Lewarne v Scotts
[2008] FMCA 533
•17 April 2008
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| LEWARNE & ORS v SCOTTS | [2008] FMCA 533 |
| BANKRUPTCY – Adjournment of petition – outstanding appeal against judgment debt – arguable grounds of appeal – discretionary considerations favoured an adjournment. |
| Bankruptcy Act 1966 (Cth), ss.52(2), 52(2)(b) Trade Practices Act 1974 (Cth), s.87 |
| Adamopoulos v Olympic Airways SA & Anor (1990) 95 ALR 525 Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 Lewarne v Momentum Productions Pty Ltd [2007] FCA 1530 Lewarne v Momentum Productions Pty Ltd [2007] FCA 1136 Momentum Productions Pty Limited v Lewarne [2007] FCA 1988 |
| Applicant: | RICHARD JOHN LEWARNE, MOMENTUM PRODUCTIONS PTY LTD AND RICHARD JAMES SCOTTS TRADING AS EAST VILLAGE HOTEL (RECEIVER AND MANAGER APPOINTED) |
| Respondent: | RICHARD JAMES SCOTTS |
| File Number: | SYG 3824 of 2007 |
| Judgment of: | Smith FM |
| Hearing date: | 17 April 2008 |
| Delivered at: | Sydney |
| Delivered on: | 17 April 2008 |
REPRESENTATION
| Counsel for the Applicant: | Mr S Golledge |
| Solicitors for the Applicant: | Piper Alderman |
| Counsel for the Respondent: | Mr S Docker |
| Solicitors for the Respondent: | Comino Prassas |
ORDERS
The petition is adjourned for directions on 8 September 2008 at 9.30am.
The parties have liberty to apply on 3 days notice.
Costs reserved.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 3824 of 2007
| RICHARD JOHN LEWARNE, MOMENTUM PRODUCTIONS PTY LTD AND RICHARD JAMES SCOTTS TRADING AS EAST VILLAGE HOTEL (RECEIVER AND MANAGER APPOINTED) |
Applicant
And
| RICHARD JAMES SCOTTS |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
I have before me a creditor’s petition which was listed today for hearing after two adjournments by consent, the petition being filed on 13 December 2007. The petitioner is, in effect, the receiver of a partnership relating to a hotel business which has been placed in receivership by order of Stone J. The partners were the parties to the proceedings before her Honour which gave rise to her Honour’s judgments in Lewarne v Momentum Productions Pty Ltd [2007] FCA 1136 and Lewarne v Momentum Productions Pty Ltd [2007] FCA 1530.
The petition relies on a judgment debt which is argued to have arisen under paragraph 5 of her Honour’s orders made on 9 October 2007, in which she ordered one of the partners, Mr Richard Scotts, to pay to the partnership: “the amount of $416,276.71 together with interest on that sum pursuant to s 52 of the Federal Court of Australia Act 1976 (Cth)”. Prima facie that amount became immediately owing and recoverable on the date of her Honour’s order. It was the subject of a bankruptcy notice which was not complied with, and, on the argument of the petitioner, this gave rise to an act of bankruptcy allowing the making of a sequestration order on the present petition.
Mr Scotts has filed a notice of grounds of opposition to the petition, raising a formal challenge to the bankruptcy notice. He also invites the Court to look behind the judgment of Stone J, to arrive at a different view on whether the debt is in truth and reality presently owing to the receiver. He also presents grounds for refusing to make a sequestration order by reason of “other sufficient cause” within s.52(2)(b) of the Bankruptcy Act 1966 (Cth). The other sufficient causes are the existence of an appeal from her Honour’s orders, and also the existence under her Honour’s orders of an accounting process to be conducted in relation to the partnership affairs. It is contended in the notice of grounds of opposition, that there is a prospect that the winding up of the business will allow the payment of the debt imposed on Mr Scotts by paragraph 5 of her Honour’s orders out of his share in the net assets of the partnership, thereby rendering it unnecessary to enforce paragraph 5.
This contention invites the Court to predict the outcome of an accounting process, including pending litigation, before it has happened, and there may be difficulties facing that invitation. The same difficulties might face the invitation to go behind her Honour’s judgment. However, I do not need to address these difficulties in today’s judgment, since I am addressing only an application for adjourning the petition. Similarly, I do not need today to address the arguments in relation to the formal validity of the bankruptcy notice.
The application for adjournment is put on the basis of the currency of the appeal to the Full Court from her Honour’s orders. Reliance is placed by Mr Scotts upon principles endorsed in the Full Court in Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148 and in Adamopoulos v Olympic Airways SA & Anor (1990) 95 ALR 525 at 531‑532. In the last of these cases, the majority judgment in the Full Court said:
It is also well established that in general a court exercising jurisdiction in bankruptcy 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: …
(Citations omitted)
That general principle is, of course, subject to the existence of countervailing considerations in relation to the financial position of the appellant, and other matters such as are referred to by Pincus J in Adamopoulos at page 526. The question of whether grounds are “genuine and arguable” also allows considerable latitude to a discretionary judgment.
