Horton v Warranted Financial Solutions Pty Ltd (in Liquidation) - [2011] FMCA 748

FEDERAL MAGISTRATES COURT OF AUSTRALIA

HORTON v WARRANTED FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION)

[2011] FMCA 748

BANKRUPTCY – Application to set aside bankruptcy notice – order on which notice based stayed after notice served – consideration of Re Schekeloff – should Re Schekeloff be followed – application to set aside dismissed.

Bankruptcy Act 1966, ss.40(1)(g), 41(6A)

Re Schekeloff (1989) 86 ALR 645
Re Sgambellone (1994) 126 ALR 71
Re Boris Ganke Ex Parte: Boris Ganke Peter Andrew Somerset and Paul Mervyn Fordyce Trading As P A Somerset and Co [1995] FCA 1183
Re Roberts Ex Parte Bower [1994] FCA 938
Murdaca v Accounts Control Management Services Pty Ltd [2007] FCA 964

Applicant:

STEVEN LESLIE HORTON

Respondent:

WARRANTED FINANCIAL SOLUTIONS PTY LTD (IN LIQUIDATION)

File Number:

MLG 971 of 2011

Judgment of:

Burchardt FM

Hearing date:

2 September 2011

Date of Last Submission:

2 September 2011

Delivered at:

Melbourne

Delivered on:

2 September 2011

REPRESENTATION

Counsel for the Applicant:

Mr Mitchell

Solicitors for the Applicant:

SP Business and Litigation Lawyers

Counsel for the Respondent:

Mr Carew

Solicitors for the Respondent:

Gadens Lawyers

ORDERS

The application be dismissed.
The Applicant pay the Respondent’s costs fixed in the sum of $4,000.00.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT MELBOURNE

MLG 971 of 2011

STEVEN LESLIE HORTON

Applicant

And

WARRANTED FINANCIAL SOLUTIONS PTY LTD
(IN LIQUIDATION)

Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

On 13 July 2011, the applicant filed an application by which he sought to set aside a bankruptcy notice and to extend the time for compliance in any event pursuant to s.41(6A) of the Bankruptcy Act 1966

(“the Act”) until after the conclusion of a posited appeal in the Supreme Court of Victoria. It should be noted that counsel for the applicant expressly indicated in reply that no application to extend the time for compliance is now pressed by the applicant. The only issue is whether the bankruptcy notice should be set aside.
The relevant facts include the following. On 18 July 2011, Anderson J conducted a hearing in the County Court of Victoria. He refused the applicant an adjournment and entered judgment for slightly in excess of $400,000 including interest. On 1 February 2011, the applicant appealed. The notice of appeal, and I should note that he was self‑represented at the time, referred to “the defendant’s set‑off for unpaid remuneration”. The bankruptcy notice was issued on 5 April 2011 based on Anderson J’s order. Pursuant to an order of Registrar Hetyey, service was deemed to have occurred on 23 June 2011, that is to say, service of the bankruptcy notice.
The time for compliance with the notice has been extended thus far to enable the applicant’s application to set aside the notice to be determined, but as I have indicated he has not sought that the time be extended after the determination of this application if it were not to be successful. On 13 July 2011, the applicant filed an application for a stay of Anderson J’s order. By then, he had, of course, been served with the bankruptcy notice pursuant to Registrar Hetyey’s order.

So much is common cause.
The applicant’s application for a stay was heard and determined by Harper J and Williams AJA on 24 August 2011. The Court ordered a stay, and also ordered the applicant to pay security for costs of $17,000 by 23 September of this year. If what the applicant has told the Court of Appeal about his finances is true, that is to say that he is impecunious, then he will certainly need a generous relative or friend in order to comply with the Court of Appeal’s order for security.
I note in passing that Harper JA was clearly close to not granting the stay. So much is apparent from paragraph 22 of his Honour’s judgment. But his Honour was also concerned that if the applicant was bankrupted, there would be a chance of the loss of a successful appeal. That is at paragraph 20.
The issue in the proceeding arises in this way. The order of Anderson J was enforceable when service took place. At present, it is no longer enforceable. The issue is, in the circumstances, whether the bankruptcy notice can stand or should it be set aside.
The answer depends on what view one takes of the authorities. I would start with s.40(1)(g) of the Act. Reading from the judgment in

