determination of the application for special leave to the High Court but later withdrew that consent. Mr Fox argues that it could be inferred that the withdrawal of consent was purely for the purpose of obtaining a tactical advantage, namely the commission of an act of bankruptcy by Mr Fox upon which a creditor’s petition could be based. This in turn would permit the respondent to obtain a sequestration order against Mr Fox so as to prevent the proper hearing and determination of the application for special leave to the High Court. I reject that argument and, in any event, do not consider that it is relevant to the exercise of the Court’s discretion.
The argument is rejected because the application for special leave was made not only by Mr Fox but also by the joint judgment debtor. That means that the inability of Mr Fox to pursue the application for special leave would have little, if any, impact upon the determination of that application. Further, at the hearing, counsel for Big Country proffered an undertaking to the Court, on behalf of his client, to the effect that if this application were refused it would agree to adjourn any creditor’s petition until after the determination of the special leave application. That undertaking effectively meets any prejudice that might be suffered by Mr Fox as a result of the withdrawal of consent to an adjournment of this application.
Thirdly, Mr Fox argued that any act of bankruptcy committed by him, would have a direct impact upon him as a consequence of a guarantee given by him over a loan to the company of which he is a director. He argued that this was similar to a consideration given significant weight in Lavin v Toppi [2014] FCCA 1228 (“Lavin”). In that case the applicant had granted mortgages to Westpac Banking Corporation which specified that an act of bankruptcy was an act of default and thus, if time to comply with the bankruptcy notice was not granted, the applicant would be exposed to enforcement action by Westpac against her.
Before turning to the facts of this case, I note that, as a general rule, the outcomes of other proceedings are no certain guide to the proper outcome in a particular case. Each case must be determined according to its own circumstances. There are significant differences between the circumstances of this case and those in Lavin which suggest that that case is not, in any event, an apt comparator. First, in that case there was a stay of execution of the primary judgment and secondly, there was a direct link between the act of bankruptcy and the applicant’s liability to Westpac. There is no such link here.
By loan agreement dated 29 April 2015 the lender agreed to make available $250,000 to Bradfield Bentley Pty Limited (ACN 137 407 820) (“borrower”). Mr Fox is the sole director of the borrower but there is no evidence that he has any other interest in it. Under an agreement entitled “General Security Agreement” (“security agreement”), the borrower also granted a fixed and floating charge to the lender over all of its assets to secure its obligations under the loan.
Mr Fox guaranteed the borrower’s performance of its obligations under the loan agreement and the security agreement.
Clause 11 of the security agreement contained provisions for what constitutes an “event of default”. Amongst the occurrences set out in that clause was the following:
...
(p) Insolvency Event: an Insolvency Event occurs in relation to a Relevant Person or any other party to any Relevant Agreement;
…
(Emphasis in original)
Mr Fox was a “Relevant Person” for the purposes of this clause.
An “Insolvency Event” is defined in cl.1.1 of the security agreement in relation to a natural person to include the commission of an act of bankruptcy by that person.
Clause 12.1 of the security agreement provides that if an “Event of Default” occurs, the lender has certain powers to exercise in its absolute discretion, including taking possession of the property secured by the security agreement. Clause 13.1 provides that after an “Event of Default”, the lender may appoint a receiver to that property. However, that is not the consequence which Mr Fox relies upon here as prejudicial to him; rather, it is one of the consequences provided for in the loan agreement that is relied upon.
Mr Fox relies upon cll.8.1 and 13.1 of the loan agreement. The first of these provides, under the heading “Acknowledgement of Borrower and Guarantor”:
8.1 Each of the Borrower and the Guarantor hereby acknowledges and agrees that each of the Securities are collateral Securities and that each of the Securities secures this Loan to the intent that a default under this agreement or any Security will constitute a default under this agreement and all Securities.
