Kalantzis v Wideline Pty Ltd
[2011] FMCA 587
•22 July 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| KALANTZIS & ANOR v WIDELINE PTY LTD | [2011] FMCA 587 |
| BANKRUPTCY – Application to set aside or extend bankruptcy notice – judgment entered on trial in absence of debtors – application to set aside refused by District Court – outstanding application for leave to appeal to Court of Appeal – no stay of execution – discretionary considerations – adjournment refused – application dismissed. |
| Bankruptcy Act 1966 (Cth), s.309 Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) |
| Adamopoulos v Olympic Airways SA & Anor (1990) 95 ALR 525 Burns v AMP Finance Limited [2004] FCA 1094 Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264 Olivieri v Stafford (1989) 91 ALR 91 Re Baker; Ex Parte v Staples (unreported, Federal Court, Kiefel J, 4 September 1995) Re Geard; Ex parte Reid (1994) 217 ALR 191 |
| First Applicant: | NICHOLAS KALANTZIS |
| Second Applicant: | CONSTANTINE KALANTZIS |
| Respondent: | WIDELINE PTY LTD (ACN 000 945 068) |
| File Number: | SYG 680 of 2011 |
| Judgment of: | Smith FM |
| Hearing date: | 22 July 2011 |
| Delivered at: | Sydney |
| Delivered on: | 22 July 2011 |
REPRESENTATION
| Counsel for the Applicants: | Mr M Rollinson |
| Solicitors for the Applicants: | Benjamin & Khoury |
| Counsel for the Respondent: | Mr M Murray |
| Solicitors for the Respondent: | Aston Reid |
ORDERS
The application is dismissed.
The applicants must pay the costs of the respondent, including reserved costs, as agreed or taxed pursuant to the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth).
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 680 of 2011
| NICHOLAS KALANTZIS |
First Applicant
| CONSTANTINE KALANTZIS |
Second Applicant
And
| WIDELINE PTY LTD (ACN 000 945 068) |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
Nicholas and Constantine Kalantzis, who are brothers, apply to the Court to set aside a bankruptcy notice number BN 1995 issued on 23 March 2011 at the request of Wideline Pty Ltd (“Wideline”). Service of the bankruptcy notice on Mr Nicholas Kalantzis is admitted as having occurred on 5 April 2011. There is no evidence of service on Mr Constantine Kalantzis, and Wideline have foreshadowed the need to seek an order from the Registrar under s.309 of the Bankruptcy Act 1966 (Cth) to provide for such service. However, undoubtedly he is aware of the present proceedings, since counsel and solicitors have appeared on his behalf as an applicant in the present application.
The bankruptcy notice asserts a debt of $107,391.94, being the amount of a judgment of the District Court of New South Wales against the Kalantzis brothers as second and third defendants, that judgment being entered on 28 February 2011. The judgment was in the total sum of $106,808.15, and the bankruptcy notice includes some accrued interest but not additional costs.
The judgment of the District Court was entered on the order of Levy DCJ, at a listed hearing of the matter in the District Court on 25 February 2011. On the evidence before me, the proceedings previously had a troubled history, involving at least one previous hearing being vacated due to defaults by the defendants, the Kalantzis brothers. They were represented on the record and at various listings by solicitors, at least until the filing of a notice of ceasing to act subsequent to Levy DCJ’s order.
Wideline’s statement of liquidated claims filed on 16 November 2009 pleaded indebtedness under invoices issued under a written agreement for the supply of building products on credit, and a written guarantee by the Kalantzis brothers in relation to the purchaser’s obligations.
An amended defence on behalf of the Kalantzis defendants filed on 11 August 2010, disputed that the goods were supplied under a purely written agreement, and alleged that there were conditions including oral conditions, affecting the terms upon which invoices were required to be met. The defence also denied that the Kalantzis brothers had signed “the Credit Agreement”, and also alleged that “oral representations by the Plaintiff led the Defendants to believe that they were not entering into personal guarantees”. There was also a pleaded allegation of only partial performance in relation to the invoiced goods and services. Particulars of these defences were not adequately included in the defence. The defence was accompanied by a verifying affidavit in formal terms, signed by Nicholas Kalantzis but not Constantine Kalantzis.