Re Schekeloff, Ex parte Schekeloff v Hopkins Group Pty Ltd
to which I will come in a moment, and assuming the term has not been amended in the last 23 or so years, it reads relevantly:
“If a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy note under this Act, and the debtor does not:
where the notice was served in Australia within the time fixed by the registrar by whom that notice was issued –“
And the section goes on to say that if you do not comply, then you have committed an act of bankruptcy. As I mentioned, this was considered in Re Schekeloff (1989) 86 ALR 645, and I will read the headnote:
“Bankruptcy notices based on final judgments of the District Court of New South Wales were issued and served.
Orders were later made by the Registrar of the District Court under the rules of the District Court and during the currency of the notices for payment of the amount of each judgment by instalments and for a stay of proceedings.
The debtor contended that an act of bankruptcy was not committed by a failure to comply with the notices as each judgment had ceased to be “a judgment or order the execution of which has not been stayed” within the meaning of s 40(1)(g) of the Bankruptcy Act 1966 (Cth).
Held: The bankruptcy notices were not to be set aside by reason of the orders for payment by instalments, and staying execution, which were not made until after service of the notices. Both in England and Australia the rule had been stated in terms which made this application depend on whether there was a stay at the date of the issue of the notice, or at latest the date of its service on the debtor. Re Dennis; ex parte Dennis (1888) 60 LT 348, followed.”
I refer to the whole of that judgment of Burchett J, but I will read the conclusion on page 649 between lines 40 and 47, where his Honour said:
“Not only has re Dennis, supra, stood unchallenged now for one hundred years, but in numbers of other cases, in which admittedly the precise point did not arise, courts have stated the law in terms that are consistent with Re Dennis. In my view, this court should follow those statements of the law. Therefore, I hold that the bankruptcy notices in the present case are not liable to be set aside by reason of the orders for payment by instalments, and staying execution, which were not made until the service of the notices.”
Re Schekeloff has been followed in a number of subsequent cases. With one exception, it has been applied with what might be described as complete approval. In Re Sgambellone (1994) 126 ALR 71 at [78], Drummond J said this:
“But it is too late, the bankruptcy notice here having been served, for the present applicant to obtain a stay now of the costs order of 29 August 1994 that will have any effect upon the operation of the bankruptcy notice. See Re Schekeloff (citation omitted). There, the applicant applied to the court to set aside the bankruptcy notices issued by the respondent judgment creditor which were founded on judgments, the execution of which had been stayed, but only after the service of the bankruptcy notices on the applicant. Burchett J held that the time for considering for the purposes of section 40(1)(g) of the Bankruptcy Act, whether a judgment on which a bankruptcy notice is founded has not been stayed is the time of issue or, at the latest, service of the notice. He therefore dismissed the applications to set aside the bankruptcy notices notwithstanding that the judgment debtors had ultimately obtained stays of execution of the relevant judgment debts.”
In Re Boris Ganke Ex Parte: Boris Ganke Peter Andrew Somerset and Paul Mervyn Fordyce Trading As P A Somerset and Co [1995] FCA 1183 at [43], Lindgren J had this to say:
“In any event, a stay of execution subsequent to the issue or, at the latest, the service of a bankruptcy notice has no effect on its validity: Re Schekeloff, Re Roberts, Re Sgambellone “(cited but citations omitted)”.
I should say that in Re Roberts Ex Parte Bower [1994] FCA 938, Einfeld J described the judgment of Burchett J in Re Schekeloff in terms of the highest approbation.
The case where Schekeloff was doubted was Murdaca v Accounts Control Management Services Pty Ltd [2007] FCA 964. I will read paragraph [9]:
“The act of bankruptcy on which the creditor’s petition was founded was Mr Murdaca’s alleged failure to comply with a bankruptcy notice. The bankruptcy notice required payment of a judgment debt within 21 days after the service of the notice. At the time of issue and service of the bankruptcy notice, execution of the relevant judgment had not been stayed (see s.41(3)(b) of the Bankruptcy Act). However, an ex parte stay of proceedings in respect of the judgment was granted within the period of 21 days after the service of the notice; that is, before the commission by Mr Murdaca of the purported act of bankruptcy on which the creditor’s petition was founded.”
At [13], Branson J continued:
“The authority that should have been drawn to the attention of the Federal Magistrate is Schekeloff (citation omitted). In that case Burchett J gave consideration to a factual situation relevantly indistinguishable from the present. His Honour concluded that, for the purposes of s 40(1)(g) of the Bankruptcy Act, the time for consideration whether a judgment on which a bankruptcy notice is founded has not been stayed is the time of issue, or at the latest, service of the notice. In reaching this conclusion, Burchett J placed considerable weight on Re Dennis, a decision of the Court of Appeal concerning the service of a garnishee order nisi on the judgment debtor after the service of a bankruptcy notice on him.”
I pause and point out that her Honour felt that the circumstances in

