Janezic v Official Receiver and Anor and; Davidson v Official Receiver and Anor
[2020] FCCA 1153
•14 May 2020
FEDERAL CIRCUIT COURT OF AUSTRALIA
| JANEZIC v OFFICIAL RECEIVER & ANOR and DAVIDSON v OFFICIAL RECEIVER & ANOR | [2020] FCCA 1153 |
| Catchwords: BANKRUPTCY – Transactions void against trustee – operation of s.139ZQ of the Bankruptcy Act 1966 (Cth) – whether expiration of time limit to bring action under s.120 precludes reliance upon s.139zq Notice – summary judgment application dismissed. |
| Legislation: Bankruptcy Act 1966 (Cth), ss.5, 55, 58, 115, 120, 127, 129, 139wa, 139zk, 139zq, 139zs, 139zib, 139zida, 184 |
| Cases cited: Halse, as trustee of the property of Payne v Norton [1997] FCA 673 |
| First Applicant: | BORIS JANEZIC |
| First Respondent: | OFFICIAL RECEIVER |
| Second Respondent: | PHILLIP NEWMAN AS TRUSTEE OF THE BANKRUPT ESTATE OF WILLIAM STEPHEN VLAHOS |
| File Number: | MLG 315 of 2020 |
| First Applicant: | SAM DAVIDSON |
| First Respondent: | OFFICIAL RECEIVER |
| Second Respondent: | PHILLIP NEWMAN AS TRUSTEE OF THE BANKRUPT ESTATE OF WILLIAM STEPHEN VLAHOS |
| File Number: | MLG 319 of 2020 |
| Judgment of: | Judge Riethmuller |
| Hearing date: | 14 April 2020 |
| Date of Last Submission: | 14 April 2020 |
| Delivered at: | Melbourne |
| Delivered on: | 14 May 2020 |
REPRESENTATION
| Counsel for the Applicant in proceedings MLG315/2020: | Mr Connor |
| Solicitors for the Applicant in proceedings MLG315/2020: | Tony Hargreaves & Partners |
| Counsel for the Applicant in proceedings MLG319/2020: | Mr Agardy |
| Solicitors for the Applicant in proceedings MLG319/2020: | Comlaw Barristers & Solicitors |
| Counsel for the First Respondent in proceedings MLG315/2020 and proceedings MLG319/2020: | Ms Slocum |
| Solicitors for the First Respondent in proceedings MLG315/2020 and proceedings MLG319/2020: | Colin Biggers & Paisley |
| Counsel for the Second Respondent in proceedings MLG315/2020 and proceedings MLG319/2020: | Mr Galvin QC and Mr Fenwick |
| Solicitors for the Second Respondent in proceedings MLG315/2020 and proceedings MLG319/2020: | Nicholas O'Donohue & Co |
ORDERS
IN PROCEEDINGS MLG315 of 2020
The Applicant’s application for summary judgment be dismissed.
IN PROCEEDINGS MLG319 of 2020
The Applicant’s application for summary judgment be dismissed.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT MELBOURNE |
MLG 315 of 2020
| BORIS JANEZIC |
Applicant
And
| OFFICIAL RECEIVER |
First Respondent
| PHILLIP NEWMAN AS TRUSTEE OF THE BANKRUPT ESTATE OF WILLIAM STEPHEN VLAHOS |
Second Respondent
MLG 319 of 2020
| SAM DAVIDSON |
Applicant
And
| OFFICIAL RECEIVER |
First Respondent
| PHILLIP NEWMAN AS TRUSTEE OF THE BANKRUPT ESTATE OF WILLIAM STEPHEN VLAHOS |
Second Respondent
REASONS FOR JUDGMENT
Background
In these matters the first respondent, the Official Receiver issued Notices under s.139zq of the Bankruptcy Act 1966 (Cth) (‘the Act’) directed to the applicants in each proceeding. The applicant Boris Janezic (‘Mr Janezic’) was issued a Notice dated 10 December 2019. The Notice issued to the applicant Sam Davidson (‘Mr Davidson’) was dated 6 December 2019. The Notices required each applicant to pay significant sums within sixty days from receipt of the Notice, on the basis that they had received money as a result of a transaction that was void against the trustee, pursuant to s.120 of the Act.