The first hearing on the matter in the District Court was vacated due to the defendants not filing any evidence, and the matter was listed for hearing on 25 February 2011, clearly with notice to the Kalantzis brothers’ solicitors of that fact. Shortly before the listed hearing, the solicitors for Wideline were served with the notice of ceasing to act filed by the solicitors for the Kalantzis brothers, and there was no appearance on their behalf at the hearing listed before Levy DCJ. According to the note of the listing:
Constantine Kalantzis, Second Defendant
Nicholas Kalantzis, Third Defendant
are to pay
Wideline Pty Limited ACN 000 945 068, First Plaintiff
the sum of $106808.15
On hearing counsel for the Plf and on hearing evidence from Mr Robson and Mr Mudde, being satisfied that the 2nd and 3rd Defs have been made aware of the hearing today, and having read “A”, I make the following orders:
1) Verdict & judgment for the Plf against the 2nd and 3rd Defs in the sum of $94,717.71 plus interest in the amount of $12,090.44 making a total judgment in the sum of $106,808.15;
2) The 2nd & 3rd Defs are to pay the Plf’s costs of the proceedings;
3) Exhibit “A” is to be returned to the custody of the Plf to be held pending any further orders of the Court. (Judge Levy)
This indicates that his Honour was satisfied on evidence led by the creditor that the assertions in the statement of claim were made out. There are suggestions in the evidence before me that at least one affidavit may also have been on the file sworn by one of the Kalantzis brothers, but it is reasonable to assume that Levy DCJ did not address the contents of that affidavit in the absence of a representative inviting his Honour to do so. However, in my opinion, the judgment of the District Court cannot be characterised as a ‘default judgment’, being one entered under rules of court without a judge addressing the merits of the claim. Rather, it was a judgment made on evidence tendered at trial, albeit in the absence of defendants who were found to be aware of the listing. As I shall explain, a subsequent judicial officer of the District Court later declined to set that judgment aside on the application of the Kalantzis brothers.
I accept, in those circumstances, the submission of counsel for Wideline that the District Court judgment upon which the bankruptcy notice was based should be characterised in the same terms as Beaumont and Gummow JJ in Olivieri v Stafford (1989) 91 ALR 91 gave to the judgment in that case. The relevant principle upon which the bankruptcy court should decide whether to “go behind” the judgment of the District Court to consider whether there “really is a debt” owed by the Kalantzis brothers to Wideline, was expressed by Beaumont J at 102:
As has been said, a Court of Bankruptcy is concerned to inquire into the “reality” of the matter in hand. Here the “reality” of the matter is that the merits of the respondents’ claim have been demonstrated to the satisfaction of one judge of the District Court and another judge of that court has declined to disturb the judgment. As a matter of substance, it is appropriate, in all the circumstances, for a Court of Bankruptcy to treat what happened in the two hearings in the District Court as a trial of the merits of the respondents’ claim. That is to say, a Court of Bankruptcy should, I think, accept that a process of adjudication in the District Court has established that the underlying transactions created a true debt which could, in turn, provide a proper foundation for the entry of a judgment in respect of which a bankruptcy notice could properly issue.
It must follow, in my opinion, that it is no longer permissable to speculate about the antecedent transactions which underlie the judgment. For all practical purposes, that is, in substance, as well as in form, the position is now governed by the judgment into which the previous obligations merged. From the judgment there arose a new obligation in the form of a judgment debt. The bankruptcy notice required payment of that debt. In so requiring, the notice must be taken to have accurately stated the amount due by the appellant to the respondents. In this sense, the notice did not overstate the amount due.
Cases where the bankruptcy court is more willing to go behind a judgment debt because it is a “default judgment”, are to be distinguished. As Beaumont J said at 103:
As has been said, where there is a default judgment, a Court of Bankruptcy will always “go behind” the judgment if there is what it regards as a bona fide allegation that no real debt “lay behind” the judgment. But, in the present case, the judgment was not obtained by default. It was obtained upon the presentation of a case to Graham DCJ. Moreover, Johnstone DCJ declined to disturb it.
In that case, Johnstone DCJ had refused an application by the debtor to set aside a judgment, which had been entered at a trial in which his legal representative had withdrawn after losing an adjournment application, the trial then proceeding on an undefended basis. As I have noted, I consider that an indistinguishable situation has occurred in the present case.
