in the matter of Whiteman v Whiteman
[2021] FedCFamC2G 131
•12 October 2021
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Deputy Commissioner of Taxation; in the matter of Whiteman v Whiteman [2021] FedCFamC2G 131
File number(s): MLG 1639 of 2020 Judgment of: JUDGE A KELLY Date of judgment: 12 October 2021 Catchwords: BANKRUPTCY – Application for review of exercise of power by a registrar to make sequestration order – interim application by debtor for a stay of all proceedings under the sequestration order – where applicant forms opinion that debtor has evaded tax – where orders made against debtor in Federal Court for freezing of assets – where Federal Court dismisses application seeking a stay of the proceeding and grants summary judgment – where debtor then applies to Administrative Appeals Tribunal seeking to challenge amended assessments issued by Australian Taxation Office – where Tribunal dismisses application – where debtor again applies to Tribunal seeking a merits review of decisions not to allow his objections against amended assessments – where application before Tribunal has not been determined – where no submission made by debtor of solvency – de novo hearing – where applicant has prima facie entitlement to sequestration order – whether court should dismiss the petition pursuant to par 52(2)(b) of the Bankruptcy Act 1966 (Cth) for other sufficient cause – applicable principles – application dismissed – whether proceedings under sequestration order should be stayed – where stay sought on basis of application made in 2021 for an extension of time in which to appeal final order made in 2017 – where no evidence of merit of proposed appeal – stay refused. Legislation: Bankruptcy Act 1966 (Cth) ss 32, 37, 40, 41, 43, 44, 52, 109
Federal Circuit and Family Court of Australia Act 2021 (Cth) s 256
Federal Circuit Court of Australia Act 1999 (Cth) s 104
Federal Court of Australia Act 1976 (Cth) ss 25, 31A
Taxation Administration Act 1953 (Cth) ss 14ZYA, 14ZZK, 14ZZM, 14ZZR, 255-5
Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth) rr 21.04, 25.04
Federal Circuit Court Rules 2001 (Cth) r 29.04Federal Court Rules 2011 (Cth) rr 36.08, 38.08
Cases cited: Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137
Bayne v Baillieu (1907) 5 CLR 64
Bechara v Bates (2021) 388 ALR 414
Boensch v Somerville Legal [2021] FCAFC 79
Cain v Whyte (1933) 48 CLR 639
Clyne v Deputy Commissioner of Taxation (1982) 45 ALR 323
Commissioner of Taxation v Bayeh (1999) 100 FCR 144
Commissioner of Taxation v Rigoli (2013) ATC ¶20–407
Commonwealth Bank of Australia v Doggett [2017] FCA 1176
Culleton v Balwyn Nominees Pty Ltd (2017) 343 ALR 632
Deputy Commissioner of Taxation v A & S Services Australia Pty Ltd (No 2) [2017] FCA 663
Deputy Commissioner of Taxation v A & S Services Australia Pty Ltd (2017) 12 BFRA 668
Deputy Commissioner of Taxation v Australian Machinery and Investment Co. Pty. Ltd (1945) 20 ALJR 326
Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd (2008) 237 CLR 473
Deputy Commissioner of Taxation v Cumins (2008) 6 ABC(NS) 12
Deputy Commissioner of Taxation v Whiteman [2017] FCA 951
Dimitriou v Pineview Property Holdings Pty Ltd [2019] FCA 2123
Emerson v Wreckair Pty Ltd(1992) 33 FCR 581
Endresz v Australian Security and Investments Commission (2015) 228 FCR 334
Kleinwort Benson Australia Pty Ltd v Crowl (1988) 165 CLR 71
Li v Wu [2020] FCA 776
Maddestra v Penfold Wines Pty Ltd (1993) 44 FCR 303
Quinn v O’Rourke, in the matter of O’Rourke (No 2) [2020] FCA 1156
Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132
Re Flatau: Ex Parte Scotch Whisky Distillers(1882) 22 QBD 83
Re Lewin: Ex Parte Milner(1986) 11 FCR 312
Re Sheldon; Ex parte Sun Alliance Australia Ltd [1989] FCA 373
Re Verma; Ex Parte Deputy Commissioner of Taxation (1984) 4 FCR 181
Rigoli v Commissioner of Taxation (2015) 96 ATR 19
Sarina v Council of the Shire of Wollondilly (1980) 43 FLR 163
Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372
Spencer v Lane Rowin Pty Ltd[2007] FCA 1519
Stratton v Bowles (No 2) (2015) 12 ABC(NS) 404
Trade World Enterprise Pty Ltd v Deputy Commissioner of Taxation (2006) 64 ATR 316
Verma, Virendra Kumar v Deputy Commissioner of Taxation [1983] FCA 388
Williams v Mortgage Ezy Australia Pty Ltd [2020] FCA 1567
Wilson v Official Trustee in Bankruptcy[1999] FCA 1760Wren v Mahony (1972) 126 CLR 212
Division: Division 2 General Federal Law Number of paragraphs: 85 Date of hearing: 7 October 2021 Counsel for the Applicant: Mr S. Linden Solicitor for the Applicant: Minter Ellison Respondent: In person ORDERS
MLG 1639 of 2020 IN THE MATTER OF PHILIP WHITEMAN
BETWEEN: DEPUTY COMMISSIONER OF TAXATION AND: PHILIP WHITEMAN ORDER MADE BY:
JUDGE A KELLY
DATE OF ORDER:
12 OCTOBER 2021
THE COURT ORDERS THAT:
1.Pursuant to ss 202-203 of the Federal Circuit and Family Court of Australia Act2021 (Cth), direct that the parties be allowed to appear and to make submissions before the Court by video and audio link.
2.The application for review filed on 13 September 2021 be dismissed.
3.The interlocutory application filed on 13 September 2021 be dismissed.
4.The order made on 3 September 2021 be affirmed.
