Gwenian Pty Ltd v Webb
[2011] FMCA 903
•28 November 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| GWENIAN PTY LTD v WEBB | [2011] FMCA 903 |
| BANKRUPTCY – Registrar’s sequestration order made in absence of debtor – earlier petition outstanding in another State – refusal of reasonable application by earlier petitioner to adjourn and transfer later petition – whether relevant considerations were addressed by Registrar – application for review of sequestration order made on later petition – Registrar’s orders set aside – priority of first petition waived – no merit in grounds of opposition to petition – new sequestration order made on de novo hearing – some costs orders made against second petitioner. |
| Bankruptcy Act 1966 (Cth), ss.32, 44(1)(a), 47(2), 49, 51, 52, 52(1), 52(1)(a), 52(2), 52(2)(b), 109, 109(1)(a), 115(1) Bankruptcy Regulations 1996 (Cth), reg.6.01, Sch.3 Civil Procedure Act 2005 (NSW), s.100 Federal Magistrates Act 1999 (Cth), ss.52, 79, 104, 104(3) Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth), rr.2.03(1), 4.06(3) Federal Magistrates Court Rules 2001 (Cth), r.8.01(2) |
| Cain v Whyte (1933) 48 CLR 639 Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 Doulman v ACT Electronic Solutions Pty Limited & Anor [2011] FMCA 232 Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637 McIntosh v Shashoua (1931) 46 CLR 494 Rankine v Lord [2011] FCA 478 Re Conomo [1960] ALR 742 Re Dean v QUF Industries Ltd (1981) 51 FLR 317, [1981] FCA 71 Re Hood; Ex parte English, Scottish and Australian Bank Ltd [1971] ALR 151 Re Taylor; Ex parte Century 21 Real Estate Corporation (1995) 130 ALR 723 Rozenbes v Kronhill (1956) 95 CLR 407 Seller v Deputy Commissioner of Taxation (2011) 282 ALR 80, [2011] FCA 865 Totev v Sfar (2006) 230 ALR 23, [2006] FCA 470 Victorian Securities Corporation Limited v Gadallah [2010] FMCA 113 Williams v Spautz (1992) 174 CLR 509 World Best Holdings Ltd v Sarker [2006] FMCA 1876 Wren v Mahony (1972) 126 CLR 212 |
| Applicant: | GWENIAN PTY LTD TRADING AS CLARK RUBBER DUBBO |
| Respondent: | BENJAMIN MICHAEL WEBB AKA BENJAMIN WEBB |
| File Number: | MLG 629 of 2011 |
| Judgment of: | Smith FM |
| Hearing date: | 2 November 2011 |
| Delivered at: | Sydney |
| Delivered on: | 28 November 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr J Johnson |
| Solicitors for the Applicant: | Mendelsons Solicitors |
| Counsel for the Respondent: | Mr N Allan |
| Solicitors for the Respondent: | Ziman and Ziman Solicitors |
| Counsel for Credit Corp Services Pty Ltd ACN 082 928 872, Supporting Creditor: | Mr D Francis |
| Solicitors for the Supporting Creditor | Francis Commercial Lawyers Pty Limited |
ORDERS
The respondent debtor’s application for review filed on 20 July 2011 is allowed.
The sequestration order made on 28 June 2011 is set aside.
The applicant creditor must pay one half of the respondent debtor’s costs on the application for review, including reserved costs, as agreed or taxed under the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).
A sequestration order be made against the estate of Benjamin Michael Webb, also known as Ben Webb and Benjamin Webb.
One half of the applicant creditor’s costs in relation to its petition, including one half of its costs on the application for review and all reserved costs, be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
Note that the date of the act of bankruptcy is 7 March 2011.
Note that a consent to act as trustee has been signed by Clyde Peter White and David Charles Quin.
The applicant must enter and give a copy of this order to the Official Receiver in Sydney and Melbourne within 2 working days.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
MLG 629 of 2011
| GWENIAN PTY LTD TRADING AS CLARK RUBBER DUBBO ACN 092 677 042 |
Applicant
And
| BENJAMIN MICHAEL WEBB AKA BENJAMIN WEBB |
Respondent
REASONS FOR JUDGMENT
Introduction
Mr Webb incurred several debts in Dubbo, NSW. In the present matter, a creditor’s petition based on a small trading debt was filed on 5 May 2011 in Melbourne by Gwenian Pty Ltd trading as Clark Rubber Dubbo (“Gwenian”). It has reached my docket on an application under s.104 of the Federal Magistrates Act 1999 (Cth) for review of a sequestration order made by a Registrar in Melbourne on 28 June 2011. The sequestration order was made two weeks before an appointed hearing before me of two other petitions against Mr Webb, which had been filed in Sydney prior to the Gwenian petition. Credit Corp Services Pty Ltd (“Credit Corp”) had filed its petition on 14 December 2010 in SYG2608/2010, and Darley Australia Pty Ltd (“Darley Australia”) had filed its petition on 20 December 2010 in SYG2747/2010. As a result of the Registrar’s order, I vacated the hearings of the two Sydney matters and, after the filing of an inevitable application for review, listed all three matters for further hearing before me.
My present judgment explains how the three petitions have been, or will now be, disposed of, including as to all costs issues. In short, I have decided that the Registrar should not have made the sequestration order on the last filed petition, and I shall set aside his order. Because Credit Corp has waived its priority in relation to its petition, and because Darley Australia has now withdrawn its petition, and in the absence of any other creditor seeking to be substituted in either of the earlier petitions, I have decided to proceed with a hearing on Gwenian’s petition, and to make a new sequestration order on that petition. I shall explain why I have not been persuaded by Mr Webb’s grounds of opposition to that petition.
As Credit Corp accepts, a new sequestration order will have the consequence that its petition must be dismissed. However, I have concluded that Gwenian’s unjustified attempt to jump the queue justifies an order that it pay Credit Corp’s costs which have been thrown away as a result of its actions. I have decided that Gwenian should also pay some of Mr Webb’s legal expenses, and receive only part of its costs from Mr Webb’s bankrupt estate. I am spared from having to decide how Darley Australia’s costs should be paid, since no costs orders are sought in that matter.
As will appear, two of the creditors’ petitions should obviously not have been pursued concurrently with the first petition. Collectively all three debts asserted in the petitions must by now be considerably exceeded by the legal costs which the parties have collectively incurred. As will appear, the burden on the Court in dealing with the three concurrent creditors’ petitions has also not been insignificant.
I hope that my recitation of events will provide lessons to lawyers and agencies involved in routine bankruptcy practice.
One lesson arising from the Darley Australia petition, is to remind creditors of the need to ensure accurate identification of the full names of their future debtors when entering contractual relations and, more importantly, when embarking upon and pursuing recovery proceedings. Failure to do this, and also properly to examine the National Personal Insolvency Index for pending bankruptcy proceedings (an “NPII search”), accounts for at least one of the present debacles. Unfortunately such mistakes come to my attention regularly in bankruptcy matters, notably leading to sequestration orders made with misstated names or in an alias of a person who is already bankrupt.
A second important lesson arising from the Gwenian petition, is to emphasise the public and general interests involved in the presentation of a creditor’s petition in bankruptcy. The Bankruptcy Act reflects a policy that only one petition should be actively pursued against a debtor at any one time. The provisions of the Act show clearly that a first filed outstanding petition should normally be brought to finality first, and that other creditors who will be able to prove in any resultant bankruptcy should normally await the outcome, or rely upon their right to apply to be substituted as petitioner in that proceeding. They can file another petition, but are at risk of never recovering their costs if the outstanding petition succeeds. Insolvency practitioners must be aware that a creditor’s petition is not just another example of debt recovery, in which creditors are free to steal the march from other creditors by a clever use of competing court processes. It is Gwenian’s failure to appreciate some elementary points of good bankruptcy practice, which results in it incurring unrecoverable legal expenses in the present case.