Beaumont J in Olivieri found no error in the first instance bankruptcy judge having declined to investigate the underlying indebtedness, and his Honour said at 104:
It follows, in my view, that the authorities relied on by the appellant may be distinguished for our purposes. It is one thing to look behind a judgment obtained in default of the taking by a defendant of a procedural step. In such a case, there has been no adjudication of the merits of the dispute. It is a different thing to ask a Bankruptcy Court to embark upon an investigation of all the details of the underlying transactions between the parties where the matter has already been the subject of an adjudication in the District Court on two occasions. (emphasis in original)
Gummow J agreed with the reasoning of Beaumont J, and made statements confirming the reluctance of a bankruptcy court to go behind a judgment, or extend time for compliance with a bankruptcy notice based upon such a judgment. Gummow J said at 107:
The procedure evinced by those authorities is in my view too deeply entrenched to be displaced at this stage; I would not construe the 1980 amendments to s 41 of the Act as meaning that the sole means by which a judgment may be looked behind upon a motion to set aside a bankruptcy notice is by extending the time for compliance with the bankruptcy notice so as to permit sufficient time for an application to the relevant court to set aside or vary the judgment in question. However, it must be a rare case that this court, upon an application to set aside a bankruptcy notice, will further extend time for compliance with a bankruptcy notice, so that this court may embark upon an inquiry as to what lies behind the judgment debt, where an extension of time for compliance with the bankruptcy notice initially was granted to enable the matter to be raised in the court in question and that court has dismissed the application made to it by the judgment debtor.
His Honour also said at 110:
It is unnecessary on this appeal to express any concluded view as to whether it is appropriate for the court or registrar to grant an extension in the time for compliance with a bankruptcy notice, so as to permit the debtor to set aside or vary the judgment debt where, if the debtor were successful there would, on the debtor’s own case, still remain an indebtedness in the sum greater than that needed to found bankruptcy proceedings. What to my mind is clear is that where such an extension of time is granted and the application fails, it would be a most unusual case where there remained any ground then for having this court (or the registrar) further to extend time for compliance so as to have this court decide whether to go behind the judgment debt as a step towards setting aside the bankruptcy notice. It would be an unusual case for the court to do this, even where the debtor seeks to impugn the judgment debt so as to leave standing no indebtedness or an indebtedness in a sum less than that necessary to found bankruptcy proceedings. The present, as I have said, is a case a fortiori, given the trifling sum as to which complaint is made and the large sum that would remain.
The Kalantzis brothers’ present application to set aside the bankruptcy notice was filed on 8 April 2011, and on an ex parte application a Registrar extended time for compliance until the first court date. That time was then further extended at listings before Registrars on 19 April 2011, 10 May 2011, and 24 May 2011, and again by myself when it was referred to me on 7 June 2011. On that occasion, I directed a timetable for the filing of evidence and submissions, and listed the matter for hearing today, extending time until 5 pm today.
The application is supported by affidavits by Nicholas Kalantzis, recounting the history of the matter in the District Court and attaching an application he made to the District Court to set aside the judgment made by Levy DCJ, and two supporting affidavits filed in the District Court. He filed the set‑aside application on 31 March 2011 during the pendency of the present proceedings in this Court, and the bankruptcy proceeding was then adjourned until it was decided.
The set‑aside application was listed and determined by Judicial Registrar Smith on 3 June 2011. His Honour gave brief reasons which have been transcribed and are in evidence before me. His Honour’s conclusion was:
I am not satisfied that the defendant has made out a strong enough case that judgment should be set aside. It may be that the defendants may have some action against their former solicitors, but the fact is, the defendants were represented as I have outlined above at the relevant times leading up to the hearing. I am not satisfied that the defendants have made out that they have a good and arguable defence on the merits. For those reasons I dismiss the notice of motion.
Judicial Registrar Smith recounted some of the history of the matter, involving the applicants’ change of solicitors from the solicitors who had been on the record prior to the hearing before Levy DCJ, to the solicitors who were representing the Kalantzis brothers in their application to set aside the judgment made in their absence. He referred to the affidavit of Nicholas Kalantzis, which claimed that he was not aware of the hearing date, was never informed of it by his solicitors, and was misled as to the hearing date by them. It is unclear from the Judicial Registrar’s judgment as to the extent to which he has made findings of fact as to the truth of this explanation. It is also unclear from the Judicial Registrar’s reasons why he was not satisfied “that the defendants have made out that they have a good and arguable defence on the merits”, although I accept a submission that it may have been open to his Honour to have arrived at that conclusion on the affidavits which were before him in support of the motion to set aside.