5.Pursuant to ss 32, 51 and 109(1)(a) of the Bankruptcy Act 1966 (Cth), the applicant’s costs of and incidental to the applications be paid out of the respondent’s bankrupt estate.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE A KELLY
Introduction
These reasons for judgment explain why orders are made dismissing an application for review of a decision by a registrar who, on 3 September 2021, made an order for the sequestration of the respondent’s estate pursuant to s 52 of the Bankruptcy Act 1966 (Cth) (Act). Orders are also made refusing the debtor’s applications pursuant to s 52(3) of the Act and s 256(2) of the Federal Circuit and Family Court of Australia Act 2021 (Cth) (FC&FCA) for a stay of all proceedings under the sequestration order that has been made.
In summary, the applicant has adduced proof of the matters required by s 52(1) and so engaged the court’s power to make a sequestration order. No evidence has been adduced by the debtor, and I am not otherwise satisfied, of his solvency. The substantive issue relied upon by the debtor was whether the court should dismiss the petition pursuant to par 52(2)(b) of the Act for other sufficient cause. The court should not look behind a judgment obtained against the debtor on 18 August 2017 for a sum of $8,453,699.99 (judgment) upon which the petition was based and in this case should not otherwise exercise its discretion to dismiss the petition. The registrar’s order should be affirmed and the application dismissed. I am not persuaded the court should exercise its discretion to stay proceedings under the sequestration order.
Background
The debtor’s estate had previously been sequestrated for the period 2010-2013. In that period, the debtor lodged income tax returns for the financial years 2010, 2011 and 2012, in each case reporting income by way of salary and/or wages for sums less than $42,000.
The debtor thereafter failed to lodge returns or declare any income for the four financial years 2013-2016. In 2016, evidence was obtained by the Australian Taxation Office “during an access without notice” attendance on the debtor suggesting his personal living and household expenses were not consistent with his reported income. During this attendance a substantial quantity of records and documents were seized and evaluated by officers of the applicant.
On 30 March 2017, a decision entitled ‘Evasion Opinion’ was made by the ATO recording opinions including that the debtor and his tax agent had engaged in evasion of tax for the years 30 June 2010, 2011 and 2012; the debtor had acted as a de facto director of five corporations, three of which acted as trustees of certain trusts; the debtor had ultimate control of those corporations; the debtor had controlled those corporations including at times when he remained an undischarged bankrupt and had been disqualified from doing so.
On 31 March 2017, upon the basis of the Evasion Opinion, notices of default and amended assessments were issued to the debtor for each of the years 2010-2016. The debtor complains of the delivery of the notices of assessment and the amended assessments to an old address. Other evidence confirms the debtor was personally served with each of those documents in early 2017 and that shortly thereafter, further copies were provided to his lawyers.
On 3 April 2017, the applicant commenced six separate proceedings including against the debtor and certain corporations for the recovery of the tax debts comprised in the amended assessments. On that date, a justice of the Federal Court made a series of ex parte freezing orders together with orders for the appointment of provisional liquidators over certain corporations, three of which conducted either an accounting, advisory or legal practice.
On 27 April 2017, reasons for judgment were published in relation to those orders: Deputy Commissioner of Taxation v A & S Services Australia Pty Ltd (2017) 12 BFRA 668. Davies J was satisfied that such orders should be made and in doing so referred to settled principles that fraud or misconduct were significant factors relevant to an exercise of the court’s discretion to do so. Her Honour at [7] was satisfied the applicant had established a prima facie case for each of the following claims: the corporate defendants were systematically avoiding compliance with their taxation obligations; the corporate defendants were collectively operating a business of defrauding creditors involving phoenix activities for their clients; the corporate defendants were controlled by the debtor, who was the de facto director of each of them; other persons registered as directors were merely ‘puppets’; two of the corporate defendants were themselves phoenix companies. Davies, J at [8] was satisfied there was cogent evidence for those findings.
Her Honour at [9]-[13] examined the evidence in relation to the corporate defendants including that several had never lodged tax returns and that the registration of one defendant as a tax agent had been cancelled on 4 January 2016 for failing to act with honesty and integrity. Upon consideration of the matter, Davies J found that a substantial basis for the grant of relief was the pattern of systemic non-compliance with tax obligations coupled with an inference that the disregard of those obligations had been deliberate. Her Honour further found the evidence raised serious questions and strongly indicated the debtor had installed directors to the corporate defendants at a time when he was an undischarged bankrupt and was disqualified from managing corporations. Davies J was satisfied a prima facie case existed for finding that while the debtor was an undischarged bankrupt and disqualified from managing corporations he had controlled the affairs of a corporate defendant which carried on the business of an accountancy firm providing business advisory services. In other respects, her Honour regarded claims a particular corporate defendant conducted a phoenix operation had negligible support. Contrastingly, Davies J was satisfied of cogent evidence that the debtor, through an accounting and legal practice, had been involved in facilitating a phoenix operation for another company in relation to which numerous contraventions of the Corporations Act 2000 (Cth) had been identified in a report lodged with the Australian Securities & Investment Commission.
On 6 June 2017, two further parties were added to those proceedings, and further freezing orders made. On 13 June 2017, Davies J gave reasons for judgment in a ruling in which her Honour observed that the debtor’s legal representative had not opposed the freezing orders being extended against him until a directions hearing on 11 August 2017. Those freezing orders were later extended, again by consent, until further order.
On 14 June 2017, Davies J gave reasons for judgment for having made orders on 6 June 2017 to wind up each of the corporate defendants: Deputy Commissioner of Taxation v A & S Services Australia Pty Ltd (No 2) [2017] FCA 663.
Final judgment & stay
The applicant applied for summary judgment in the proceedings against the defendants, including the debtor upon the amended assessments.
On 10 August 2017, the debtor filed an interlocutory application seeking a stay of the proceeding, doing so on the basis of matters contained in an affidavit made by the debtor’s solicitor as follows: the applicant was aware the debtor was unable to pay the full amount of the liability under the amended assessments; the debtor’s solicitor reasonably expected if judgment was given the applicant would apply for the sequestration of his estate; a trustee appointed to the debtor’s estate would be unlikely to prosecute the debtor’s objections; if a trustee failed to adopt the action taken by the debtor of objecting to the assessments such action would be deemed abandoned. By an affidavit filed on 11 August 2017, the debtor deposed that his only asset in Australia was a motor vehicle with a value of $3,000.
