Kanovics v Lean

[2002] FCA 803

FEDERAL COURT OF AUSTRALIA

Kanovics v Lean [2002] FCA 803

BANKRUPTCY – appeal from decision of Federal Magistrate – whether the Federal Magistrate erred in law in concluding that any security ordered by a court as a condition of release of bail is a charging order for the purposes of s 118 of the Bankruptcy Act 1996 (Cth) – nature of a charging order within meaning of s 118(12) of the Bankruptcy Act 1996 (Cth).

Bankruptcy Act 1996 (Cth) s 30, s 118, s 122, s 188, s 189AA

Enforcement of Judgments Act 1991 (SA) s 8, s 14

LAZLO ZOLTAN KANOVICS  v  GRAHAM TREVOR LEAN

S236 OF 2001

MARSHALL J

24 JUNE 2002
MELBOURNE (HEARD IN ADELAIDE)

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	S236 OF 2001

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT

BETWEEN:	LAZLO ZOLTAN KANOVICS APPELLANT
AND:	GRAHAM TREVOR LEAN RESPONDENT
JUDGE:	MARSHALL J
DATE OF ORDER:	24 JUNE 2002
WHERE MADE:	MELBOURNE (HEARD IN ADELAIDE)

THE COURT ORDERS THAT:

1.        The appeal be allowed.

2.        The order of the Federal Magistrates Court of 12 December 2001 be set aside.

3.The matter be remitted to the Federal Magistrates Court for further hearing and determination.

4.        The costs of the appeal be reserved.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY	S236 OF 2001

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT

BETWEEN:	LAZLO ZOLTAN KANOVICS APPELLANT
AND:	GRAHAM TREVOR LEAN RESPONDENT

JUDGE:	MARSHALL J
DATE:	24 JUNE 2002
PLACE:	MELBOURNE (HEARD IN ADELAIDE)

REASONS FOR JUDGMENT

1. This is an appeal from the whole of the orders and judgment of a learned Federal Magistrate dated 12 December 2001. The proceeding before his Honour involved an application by Mr Lean (“the respondent”) pursuant to the Bankruptcy Act 1966 (Cth) (“the Act”). The respondent’s application was originally made to this Court but was transferred to the Federal Magistrates Court.

2. The respondent is the controlling trustee of Mr Daryl Francis Roder’s bankrupt estate. By his application, the respondent sought to stay a particular proceeding in the Magistrates Court (Civil Division) South Australia (“the local Magistrates Court”) between Mr Roder and Mr Kanovics (“the appellant”). The appellant is a judgment creditor of Mr Roder.  The respondent also sought a declaration that certain property, namely gemstones, being held by the solicitors for the appellant under an order of the local Magistrates Court, was property of Mr Roder which had vested in the respondent as controlling trustee.

3. On 12 December 2001, the Federal Magistrate found that the rights which the appellant had over the gemstones was a charge which had been created by an order of the local Magistrates Court and that the charge was void under the Act.

4. By notice of appeal filed on 21 December 2001, the appellant appealed from the Federal Magistrate’s decision.

   Factual Background

5. On 23 December 1999, the appellant obtained judgment against Mr Roder in the Magistrates Court (Civil Division) South Australia (“the local Magistrates Court”) in actions numbered 24274, 24275 and 24276 of 1999 for the respective sums of $2,000, $6,680 and $30,000. When the judgment debts were not subsequently satisfied, the appellant commenced a proceeding to enforce them under the Enforcement of Judgments Act 1991 (SA) (“the Enforcement Act”).

6. On 14 March 2000, an order was made by the local Magistrates Court for the arrest of Mr Roder.  He was subsequently arrested and brought before the local Magistrates Court.  He was released on bail in the sum of $1,000, such sum to be forfeited in the event that he did not comply with the bail agreement.