Clause 13.1 is headed “Consequences of Default” and provides:
13.1If any of the events described in clause 13.2 occurs, the Total Owing will, at the option of the Lender and notwithstanding any delay or previous waiver of the right to exercise that option, become immediately due and payable to the Lender. In addition the Security will become immediately enforceable without notice to the Borrower or the Guarantor.
It is not immediately apparent to me from these provisions that an act of bankruptcy by Mr Fox will result in the entirety of the outstanding amount under the loan agreement (if any) becoming payable and thus, there arising the potential for Mr Fox as guarantor to meet that liability. Clause 13.1 appears on its face to be limited to the events of default as defined in cl.13.2. Clause 13.2 does not refer to any act of bankruptcy.
In any event, for present purposes I am willing to proceed on the basis that Mr Fox’s construction of the relevant agreements is correct. Even on that basis, however, there is a significant difficulty on the evidence. The obligation of the borrower was to repay and finally discharge the amount loaned, and any interest, to the lender on the repayment date: cl.9.1. The repayment date was specified in item 7 to sch.A of the loan agreement as being “12 months from the Advance Date”. The advance date was, in turn, defined in cl.1.1 to mean the date that any part of the loan was made.
There is no evidence to suggest that any such loan was advanced and conversely, no evidence that if the loan was advanced, it was not advanced on or shortly after the date of the agreement, namely 29 April 2015. Counsel for Mr Fox submitted that I should infer that the loan was made and that the term of the agreement was extended by the parties to the agreement. I can see no basis for such an inference.
Even if I were to accept that the loan had been advanced under the loan agreement and that that agreement was extant, there is no indication at all as to the probability that the lender will exercise the option available to it under cl.13.1 of the loan agreement. This is significant given that, by failing to comply with the Notice by 19 August 2016, Mr Fox has already committed an act of bankruptcy. In light of the absence of any response by the lender to that fact, I infer that the probability of such action is not nearly as real as suggested by Mr Fox.
That said, I give some weight to the possibility that an act of bankruptcy will give rise to some liability of Mr Fox under the guarantee given by him in favour of the lender under the loan agreement.
The final matter relied upon by Mr Fox is his current application for special leave to appeal from the decision of the Court of Appeal. Bearing in mind that this application is not the first appeal from the decision of the primary judge, and the fact that Big Country has undertaken to agree to an adjournment of any creditor’s petition pending the outcome of the special leave application, I do not give this consideration much weight.
In assessing the weight to be given to this matter, I have also given some consideration to the prospects of success of the application for special leave to appeal. Such an assessment is notoriously difficult. In Lavin, Manousaridis J found that the prospects of the application for special leave in that case were weak. It is nothing against his Honour’s assessment to note that special leave was in fact granted in that case, bearing in mind that the appeal was unanimously dismissed: Lavin v Toppi (2015) 254 CLR 459; [2015] HCA 4. Nevertheless, it seems to me that the prospects of this application for special leave are very low.
The critical question raised by the special leave application, is whether the primary judge erred in refusing to grant leave to the defendants (now the applicants, for special leave) to adduce evidence from a Mr White by video link from England. There were two such applications: the first being made on the first day of the hearing. That was rejected essentially because there was no evidence of any medical condition to support the application or explanation for the absence of such evidence. The point was not argued on appeal: Duncan at [23]. In light of that, in my view it is extremely unlikely that special leave would be granted to appeal on that point.
The second application was made on the third day of the trial, by which time all of the evidence was complete and a series of forensic decisions had been made by Big Country: Duncan at [24]. On appeal, Leeming JA, with whom Basten and Ward JJA agreed, noted at [25] that the only error identified in the rejection of this application was that the exercise of discretion “miscarried by not taking into account, or giving insufficient weight to, the extent to which the Appellant’s case would be prejudiced by Mr White not giving evidence and his affidavit not being read”. The problem with the submission, noted by Leeming JA, was that the primary judge expressly took into account the prejudice occasioned to the appellants. It is difficult to see how the Court of Appeal erred in light of that. As the prospects of success on appeal are important, even if not always critical, to the prospects of an application for special leave to appeal, this seriously undermines the strength of Mr Fox’s prospects on his application.