On 11 August 2017, Davies J heard argument on the applications for summary judgment and a stay of the proceeding to which he was a party respectively, granting the first and refusing the second such application: Deputy Commissioner of Taxation v Whiteman [2017] FCA 951. Each of the parties was represented by senior counsel at that hearing.
On 18 August 2017, Davies J made orders that the debtor’s interlocutory application be dismissed and summary judgment was given against him in the sum of $8,453,699.99 together with the costs of the proceeding. In providing reasons, her Honour observed the debtor had not filed a defence but only sought a stay of the proceeding, alternatively, of execution should judgment be entered. Davies J set out the principles applicable to a stay and at [10] held:
The principles reflect and give weight to the scheme of the taxation legislation under which tax liabilities may be sued for, and recovered by the DCT, as debts due to the Commonwealth and payable to the Commissioner of Taxation, notwithstanding that the imposition of the tax liabilities may be contested by the taxpayer in Part IVC proceedings in the Administrative Appeals Tribunal or Federal Court. The pendency of Part IVC proceedings in either the Administrative Appeals Tribunal or Federal Court does not, in the meantime, interfere with, or affect, the tax decision under challenge in such proceedings and the tax imposed may be recovered as if no review or appeal were pending: s 255-5 of schedule 1 to the TAA; ss 14ZZM and 14ZZR of the TAA. As the High Court observed in Deputy Commissioner of Taxation v Broadbeach Properties Pty Ltd [2008] HCA 41 at [44], harsh though the operation of these provisions may be, the provisions implement a long‑standing legislative policy to protect the interests of the revenue: see also Deputy Commissioner of Taxation v Australian Machinery and Investment Co. Pty. Ltd (1945) 20 ALJR 326; 47 WALR 9; 8 ATD 133.
Davies J considered evidence of the debtor’s financial position fell far short of what would be required to satisfy the court he did not have the capacity to satisfy the judgment if it was enforced against him: [16]. One of the factors taken into account by her Honour in reaching that conclusion was that virtually no weight should be attached to the affidavit made by the debtor’s solicitor referred to above, particularly in the circumstances that the debtor himself had failed to comply with terms of the freezing orders which required him to make an affidavit disclosing all of his Australian assets within 10 days of service of that order. Davies J regarded the disclosure made on the date of the hearing by the filing of an affidavit as not providing any explanation for his earlier failure to comply with an order to do so. Upon findings that there had been a deliberate lack of financial disclosure, her Honour applied settled principles that the mere imposition of an obligation to pay tax did not constitute hardship: [2017] FCA 951, [16].
For those reasons, Davies J held the debtor’s intention to contest his liability through the Pt IVC process before the Administrative Appeals Tribunal was not a weighty consideration in favour of granting a stay observing at [17] “the tax is payable and recoverable by the DCT notwithstanding that Mr Whiteman may dispute the tax liability through the Part IVC process and even if Mr Whiteman may have, or might genuinely believe that he has, a good case on the merits that the tax assessed is excessive, the authorities make it plain that this is not of itself sufficient reason to justify a grant of a stay, having regard to the clear legislative policy manifested in ss 14ZZM and 14ZZR of the TAA” (citations omitted).
The debtor did not appeal from the judgment and orders of Davies J in 2017. Contextually, while the debtor may have opposed the application for summary judgment, it appears the burden of his application was to secure a stay pending the determination of his application for a merits review before the Tribunal. Until the eve of the present application, no other application was made in relation to the orders made on 18 August 2017. In the course of submissions, the debtor informed the court that he had lodged documents which had been accepted by the Federal Court on 13 September 2021 seeking an extension of time within which to appeal the orders and judgment given on 18 August 2017.
By his affidavit of 10 September 2021, and before me, the debtor made complaints which, in substance, involved a collateral attack upon the findings and decision of Davies J pursuant to which the judgment was given against him. Save for the belated application in 2021 for an extension of time in which to appeal from her Honour’s decision, the complaint is without force. If and insofar as an application for an extension for time has been made, that is for the debtor to address in the Federal Court.
For the purposes of par 41(1)(g) of the Act, Davies J order is a final judgment: Act, s 40(3).
Objections
On about 31 March 2019, the debtor lodged objections in respect of all years of income from 1 July 2009 to 30 June 2016 and against each of the notices and amended assessments issued on 31 March 2017. On 10 May 2019, the applicant notified the debtor his objections were invalid. In the event, the applicant would later determine to consider the debtor’s objections.
On 8 September 2020, the debtor filed an application with the Administrative Appeals Tribunal (Tribunal) seeking to challenge the amended assessments. The application was dismissed by the Tribunal on the basis that it had no jurisdiction to conduct the review.
Next, on 25 September 2020, the debtor sought to invoke s 14ZYA of the TAA requiring the applicant to make an objection decision in accordance with the provisions of that Act. On 14 December 2020, the debtor supported his s 14ZYA request by extensive submissions.
On 15 January 2021, the applicant made a decision on the s 14ZYA request and in doing so approved the debtor’s application for more time in which to lodge his objections, however, the applicant’s decision was that each of the objections not be allowed. On the same date, the applicant furnished the debtor with a detailed statement of its reasons for those decisions.
On 22 January 2021, the debtor again applied to the Tribunal, on this occasion seeking a merits review of the decisions not to allow his objections against the amended assessments. The applicant was notified by the Tribunal on 8 April 2021 of this application.
An affidavit was made by a solicitor on behalf of the applicant giving a procedural history of the application before the Tribunal from its inception to the period 1 October 2021. By that affidavit, the deponent explained the means by which the applicant had facilitated access by the debtor, by electronic means, to documents considered to be material to the application for review and as required by s 37 of the Administrative Appeals Tribunal Act 1975 (Cth) (T documents). Upon the evidence of this deponent there are at least 115 T documents comprising 3611 pages and a supplementary bundle of T documents comprising a further 80 pages.