7. On 31 March 2000, upon further application, the local Magistrates Court made an order by consent (“the 31 March order”), varying the conditions of Mr Roder’s bail agreement.  The 31 March order was in the following terms:

   (1)The conditions of the defendant’s bail be varied as follows:-

   1.1The return date of the defendant to Australia be varied to
   10 July 2000;

   1.2The defendant’s passport be returned to him and he be at liberty to travel within and outside Australia;

   1.3The defendant forthwith will deposit for safekeeping and security with the solicitors for the plaintiff and defendant in a safety deposit box at a bank to be agreed, the parcel of gems as inspected and marked by the plaintiff;

   1.4The parcel of gems to be deposited as referred to in paragraph 1.3 above is agreed by and between the plaintiff and defendant as having a value of $9,630 and may be taken and applied by the plaintiff in part satisfaction of the judgment against the defendant in the event of default by the defendant in complying with the terms of his bail but otherwise shall be returned to the defendant upon fully complying with the terms of his bail as varied by this order;

   1.5The defendant pay to the plaintiff the sum of $10,000 on or before 10th April, 2000 in part satisfaction of the plaintiff’s judgment;

   1.6The amount of interest and cost of the judgment sums up to and including 1 July 2000 is an agreed sum fixed in the amount of $2,000;

   1.7The defendant pay to the plaintiff the balance of the judgment sums and the agreed sum for interest and costs on or before 10 July 2000;

   1.8The defendant execute and deliver to his solicitor and a counterpart to the plaintiff’s solicitor an irrevocable instruction and power of attorney (in form approved by the plaintiff’s solicitor) to the defendant’s solicitor authorising, empowering and binding him to accept service as solicitor or attorney for the defendant of any execution process the plaintiff may hereinafter issue upon the judgment’s interest and costs agreed and such process without limiting the generality thereof shall include a bankruptcy notice and petition;

   (2)Provided the defendant fully performs and observes the terms of his bail as varied by this order, execution on the judgments be stayed.

   (3)If the defendant fully performs and observes the terms of his bail as varied he shall be discharged therefrom but otherwise his bail shall remain in full force and effect.”

8. Mr Roder failed to comply with the 31 March order. 

9. On 14 July 2000, the appellant obtained a further order from the local Magistrates Court entitling him to possession of the gemstones.  The gemstones were taken into the custody of Mr D’Aloia of Clelands, solicitors for the appellant, to be held jointly by him and Mr Woods, solicitor for Mr Roder.  It should be noted that in the Federal Magistrate’s judgment at [8], Mr D’Aloia and Mr Woods were described as “hold(ing) the keys to the safety deposit box containing the parcel of gemstones.”

10. On 3 June 2000, Mr Roder had executed an authority pursuant to s 188 of the Bankruptcy Act 1966 (Cth) (“the Act”) with the result that the respondent became his controlling trustee. On 28 July 2000, the respondent applied to the Court for orders staying the proceeding in the local Magistrates Court involving Mr Roder and the appellant. The application was purportedly made pursuant to s 189AA of the Act. The respondent’s application also sought a declaration that the gemstones referred to in the 31 March order were subject to his control as controlling trustee of Mr Roder.

11. On 10 August 2000, Mr Roder petitioned for his own bankruptcy.  As a consequence, the respondent became the trustee of Mr Roder’s bankrupt estate.

12. On 4 September 2000, the respondent amended his application to record that it was made pursuant to s 30 of the Act. On 5 December 2000, O’Loughlin J ordered, by consent, that the matter be transferred to the Federal Magistrates’ Court.

13. On 19 December 2000, the learned Federal Magistrate ordered that:

    “… this matter be listed for preliminary argument on the papers on the question of whether the orders made in the Adelaide Magistrates Court on 31 March 2000 in proceedings numbered 24274, 24275 and 24276 of 1999 constitute a charge or charging order as defined in s 118 of the Bankruptcy Act.”

14. By judgment and orders dated 12 December 2001, his Honour, inter alia, made a declaration that:

    “(t)he charge created by the order of the Magistrates Court (Civil Division) South Australia made 31 March 2000 in actions numbered 24274,24275 and 24276 is void as against the applicant as trustee of the estate of Darryl Francis Roder pursuant to s 118 (9) of the Bankruptcy Act.”