In the present case, I have before me the notice of appeal which has been filed in the Federal Court, and also a foreshadowed further amended notice of appeal setting out the grounds which will be argued. Essentially, it appears that Mr Scotts does not challenge her Honour’s conclusion that Mr Lewarne was induced to pay some $300,000 to Mr Scotts by reason of misrepresentation on his part that the money would be applied towards the hotel business, and by reason of other false or misleading representations as to some attributes of the business. However, the grounds of appeal do challenge her Honour’s finding made in [9] of her second judgment that, looking at the evidence concerning the value of the hotel business, it is likely that on the taking of accounts Mr Lewarne “has suffered or is likely to suffer loss or damage” by reason of not receiving back his $300,000 and interest in the course of the winding up. A foreshadowed ground of appeal argues that her Honour failed to address evidence indicating that one of the assets in the business was an ongoing Supreme Court action against the landlord of the hotel business, which has a prospect of a very substantial verdict in favour of the business partnership. I am satisfied at least that this ground has been genuinely put forward, and appears to be reasonably arguable.
I am also satisfied that a ground of appeal, which contends that her Honour’s orders contain ambiguities and inconsistencies in relation to the process for taking accounts and winding up the hotel business, has some arguable substance and is genuinely put forward. Her Honour attempted to craft orders by reference to powers under s.87 of the Trade Practices Act 1974 (Cth), which depart from the usual orders for the taking of partnership accounts followed by the entry of judgments against partners for amounts found to be owing by them. The present order against Mr Scotts appears abnormal in its provision for such a judgment to be made before the taking of accounts, and not after the determination of what is due from them. There may be reasons why her Honour thought it appropriate to create an immediately enforceable liability on Mr Scotts to pay an amount to the receiver to be held available so as to discharge a personal liability which her Honour imposed on Mr Scotts under paragraph 11 of her Honour’s orders. However, her reasoning is not entirely clear, and in my view there is likely on an appeal to be a substantial argument concerning the terms and procedures for the accounting provided in her Honour’s orders.
Of course, I have not today heard any of the arguments with the detail, and with reference to evidence, which will be presented to the Full Court in relation to these matters, and it would in any event be inappropriate for me to attempt to arrive at conclusions on these matters at this stage in the bankruptcy proceedings. However, there appears sufficient merit in the grounds of appeal to point clearly towards adjourning the petition, so as to allow the appeal to proceed. It is not contested that I should assume that the appeal is being pursued expeditiously, and is likely to be heard by the Full Court in its sittings in August 2008.
The present applicant does not dispute my above conclusions about the merits of the appeal, although his counsel points out that Mr Scotts was refused a stay on execution under paragraph 5 (see the judgment of Graham J in Momentum Productions Pty Limited v Lewarne [2007] FCA 1988).
Counsel for the applicant also pointed out that there is pending a judgment by Emmett J in relation to the question of security for the costs of Mr Lewarne as respondent to Mr Scotts’ appeal. It is not, however, suggested to me that if security is ordered, it would not be able to be met by Mr Scotts in the amount likely to be ordered by his Honour.
The applicant’s counsel did not strongly contest that there was at least sufficient merit in the appeal to justify an adjournment of the petition, even if I could not be satisfied that its merits would justify the dismissal of the petition under s.52(2). That is the view which I also take at present, and I have not formed any opinion on whether the appeal would justify the dismissal of the petition.
Counsel for the applicant pointed to a number of other matters which I should take into account against allowing an adjournment. One significant point is that it has been conceded by Mr Scotts before Graham J that, at least as at November 2007, his assets and liabilities reveal net assets of $142,846, that is, that he is not able to pay the present judgment debt. If order 5 is upheld on appeal, his ability to pay the debt will depend upon the winding up of the hotel producing a surplus significantly in excess of the amount envisaged by Stone J.
In this situation, the Bankruptcy Court should consider the general interests of creditors, and the public interest in relation to not allowing insolvent persons to trade or to be active in business. However, there is no evidence before me of any other substantial creditor, and there has been no creditor who has sought to intervene in the bankruptcy proceedings.
Counsel for the applicant also pointed to Mr Scotts’ failure to obtain a stay, which was based upon the likelihood that at the end of the appeal there is a probability that he will face, in one form or another, a liability to pay $300,000 with interest to Mr Lewarne.
These are significant points, which I have taken into account. However, as I have explained above, the grounds of appeal do in my opinion have genuine substance in their challenges to order 5, which is sufficient to require the Bankruptcy Court to await the outcome of the appeal in relation to her Honour’s orders, before proceeding to determine the petition.
I therefore propose to adjourn the petition for directions before me early in September 2008. I shall then be able to hear how the appeal has proceeded, when it is likely to be resolved, and whether and when the petition should proceed to a final hearing. I shall give liberty to apply.
I certify that the preceding seventeen (17) paragraphs are a true copy of the reasons for judgment of Smith FM
Associate: Lilian Khaw
Date: 13 May 2008
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