The debtor submitted he had experienced repeated difficulties in obtaining access to the T documents. The evidence satisfies me the debtor has been added to a file sharing application granting him access to the T documents in May 2021. Further, the evidence confirms that since July 2021, the debtor’s tax lawyer acting in the proceeding before the Tribunal has been in active dialogue with the applicant’s lawyer respecting the production of further documents. The matters addressed by the debtor’s lawyer with the applicant’s lawyer in relation to the application before the Tribunal in the early part of 2021 were reiterated by the debtor in an affidavit made on 10 September 2021, however, in the absence of more cogent evidence I am not prepared to infer the ongoing production of documents has not been addressed.
The debtor’s application before the Tribunal has not been determined. However, by his affidavit made on 10 September 2021 in this proceeding, the debtor deposes that he has now submitted his witness statement and supporting documents to the Tribunal.
Procedural history
On 10 October 2018, bankruptcy notice BN230015 was issued by the Official Receiver. By an order made on 4 October 2019, substituted service of the notice was permitted and, pursuant to the service of that order, the notice was deemed served on 29 October 2019.
There is no evidence of any application to set aside that notice.
The debtor failed to comply with the bankruptcy notice and thereby, on 19 November 2019, he committed an act of bankruptcy.
One condition against the presentation of a creditor’s petition is that the act of bankruptcy upon which the petition was founded “was committed within six months before the presentation of the petition.” As noted, on 19 May 2020, the applicant presented the petition.
The applicant’s petition for the sequestration of the debtor’s estate was grounded upon the commission of an act of bankruptcy arising from his failure to comply with the bankruptcy notice. An order for substituted service of the petition was also made and the petition was deemed served on 19 December 2020.
In this proceeding also, solicitors have filed a notice of appearance on behalf of the debtor. Over the period 4 February – 19 August 2021, those solicitors have filed or made applications to adjourn the hearing of the petition, which applications have been supported by several affidavits. In one such affidavit made by the debtor’s solicitor on 15 July 2021 he exhibited two documents, the first being a letter dated 14 July 2021 from a psychiatrist addressed “To Whom It May Concern” supporting the debtor’s application to adjourn the hearing of the petition and otherwise stating, upon an assessment made on that date, the psychiatrist considered the debtor “has anxiety and stress in relation to life stresses and has had difficulty preparing the case due in the Federal Court on the 15th July 2021.” The second document, which took the form of a chronology, described the debtor’s life history in a narrative form but the matters contained in it were not otherwise proved.
The debtor has made affidavits on 5 March, 15 March and 10 September 2021. There was substance in the applicant’s objection that much of that stated in the affidavits took the form of submissions and expressed opinions he was not able to proffer and which had been expressed in conclusory terms rather than providing direct evidence of material facts.
The parties were legally represented at the adjourned hearing of the petition before the registrar on 3 September 2021. No submission as to solvency was made by the debtor’s representative. Although the debtor faintly avowed his solvency before me, there is no evidence of it.
On 14 April 2021, the debtor filed a notice of his grounds of objection by which he relied upon and adopted the matters in his affidavits made on 5 March on 16 March 2021 including the medical evidence and other exhibits thereto and stated that he sought to adjourn the petition pending the hearing and determination of his application before the Tribunal.
On 29 April 2021, an order was made extending the life of the petition for 24 months from the date of presentation.
An order for the sequestration of the debtor’s estate was made on 3 September 2021 and a further order made which stayed the operation of that order for seven days: Act, s 52(3).
On 13 September 2021, the debtor filed his application for review, doing so pursuant to s 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth) and sought orders: to set aside the registrar’s order; to allow proper time for the Tribunal “to complete its decision in that proceeding under s 52(3)”, and; seeking a stay of execution from this court pending an appeal to the Federal Court pursuant to r 36.08(2) of the Federal Court Rules 2011 (Cth).
On the same date, the debtor filed an interim application seeking relief which mirrored that sought by the application for review.
The application was listed for directions on 4 October 2021. On that date, the debtor was represented by counsel who alluded to her recent retainer in the matter. As the court is required by the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (General Federal Law Rules) to list an application for review as soon as possible, the application was adjourned for final hearing on 7 October 2021. On that date, the debtor was self-represented before me and in those circumstances I have examined the materials as filed and reflected upon the parties’ submissions in light of that consideration.
As leave is required to receive further evidence on an application for review: General Federal Law Rules, r 21.04(2)(b). I enquired of Counsel for the applicant whether the grant of leave for the debtor to reply upon his affidavit made on 10 September 2021 was opposed or consented to. The applicant did not oppose the grant of leave and leave was granted.
Affidavits of search and debt have been filed at various intervals throughout the proceeding including on the date preceding the hearings before the registrar and on 7 October 2021. In the circumstance that the current pandemic impeded the parties’ ability to work from their place of employ and their presence at court at this hearing, leave was granted to the applicant to rely upon those affidavits on the basis that they would be sworn and witnessed. This has occurred.
Amendment of application
On 6 October 2021, the debtor transmitted an amended application to chambers requesting that he have leave to file it. The debtor was informed it should make that application in court. For reasons which were not explored or explained, the proposed amended application had not served been on the applicant.
Several amendments were sought by the proposed amended application.
First, the debtor sought to abandon the application for review of the exercise of power by the registrar “pursuant to s 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth)” (now see s 256 of the FC&FCA). The application was refused on the basis I considered this was inimical to the debtor’s objects in pursuing the application. Before me, the debtor suggested he had received advice the prospects of success in this application grounded upon his pending application for merits review before the Tribunal had minimal prospects of success and he would for that reason be better advised to seek a stay, however, the scope and extent of the stay was not articulated. On the assumption the debtor was seeking to stay proceedings under the sequestration order this was separately addressed.