    The reasoning of the Federal Magistrate

15. His Honour commenced his analysis of the issues by setting out the text of ss 118(9) and (12) of the Act. He noted that the respondent had contended that the 31 March order was “a charging order made by a Court in respect of a judgment”. He also noted the competing contention raised by the appellant that the 31 March order was not a charging order notwithstanding that his interest in the gemstones created an equitable mortgage.

16. His Honour referred to ss 8 and 14 of the Enforcement of Judgments Act 1991 (SA) (“the Enforcement Act”). Section 8 enables the local Magistrates Court to make a charging order and section 14 enables it to then require a defendant to give security for the satisfaction of a judgment in the plaintiff’s failure. His Honour also referred to the relevant rules of the local Magistrates Court pursuant to which examinations of debtors are conducted and charging orders made.

17. His Honour noted that the proceeding which led to the 31 March order was commenced under s 14 of the Enforcement Act and not s 8 thereof, but then said “I do not think this is of consequence”. At [15] and [16] of his reasons for judgment, his Honour said that:

    “15.The Magistrates Court was exercising the power given to it in subsection 14(2) to require the defendant to give security for the satisfaction of any judgment. There is no reason why the Court, in the same order, could not exercise its power under s 8 to make a charging order and subsection 14(2) to require security and to make the same property the subject matter of the same order. A charge is a form of security. A charge created by a court order is the same as any other charge at general law. Warburton v Hill (1854) Kay 470 at 477.

    16.The charge does not have to make any particular form, and neither does a charging order.  What is important is the effect of the order.” 

    (emphasis added)

18. Further, at [21] his Honour said:

    “I consider that as soon as the Magistrate’s order was made, even prior to deposit of the gemstones, the rights which the creditor had over the gemstones constituted a charge. It was a charge created by Court order. The only way the Magistrates Court could have created that order was by exercising its powers under s 8 of the Enforcement of Judgments Act. Therefore it is a charging order. The judgment is the orders of the Magistrates Court made on 23 December 1999. The charging order was made within six months before the presentation of the petition. Accordingly, all the requirements for the operation of s 118(9) of the Bankruptcy Act are made out and the charging order is void.”

    The legislative context

    The Act

19. Section 118(9) of the Act provides as follows:

    “(9)     Subject to subsection (10), where:

    (a)a creditor has, within 6 months before the presentation of a petition, or after the presentation of a petition, against a debtor obtained a charge or charging order against property of the debtor; and

    (b)the debtor subsequently becomes a bankrupt on, or by virtue of the presentation of, the petition;

    the charge or charging order, as the case may be, is void as against the trustee in the bankruptcy.”

20. Section 118(12) of the Act states that:

    “(12)   In this section:

    charge means a charge created by a law of the Commonwealth or of a State or Territory of the Commonwealth upon registration of a judgment in any registry.

    charging order means a charging order made by a court in respect of a judgment.”

21. Section 122(1) and (2) of the Act provide that:

    “122(1)A transfer of property by a person who is insolvent (the debtor) in favour of a creditor is void against the trustee in the debtor's bankruptcy if the transfer:

    (a)had the effect of giving the creditor a preference, priority or advantage over other creditors; and

    (b)was made in the period that relates to the debtor, as indicated in the following table.

Periods during which  transfers of property may be void
Description of petition leading to debtor's bankruptcy	Period during which the transfer was made
1	Creditor’s petition	Period beginning 6 months before the presentation of the petition and ending immediately before the date of the bankruptcy of the debtor
2	Debtor's petition presented when at least one creditor's petition was pending against a petitioning debtor or a member of a partnership against which the debtor's petition was presented	Period beginning on the commencement of the debtor's bankruptcy and ending immediately before the date of the bankruptcy of the debtor
3	Debtor's petition presented in any other circumstances	Period beginning 6 months before the presentation of the petition and ending immediately before the date of the bankruptcy of the debtor

(1A)Subsection (1) applies in relation to a transfer of property by the debtor in favour of a creditor:

(a)whether or not the liability of the debtor to the creditor is his or her separate liability or is a liability with another person or other persons jointly; and

(b)whether or not the property transferred is the debtor's own property or is the property of the debtor and one or more other persons.