The history of the three petitions
Credit Corp’s petition against Mr Webb was filed in the Sydney Registry on 14 December 2010. It properly identified him by his three names “Benjamin Michael Webb”. It alleged indebtedness of $14,980.71, comprising the balance owing under a judgment debt entered by default in the Local Court at Sydney on 22 October 2004, which was based on an indebtedness assigned from Westpac Banking Corporation. It alleged an act of bankruptcy committed on 21 June 2010 as a result of non‑compliance with a personally served bankruptcy notice based upon the same judgment. The petition was initially given a first court date of 31 January 2011, but this was amended to 13 April 2011 by the Registry at the petitioner’s request due to difficulties of service.
Darley Australia filed its petition on 20 December 2010. It named the debtor as “Ben Webb”, which was the name of the judgment debtor shown in a default judgment entered in the Local Court at Muswellbrook on 7 July 2010 upon which it relied. The petition alleged an act of bankruptcy on 5 October 2010, upon a failure to comply with a bankruptcy notice directed to Mr Webb under the same name, and based on the same judgment debt. Clause 5 of the petition correctly identified Mr Webb’s full name, but unfortunately this was not indicated in the title of the proceedings, and therefore was never correctly recorded in the NPII index.
Both the affidavit verifying the petition, and the r.4.06(3) affidavit of search made on 16 March 2011, referred to making NPII searches, but not in relation to Mr Webb’s full name. The solicitors for Darley Australia were therefore not alerted to the prior petition filed by Credit Corp, before they moved on their own petition at its first listing before a Registrar on 17 March 2011. There was no appearance by the debtor, and the Registrar made a sequestration order in the name of “Ben Webb”. It appears to me that this would not have happened, if the Registrar had been accurately informed as to the pending earlier petition against Mr Webb.
On 6 April 2011, an application for review of the Darley Australia sequestration order made on 17 March 2011 was filed by a solicitor for Mr Webb. In his affidavit, Mr Webb denied service of the Darley Australia bankruptcy notice and petition, disputed his liability in relation to the judgment debt, and asserted solvency. Mr Webb did not mention the pending Credit Corp petition. At an initial hearing before Raphael FM on 19 April 2011, his Honour set aside the sequestration order by consent, and adjourned the petition to 17 June 2010, noting an agreement to pay the debt by instalments.
The promised payments did not eventuate, but at the adjourned hearing the existence of the pending Credit Corp petition was drawn to his Honour’s attention for the first time, and the fact that it had been set down for hearing before me on 13 July 2011. His Honour therefore adjourned the reinstated Darley Australia petition for hearing before me at the same listing, indicating to the parties his concern at the existence of two active petitions.
Meanwhile, the Melbourne solicitors of Gwenian had received instructions to enforce a judgment debt for $11,169.35 obtained by default against “Benjamin Webb” in the Local Court at Dubbo on 1 July 2010. The statement of claim alleged that he had become liable to meet two invoices for the supply of horse float stable mats totalling $9,308 no later than 28 June 2009, under a director’s guarantee in a credit agreement with Mr Webb’s company. On 9 November 2010 their law clerk conducted an NPII search, including in the name of “Benjamin Michael Webb”, and – correctly – noted that there was no pending bankruptcy matter involving Mr Webb at that date. However, Gwenian’s solicitors did not procure the issue of a Bankruptcy Notice until 20 January 2011, and did so without conducting a new search which would have disclosed the pending Credit Corp petition. Their bankruptcy notice relied upon the Dubbo Local Court judgment, and it is now uncontested that it was served personally on Mr Webb at his usual address at Dubbo on 14 February 2011.
The solicitors for Gwenian did, however, become aware of the pending Credit Corp petition no later than early April 2011. They made a series of contacts with the office of Mr Francis, solicitor for Credit Corp. They were given a copy of Credit Corp’s petition, were informed that Mr Francis was instructed to seek to proceed at the listing of the petition on 13 April 2011, and wrote a letter to Mr Francis indicating that they intended to appear and support the petition.
An agent for Gwenian then did appear at the listing of Credit Corp’s petition before a Registrar in Sydney, and filed in court a notice of this intention. Mr Webb appeared on that occasion by way of his solicitor Mr Ziman, who procured a contested adjournment of Credit Corp’s petition to 3 May 2011.
Mr Webb filed on 3 May 2011 an affidavit indicating that he contested the petition on grounds disputing service, liability, and solvency. The matter was then referred to me on the same day for hearing. Mr Francis and Counsel for Mr Webb appeared, and the filed notice of support by Gwenian was noted. I was unable to proceed with a hearing on that day, but appointed a full day for hearing on 13 July 2011, and directed a timetable setting deadlines for any further evidence.
It is now common ground that Gwenian could have satisfied the conditions allowing it to apply to be substituted as petitioning creditor in the Credit Corp petition under s.49 of the Bankruptcy Act, had it thought that it had grounds to do so. In particular, because the underlying liability upon which Mr Webb’s indebtedness to Gwenian was claimed to have arisen had accrued before the date of the act of bankruptcy relied upon in the Credit Corp petition (see Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637 at 639), and because there is no time limit on seeking substitution (see Re Dean v QUF Industries Ltd (1981) 51 FLR 317, [1981] FCA 71).
Section 49 provides:
49Change of petitioners
Where a creditor’s petition is not prosecuted with due diligence or where for any other reason the Court considers it proper to do so, the Court may permit to be substituted as petitioner or petitioners another creditor or other creditors to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor, and the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor.
However, Gwenian did not take that course, perhaps because it obviously had no basis for seeking substitution. The Credit Corp petition was being “prosecuted with due diligence”, and it was set down for an expeditious final hearing before a Federal Magistrate, and not before a Registrar whose decisions are always subject to de novo review. I also cannot perceive any arguable “other reason” which could have made it “proper” for Gwenian to assume conduct of the pending creditor’s petition in the interests of itself and all of Mr Webb’s other creditors.
The only explanation provided by Gwenian for filing its own creditor’s petition in the Melbourne registry of the Court on 5 May 2011, is found in an affidavit by its solicitor, Mr Hanlon:
19.I gleaned from the orders made by Federal Magistrate Smith on 3 May 2011 that the Credit Corp petition was opposed by Webb, that orders had been made allowing for various subpoenas to be issued and that there was no certainty that the Credit Corp petition would succeed and nor was there any certainty for what further period of time the matter might potentially proceed. It was also noted that the Petition had been on foot for almost five months already. In the circumstances, a decision was made that my client, Gwenian, should proceed to issue its own petition, particularly in light of the fact that indications had been made by Webb’s legal representative, namely Mr Derek Ziman (“Ziman”) of Ziman & Ziman Solicitors, that Webb had paid or intended to issue a cheque in satisfaction of the claim by Gwenian, but failed to do so.
The sequestration order made on 28 June 2011
Gwenian’s petition names the debtor as “Benjamin Webb”, and relies upon the Dubbo Local Court judgment debt of $11,169.35 upon which Gwenian’s bankruptcy notice was based. It alleges an act of bankruptcy on 7 March 2011 resulting from non‑compliance with the bankruptcy notice. For reasons which were not explained to me, the petition does not contain paragraph 5 required by Form 6, which is designed to draw attention to identification details, including aliases, of the debtor. This section of the petition form is important, since it should assist the Court and other creditors to avoid the duplication of bankruptcy proceedings or, at least, to case‑manage concurrently pending petitions in an appropriate manner. Its accurate completion is particularly important, since I note that the rules now no longer require evidence of a recent search of the NPII index to be filed with the petition, and none was filed by Gwenian.