The applicants had been involved in betting syndicates operated by William Stephen Vlahos (‘Mr Vlahos’) prior to Mr Vlahos entering into bankruptcy. The general nature of the scheme that Mr Vlahos had established is briefly summarised in White (Trustee); In the matter of Vlahos (a bankrupt) v Ljubicic [2017] FCA 717 at [3]. The trustee seeks to recover moneys paid to the applicants by Mr Vlahos prior to his bankruptcy, relying upon the mechanism established in s.139zq.
The applicants seek summary judgment on their claim to have the Notices set aside on the basis that the claim by the trustee is statute barred under s.127(3) of the Act.
Statutory context
Section 120 of the Act sets out that a transfer of property from a bankrupt to another person in the period starting five years before the commencement of the bankruptcy and ending on the date of the bankruptcy is void if it was for no consideration, or consideration less than market value. The section contains various exemptions and defences.
Section 127 of the Act provides that an action under s.120 may only be commenced by the trustee before the expiration of six years from the date in which the bankrupt became a bankrupt. The date on which a bankrupt becomes a bankrupt is the date on which the sequestration order is made. In this case Mr Vlahos became bankrupt on 16 December 2013, thus the Notices were issued 10 days prior to the expiration of the limitation period under s.127 for the commencement of actions under s.120.
The Notices are for considerable sums. In Mr Janezic’s case, in excess of $1.2 million, and in Mr Davidson’s case it was in excess of $12.5 million.
The requirement for a trustee to bring an action pursuant to s.120 imposes a significant burden upon trustees in cases involving claims for undervalued transactions. As a result, in 1992, s.139zq was introduced into the legislation, providing an administrative mechanism for the recovery of transfers of property made for an under value. Section 139zq provides a mechanism whereby:
a)The trustee may make application to the Official Receiver to issue a Notice requiring the person to pay to the trustee an amount equal to the value of the property received;
b)The Notice must set out the facts and circumstances which lead the Official Receiver to consider that the transaction is void;
c)The Notice must be given to the person who has allegedly received the property.
Once a Notice has been given to a person, the amount payable becomes a sum recoverable by the trustee as a debt: see s.139zq(8) of the Act.
There is considerably more detail in the scheme, however, these are the relevant aspects of it for the purpose of these proceedings.
Under s.139zs a Court may set aside a Notice if satisfied that the subdivision does not apply to the person on the basis of the alleged facts and circumstances set out in the Notice. An application to set aside a Notice must be made within 60 days of the date the Notice was given.
In these proceedings:
a)The Notices were issued within six years of the date of the acceptance of the debtors petition of the bankrupt (16 December 2013);
b)The time for payment under the Notices (60 days) did not expire until after the expiration of the limitation period referred to in s.127 for a s.120 action; and
c)The trustee cannot now commence proceedings under s.120 of the Act for a declaration that the property transfer is void as against the trustee.
Were the Notices issued within the time for bringing proceedings under s.120 of the Act?
It is not disputed that Mr Vlahos was discharged from bankruptcy on 16 December 2016, some three years after the date of the endorsement of his debtor’s petition presented pursuant to s.55 of the Act.
The ‘date of the bankruptcy’, pursuant to s.5 of the Act, was the date of the endorsement of the debtor’s petition by the Official Receiver as provided for in s.55(4a) of the Act.
The date of the ‘commencement of the bankruptcy’ is an earlier date, defined in s.115(2) of the Act. It was argued that s.115(2) provides for circumstances (the commission of acts of bankruptcy in the 6 months before presentation of the debtor’s petition) where the date of the ‘commencement of the bankruptcy’ may have been as early as 16 July 2013.