122(2) Nothing in this section affects:

(a)the rights of a purchaser, payee or encumbrancer in the ordinary course of business who acted in good faith and who gave consideration at least as valuable as the market value of the property; or

(b)the rights of a person who is making title through or under a creditor of the debtor in good faith and who gave consideration at least as valuable as the market value of the property; or

(c)a conveyance, transfer, charge, payment or obligation of the debtor executed, made or incurred under or in pursuance of a maintenance agreement or maintenance order; or

(d) a transfer of property under a debt agreement.”

The Enforcement Act

1. Section 8 of the Enforcement Act provides that:

   “(1)A court may, on application by a judgment creditor, charge property of a judgment debtor with a judgment debt or part of a judgment debt.

   (2)Where the court makes an order under subsection (1), it may make ancillary or consequential orders -

   "(a)"    requiring registration of the charge; or

   "(b)"prohibiting or restricting dealings with the property subject to the charge; or

   "(c)"providing for the sale of the property and the application of the proceeds of sale; or

   "(d)"    relating to any other incidental or consequential matters.”

2. Section 14 of the Enforcement Act provides that:

   “(1)     If -

   "(a)"a plaintiff has brought an action in a court for recovery of a monetary sum; and

   "(b)"    there are grounds for believing—

   (i)        that the defendant is about to leave the State; and

   (ii)that the defendant's absence from the State would seriously prejudice the plaintiff's prospects of enforcing a judgment that has been, or may be, given in that plaintiff's favour, the court may issue a summons requiring the defendant to appear for examination before the court, or issue a warrant to have the defendant arrested and brought before the court, for examination.

   (2)If, after examination of the defendant, the court is satisfied that there is good reason for doing so, it may require the defendant to give security for the satisfaction of any judgment that has been or may be given in the plaintiff's favour.

   (3)If a defendant fails without proper excuse to comply with a requirement under subsection (2), the defendant commits a contempt of the court by which the requirement was imposed.”

   The appellant’s contentions

3. Mr Edwardson, of counsel, appeared for the appellant. He submitted that it was significant, contrary to the Federal Magistrate’s view, that the 31 March order was made in a proceeding commenced under s 8 rather than under s 14 of the Enforcement Act. Mr Edwardson contended that his Honour was wrong in law in concluding that any security ordered by a court as a condition of release on bail is necessarily a charging order.

4. It was submitted that the failure to comply with the 31 March order was enforceable by a contempt proceeding or by way of an application for a charging order pursuant to s 8 of the Enforcement Act.

5. Mr Edwardson said that to the extent that a charge was created over the gemstones by the 31 March order, it was an equitable charge. He contended, however, that the order itself was not a charging order under s 118(12) of the Act and, in particular, that it was not “a charging order made by a court in respect of a judgment”.

6. Mr Edwardson contended that a charging order as defined in s 118(12) of the Act can only be made on the application of a judgment debtor under the relevant State law. In this case the relevant State law was s 8 of the Enforcement Act.

7. It was submitted that the parties to the 31 March order only considered by their agreed position the question of Mr Roder’s bail and the conditions that should attach to that bail.  That position is supported, so the argument ran, by the fact that the application to the local Magistrates Court which led to the consent order was one by Mr Roder to vary an existing bail arrangement on certain terms.  It was contended that such variation was “no more than a reflection of [Mr Roder] providing security in part for the judgment debt”.

8. Mr Edwardson submitted that if the 31 March order was declared to not be a charging order, his client would not thereby obtain an unfair advantage over and above other creditors of Mr Roder.  This was for reason that an issue would then arise about the applicability of s 122 of the Act and whether the proceeds of the sale of the gemstones by the appellant would amount to a preference payment.