Secondly, the debtor sought to amend the application by adding an application for a stay pursuant to r 29.04 of the Federal Circuit Court Rules 2001 (see now General Federal Law Rules, r 25.04). Having gained some appreciation of the object sought to be achieved by the debtor in amending his application, leave is granted to seek an order pursuant to s 52(3) of the Act for a stay of all proceedings under the sequestration order as made on 3 September 2021 or upon the application for review.
Thirdly, the debtor also sought to abandon the application “To allow proper time for the application [and for the Tribunal] to complete its decision in that proceeding under s 52(3).” For the reasons above, I considered that application should be refused.
Fourthly, an amendment to the application was sought so as to “allow proper time for” the “Federal Court Appeal to rehear the decision of Justice Davies on 8 August 2017, application number VID 326/2017 to have the judgment set aside and the proceeding reheard, which is currently before the Federal Court, application number VID 465/2021 pursuant to s25 of the Federal Court of Australia Act 1975.” While the case for refusal might have been strong, as explained to the parties in the course of the hearing, I considered it to be in their interests and in the interests of finality to allow the debtor to pursue this application.
Review of registrar’s order
There was no dispute as to the applicable principles and that the court is required to hear afresh the application which was before the registrar and upon which power was exercised.
It is not a requirement upon the application for review that error must be demonstrated in the process adopted, or decision made, by the registrar. The right of review is an imperative requirement for the delegation of power to a registrar such that the validity of a decision made by a registrar is secured by the guaranteed constitutional entitlement to obtain review by a judge of the Court: Bechara v Bates (2021) 388 ALR 414.
Since the review is a hearing de novo, the party with the carriage of the application before the registrar has the carriage of the application for review. In the case of an application for review of an order made by a registrar for the sequestration of a debtor’s estate, the creditor has the carriage and onus of satisfying the Court of the matters required by s 52 of the Act. By contrast, a debtor seeking the stay of proceedings made under a sequestration order has the burden of persuading the court afresh of his or her entitlement to relief of that kind.
Although the proposed amended application contemplated the debtor would abandon his application for a review of the exercise of power by the registrar in making the sequestration order pursuant to s 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth), I decided it was preferable, in the interests of the administration of justice, to refuse that amendment.
Sequestration of a debtor’s estate
Part IV of the Act, which concerns the subject, Proceedings in connexion with bankruptcy, is arranged in six divisions and comprises 40 – 76B. Within Div 1, Acts of bankruptcy, relevantly ss 40-41 concern the topics, Acts of bankruptcy and Bankruptcy notices. Within Div 2, s 43 confers jurisdiction to make sequestration orders while s 44 identifies the conditions on which a creditor may petition. Section 52 addresses proceedings and orders on a creditor’s petition.
The Act does not rest upon any policy whereby a creditor should be entitled to a sequestration order against the estate of a recalcitrant, but solvent, debtor. The centrality of solvency in the law of bankruptcy bears several aspects. In light of the quasi-criminal nature of the proceeding, it recognises the public interest directed to sequestration orders not being made against the estate of persons who are solvent. One aspect of the public interest arises from the critical importance of recognising that the interests of creditors (other than the petitioner), of being paid in full should not be prejudiced by the making of a sequestration order that should not be made. A corollary of that public interest is the due administration of an insolvent estate for the general body of existing and potential creditors. Delay is inimical to proper administration. Importantly, an order for the sequestration of a person’s estate effects a change in the debtor’s status and has the significant personal consequences that this entails: Wren v Mahony (1972) 126 CLR 212, 223-225; Kleinwort Benson Australia Pty Ltd v Crowl (1988) 165 CLR 71, 82; Sarina v Council of the Shire of Wollondilly (1980) 43 FLR 163, 165-166; Sarina v Council of the Shire of Wollondilly (1980) 48 FLR 372, 376-377; Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137, 148; Culleton v Balwyn Nominees Pty Ltd (2017) 343 ALR 632, [40]-[46], [55]; Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132, [55]; Bechara v Bates [2021] FCAFC 34; Boensch v Somerville Legal [2021] FCAFC 79, [85]-[88]. In Boensch, the Full Court considered the obligations owed towards self-represented litigants in bankruptcy proceedings. The de novo hearing in this proceeding was conducted with those principles very much in mind.
I adopt the submissions of counsel for the applicant who relied upon the reasoning of Gilmour J in Deputy Commissioner of Taxation v Cumins (2008) 6 ABC(NS) 12, [14]-[18] and [64]:
On proof of the matters mentioned in s 52(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) a petitioning creditor has a prima facie right to the making of a sequestration order and the Court will proceed to make a sequestration order unless the Court is satisfied that for other sufficient cause a sequestration order should not be made: s 52(2)(b) of the Act; Cain v Whyte (1933) 48 CLR 639 at 646. The onus is on the respondent debtor to demonstrate “sufficient cause”: Commissioner of Taxation v Bayeh (1999) 100 FCR 144 at [12]
Section 52(2)(b) of the Bankruptcy Act 1966 (Cth) is wide enough to entitle the Court, in a proper case, to adjourn or dismiss a petition in the exercise of its discretion, where the debtor demonstrates a genuine dispute as to the liability to pay the debt: Re Verma; Ex Parte Deputy Commissioner of Taxation (1984) 4 FCR 181 at 185 and 187. This power is discretionary: Clyne v Deputy Commissioner of Taxation (1982) 45 ALR 323 at 328.
The Court is entitled to inquire whether a judgment is founded on a real debt. In general, a court exercising jurisdiction should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings, provided that the appeal is based on genuine and arguable grounds: Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148; Bayne v Baillieu (1907) 5 CLR 64.
The mere fact that an appeal has been lodged does not without more, give rise to a duty to postpone the hearing of the petition: in Re Flatau: Ex Parte Scotch Whisky Distillers (1882) 22 QBD 83 (CA) at 84-85; nor will the court as a matter of course inquire into the validity of a judgment debt: Wren v Mahony (1972) 126 CLR 212 at 222-223.