A careful reading of s.120 shows that the transfer relevant for that section must occur in a period beginning five years before the ‘commencement of the bankruptcy’, which may well have been the earlier date argued by counsel, and ends on the date of the bankruptcy, the date when the petition was accepted.
Rather than providing that the date of the bankruptcy is earlier than the date when the petition is accepted, s.115 allows for the possibility of a period of time between the date that signals the, ‘commencement of the bankruptcy’ and the ‘date of the bankruptcy’. Thus, pursuant to s.120(1)(a), the transfer could take place, in some cases, more than five years before the acceptance of the debtor’s petition, if there is a period of time between the commencement of the bankruptcy (as defined in s.115), and the acceptance of the debtors petition. This section ensures that the five year period precedes the act of bankruptcy (the relevant conduct leading to bankruptcy), rather than the mere acceptance of the petition by the Official Receiver.
Section 127(3) is somewhat clearer. The six year limit on commencing proceedings under s.120 runs from the date upon which ‘the bankrupt became a bankrupt’, which is clearly the date that a debtor’s petition is accepted, or the date on which a sequestration order is made by the Court.
As a result, I find that the time limit under s.127 of the Act runs for six years from the date that the debtor’s petition is accepted. Therefore, in this case, the time limit for bringing proceedings under s.120 expired on 16 December 2019. Thus, the Notices were issued within the time period for bringing proceedings under s.120 of the Act.
There is no dispute that the impugned transactions otherwise fell within the timeframes as defined by s.120.
Can Notices be issued under s.139zq if the bankrupt has been discharged from bankruptcy?
It is argued that it was not open to the trustee to seek, nor the Official Receiver to issue, Notices under s.139zq as Mr Vlahos had been discharged from bankruptcy around three years before the issue of the Notices,. This argument turns upon the definition of ‘bankrupt’.
In support of this argument counsel for the applicants’ point to sections of the Act which specifically defined ‘bankrupt’ as including a person who has been discharged from bankruptcy. A number of examples were raised:
a)Section 139zk provides that in Subdivision I of Division 4b of Part VI of the Act the term bankrupt, ‘includes a person who has been discharged from bankruptcy’. Section 139zk makes clear that the subdivision addresses persons from whom money is due or accruing, or may become due to a bankrupt. That is, the subdivision addresses circumstances where at the time of bankruptcy money was not actually due to the bankrupt, but later became due to the bankrupt. In these circumstances it is apparent that there needs to be an extended definition of bankrupt, otherwise the trustee may face a position where the time at which the obligation crystallises into an amount due to the bankrupt, is after the bankrupt has been discharged from bankruptcy. This is significantly different to the operation of s.120 which must necessarily apply to property transferred by the bankrupt to another person in the period leading up to the sequestration.
b)A similar problem arises in s.139wa which deals with a trustee reviewing the contributions that a bankrupt must make to his estate, and expressly provides that it may be done so after the bankrupt is discharged from bankruptcy (see s.139wa(1)(b)) which necessarily entails a requirement that the word ‘bankrupt’ includes a former bankrupt, as set out in s.139wa(2).
c)The extended definition appears again in s.139zib, in the context of Subdivision HA of Div 4b of Pt VI, which provides for a trustee to supervise a bankrupt’s accounts and ensure that all monetary income received by a bankrupt is deposited into a single supervised account, as a bankrupt may be liable to make a contribution after being discharged from bankruptcy: see s.139zida(3).
The difficulty with this argument is that s.139zq, by its very terms, does not operate with respect to a ‘bankrupt’, but rather addresses a person who has received money or property as a result of a transaction that is void against ‘the trustee of the bankrupt’. A trustee of a bankrupt, if not released by the Court, is only released by operation of law seven years after the date on which the Official Receiver notes that the administration of the estate is finalised: see s.184 of the Act. As a result, the trustee is clearly continuing in the role of ‘trustee of the bankrupt’, even though Mr Vlahos has now been discharged from bankruptcy.