The Gwenian petition was marked with a time for hearing, being 9.30am on 28 June 2011 before a Registrar of this Court in Melbourne. According to an affidavit of service, it was served personally on Mr Webb on 10 May 2011 at Dubbo. Service is now not contested.
Mr Webb denies awareness of the date for hearing of the Gwenian petition, but this was not explored by cross‑examination. It is, however, clear that his solicitor became aware of the petition and its return date. I infer that he also became aware that Mr Francis, solicitor for Credit Corp, was aware of the Gwenian petition, and that Mr Francis intended to instruct an agent in Melbourne to request that the petition be transferred to Sydney for case management in the context of the imminent hearing before me of the two earlier petitions. It is a reasonable inference that both Mr Ziman and Mr Francis expected that the Melbourne petition would be transferred to Sydney or, at least, be adjourned to await the outcome of the petitions listed before me. On the evidence before me, this would have been a reasonable expectation.
Mr Ziman recounts in his affidavit a conversation with one of Mr Hanlon’s junior solicitors, Mr Block, on the morning of the 28 June 2011. I infer that this probably occurred before the time of the listing. He said:
3.I reject Messrs Block and Hanlon’s account of that conversation. I telephoned for Mr Hanlon and spoke with ‘Eva’ who said ‘Mr Hanlon is not available’. She then put me through to Mr Block. In that conversation on that morning of 28 June 2011 words to the effect of the following were said
DZ:‘Mr Block, Derek Ziman here for Ben Webb.’
SB:‘Hello. The matter is in the list this morning and I have a lawyer at court.’
DZ:‘What’s going to happen?’
SB:‘David Francis [on behalf of Credit Corp Pty Ltd] is going to ask for the matter to be transferred to Sydney. I’m looking at the law in that regard.’
DZ:‘I don’t believe you can bring your petition in Melbourne while other petitions are on foot in Sydney.’
SB:‘I know that.’
Mr Ziman’s account of the conversation tends to be confirmed by his contemporaneous notes. Mr Block, in an affidavit in response, denies that he was the person who referred to Mr Francis’ intentions, and I am inclined to think that Mr Ziman may have made this reference and not Mr Block. However, Mr Block does not deny that Mr Ziman told him words indicating that Mr Webb disputed the propriety of the Gwenian petition, and, implicitly, supported the anticipated transfer application by Mr Francis’ agent.
Mr Block does not depose to making any attempt to communicate Mr Webb’s position to Mr Hanlon, so that it could be communicated to the Registrar. This was an important point which I was unable to clarify, since none of the deponents of affidavits were called for cross‑examination.
There is no complete evidence as to what occurred before the Registrar in Melbourne on 28 June 2011, leading to the Registrar making a sequestration order. No transcript is on the file, and none was tendered. The Registrar neither recorded nor subsequently published his reasons for not acceding to the transfer request of Mr Francis’ agent. Mr Hanlon made no attempt in his affidavit to give a detailed account of the proceedings, and did not put into evidence any contemporaneous notes of what happened. He states only:
27.I appeared at the hearing of Creditor’s Petition no. MLG 629 of 2011 at the Federal Magistrates’ Court of Australia in Melbourne on 28 June 2011. Credit Corp appeared via its agent, Mr Fijalski of White Cleland Lawyers. Prior to the matter being determined, I advised the Court that there were two other creditors’ petitions on foot, namely the Credit Corp petition and the Darley Australia petition. Annexed hereto and marked “AH‑20” is my affidavit sworn 27 June 2011 and filed in that proceeding and which confirmed the existence of the Credit Corp and Darley Australia petitions.
The two affidavits of Mr Hanlon which were given to the Registrar show that the Registrar was fully informed as to the existence of the two earlier petitions pending in Sydney, and of their listing before me for hearing two weeks later. One of the affidavits implied that no communication had been received from Mr Webb or his solicitor Mr Ziman in response to a courtesy copy of the Gwenian petition sent to Mr Ziman by letter dated 16 May 2011 with the hope that “the matter can be resolved amicably prior to 28 June 2011”. I conclude from all the evidence before me, that the Registrar was probably misled as to Mr Webb’s position, by the failure of Mr Hanlon to inform him of Mr Ziman’s communication to Mr Block prior to the listing, but that this was probably unwitting on the part of Mr Hanlon.
The best account of what happened before the Registrar is found in a report from Mr Francis’ agent which was written the next day:
On your instructions, the writer attended the Federal Magistrates’ Court of Australia at Melbourne on 28th June 2011, the return of the Creditor’s Petition issued on behalf of Gwenian Pty Ltd.
The Applicant Creditor sought to proceed. The writer argued on your client’s behalf that the matter should be referred to the Sydney Registry and listed before Federal Magistrate Smith on 13 July 2011 with the related matters.
Registrar Allaway took the view that as the Respondent did not appear, the application was unopposed. He was satisfied from reading the affidavit of Anthony Hanlon sworn 27 June 2011 (copy enclosed), that the Respondent was aware of the proceedings.
Registrar Allaway made a sequestration order against the Estate of Benjamin Webb and noted that the date of the Act of bankruptcy was 7 March 2011. We enclose a copy of the Order.
He noted that Clyde White and David Quin of H L B had consented to act as Trustees of the Estate. He made the usual order in relation to the Creditor’s costs but refused our application for costs.
If the Court forwards our office a sealed copy of the Sequestration Order, we will forward it to you. In the meantime, thank you for your instructions and enclose our account herewith.
I accept this account, and do not consider that it is contradicted by a notation on the Court’s ‘report of listing’ form, in handwriting which I take to be that of the Registrar:
NB. Mr Fijalski appeared to inform me that his client had a pending CP against the debtor in NSW (SYG2608/10) but did not formally support nor oppose this application.
Doing the best I can to reconstruct what happened, I conclude that the Registrar probably recorded the effect of statements made by Mr Fijalski after the Registrar had rejected Mr Fijalski’s request for the transfer to Sydney, and after the Registrar had indicated that he intended to proceed to hear the petition on an undefended basis.
It is regrettable, that I have not been assisted by a statement of reasons provided by the Registrar for his refusal to adjourn and transfer a later petition to a Federal Magistrate who he was aware was case managing, and was about to hear and determine, two earlier creditor’s petitions against the same debtor in a more appropriate venue. In the absence of reasons, it is impossible for me to be satisfied that the Registrar took into account all relevant considerations bearing on his decision not to transfer or adjourn the later petition, including some important points of bankruptcy law and practice which I shall discuss below.
I was informed of the Registrar’s making of the sequestration order on 28 June 2011 in Melbourne, at the listing of the Credit Corp and Darley Australia petitions on 13 July 2011 in Sydney. I was informed that this had occurred notwithstanding an application for transfer made by Mr Francis’ agent, and that Mr Ziman was instructed by Mr Webb to file an application for review. I therefore vacated the hearings, and appointed a directions listing on 16 August 2011, at which all three matters would be brought before me.
Mr Webb’s application for review was filed on 20 July 2011. This was one day after the time prescribed under Bankruptcy Rules r.2.03(1). However, an extension of time is not opposed, and has been ordered. The application for review was made returnable for directions before me in Sydney on 16 August 2011.
At that listing of all three petitions, the solicitor for Darley Australia consented to the dismissal of its petition, with no orders as to costs.