The test to be applied has been described variously. The judgment debtor must point to grounds having “a real chance of success on appeal”: Re Lewin: Ex Parte Milner (1986) 11 FCR 312 at 318; or ensure “that substantial reasons are given for questioning” whether there was in truth a debt: Wren 126 CLR 212 at 225. It is not enough to rely upon mere assertion. The onus is on the applicant for a stay to show the existence of a genuine dispute by adducing evidence establishing the substantial nature of the grounds of challenge: Verma, Virendra Kumar v Deputy Commissioner of Taxation [1983] FCA 388 referred to with approval in Re Verma 4 FCR 181 at 187.
. . . .
Furthermore the Court should not go behind a judgment debt where to do so would, if the debtor’s objections be successful, only support a finding that the debt be reduced but would still leave an amount in excess of the amount on which a creditor may petition. The reduction will only be relevant if the amount contained in the bankruptcy notice would be reduced to an amount below the minimum amount that supports a petition. In the present case, even if the AAT proceedings were successful, there would remain an amount owing on which the applicant may petition: Emerson v Wreckair Pty Ltd (1992) 33 FCR 581 at 589; Wilson v Official Trustee in Bankruptcy [1999] FCA 1760; Spencer v Lane Rowin Pty Ltd [2007] FCA 1519 at [21]-[24].
See also Stratton v Bowles (No 2) (2015) 12 ABC(NS) 404, [27]-[37]; Endresz v Australian Security and Investments Commission (2015) 228 FCR 334, [36]-[37] (Edmonds, Gordon and Beach JJ). I note that in Endresz, the Full Court held at [38], that the question whether a petition should be dismissed arises under s 52(2), while the exercise of power for it to be adjourned separately arises under s 33(1). While the considerations which may relevant to the exercise of power to dismiss or adjourn a petition will overlap, it may be appropriate to consider a broader range of matters in the exercise of power under s 33(1): Williams v Mortgage Ezy Australia Pty Ltd [2020] FCA 1567, [27] (Jackson J).
Upon the evidence, I was satisfied by the applicant of the matters of which proof is required by 52(1). No submission to the contrary was made by the debtor. Upon being so satisfied, the applicant established a prima facie entitlement to the making of a sequestration order: Cain v White (1933) 48 CLR 639, 646.
Other sufficient cause
Though satisfied of the proof of such matters, the court may nonetheless dismiss a petition where it has been satisfied by the debtor that he or she is able to pay his or her debts or that for other sufficient cause a sequestration ought not to be made: Act, s 52(2).
As noted, the debtor made some submissions being generally assertive of his solvency, there was no evidence upon which a finding to that effect could be made.
The substantive question posed for determination in the present application was whether for other sufficient cause a sequestration order ought not be made. In support of the submissions against the making of such an order, the debtor contended the evidence was sufficient to support a conclusion (for the purposes of the exercise of the bankruptcy jurisdiction), to look behind the judgment, in the circumstance that his merits review of the decision by the applicant to reject his objections to the assessment was pending before the Tribunal.
Underlying the submission a court should go behind a judgment is that an essential element of proof for the engagement of power to make a sequestration order is the fact that the debt on which the creditor relies is owing: Act, par 52(1)(c); Ramsay Health Care (2017) 261 CLR 132, [39]. An allied concern reflected in well-settled principles is the critical importance to the Bankruptcy Court that the interests of persons who are not parties to a proceeding are not prejudiced by the making of a sequestration order granted on a judgment debt that does not reflect the true indebtedness of the debtor to the petitioning creditor: Ramsay Health Care (2017) 261 CLR 132, [55]-[64]. The debt must be truly owing.
The applicant drew to the court’s attention Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132. In the conduct of this de novo review, I examined the judgment given against the debtor establishing his liability upon the amended assessments in light of all of the facts and circumstances described above. In contrast with some of the principles addressed in Ramsay Health Care, the present case is to be distinguished from those in which a judgment was obtained by default or consent or in other circumstances shown by the evidence to warrant particular scrutiny: (2017) 261 CLR 132, [35], [43]-[44], [50], [54], [67], [69]-[70], [87].
The reason to consider the facts and circumstances in which the judgment was given against the debtor in this case is that “a Bankruptcy Court is concerned with whether the debt on which it is based is truly a basis for the making of a sequestration order”: (2017) 261 CLR 132, [54].
It is inappropriate to catalogue or circumscribe the infinitely variable circumstances which may constitute “other sufficient cause”: Stratton v Bowles (No 2) (2015) 12 ABC(NS) 404, [27]. The breadth of the discretion conferred by s 52(2) and the correlative duty upon a Bankruptcy Court to examine the circumstances of a case to consider whether, for other sufficient cause, a petition should be dismissed, is well established: see Commonwealth Bank of Australia v Doggett [2017] FCA 1176, [31]-[32]; Ramsay Health Care (2017) 261 CLR 132, [68], [110]. If a sufficient other cause is shown, this merely engages the discretion to dismiss the petition.
In Stratton, Beach J held that since the power to make a sequestration order was expressed in permissive, not mandatory, terms in the circumstance that a debtor had demonstrated the existence of some other sufficient cause within the meaning of par 52(2)(b) “does not entitle him or her to have a sequestration order refused” [2015] FCA 43, [27]-[30]. The reasoning in Stratton was recently endorsed in Li v Wu [2020] FCA 776, [96(g)].
In the present case, there is no reason to look upon the judgment obtained against the debtor with suspicion as the court may do where a judgment has been obtained by consent or default. Here, the judgment was not obtained after the fully contested hearing but upon an application for summary judgment. This places the judgment at a mid-point on the spectrum between those cases where a debtor’s liability has been determined upon a fully contested hearing and those in which judgment has been secured by default or upon a compromise. As the reasons of Davies J confirm, by force of s 31A(3) of the Federal Court of Australia Act 1976 (Cth), a defence need not be hopeless or bound to fail for it to have no reasonable prospect of success. By extension, the concern informing the exercise of power by a Bankruptcy Court in the consideration whether it is appropriate to look behind a judgment; namely, whether the debt upon which the petition is based is truly a basis for the making of a sequestration order, in the circumstances where a creditor has obtained summary judgment is to be addressed with acceptance that s 31A(3) above authorises the court to grant judgment where it is concluded the defence has no reasonable prospect of success.