   The respondent’s contentions

9. Mr Heuzenroeder, of counsel, appeared for the respondent. He submitted that the relevant part of the 31 March order which created the charge was “empowered” by s 8 of the Enforcement Act as well as by s 14 of that Act. In the alternative, it was contended that it does not matter if the order was not made pursuant to s 8 of the Enforcement Act because the 31 March order, properly characterised, was a charging order within the meaning of s 118(12) of the Act. It was submitted that the order was an order by a Court in respect of a judgment and that it was one which created a charge. It was contended that the learned Federal Magistrate had therefore correctly characterised the order.

10. Mr Heuzenroeder submitted that the policy of ss 118(9) and (12) of the Act was to ensure that, in a period of doubtful solvency, some creditors would not achieve an arbitrary advantage over other creditors. Mr Heuzenroeder further contended that public policy favoured the respondent’s position as in the event that the appeal were decided in the appellant’s favour, an unwarranted lacuna would arise within the Act. Such a lacuna might then be exploited in the future by judgment creditors as an artificial way to “outflank” the Act.

    Consideration

11. Neither Counsel dissented from the proposition that the task currently before the Court is one of looking at the 31 March order and properly characterising it to determine whether it meets the description of a “charging order” for the purposes of s 118 of the Act.

12. In my opinion, the 31 March order is properly characterised as an order which varied the terms of Mr Roder’s bail. A consequence of the order was that an equitable charge was created over the gemstones in favour of the appellant. That does not mean that the order is thereby transformed into a charging order as defined by s 118 (12) of the Act.

1. I accept the submission put by Mr Edwardson in his reply that any order of a court which creates a charge is not necessarily a charging order. I agree with Mr Edwardson’s argument that if such had been the intention of Parliament in enacting s 118(12), a charging order would have been so defined. The concept of a charging order is a well recognised one within the jurisdiction of the local Magistrates Court. It is one specifically recognised by s 8 of the Enforcement Act. I respectfully disagree with the view of the Federal Magistrate that it was not relevant that the 31 March order did not come about as a result of proceedings initiated under s 8 of the Enforcement Act.

2. While I agree with his Honour’s view that it is important to look at the substance rather than the form of the order, I consider that the substance of the 31 March order was that it was an order dealing with the topic of “bail”. The charge created by the order was incidental to that topic.

3. In my view, the wide construction of “charging order” preferred by Mr Heuzenroeder does not find support within the text of s 118(12) nor in the wider context of the Act when considered as a whole. I do not consider that any unfairness is created or a lacuna established as the result of such an interpretation. The effect of s 122 of the Act remains to be considered in addition to the question noted by his Honour at [6] of his judgment, that is, whether “there had been a transfer of property which was void under s 120(1) of the Bankruptcy Act.”

   Disposition

4. The respondent relied on certain contentions in the event that the appeal was allowed.  Counsel ultimately were content not to have these contentions addressed in the appeal on the basis that they essentially were relevant only to the question of costs.  Further, Counsel were in agreement that if the appeal succeeded, it would be appropriate to make the following orders:

   1.        The appeal be allowed.

   2.        The order of the Federal Magistrates Court of 12 December 2001 be set aside.

   3.The matter be remitted to the Federal Magistrates Court for further hearing and determination.

   4.        The costs of the appeal be reserved.

5. For the reasons set out above, I propose to make those orders in the orders accompanying these reasons for judgment.

I certify that the preceding thirty-eight (38) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Marshall.

Associate:

Dated:             24 June 2002

Counsel for the Applicant:	Mr Edwardson
Solicitor for the Applicant:	Sydney G. Maidment Lawyers
Counsel for the Respondent:	Mr Heuzenroeder
Solicitor for the Respondent:	Camatta Lempens Pty Ltd
Date of Hearing:	30 May 2002
Date of Judgment:	24 June 2002