In relation to Credit Corp’s petition, Mr Francis conceded that I would need first to address Mr Webb’s application for review of the Registrar’s order, and that this would entail consideration of the merits of Mr Webb’s opposition to Gwenian’s petition. In that circumstance, he foreshadowed that Credit Corp would waive its priority in relation to its petition, in the event that I upheld the Gwenian petition, subject to a foreshadowed application for costs against Gwenian.
I therefore set a timetable for the hearing on 2 and 3 November 2011 of Mr Webb’s application for review and Gwenian’s petition. I adjourned the Credit Corp petition for directions on the same date. I dismissed Darley Australia’s petition with no orders as to costs.
The hearing was able to be concluded in one day, due to the abandonment of some of Mr Webb’s grounds of opposition to the petition, and with the (mixed) benefits of counsel agreeing not to require deponents of affidavits for cross‑examination. Mr Francis participated in the hearing in so far as it encompassed issues of costs in relation to the Credit Corp petition.
Mr Webb’s grounds of opposition to the Gwenian petition
Mr Webb’s notice of grounds of opposition to Gwenian’s petition filed on 28 September 2011, in effect, presents his grounds both for upholding the review application seeking the setting aside of the Registrar’s order and for dismissing that petition. The grounds of opposition, which were all maintained by his counsel, were:
1.The applicant’s presentation of a creditor’s petition is an abuse of the process of the Federal Magistrates Court in that:
a.The applicant first appeared in the Court as a creditor supporting another, petitioning creditor known as Credit Corp Services Pty Ltd, the latter’s petition having been presented and engrossed with number SYG 2608/2010 (the ‘primary petition’);
b.The hearing of the primary petition began on 3 May 2011 in the Court sitting at Sydney, and was adjourned to 13 July 2011;
c.On 5 May 2011 the applicant presented its own petition against the respondent in the Federal Magistrates Court sitting at Melbourne, which was engrossed with number MLG 620/2011 (the ‘secondary petition’);
d.The applicant moved the Court at Melbourne, on 28 June 2011, for a sequestration order against the respondent, using its secondary petition;
e.The Court at Melbourne was constituted by a Registrar;
f.The applicant’s application on 28 June 2011 was in the respondent’s absence;
g.The use of the Court’s procedures, as described in connection with the secondary petition, brings the administration of justice into disrepute;
h.The applicant knew or ought to have known the presentation and hearing of the secondary petition was at great distance from where the primary petition was being heard and where the respondent lived;
i.The applicant continued to support the primary petition;
j.The applicant knew, or ought to have known, that its presentation of the secondary petition would force the respondent to consider, prepare and defend a multiplicity of proceedings in different States, at great cost;
k.The applicant knew, or ought to have known, that its actions would mean the respondent threw away time, money and energy on the primary petition,
1.The use of the Court’s procedures, in these circumstances, makes the applicant’s use of the Court’s procedures unjustifiably oppressive to the respondent.
2.Further, the alleged debt owing by the respondent to the applicant is not in truth and reality owing.
Circumstances
a.The debt underlying the applicant’s petition is the product of a default judgment given by the Local Court of New South Wales on or about 1 July 2010.
b.The judgment debt is $11,169.35 comprised by principal of $9,308.00, interest of $901.99, filing fees of $160.00, service fees of $54.00 and solicitor’s fees of $745.36.
c.The judgment debt is based upon an alleged guarantee of the debts of a third party known as FHW Infrastructure & Engineering Pty Ltd.
d.FHW’s debts arose out of its acquisition of the applicant’s goods on two occasions in about May 2009.
No Guarantee
e.The respondent’s purported guarantee did not include what FHW owed to the applicant.
f.The guarantee, properly construed, was no more than a promise by the respondent to pay any debt which he personally incurred in direct dealings he had with the applicant (such dealings being potentially on a credit basis).
g.The respondent did not have any personal dealings with the applicant.
Guarantee a Secondary Obligation
In the alternative to subparagraphs 2e. to 2g. above,
h.The proper construction of the guarantee, and the proper application of the common law in these circumstances, is that the respondent was liable to see to it that FHW performed its obligation to pay what it rightfully owed.
i.Where FHW failed to perform its obligations, the respondent was put into breach of its obligation in the guarantee.
j.The applicant’s remedy for the respondent’s breach of the guarantee was for such damages as it could prove to have suffered by FHW’s breach of its obligations.
k.The applicant’s right to unliquidated damages has never been proven or assessed, and there never was a debt or other liquidated sum upon which the applicant could present the secondary petition.
3.Further to ground 1, and in the alternative to ground 2, the debt asserted in the bankruptcy notice, and again in the secondary petition, is a substantial overstatement of what is owed by the respondent. The overstatement is so great as to be, in the circumstances, hopelessly misleading. The bankruptcy notice should be held a nullity and the secondary petition accordingly dismissed.
a.The first acquisition of goods for $3,938.00 was a sale by the applicant on a cash‑on‑delivery basis to FHW. No debt ought to have been left owing by FHW, and the respondent proffered no guarantee for what was left owing.
b.The applicant wrongly applied interest to the principal amount from 29 May 2009, the date of the second invoiced acquisition. In contrast the applicant’s terms with FHW made interest run from the 31st day after the amount owing had been invoiced.
c.In removing from the judgment debt the first acquisition for $3,938.00, and correcting the interest calculation:
i. The principal amount owing falls to $5,370.00.
ii. The interest on this principal amount, from 29 June 2009, is based on 362 days and is $479.33.
iii. The addition of principal of $5,370, interest of $479.33, filing fees of $160.00, service fees of $54.00 and solicitor’s fees of $745.36 totals $6,808.69.
iv. The difference between the actual amount owing, and the amount claimed in the bankruptcy notice and secondary petition, is $4,360.66 or 39 per cent.
4.Further to grounds 1 and 3, and in the alternative to ground 2, the real amount owing to the applicant is so small, compared to the consequences of bankruptcy, as to warrant the exercise of the Court’s discretion not to make a sequestration order. The applicant should be left to its ordinary enforcement remedies.
Ground 1: abuse of process
It is well established that the presentation of a creditor’s petition in circumstances constituting an ‘abuse of process’ may provide ‘other sufficient cause’ for dismissing the petition under s.52(2)(b) of the Bankruptcy Act, even if the requirements of s.52(1) in relation to jurisdiction, indebtedness and act of bankruptcy are established. In this respect, I was referred by counsel for Gwenian to a line of cases in the High Court which recognise a species of abuse of process, where a petitioner is motivated to achieve a collateral purpose which is not a ‘legitimate’ purpose of a creditor’s petition as a remedy for attempted recovery of the alleged indebtedness through insolvency administration (see Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509, McIntosh v Shashoua (1931) 46 CLR 494, Cain v Whyte (1933) 48 CLR 639, and Rozenbes v Kronhill (1956) 95 CLR 407). As counsel pointed out, these cases are consistent with general principles of ‘abuse of process’ discussed in Williams v Spautz (1992) 174 CLR 509 in which, as was noted by Allsop J in Totev v Sfar (2006) 230 ALR 23, [2006] FCA 470 at [53] “Central is the requirement that the party who has instituted proceedings has done so for a purpose, or to effect an object, beyond that which the legal process offers”. The principle has also been applied to invalidate the service of a bankruptcy notice, where it was not ‘genuinely’ motivated to invoke bankruptcy jurisdiction, but sought only to apply pressure on the debtor for a collateral advantage (c.f. Rankine v Lord [2011] FCA 478, and Seller v Deputy Commissioner of Taxation (2011) 282 ALR 80, [2011] FCA 865, and earlier authorities cited therein).