In my view, in addressing the concern whether the debt in this case is truly a basis for the making of a sequestration order, a significant consideration is that the debtor did not file a defence at all: [2017] FCA 951, [2]. Upon the principles stated by Davies J and as applied to the facts as analysed at [1]-[8], I am not satisfied for the purposes of the exercise of bankruptcy jurisdiction there is any, or any, sufficient reason to go behind the judgment. Nothing in that conclusion should be misunderstood as holding where summary judgment has been granted, the unique facts and circumstances of a particular case might not justify a Bankruptcy Court in going behind the judgment in deciding to dismiss or stay a petition. As the authorities illustrate, in an appropriate case the court may go behind the judgment of its own motion: Ramsay Health Care (2017) 261 CLR 132, [41]. In exceptional circumstances it may do so notwithstanding there has been a fully contested hearing that led to the entry of a final judgment.
As the reasons of Davies J confirm, an amount of a “tax-related liability” that is due and payable is a debt due to the Commonwealth and payable to the applicant. A tax-related liability is identified for the purposes of the TAA as a pecuniary liability to the Commonwealth. In granting summary judgment, her Honour accepted the evidentiary certificates produced on the application for summary judgment as prima facie evidence that the sum sued for was a debt due and payable by the applicant to the Commonwealth: [2017] FCA 951, [4]-[8].
Contextually, the failure to institute any appeal from that final judgment but to file, on about 13 September 2021 as I was told, an application for an extension of time to appeal fortifies me in the conclusion that the debt, the applicant’s liability for which is established by the judgment, is a proper basis for the making of a sequestration order.
While the debtor deposed to a diagnosis made in 2015 of his suffering an attention deficit hyperactivity disorder, in submissions before me he stated he had recovered from his illnesses. The debtor exhibited a number of other medical reports which I have considered. The most detailed account of the debtor’s medical history, diagnoses, attendant difficulties and prognoses are detailed in the report of a psychiatrist whom he had attended on three occasions as at February 2021. Those reports were supplemented by an extensive array of narratives and text messages many of which spoke to the difficulties which the debtor has experienced including in his ongoing family law proceedings (which includes proceedings transferred by the Federal Court in relation to claims respecting the debtor’s beneficial interests in the assets and interests of certain corporations). I have reflected upon the opinion of that psychiatrist as expressed in the report dated 12 February 2021 (at the final page of the 5 March 2021 affidavit).
The debtor also deposed in extensive terms to the manner in which records, documents and computerised information had been seized from him and that his inability to obtain access to the information in those records prevented him from adducing more cogent evidence for the purposes of opposing the petition. Contextually, I note the “access without notice” attendance upon the debtor occurred in 2016 and that he has frequently been represented throughout the various proceedings which have occurred in the period 2016 – 2021. Other parts of the debtor’s affidavits, in particular that made on 5 March 2021 rehearsed the totality of the parties’ dealings in the period since 2016. In this affidavit, the debtor address the subject AAT Appeal at [98]-[106]. I note at [105] of that affidavit the debtor disclosed advice obtained from his ‘tax lawyer’ that to be successful in that appeal he would “need to ‘positively show what [my] taxable income was for each year taking into account all [my] living circumstances.’”
Otherwise, I accept the submission of Counsel for the applicant that in the hearing and determination of his application before the Tribunal for the review of the objection decision, the debtor is confined to the ground stated in his taxation objection and bears the burden, relevantly, of proving that the assessment is excessive or otherwise incorrect and what the assessment should have been: TAA, s 14ZZK; Commissioner of Taxation v Rigoli (2013) ATC ¶20–407, [10] (Pagone J); Rigoli v Commissioner of Taxation (2015) 96 ATR 19, [20], [31]. The debtor submitted he had filed the application for an extension of time in which to appeal because of advice obtained that he had negligible prospects of discharging that burden of proof in his application before the Tribunal. Indeed, his evidence, such as it was had been expressed in argumentative or conclusory terms and providing opinions he was not able to provide or which, in any event, had not been supported by direct evidence of the matters necessary for those opinions to be made out. If it was assumed in the debtor’s favour that he was able to discharge the burden before the Tribunal that the several amended assessments were excessive, I accept there is no rational basis for a conclusion his tax liability would be less than the statutory threshold of $20,000 upon which the petition could be presented. Again, upon the debtor’s evidence and submissions above, he has known since at least May 2021 that he would need to positively show what his taxable income was for each relevant year. No attempt has been made to adduce this evidence for the purposes of this application. Absent such proof, the applicant could not demonstrate the amended assessments were excessive: TAA, s 14ZZK. The supposed merit of the application to the Tribunal has accordingly not been made out for the distinct purpose of demonstrating whether for other sufficient cause the petition should be dismissed pursuant to par 52(2)(b) of the Act. Further, no attempt was made to demonstrate the supposed merit of the application for an extension of time in which to appeal from the orders of Davies J made in 2017 or the merit of any grounds of appeal.
Discretionary considerations also militate against a conclusion the court should exercise its discretion, or that there is other sufficient cause, not to make a sequestration order. Included amongst those considerations is that provisions such as ss 14ZZM and 14ZZR of the TAA are grounded upon a clear legislative policy in favour of the revenue against the taxpayer: Ahern Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137, 148 (Davies, Lockhart and Neaves JJ); Trade World Enterprise Pty Ltd v Deputy Commissioner of Taxation (2006) 64 ATR 316, [19]-[21], (Nettle JA, Redlich JA agreeing).