However, as I have said, it is notoriously difficult to accurately estimate the prospects of any application for special leave to appeal to the High Court and I accept the submission by counsel for Mr Fox that there are at least some prospects. However, I do not think that those prospects are significant and, for that additional reason, I do not give much weight to the existence of the application for special leave.
I have also taken into account in this respect, the fact that there is no question that Mr Fox has diligently pursued his avenues of appeal and, as I have already mentioned, there is no suggestion that he has done so otherwise than in good faith.
The next consideration is the fact that there has been no application by Mr Fox for a stay of the primary judgment. Counsel for Mr Fox argued that weight should be given to this in light of the well-known practice in the Court of Appeal of New South Wales, not to grant any stay of a money judgment in the absence of payment of the judgment amount. I am unaware of such practice. Counsel for Mr Fox did not draw my attention to any authorities on this point.
In Rinehart v Welker (2012) 83 NSWLR 347; [2012] NSWCA 1, the Court of Appeal held, that in considering applications to stay a judgment or order which is the subject of an application for leave to appeal to the High Court, the approach to be adopted is that stated by Brennan J in Jennings Construction Ltd v Burgundy Royale Investments Pty Ltd (No 1) (1986) 161 CLR 681; [1986] HCA 84. In that case, his Honour observed that “exceptional circumstances must be shown” before the exercise of that power is warranted. Brennan J continued (at 685):
In exercising the extraordinary jurisdiction to stay, the following factors are material to the exercise of this Court’s discretion. In each case when the Court is satisfied a stay is required to preserve the subject-matter of the litigation, it is relevant to consider: first, whether there is a substantial prospect that special leave to appeal will be granted; secondly, whether the applicant has failed to take whatever steps are necessary to seek a stay from the court in which the matter is pending; thirdly, whether the grant of a stay will cause loss to the respondent; and fourthly, where the balance of convenience lies.
See also Buckworth v Gladio Pty Ltd [2016] NSWCA 104; Tanamerah Estates Pty Ltd v Tibra Capital Pty Ltd [2016] NSWCA 78 and compare the position when the Court of Appeal is considering an application for stay pending an appeal to it: Woollard v Australia and New Zealand Banking Group Ltd [2016] NSWCA 258.
While I accept that the principles applied by the Court of Appeal on applications for a stay of judgment pending application for special leave to the High Court are different to those to be applied in an application for an extension of the period for compliance with a bankruptcy notice, I consider the complete absence of any attempt to make an application for a stay a significant matter, although it is not determinative.
Finally, Mr Fox gave an undertaking through his counsel not to dispose of any assets pending the determination of the application for special leave, other than for the payment of his legal costs. This undertaking is undermined to some extent by the absence of any evidence of Mr Fox’s financial circumstances. For that reason, although I have taken it into account, I do not attach significant weight to it.
In all of the circumstances, I am not satisfied that there ought to be an order extending the period for compliance with the Notice. I note in particular that, in light of Big Country’s undertaking, Mr Fox will not be denied the opportunity to have his application for special leave determined. The prejudice that Mr Fox says will flow to him as a consequence of his obligations under a loan agreement and the security agreement if he commits an act of bankruptcy, is not sufficiently established on the material before me to outweigh the interests of Big Country and other creditors in maintaining an earlier rather than later occurrence for the purposes of any act of bankruptcy. Further, in my view, for the reasons I have given, the merits of the application for special leave are insufficient also to outweigh the other considerations.
For those reasons, the application for an interim order extending the period for compliance with the Notice is dismissed. As a consequence, the application for review of the Registrar’s decision must also be dismissed.
I certify that the preceding forty-three (43) paragraphs are a true copy of the reasons for judgment of Judge Smith
Date: 11 October 2016
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