The affidavits in support of the present application to this Court refer to an intention to seek leave to appeal to the Court of Appeal from the Judicial Registrar’s order refusing to set aside Levy DCJ’s judgment. However, it appears that an appeal was not actually commenced until this morning. It is in evidence before me. The orders sought in the summons seeking leave to appeal are:
1An order extending the time in which to file and serve a White Folder (CPR 51.12).
2Leave to appeal from the whole of the decision below.
3That the decision below be set aside.
4That the judgment given against the Applicants on 25 February 2011 be set aside.
It is notable that no stay on execution of the District Court judgment of Levy DCJ is sought from the Court of Appeal, and it is also notable that no application for stay has been sought from the District Court. I am informed from the Bar table that there is an intention to seek a stay from the Court of Appeal, but there is no evidence showing any prospect that a stay will be sought or obtained from any court. It is also notable that a ‘white folder’ has not accompanied the application, with the result that neither the Court of Appeal, this Court, nor Wideline is yet aware of what grounds of appeal might be intended to be raised.
Counsel for the Kalantzis brothers today took me through the Judicial Registrar’s reasons, seeking to persuade me that there were arguable grounds with merit, both for obtaining leave to appeal, succeeding in the appeal, and obtaining a stay while it is on foot in the Court of Appeal. I am prepared to accept that there may be arguable grounds for seeking all of those outcomes in the Court of Appeal, however, I am not prepared to make findings as to the probability that those arguments will be accepted by the Court of Appeal if they were put to it.
The summons seeking leave to appeal has a return date on 29 August 2011, presumably before a Registrar, and will only reach a Judge if the Registrar is satisfied that there is an issue ready for determination. The prospects for an outcome in relation to the summons seeking leave to appeal are therefore obscure in relation to when those proceedings might be completed, as well as to their possible outcomes.
Counsel for the Kalantzis brothers put his case today as principally seeking an adjournment of the application to set aside the bankruptcy notice with an extension of time for the bankruptcy notice, until a further listing subsequent to 29 August 2011, and possibly further adjournments and extensions after that date, depending on the state of proceedings in the Court of Appeal.
I accept that I have a broad discretion to do this, and that the considerations for and against such an adjournment and extension of time need to be carefully addressed on both sides.
A refusal to adjourn and extend the bankruptcy notice would have the consequence that Nicholas Kalantzis, but not his brother, will have committed an act of bankruptcy if he does not comply with the bankruptcy notice before 5 pm today. That will give Wideline an act of bankruptcy upon which it could base a creditor’s petition against him, and notionally would provide an act of bankruptcy available to other creditors also. But it would not alter the civil status of either of the Kalantzis brothers, in particular by making them bankrupt or impeding their pursuit of the appeal in the Court of Appeal.
If I dismiss the application, Wideline would be required to consider whether it would rely on that act of bankruptcy by filing a petition in the subsequent six month period, regardless of whether the Court of Appeal proceedings are finalised in that period, and might face a strong case for an adjournment of the petition if it is brought while an appeal with merit is still outstanding (see Adamopoulos v Olympic Airways SA & Anor (1990) 95 ALR 525 at 531‑532).
Essentially, therefore the hardship resulting from a refusal by me to adjourn today is the prospect of having to meet a creditor’s petition during the pendency of the appeal proceedings.
There is a well‑established line of authority that deals with this scenario, in my opinion. The line of cases was addressed by Lehane J in Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264. His Honour explained his preference for an approach taken by Sheppard J in Re Geard; Ex parte Reid (1994) 217 ALR 191 rather than the approach taken by Kiefel J in Re Baker; Ex Parte v Staples (unreported, Federal Court, Kiefel J, 4 September 1995) where her Honour thought that, in Lehane J’s words:
The mere fact that it is arguable, once it is determined that the appeal has been instituted in good faith and is being diligently prospected, produces the consequence (her Honour held) that, ordinarily at least, an extension of time will be granted.
Sheppard J had earlier expressed a contrary view, giving substantial weight to whether a stay of proceedings on the judgment upon which the bankruptcy notice has been brought had been sought and obtained. He said at 217 ALR 191 at 193 that:
It would seem to me to require quite special circumstances before a court exercising jurisdiction in bankruptcy would, in effect, do what has not been done in the court in which the judgment has been obtained by extending the time for compliance with the bankruptcy notice when no application to stay the judgment has been made.