All of the property of a bankrupt at the time of bankruptcy vests in the trustee (see s.58 of the Act), a trustee is obliged to take possession of the property (see s.129 of the Act) and the trustee can recover any property of which the bankrupt has divested themselves at an undervalue from the person who received it: see s.120 et seq. As the circumstances that s.139zq address must necessarily arise out of a transaction prior to a sequestration of a bankrupt (see s.120), there is no need to make the section referrable to the period in which the bankrupt remains undischarged from bankruptcy, nor provide for it to extend beyond the date of discharge from bankruptcy.
I am not persuaded that this argument shows that s.139zq should be read as being limited in operation to the period during which the bankrupt is undischarged.
Does the time limit in s.127 apply to s.139zq Notices
It was argued that issuing a Notice under s.139zq cannot amount to, ‘an action under s.120 of the Act’ within the meaning of the time limit in s.127. This must be accepted. The issuing of a Notice is not an action (commencement of proceedings in a court) under s.120, rather, it is an administrative step that creates a liability on the part of the person to whom the Notice is addressed.
As McKerracher J said in Verge (Trustee); In the matter of Underdown (deceased)(a bankrupt) v Fazio [2013] FCA 18, at paragraph 14:
14. … A section 139zq Notice is an administrative aid to a trustee in bankruptcy who seeks to recover property to which he claims he is entitled pursuant to s.120 or s.121 BA: Lin v Official Trustee in Bankruptcy (2001) 187 ALR 220 (at [12]) per Raphael FM. The effect of the Notice is to provide an administrative shortcut where the necessity for protracted proceedings under section 120 and section 121 BA can be circumvented: In the matter of Rose, a bankrupt; Godfrey v Whitton [2006] FCA 823 (at [24]) per Graham J the notice acts as a charge which remains in place either until it is complied with or set aside: Sutherland v Vale [2007] FMCA 1617 (at [45]).
Thus, the Notice does not commence an action under s.120, and therefore does not preserve any rights that the trustee may have had, up until the expiration of six years from the bankruptcy of Mr Vlahos, to commence proceedings under s.120. The trustee cannot now commence proceedings under that section: see s.127(3).
However, the fact that the operation of s.139zq relies upon fulfilment of the provisions in s.120 does not mean that an action must necessarily be commenced under s.120. Rather, a s.139zq Notice will only be valid if it can be demonstrated that the matters alleged in the Notice are sufficient, in fact, to satisfy the terms of s.120. It is not necessary to bring an action under s.120 to prove that the facts and circumstances are sufficient to have satisfied that section.
There was, at one point, a question as to whether a Notice can be set aside upon proof of facts that show that the facts set out in the Notice are untrue, or additional facts that go to the questions in s.120 is a matter of some debate: see Re McLernon; Ex parte SWF Hoists and Industrial Equipment Pty Ltd v Prebble & Anor [1995] FCA 1408; (1995) 58 FCR 391 at [23]. However this was resolved by the decision in Vale v Sutherland [2009] HCA 26 at [13] to [14]. A challenge to the Notice is heard as a ‘hearing de novo’ in which the Court can investigate and determine the correctness of the facts and circumstances in the Notice and determine whether any defence to liability arises out of the additional facts proved by the applicant.
Even though the six year limitation period set out in s.127(3) has now expired, this does not stop the trustee from satisfying the Court that the provisions of s.120 are fulfilled. The limitation period does not extinguish the claim under s.120, it merely creates a bar to bringing an action pursuant to that section. This is set out clearly in the words of s.127(3) which state:
An action under s.120 with respect to a transfer shall not be commenced […] after the expiration of six years…
In this case the trustee is not bringing an action pursuant to s.120, but relying instead upon the s.139zq Notice. It remains open to the applicants to challenge the Notice and test whether or not the facts and circumstances alleged in the Notice can be proved, and if so proved, satisfy s.120.
The limitation period set out in s.127(3) does not have the effect, even if it has expired, of nullifying the effect of s.120 to the extent that it is imported into the operation of s.139zq. Instead, s.127 merely has the effect of stopping the trustee from bringing an action under s.120.