Counsel for Mr Webb did not cite any of these authorities, nor attempt to bring the present circumstances within their principles. Moreover, the evidence before me does not persuade me to find that Gwenian filed its petition without any intention to force Mr Webb into bankruptcy administration as a means of attempted recovery of the debt identified in the petition. There are suspicions raised by the evidence that Gwenian thought that serving Mr Webb with a third petition returnable in Melbourne might elicit a voluntary payment of its debt, without its having to wait the outcome of the pending contested petitions, and, perhaps, to avoid being required to participate in a bankruptcy administration resulting from the pending petitions. If so, it might have hoped to gain an unfair advantage over other creditors, including Credit Corp and Darley Australia.
However, the filing of the petition for the purpose of recovering the indebtedness alleged in the petition was consistent with the use of a creditor’s petition as a legitimate recovery option provided by the Bankruptcy Act, rather than indicative of an entirely illegitimate motive, at least unless I were satisfied that Gwenian had no intention of, in fact, making Mr Webb bankrupt.
Ultimately, the ‘legitimacy’ of Gwenian’s motives when presenting the petition appears to be sufficiently demonstrated by the fact that, when its expectations of an early payment from Mr Webb were disappointed, it did pursue the remedy provided under Part IV of the Bankruptcy Act, so as to achieve an insolvency administration as a remedy for Mr Webb’s non‑payment of the debt upon which the petition was based. Moreover, it has continued to pursue that legitimate object in the course of the application for review which I am now addressing. Its decision not to rely only on its rights as a supporting creditor in the Credit Corp petition, but to present and pursue its own petition and to take the risk that it might not recover its cost of a later petition, might have been misconceived and ill‑advised, but it is not shown, in my opinion, to be an ‘abuse of process’ so as to justify the dismissal of the petition under s.52(2)(b).
Counsel for Mr Webb did not seek to develop his submissions on ‘abuse of process’ beyond the contentions made in the Grounds of Opposition. Essentially, these are that the bringing of the petition and the obtaining of a sequestration order in the circumstances sketched above was oppressive to Mr Webb and contrary to usually recognised procedures in bankruptcy matters, so as to allow the presentation and pursuit of its petition to be characterised as an abuse of process. Counsel pointed to the unfairness of requiring Mr Webb to defend a third petition, based on a relatively small debt, brought in Melbourne remotely from his location and the location of the indebtedness, and in a situation where the petitioning creditor was aware of, and was supporting, another creditor’s pursuit of the same remedy at an imminent contested hearing.
Counsel for Mr Webb developed this ground by reference to the important feature of a creditor’s petition, in that it concerns the general interests of creditors and the public in relation to a debtor’s alleged insolvency, and is not only a remedy to assist a particular creditor to effect maximum recovery of a particular indebtedness. This feature supports the proposition that a later petition brought by a creditor who could have applied under s.49 should normally not be given priority over an outstanding earlier petition, particularly if the ensuing bankruptcy would prevent the debtor’s creditors from benefitting from an earlier relation back period.
Counsel for Mr Webb cited the judgment of Burbury CJ in Re Hood; Ex parte English, Scottish and Australian Bank Ltd [1971] ALR 151 at 153, in which his Honour addressed an application for leave to withdraw a creditor’s petition. Burbury CJ cited long established authorities, and said:
Neither of the applications made in the present case was supported by any evidence and it seems necessary to remind Tasmanian legal practitioners of the basic principle that once the machinery of the Bankruptcy Act has been put in motion by one creditor filing a petition the case is thereafter affected with the interests of other creditors and the public and the law does not permit the petitioning creditor and the debtor to terminate the proceedings by agreement unless they can satisfy the Court that to do so is in the interests of the creditors and the public. Once the Court is seised of a regular creditor’s petition with accompanying proof that the debtor has committed an act of bankruptcy, it is the duty of the Court to exercise a robust initiative to ensure that the interests of the general body of creditors and the public are protected. It will insist that the petitioning creditor act in the interests of the creditors as a whole and will not allow him to use the petition in terrorem to obtain an advantage to himself over and above what he would receive upon a distribution of the estate in the course of a regular bankruptcy administration. …
Counsel also referred me to Re Conomo [1960] ALR 742, where Clyne J considered the antecedent of s.49. His Honour said:
In the early part of the nineteenth century it was well established by bankruptcy statutes that a petitioning creditor could not make use of the proceedings instituted by him merely to secure the payment by the bankrupt of the debt due to him. If he did so, he became liable to stringent penalties.
This object of the law is now made manifest by many provisions of the Bankruptcy Act, but it is sufficient for the purposes of this judgment to mention one only of these provisions. By s. 59 [see now s.47(2)] a petition, whether presented by a creditor or debtor, shall not after presentation be withdrawn without the leave of the Court; and this leave is not given as a matter of course.
Clyne J noted that the policy of allowing substitution was intended to “compel a petitioning creditor to prosecute his petition without unnecessary delay”. He referred to the objects of the antecedent to s.49 at 745:
The purpose and object of s. 35, in my opinion, is to enable the Court where the petitioning creditor does not prosecute his petition to allow another creditor to take up and proceed with the petition. The other creditor, to use the words of Lord Cairns in Bristow’s Case, supra, can be “allowed to take up the case, proceeding upon his own debt in the place of that of the original creditor, and going on to an adjudication”.
Clyne J also noted that every creditor is at risk, if they accept payment of their debt while a petition is outstanding, since “he incurs the risk of having to hand over the money received to an official receiver or trustee of the debtor’s estate”.
This observation points to the relation‑back of the commencement of a bankruptcy under s.115(1) of the Bankruptcy Act, in relation to the vesting of the debtor’s assets in the trustee in bankruptcy and the conversion of creditors’ rights against the debtor into rights to participate in the bankruptcy. This is particularly important when considering whether a creditor should be permitted by the Court to move on a later petition, rather than await the outcome of a pending earlier petition or seek substitution as the petitioner in that petition. Allowing a later petition to overtake a pending petition, may have the effect of considerably reducing the relation‑back period, and thereby reducing the assets which are recoverable and available for distribution to creditors generally. Thus under s.115(1) the relation‑back period from the sequestration order made on the Gwenian petition was only to 7 March 2011. The bankruptcy arising from the Registrar’s order could not relate back to the date of the act of bankruptcy relied upon in the Credit Corp petition, 21 June 2010, since that date occurred more than six months prior to the filing of Gwenian’s petition. For that reason alone, the Registrar erred when making the sequestration order in the face of Credit Corp’s opposition.
The loss of an earlier relation‑back date, results because a sequestration order made on a later petition has the direct consequence that the pending earlier petition must be dismissed. This is the consequence of the earlier petitioning creditor’s claim against the debtor being converted into a right to prove in the bankruptcy resulting from the sequestration order, so that the debt relied upon in the earlier petition is no longer ‘owing’ (see Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 595).
The making of a sequestration order on a later petition, also means that an earlier petitioner loses a reasonable expectation that it will receive a priority right to recoup the expenses of its petition from the bankruptcy administration. The fairness of imposing this consequence on Credit Corp is another consideration which the present Registrar appears to have overlooked when refusing its application to transfer Gwenian’s petition. The consideration had particular relevance in the present circumstances, taking into account that Gwenian had knowledge of the Credit Corp petition before it filed its own petition, and had told Credit Corp and the Court in Sydney that it was supporting the earlier petition.
The above points in relation to concurrent creditors’ petitions give added substance to the general policy of the administration of justice which discourages unnecessary multiplicity of actions directed at the same remedy. In the present case, a sequestration order is the single desired outcome of all creditors who support an insolvency administration as a means of recovering all their debts. The simultaneous pursuit of a debtor in a multiplicity of creditors’ petitions is likely not only to be oppressive to the debtor, but his added costs of defending those proceedings may work against all creditors, by depleting his assets which would become available to creditors in bankruptcy.