Lehane J expressed his conclusion in relation to general principle by saying at 73 FCR 264 at 270:
I think, therefore, that considerable weight should be given to the circumstance that here, as in Geard, no stay has been granted (or, apparently, sought) of the judgment supporting the bankruptcy notice. It does not follow that other matters are not to be taken into account: the discretion is “at large” (Re Taylor; Ex parte Deputy Commissioner of Taxation (Cth) (1983) 74 FLR 377 at 379). For example, the authorities suggest that, reluctant as the Court may in most cases be to enter into the merits of an appeal, the merits may be relevant, at least where the Court is able to regard the prospects of success as “slight” (for example, Bryant) or, possibly, in a case where it is apparent that the prospects of success are unusually strong (Kiefel J, in Baker, discussed the merits of the appeal in some detail, considering it desirable to do so as further applications were likely; it is evident that her Honour’s view was that the appeal had substantial prospects of success). It may be that different considerations apply where the proceedings instituted for the purpose of setting aside the judgment are, rather than an appeal, separate proceedings seeking to set the judgment aside (Olivieri; Agrillo) particularly where, as in Agrillo, the judgment was entered by consent. I think it is relevant, as a consideration reinforcing the Court’s reluctance to extend time in the absence of a stay, that an appeal has already been dismissed and the proceeding in question is (as here) an application for special leave to make a further appeal.
Lehane J’s judgment in Byron has been applied in many cases, including in this Court. One such case was Branson J’s judgment in Burns v AMP Finance Limited [2004] FCA 1094. Her Honour said:
18As Byron illustrates, the Court is always reluctant to extend time for compliance with a bankruptcy notice where the notice requires payment of a judgment debt and no stay of the judgment has been obtained. …
Her Honour noted other considerations in the circumstances of her case, including at [19] that “there is no evidence before me touching on the merits of the appeal”, and that the applicant’s evidence about his financial affairs was “insufficient to satisfy me that the applicant or the other judgment debtors will be able to pay the judgment debt in the near future or, indeed, at all”.
Her Honour also noted that:
21… If the applicant commits an act of bankruptcy by failing to comply with the bankruptcy order and the respondent presents a petition seeking the making of a sequestration order in respect of his estate, the applicant may make an application at that time for the hearing of the petition to be adjourned. …
These cases, although indicating a general approach to applications for extension of time of a bankruptcy notice in circumstances where there is an appeal outstanding in relation to the judgment debt upon which the bankruptcy notice is based, emphasise that the particular facts and circumstances need to be individually addressed.
However, in the present case I am not persuaded that I should depart from the ‘usual approach’ referred to by Branson J, and the giving of ‘considerable weight’ to the absence of any stay on execution having been obtained from either the District Court or the Court of Appeal.
It appears to me that the Kalantzis brothers have had more than ample opportunities to apply for such a stay. As in Olivieri and Byron, they have also had the opportunity during the pendency of the bankruptcy matter to seek to have the judgment of the District Court made in their absence set aside, and have failed in that effort after a contested hearing before the Judicial Registrar.
Although I accept that their appeal may have arguable grounds, I am certainly not able to predict a successful outcome to it, nor indeed that it will even attract leave to appeal. I am not prepared to make any predictions as to whether a stay on execution would be achievable in other courts if applied for.
As well as the absence of a stay on execution, I consider that substantial weight should be given to the absence of any evidence before me as to the financial position of the Kalantzis brothers, who appear to be trading as builders. They have not presented any evidence showing an ability to pay this debt. I am not at all persuaded that the existence of an act of bankruptcy occurring today, rather than in one or two or three months’ time, would make no difference to the administration of their insolvency, if indeed they are insolvent.
At the tail of their submissions today they offered to the Court to consent to a condition attaching to any adjournment application that they pay $30,000 into Court. However, that is far from meeting the amount claimed in the bankruptcy notice, nor as establishing a state of solvency.
Weighing up all the circumstances, including the considerations of justice and hardship which were urged upon me by counsel for the Kalantzis brothers today, in my opinion they have not made out a case for this Court to go behind the judgment debt regularly entered by Levy DCJ in the District Court, nor for adjourning their application to set aside the bankruptcy notice and extending time during the adjournment, nor for making an order by way of final relief that the time under the bankruptcy notice be extended until the conclusion of the Court of Appeal proceedings.
I shall therefore dismiss the application. Costs should follow the event.
I certify that the preceding forty (40) paragraphs are a true copy of the reasons for judgment of Smith FM
Date: 10 August 2011
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