At the time when these s.139zq Notices were issued, s.127(3) had not been engaged. Even if the limitation period under s.127(3) had the effect of creating a defence for the applicants, at the time the Notice was issued the limitation period in s.127(3) had not expired. The fact that s.127(3) would prevent proceedings being brought under s.120 by the trustee after the expiration of six years does not appear to affect the operation of s.139zq. Indeed, a careful reading of s.139zq leaves open the question of whether or not that section can be relied upon to issue a Notice at a time when s.127(3) would bar a claim by the trustee under s.120. However, that is not a question that must be confronted in these proceedings.
In any action by the trustee pursuant to the Notice the amount recoverable is a debt recoverable by action under s.139zq(8) and not an action under s.120. For these reasons s.127(3) is not engaged when the debt action is brought under s.139zq(8).
This view is in accordance with that stated by Black CJ in Halse, as trustee of the property of Payne v Norton [1997] FCA 673:
The regime established by Division 3, with its specific provisions as to the onus of proof in certain cases and its assumptions as to where the onus lies otherwise, takes on particular significance when it is seen that the voidness of a transaction under Division 3 is the basis for the exercise of the power to give a notice under section 139zq(1). Moreover, for the reasons given by Carr J in Re McLernon; Ex parte SWF Hoists and Industrial Equipment Pty Ltd v Prebble [1995] FCA 1408; (1995) 58 FCR 391 at 400-401 (and see also at 403) the power to issue the notice is conditioned not upon the Official Receiver's opinion or satisfaction that the transaction is void against the trustee but upon the existence of the facts and circumstances that produce such a result.
Clearly, too, section 139zs is not the exclusive means of challenging a notice under section 139zq (see Re McLernon at 403), and there may well be cases in which there is good reason for the trustee to bring what would be in effect a cross-application for a declaration that a transaction is void, as in Re McLernon; see also Theo v Official Trustee in Bankruptcy [1998] FCA 862; (1996) 34 ATR 404. It would be strange if the position of the trustee varied according to the procedure adopted in the particular case.
The practice of trustees to issue s.120 proceedings by way of a counterclaim or cross-claim, when a person challenges a Notice, is wise, but has led to some assumptions that are not appropriate. It is a wise course of action for a trustee to bring a cross claim under s.120, as it ensures that the proceedings are limited entirely to the satisfaction of s.120, obviating any claim with respect to possible technical problems with respect to the Notice. However, it is not necessary for a trustee to issue a cross-claim under s.120. Of course, in the present case the time limit under s.127(3) has now expired, leaving the trustee to rely solely upon the trustee’s rights, pursuant to the s.139zq Notice. In these circumstances, the trustee must satisfy not only s.120 (to the extent it is taken up by s.139zq), but also defend any challenge alleging that any of the technical requirements of s.139zq have not been satisfied.
Questions as to whether or not the Official Receiver acted according to law in issuing the Notice, and whether or not there were appropriate facts and circumstances to justify the Notice, are all matters for the trial of these proceedings and are not matters to be determined on this application.
In the circumstances I am not persuaded that there is any time limit, either pursuant to s.127(3) or otherwise, that prevented the issue of the 139zq Notices in this case. Nor am I persuaded that there is any time limit presently operating to prevent the trustee from relying upon the Notice to pursue the claim that arises on the issuing of the Notice. It could be the case that the Limitation of Actions Acts in the various States would operate to impose a time limit upon the recovery of a debt, pursued under s.139zq(8), however the expiration of any such potential time limits would not occur until many years into the future, and thus this question does not need to be determined in the present application.
Conclusions
In the circumstances of this case, I therefore dismiss the current interlocutory application for summary judgment.
As discussed with the parties at the hearing of this application I will await draft proposals for appropriate directions towards preparation for trial, and an indication as to the length of time the trials will require.
I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of Judge Riethmuller
Associate:
Date: 14 May 2020
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