In Re Dean v QUF Industries Ltd (1981) 51 FLR 317, [1981] FCA 71, the Full Court observed:
Section 49 empowers the court to permit substitution, as petitioner or petitioners, of “another creditor or other creditors to whom the debtor is indebted in the amount required by this Act”. The section serves a number of important practical purposes. It helps avoid multiplicity of petitions in that it reduces the circumstances in which it is necessary for another creditor to file an independent petition to protect his position against the possibility that the petitioner in a pending petition may be paid out or may otherwise fail to proceed. It gives to other creditors a degree of protection against dilatoriness on the part of a petitioner or collusion between petitioner and debtor to defeat or delay other creditors.
In the present case, there is no indication in the evidence before me that the Registrar adverted to the undesirability of Mr Webb simultaneously being pursued in both Melbourne and Sydney on separate creditor’s petitions, and to the desirability that they should all be case‑managed in an orderly fashion toward a single hearing on whichever petition deserved priority, taking into account the objectives of maximising the possible return to creditors from a bankruptcy administration, and of minimising the costs which eventually might be faced by Mr Webb, his creditors wishing to participate in bankruptcy litigation, and all his creditors generally who would participate in any bankruptcy administration.
All the above considerations appear prima facie inconsistent with the decision of the Registrar on 28 June 2011 to refuse Credit Corp’s application to adjourn and transfer Gwenian’s petition to Sydney in deference to the priority of Credit Corp’s own petition. I am unable to discern, and counsel for Gwenian was unable to suggest a good reason, why these considerations were ignored by the Registrar. Counsel for Gwenian could only point to the principle that “prima facie, on proof of the matters mentioned in s. 56 (2), the Court will proceed to make an order for sequestration” (see Rozenbes v Kronhill (supra) at 414, citing Henchman J’s dicta approved in Cain v Whyte). However, in my opinion, although this statement supports the expectations of a currently petitioning creditor, it gives no basis for believing that a later petitioner will be permitted by the Court to ignore the general interests and considerations which I have pointed to above.
In my opinion, the general policies of the Bankruptcy Act, and the authorities cited by counsel for Mr Webb which articulate them, show that the Registrar erred when making a sequestration order on Gwenian’s petition, and that his orders should now be set aside in the exercise of my discretions upon review under s.104 of the Federal Magistrates Act.
In my opinion, the Registrar should have acceded to the application made by the agent for Credit Corp, and probably anticipated by Mr Webb’s solicitor, for the new petition to be transferred to Sydney for case management there in the context of the imminent hearing by a Federal Magistrate of the earlier petition. The solicitor for Gwenian should have supported that transfer, or at least invited the Registrar to adjourn the new petition. Such an outcome would, in my opinion, have reflected the correct and preferable assessment of the considerations of bankruptcy practice which I have discussed above, as well as those set out in Federal Magistrates Court Rules r.8.01(2) and s.52 of the Federal Magistrates Act concerning change of venue. At least, a proper consideration of the relevant considerations, if necessary on his own motion, should have caused the Registrar to adjourn the petition to await the outcome of the Credit Corp petition.
However, I am not persuaded that any policy of the legislation or authority cited to me has the consequence that Gwenian’s petition should necessarily be dismissed by me now, upon a consequential de novo consideration of all the pending petitions conducted in the light of all the current circumstances.
Counsel for Mr Webb did not contend, correctly in my opinion, that it is an implication of s.49 or any other provision of the Act that a second petition is invalid when filed, or should summarily be dismissed under s.52(2) in all cases, if there was in existence at the time when it was filed, or is in existence at the hearing of the petition, a pending petition which would give the creditor the same remedy as is sought in the new petition.
In the absence of such an implication, in my opinion, the Bankruptcy Act leaves to the bankruptcy court’s procedural discretions the manner in which it deals with a second petition. The principles which I have discussed above suggest that the second petitioner takes a clear risk, even probability, that the court will usually defer consideration of the second petition until the first petition has been disposed of. The second petitioner must anticipate that the court will normally allow the first petition to proceed first, both because it is likely to carry the earliest relation‑back date and for that reason be most in the interests of creditors generally, and because allowing the first petition to proceed must usually be in the general interests of justice for an orderly case‑management of duplicate proceedings. The second petitioner must also anticipate that if a sequestration order is made on a pending petition with priority, then the second petition must be dismissed and its petitioner cannot expect its costs to be paid from the bankrupt’s estate or otherwise by the debtor.
I have sympathy with Mr Webb’s complaints that the filing of the third petition in the present case was oppressive to him and to his creditors generally, particularly in circumstances where Gwenian had full knowledge of the circumstances of the pending earlier petition and had intervened to support it. However, ultimately, I have concluded that these are complaints about procedure, which are appropriately remedied by the exercise of discretions available to me on review of the Registrar’s decision, short of the dismissal of the petition for discretionary reasons under s.52(2) of the Bankruptcy Act. In my opinion, the proper response to them is to recognise that Gwenian’s petition should not on 28 June 2011 have been permitted to proceed in priority to the earlier petitions, rather than to characterise the petition itself as an abuse of Gwenian’s remedies under Part IV of the Bankruptcy Act, and to refuse to exercise my de novo power to make a sequestration order on that petition in the light of the current situation.
Grounds 2, 3 and 4: the debt relied upon by Gwenian
I shall return to consider how I should exercise de novo the Court’s discretions in relation to Gwenian’s petition, after examining Mr Webb’s other grounds raised in opposition to that petition.
Gwenian relies in its bankruptcy notice and petition on a judgment debt of $11,169.35. Mr Webb does not dispute that the judgment was duly made, and that its amount remains unpaid, but invites the Court to go behind the default judgment, and to find that “in truth and reality” the indebtedness did not arise or was overstated (see Wren v Mahony (1972) 126 CLR 212 at 224‑225). He has not presented any evidence in support, but seeks to identify defects in Gwenian’s claims made in the Local Court and in some evidence tendered by Gwenian.
Gwenian relies upon a one page ‘credit application’ and director’s guarantee signed by Mr Webb on 10 February 2009, entered into in anticipation of orders being placed for goods purchased from Clark Rubber at its Dubbo store. Mr Webb does not dispute that he completed the credit application to show a company, FHW Infrastructure & Engineering Pty Ltd (ACN 133 970 386) as the ‘debtor’, and that he was authorised to complete and executed the application as a director of that company. The stated ‘terms of credit’ are:
All invoices are to be paid within 30 days of invoice.
All outstanding balances may be charged a late fee of 1% monthly plus a $5.00 account keeping fee.
Unless otherwise agreed, all first orders are C.O.D.
Below Mr Webb’s signature indicating his confirmation of the completed details of the credit application on behalf of his company, there appears:
ALL PROPRIETORS, OR ALL DIRECTORS MUST SIGN THE FOLLOWING UNDERTAKING
In consideration of you agreeing to our request to trade on a credit basis with your company, we, the above mentioned Directors (in the case of a company being a Proprietor), hereby warrant all details above are true and correct and agree to accept and be bound by the terms of credit and trading. We and each of us hereby agree to jointly and severally guarantee to pay any debt which becomes due and owing in the course of our trading with your company.
Signed
Director/
Partner: [Mr Webb’s signature]Witness: [indecipherable]
Date: 10/02/09
Also in evidence, is a copy of a demand dated 9 April 2010 addressed to Mr Webb from Gwenian’s solicitor. This asserts that goods were supplied to his company on 7 May 2009 and 29 May 2009, for which $9,308 remains outstanding. Neither party has tendered the invoices, nor any other documentary or other evidence concerning these supplies.