Re Schekeloff were relevantly indistinguishable from the facts before her which I have read out. In Murdaca there had actually been a stay. In Schekeloff there was a stay by operation of instalment payments. This characterisation by Branson J of “relevantly indistinguishable” is in my view fatal to counsel for the applicant’s arguments that the facts in Schekeloff are distinguishable to those here. I return to the judgment in Murdaca at [14]:
“Schekeloff has been referred to in a number of Federal Court judgments with apparent approval, but in none that I have been able to identify has a comparable factual situation been under consideration (see, for example, Re Frasersmith; Ex Parte J Blackwood & Son Limited (1992) 36 FCR 144 (Beaumont J); Re Roberts; Ex Parte Bower (1994) 48 FCR 350 (Einfeld J); Re Johnson Ex Parte Johnson v Tonkin (1994) 53 FCR (Spender J); Re Sgambellone: Ex Parte Jacques 91994) 53 FCR 275 (Drummond J).
In my respectful view, the correctness of the decision in Schekeloff is open to reasonable question. It is at least arguable, in my view, that a debtor does not commit an act of bankruptcy by not complying with a demand to pay a judgment debt which becomes unenforceable during the period allowed for compliance with the demand - albeit that the debt had been due and payable at the dates of issue and service of the bankruptcy notice.”
The question obviously arises who should I follow. I note that this controversy, to the extent that it obtains, is controversy that obtains in the Federal Court. It awaits guidance from a Full Court. I regard myself as bound by decisions of the Federal Court even if constituted by a single judge. There is a hierarchy of courts and this court is directly inferior to the Federal Court. It is clear that I should follow Schekeloff. Burchett J and those who have followed him express no doubts. Branson J’s views were that:
“The correctness of Schekeloff is open to question and that it is at least arguable that a debtor does not commit an act of bankruptcy in the given circumstances.”
Although Branson J gave Mr Murdaca a stay pending a High Court special leave application, she did not find in terms that Schekeloff was wrongly decided. She went no further than I have indicated. I think it is clear that I must follow the line of authorities following and including Schekeloff. If Branson J’s reservations are to be sustained, it should be by the Federal Court, not the Federal Magistrates Court.
I should interpolate and say that I am well aware that there is some difference of views in this court as to the extent to which decisions of single judges of the Federal Court bind this court. There is jurisprudence to support both points of view and the arguments are clearly significant. But for what it is worth, my view remains as I have described it. I should also say that I share Branson J’s reservations.

It seems counterintuitive that a person may commit an act of bankruptcy by not paying money they are not presently legally obliged to pay. It is also an awkward outcome, given the observations of Harper JA and the stay that he ordered, together with Williams AJA.
I note, however, that the applicant still has various potential defences that speak before a petition could succeed. Nonetheless, faced with longstanding authority - after all, Schekeloff was a 1988 judgment and has only been doubted once in 2007 - I am bound to and do follow that authority. The application will be dismissed and I see no immediate reason why the applicant should not pay the respondent’s costs.

I certify that the preceding sixteen (16) paragraphs are a true copy of the reasons for judgment of Burchardt FM

Associate:

Date: 2 September 2011