As I understood it, the applicant submitted that the importance of those policy considerations was magnified in cases where findings have been made that a taxpayer has been found to have conspired with others to achieve an illegal purpose. Reliance was placed upon Re Sheldon; Ex parte Sun Alliance Australia Ltd [1989] FCA 373, [7]. There Fisher J had regard to the plaintiff’s alleged illegality of purpose in seeking to recover insurance monies in consequence of a fire that had been deliberately lit and destroyed property. The case may be somewhat illustrative but does not identify a principle as applying in a revenue or insolvency context. Upon the facts of this case I am not prepared to act on that principle or statement.
The reasons for judgment given by Davies J in the 2017 proceedings were based upon evidence adduced for the purposes of an ex parte application and also on the application for summary judgment; equally, it is not irrelevant that the debtor did not seek to test that evidence (all of which appears to have been based upon contemporaneous documentary or other records obtained from the debtor as a consequence of the applicant’s “access without notice” attendance on his offices). Equally, I have not ignored that the debtor did not file any evidence in opposition to the relief sought in the proceedings, consented on at least two occasions to the freezing orders being extended, filed no defence, seemingly did not oppose the application for summary judgment and instead sought a stay. Further, while Davies J considered there was negligible evidence for one of the claims put forward by the applicant in seeking ex parte relief, her Honour was generally satisfied there was cogent evidence for the findings made when appointing provisional liquidators and granting freezing orders, including the findings made against the debtor respecting his role as a de facto director and his control of the corporations that her Honour found had been deployed in the extensive phoenix activities which collectively resulted in the extensive evasion of tax liabilities over a prolonged period.
Upon the evidence and submissions made on this review I am not satisfied by the debtor there exists other sufficient cause why the petition should be dismissed. To the contrary, the evidence persuades me the applicant’s prima facie entitlement to relief is not displaced. Had I been persuaded other sufficient cause was shown, I would not have exercised the discretion conferred by s 52(2) to dismiss the petition. For the reasons above, the application for review of the exercise of power by the registrar to make the sequestration order should be dismissed. Conformably with settled practice, the registrar’s order should be affirmed: Bechara v Bates.
Stay of proceedings under sequestration order
As detailed above, pursuant to his amended application, the debtor sought relief by way of a stay of proceedings under the sequestration order, whether as made by the registrar, or affirmed by this court on review, doing so pursuant to r 29.04 of the Federal Circuit Court Rules 2001 (Cth), s 52(3) of the Act and further, under r 38.08(2) of the Federal Court Rules 2011 (Cth).
The form of stays sought by the debtor were not well conceived. As Beach J observed in Endresz at [8]-[10], it is inapposite to speak of a stay of a sequestration order. A debtor becomes a bankrupt immediately upon the making of the order, the making of which effects a change of the status in that person with the result that his or her property immediately vests in the trustee who has been appointed: Endresz, [8]; Chang v Haughton, in the matter of Haughton (No 2) [2021] FCA 998, [33]; Quinn v O’Rourke, in the matter of O’Rourke (No 2) [2020] FCA 1156, [7]; Dimitriou v Pineview Property Holdings Pty Ltd [2019] FCA 2123, [5]. As the authorities suggest, an application for a stay of a sequestration order is ‘conceptually incoherent’. The court has no power to suspend the operation of a sequestration order: Act, par 37(2)(a). The power it does possess is of a limited and different kind: Act, s 52(3).
The applicant conceded in all the circumstances that an application for a stay of the kind permitted by s 52(3) was available to be sought as an incident of an application for review of the exercise of power by a registrar in making a sequestration order: cf Endresz at [11]. For the reasons identified by Beach J in Endresz, so here, difficulties in the identification of the proceedings in the present case include that it was only in 2021 that the debtor made application for an application of extension of time within which to appeal the orders of Davies J. Absent the grant of an extension of time, any rights of appeal which may inhere in the debtor are at best hypothetical unless and until such an extension be granted. Moreover, in the circumstance where the debtor did not file a defence but advanced an application for a stay of the underlying proceedings in answer to the application for summary judgment, it is more than difficult to conceive the debtor has any arguable point on the proposed appeal or that it has any rational prospect of success and further that the balance of convenience would favour the grant of a stay where many years have elapsed since the final judgment was given: Endresz at [13]-[16].
It may be accepted that if collateral litigation is well advanced and likely to bring a beneficial result to a debtor, in the circumstances of a particular case there may be good cause for an order not to be made: Williams v Mortgage Ezy Australia Pty Ltd [2020] FCA 1567, [27] (Jackson J), citing Maddestra v Penfold Wines Pty Ltd (1993) 44 FCR 303, 309 (Lee J).
Although the application before the Tribunal might generously be described as ‘well advanced’ for the reasons above and as was tacitly conceded by the debtor in applying to amend the relief being sought by his application for review, the evidence on this application does not support a conclusion that the amended assessments are excessive or otherwise incorrect or what the true assessments should have been. It was for those reasons the applicant instead sought his stay on the basis of his proposed application before the Federal Court for an extension of time in which to appeal the judgment and orders of Davies J made in 2017. It cannot be said on any view that any collateral litigation by way of appeal is near well advanced or likely to bring a beneficial result to the debtor. Nor is there good cause in all the circumstances to grant a stay.
Insofar as application is made to this court for a stay pending the hearing and determination of an appeal pursuant to r 36.08(2) of the Federal Court Rules 2011 (Cth), it is misconceived. There is no such appeal and on assumptions the intended application was to seek a stay pending determination of the debtor’s application to the Federal Court for an extension of time in which to appeal the 2017 judgment and that the rule confers power on this court to grant such a stay, for the reasons above the court should not exercise its discretion to do so.
The applications for a stay are refused.
Conclusion
For the reasons I have given, each of the application for review of the registrar’s power in making a sequestration order against the debtor’s estate and the interlocutory application in which he pursued the same relief, including for a stay, should be dismissed with costs.
I certify that the preceding eighty-five (85) numbered paragraphs are a true copy of the Reasons for Judgment of Judge A Kelly. Associate:
Dated: 12 October 2021