Also in evidence is the affidavit of debt which was filed in the Local Court in support of the entry of default judgment. It deposes as at 25 June 2010:
4.I have been advised and verily believe that:
…
c)The amount owing to the Plaintiff and amounts claimed for interest and costs as at the date of swearing this affidavit taking into account payments made or credits accrued are:
Current amount owing
$
9,308.00
Interest claimed at
$
901.99
Filing fees
$
160.00
Service fees
$
54.00
Solicitors fees
$
745.36
TOTAL
$
11,169.35
The attached interest calculations showed that interest up to judgment was calculated from 29 May 2009 until 25 June 2010 under s.100 of the Civil Procedure Act 2005 (NSW) at the prescribed rate of 9% per annum simple on the total amount alleged to have accrued by 29 May 2009.
Grounds 2 and 3 of Mr Webb’s objection to the petition, as I understand them, invite the Court to go behind the ensuing default judgment on the following alternative contentions:
i)The guarantee signed by Mr Webb was ineffective to make him personally liable for the debts of his company to Clark Rubber, since it guaranteed only “any debt which becomes due and owing in the course of our trading with your company” where “our” meant “my personal” trading and no such trading occurred.
ii)The guarantee was a ‘secondary obligation’ which depended upon a prior default by the company, and this was not proved to have occurred.
iii)The guarantee did not cover the first supply of goods, since they were required to be cash on delivery, and this was not proved not to have occurred.
iv)The default judgment miscalculated Mr Webb’s liability by including interest calculated from 29 May 2009, i.e. the date of the second supply, rather than from a date 30 days after that date.
Implicitly, it was contended that the above defects invalidated the bankruptcy notice, and also provided good reason for the Court declining to accept pursuant to s.52(1)(a) the affidavits of debt filed in support of the petition. In the alternative, Ground 4 invites the Court to dismiss the petition on a discretionary ground that “the real amount owing to the applicant is so small, compared to the consequences of bankruptcy, as to warrant the exercise of the Court’s discretion not to make a sequestration order. The applicant should be left to its ordinary enforcement remedies”.
However, I am unpersuaded by any of the contentions inviting me to go behind the default judgment, because:
i)In my opinion the ‘plain English’ language used throughout the ‘credit application’ has the obvious intention that, where the application is signed by a director on behalf of a corporation which is the proposed principal debtor, the director will become personally and concurrently liable under the guarantee undertaking. This intention emerges from the obvious nature of the transaction, which is the seeking of credit for the supply of goods to a business operated by a natural person, either in his or her own name or partnership, or in the name of a corporation. In this context the reference to “our trading” with Clark Rubber was, in my opinion, clearly intended to mean “our company’s trading” in the case of one or more directors signing the guarantee. I do not consider that there is any ambiguity in this respect sufficient to allow the clause to be read against the author of the form and the beneficiary of the guarantee.
ii)In its terms, the guarantee is an ordinary director’s guarantee on a trading account, and I can see no reason to construe it as conditioned upon proof of a prior default by the principal debtor, whether after a demand or after any other default on the part of Mr Webb’s company. In this respect, I gain no assistance from consideration of the characterisation issues facing more elaborately written indemnities such as were discussed by Burchett J in Re Taylor; Ex parte Century 21 Real Estate Corporation (1995) 130 ALR 723, which was cited to me.
iii)Moreover, in my opinion, Mr Webb has not presented any evidence to give a foundation for this contended basis for avoiding liability, even at a level sufficient to cause me to exercise my discretion to go behind the default judgment. He has not tendered the invoices relating to the two supplies of goods, nor recounted the relevant circumstances of the supplies, nor pointed to any evidence suggesting that, in fact, his company was at any time not in default on all its obligations under the supply and credit agreement in relation to the two supplies which were alleged in Gwenian’s statement of claim in the Local Court. He has had ample time to formulate and verify his defences in this respect, and to present them to the Local Court in support of a setting aside application. In all the circumstances, I am not persuaded that any of the factual contentions made in Grounds 2 and 3 have been given sufficient factual substance to lead me to ‘go behind’ the default judgment.
iv)There is no evidence before me raising any issue whether the amount claimed by Gwenian included a ‘first order’, nor that it was not ‘otherwise agreed’ that the first order would not be C.O.D. There is no evidence suggesting that, in fact, Mr Webb’s company ever made any payment C.O.D., so as absolve him from his liabilities under his personal guarantee.
v)There is also no evidence suggesting that the full amount claimed by Gwenian in the Local Court was not due and owing by both Mr Webb and his company no later than 29 May 2009, for the purposes of calculating interest under s.100 of the Civil Procedure Act.In this respect, I would construe the credit term that “invoices are to be paid within 30 days of invoice” as intending to allow a period of grace for payment, rather than intending to postpone the liabilities of the debtor and guarantor immediately arising under an invoice presented at the time of supply. I am therefore not persuaded that sufficient substance has been shown for challenging the interest calculations upon which the default judgment was based.
I am therefore not persuaded that the bankruptcy notice was invalid for overstating the true amount owing by Mr Webb, and do not need to consider the implications of Mr Webb’s failure to take any such point before the expiry of time under the bankruptcy notice. Nor am I persuaded that I should decline to accept the affidavits of debt filed by Gwenian in support of its petition. I am satisfied by those affidavits that the amount of the judgment debt identified in the petition remains owing by Mr Webb.
That amount is clearly in excess of the amount of $5,000 provided in s.44(1)(a) as the minimum debt upon which a creditor’s petition may be based and a sequestration order may be made. I do not consider that I should regard the amount of $11,169.35 as being so insubstantial as to justify the dismissal of the petition on a discretionary ground that this is “so small, compared to the consequences of bankruptcy”. In effect, the minimum amount serves as a marker upon which the Act raises an assumption of general insolvency by a debtor, the non‑payment of which warrants administration of the bankrupt’s whole estate in bankruptcy for the benefit of all creditors. Accepting that bankruptcy will result in ‘hardships’ to Mr Webb of a significant, if unidentified, nature, I am unpersuaded that their existence should provide grounds for dismissal of the petition. Particularly where Mr Webb initially raised, but did not press nor support with sufficient evidence, a contention that he was ‘solvent’. On the evidence before me, I am far from satisfied that he is able to pay this debt or any other debts which are currently due or which are about to fall due.
Conclusions in relation to Gwenian’s petition
The Court has a very broadly expressed power under s.104(3) of the Federal Magistrates Act on a review of an exercise of power by a Registrar to “make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised”. Where the ‘matter’ before the Registrar was a creditor’s petition, this power includes, in my opinion, a power to set aside a sequestration order which should not have been made at the time and in the circumstances before the Registrar, and then to proceed to consider the petition de novo on the evidence presented in the course of the review, or to adjourn the reinstated petition for any good reason. It may then make a new sequestration order on the reinstated petition, if that course appears a proper exercise of power under the Bankruptcy Act.
No submission was made by any person appearing before me that I did not have these powers, nor that any other course should be contemplated.
I have above explained why in my opinion the Registrar’s order was wrongly made on 28 June 2011, and should be set aside. I have also explained why I am not satisfied that Mr Webb has identified any good reason for my now dismissing the Gwenian petition. I must therefore consider whether I should proceed immediately to make a new sequestration order on that petition, or adjourn Gwenian’s petition in deference to the other creditor’s petitions which were outstanding at the time that it was filed and when it was addressed by the Registrar.
Considering the present circumstances of all three petitions, there is no longer a competing earlier petition filed by Darley Australia.
The earlier petition filed by Credit Corp, if upheld, would result in an earlier relation‑back date, and it should normally be permitted to proceed in priority to the Gwenian petition for that reason. However, no supporting creditor has appeared before me to argue that the loss of the earlier relation‑back date would carry any particular significance in the administration of Mr Webb’s estate in bankruptcy, and I am aware of nothing in the evidence which points strongly to the desirability of retaining the earliest available relation‑back date. Moreover, any further delay in finalising the outstanding Credit Corp petition may result in prejudice to his creditors generally, if it allows Mr Webb to continue to trade. The resumption of the hearing of Mr Webb’s objections to the Credit Corp petition might not be possible for several months, and would itself result in more legal expenses to Mr Webb and his potential estate in bankruptcy, and to Credit Corp and other creditors who have appeared in support of its petition – including Gwenian.
Although Credit Corp had earlier wished its petition to proceed first, it has adopted a pragmatic response to the Registrar’s order and Mr Webb’s application for review. It recognised that its petition could not proceed without the Court first considering whether to set aside the Registrar’s order. It also recognised that it was an efficient use of the Court’s time for it to consider all of Mr Webb’s objections to Gwenian’s petition in the context of his application for review.
Credit Corp did not seek that its petition should be concurrently listed for hearing with that application. Rather, its sensible position was that, having already thrown away its costs relating to the vacated hearing on 13 July 2011, it did not wish to incur the costs of a concurrent hearing of its petition with Mr Webb’s contested review application, and it was prepared to waive the priority of its own petition if an outcome on that review would result in it being spared another contested hearing.
In all the circumstances as they are presented to me now, I have concluded that I should give effect to my above conclusions that Gwenian has established a present case for the making of an immediate sequestration order, and that Mr Webb’s grounds of opposition to this course should not be accepted. The significant element now facing me is the present absence of any application by Credit Corp or by another creditor seeking substitution in its petition, that I should adjourn Gwenian’s petition so as to allow the earlier petition to proceed with the priority which should have been recognised by the Registrar.
Gwenian’s evidence presented to me satisfies all the matters required to be established under s.52 of the Bankruptcy Act and the other relevant provisions of the Act and Rules. I am satisfied that the proper exercise of my discretions under s.104 and de novo under s.52, is now to make a sequestration order.
The trustees’ consent previously filed in relation to Gwenian’s petition should appropriately be again recognised, notwithstanding that the trustees must commence their administration afresh based upon my new sequestration order. I note that there is no evidence before me suggesting that their expenses relating to the Registrar’s order are of any substance, and that no application was made by them for any orders arising from their administration pursuant to the Registrar’s order and my setting aside of that order.
The remaining costs issues
There remains for me to consider what orders as to costs I should make in relation to Mr Webb’s application for review, Gwenian’s petition, and Credit Corp’s petition.
I have very broadly expressed powers to make such costs orders as appear just in the circumstances, both under s.79 of the Federal Magistrates Act, and under s.32 of the Bankruptcy Act. The latter provides:
The Court may, in any proceeding before it, including a proceeding dismissed for want of jurisdiction, make such orders as to costs as it thinks fit.
This power has been construed as allowing costs to be ordered in favour of a petitioning creditor, even where its petition is dismissed and notwithstanding the language of s.51 of the Bankruptcy Act (see my judgment in World Best Holdings Ltd v Sarker [2006] FMCA 1876 and judgments cited therein, also Victorian Securities Corporation Limited v Gadallah [2010] FMCA 113 at [20]‑[22]). The power encompasses ordering costs against a non‑party to a proceeding in bankruptcy, if that person has been given an opportunity to be heard and appears responsible for costs thrown away (see Doulman v ACT Electronic Solutions Pty Limited & Anor [2011] FMCA 232 at [65]‑[91] and cases cited therein at [74]).
In my opinion, the power in s.32 allows the Court to frame a costs order which would result in costs being payable as an expense of the administration of a bankrupt estate in a manner not specifically provided in s.109 of the Bankruptcy Act, including by giving their payment a priority not expressly provided for under that section. When doing this, however, the Court needs to be satisfied that such an order would be consistent with the policies of the Act as reflected in that section, and that it is capable of implementation by analogy with one of the species of priority payments described in s.109 and the Bankruptcy Regulations. In this respect, it may not be sufficient to direct priority only by reference to s.109(1)(a) without indicating which of the sub‑classes of priority under Bankruptcy Regulation reg.6.01 and Sch.3 is adopted by analogy.
Mr Webb seeks costs against Gwenian in the event that his application for review is successful. For its part, Gwenian seeks the affirmation of the Registrar’s costs order, and a further order for its costs on the application for review to be payable from Mr Webb’s estate in bankruptcy with the priority of a successful petitioning creditor.
However, my above reasoning has resulted in a mixed outcome, and neither of these courses would provide a just and appropriate approach to the determination of the costs of these parties in the light of my above findings. Mr Webb’s application for review has succeeded to the extent of leading me to set aside the Registrar’s orders, including his costs order, but not to the extent of leading to the dismissal of Gwenian’s petition. Gwenian has ultimately been successful on its petition, but only because Credit Corp has waived the priority which I would otherwise have given its petition, and Gwenian has not persuaded me that its decision to bring and pursue its own petition was otherwise justified.
Balancing all the considerations, and adopting an approach to apportionment which should simplify the process of taxation, I consider that Gwenian should be awarded one half of its taxed costs in relation to its petition and the application for review, and that these costs should be payable from Mr Webb’s bankrupt estate with the priority given to the costs of a petitioning creditor. I consider that Mr Webb’s success in obtaining the setting aside of the Registrar’s order should result in an order that Gwenian pay one half of his taxed costs in the proceedings commencing with his application for review.
Credit Corp seeks an order for costs against Gwenian encompassing all of its costs thrown away on its own petition as a result of Gwenian’s unjustified pursuit of its own petition before the Registrar on 28 June 2011. Alternatively, it seeks that its costs should be ordered to be paid from the estate of Mr Webb with the same priority which they would have received if its petition had succeeded, and if its pursuit had not been precluded by the Registrar’s order.
Credit Corp’s case for an award of some costs has merit, since it lost its opportunity to recover costs on its petition as a result of actions by Gwenian in relation to which it was entirely blameless. As I have explained above, it appears to me that Gwenian had no justification for deciding to pursue its own petition with conscious disregard of Credit Corp’s petition, and in circumstances where its solicitors should have appreciated the important policies of the Bankruptcy legislation which I have noted above and which required it to defer its petition until the conclusion of Credit Corp’s petition. In my opinion, in all the circumstances it would be a just exercise of my costs powers to order Gwenian to pay Credit Corp’s costs to the extent that they were thrown away or incurred by reason of its own actions when pressing for the orders made by the Registrar on 28 June 2011. However, I do not consider that they should include Credit Corp’s costs incurred on its petition prior to the Registrar’s order, particularly, since the outcome of that petition is – and will now always remain – unknown.
I do not consider that it would be fair to Mr Webb’s creditors generally that any of Credit Corp’s costs should be payable from his bankrupt estate, whether with or without special priority. Nor do I consider that it would be appropriate to make any costs order against Mr Webb personally in relation to the costs of the uncompleted Credit Corp petition.
For all the above reasons I shall therefore make the orders in proceeding MLG629/2011 which are set out at the commencement of this judgment.
In proceeding SYG2608/2010 I shall order that the petition be dismissed. I shall also order that Gwenian Pty Ltd pay the applicant creditor’s costs incurred in relation to both proceedings subsequent to the listing on 28 June 2011 in proceeding MLG629/2011, including reserved costs and costs in relation to the hearing on 2 November 2011, as agreed or taxed pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).
I certify that the preceding ninety (90) paragraphs are a true copy of the reasons for judgment of Smith FM
Date: 28 November 2011
1
19
0