Luka & Ors v Strata Sphere Pty Ltd
[2006] FMCA 1327
•13 September 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| LUKA & ORS v STRATA SPHERE PTY LTD | [2006] FMCA 1327 |
| BANKRUPTCY – Applications to have bankruptcy notices set aside – operation of a stay of the original judgment – issue of separate bankruptcy notices – applications dismissed. |
| Bankruptcy Act 1966 (Cth), ss.40(1)(g), 41, 306 Bankruptcy Regulations 1996 (Cth), Schedule 1, Form 1 Federal Magistrates (Bankruptcy) Rules 2006 (Cth), rr.3.02, 3.03 Uniform Civil Procedure Rules 2005 (NSW), rr.36.11(2A), 36.15, 36.16 |
| Harvey v Phillips (1956) 95 CLR 235 McDonald, Henry and Meek, Australian Bankruptcy Law and Practice |
| Applicants: | ROBERT LUKA, RUTH LUKA, GABOR FEJSZES |
| Respondent: | STRATA SPHERE PTY LTD |
| File Numbers: | SYG 1581 of 2006, SYG 1582 of 2006 and SYG 1558 of 2006 |
| Judgment of: | Lloyd-Jones FM |
| Hearing date: | 20 June 2006 |
| Last Submission filed: | 23 June 2006 |
| Delivered at: | Sydney |
| Delivered on: | 13 September 2006 |
REPRESENTATION
| Counsel for the Applicants: | Mr B Slowgrove |
| Solicitors for the Applicants: | John J Puleo & Company Solicitors |
| Counsel for the Respondent: | Ms S Kaur-Bains |
| Solicitors for the Respondent: | Jackson Smith Solicitors |
ORDERS
The applications of Robert Luka, Ruth Luka and Gabor Fejszes filed on 2 June 2006 are dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG1581 of 2006
SYG1582 of 2006
SYG1558 of 2006
| ROBERT LUKA, RUTH LUKA AND GABOR FEJSZES |
Applicants
And
| STRATA SPHERE PTY LTD |
Respondent
REASONS FOR JUDGMENT
The Proceedings
The three separate applications of Gabor Fejszes, Ruth Luka and Robert Luka (the debtors) were all filed in the Federal Magistrates Court of Australia on 2 June 2006. The applications for review seek to have the bankruptcy notices served on the applicants set aside. As the issues in the three separate applications are identical, as are the submissions by counsel for both sides, I will deal with the three separate applications as one. Separate bankruptcy notices were served on Ruth Luka on 17 May 2006, Robert Luka on 17 May 2006 and Gabor Fejszes on 24 May 2006.
Previously, all parties were involved in proceedings number 2272 of 2001 in the Equity Division of the Supreme Court of New South Wales. In those proceedings, Strata Sphere Proprietary Limited commenced proceedings against Robert Luka, Ruth Luka and Gabor Fejszes (the defendants). Strata Sphere claimed a breach of the defendants’ duty of fidelity. They alleged that the defendants, while in the employ of Strata Sphere, solicited customers away from Strata Sphere to a new business in which they were each involved. Those proceedings were set down for four days of hearing commencing on
9 May 2006 before Nicholas J. On 1 May 2006, the parties settled in those proceedings and agreed to short minutes of order in the following terms:
1.Judgment be entered for the plaintiff against the First, Second and Third Defendants in the sum of $44,000.
2.The execution of judgment be stayed pending the defendants complying with the terms of payments referred to in paragraphs 6 and 7 below.
3.Release of the security of costs paid by the Plaintiff in the sum of $45,000.
4.All existing cost orders are vacated.
5. No order as to costs.
The Court notes the following agreement between the parties:
6.The first, second and third defendants pay the plaintiff the total sum of $44,000 by the following instalments:
$20,000 by 5 May 2006;
$2,500 by 1 June 2006;
$2,500 by 1 July 2006;
$2,500 by 1 August 2006;
$2,500 by 1 September 2006;
$2,500 by 1 October 2006;
$2,500 by 1 November 2006;
$2,500 by 1 December 2006;
$2,500 by 1 January 2007;
$2,500 by 1 February 2007;
$2,500 by 1 March 2007.
7.The payments referred to in paragraph 6 above are to be made by cheque payable to Strata Sphere Pty Limited and sent to “Jackson Smith Solicitors, Level 3, 48 Hunter Street, Sydney” to be received by each of the dates stated in paragraph 6. Time of payment is of the essence.
8.In the event that the first, second and third defendants do not pay by each of the dates specified in paragraph 6 or the cheque is dishonoured then the plaintiff is entitled to proceed to execution of the judgment.
9.The first, second and third defendants may at any time make full payment of any money owing as set out above.
Background
On 2 May 2006, the parties attended the Supreme Court and handed up the agreed short minutes of order to Nicholas J, who made the orders accordingly. Counsel for Strata Sphere, Ms Kaur-Bains, drew His Honour’s attention to the third order pertaining to the release of a bank guarantee which had been provided by Strata Sphere for security of costs in the sum of $45,000. Ms Kaur-Bains indicated that the Supreme Court Registry required a specific order to be made in that regard before it would release the guarantee. Justice Nicholas indicated that if any difficulty presented itself in respect of the release, the matter could be returned to His Honour for further orders.
However, the finance section of the Supreme Court Registry refused to release the guarantee because it believed that the order in question was ambiguous.
Jackson Smith Solicitors informed the Associate to Nicholas J of the difficulty it faced in respect of the release of the guarantee. Arrangements were made for new short minutes of order to be approved by His Honour, provided that draft orders were consented to by the parties.
On 2 May 2006, Diana Zreik, solicitor of Jackson Smith Solicitors, sent an email to Matthew Puleo of John J Puleo & Co Solicitors, advising him of the Supreme Court Registry’s refusal to release the bank guarantee. She forwarded short minutes of order amending Order 3 of the orders made on 2 May 2006, in satisfaction of the Registry’s concerns. The original Order 3 reads:
Release of the security of costs paid by the Plaintiff in the sum of $45,000.
This was replaced with the following amended Order 3:
The release of the original Bank Guarantee filed by the Plaintiff in the sum of $45,000 to the Plaintiff.
Ms Zreik’s email of 2 May 2006 also contained the following statement:
The Associate to Justice Nicholas has informed me that His Honour will enter the new Short Minutes forthwith if they are by consent and delivered to His Honour before 10am tomorrow morning.[3 May 2006]
A request was made to John J Puleo & Co Solicitors for return of the signed short minutes by facsimile to enable them to be delivered to Nicholas J for execution.
The amended short minutes of order signed by the defendants were returned to Ms Zreik on 5 May and delivered to the Associate to Nicholas J on 9 May. On the same date the short minutes of order were entered and on 10 May 2006, a sealed copy of the judgment was forwarded to John J Puleo & Co Solicitors and received by them on
11 May.
On 11 May 2006, three separate bankruptcy notices were issued based on the Supreme Court judgment.
On 18 May 2006, the applicants forwarded $20,000 in satisfaction of the instalment under paragraph 6(i) of the judgment. On 23 May 2006, the respondent returned the sum of $20,000, which was received by the applicants on 24 May 2006.
On 30 May 2006, an amount of $2,500 in continuing satisfaction of the settlement was paid in accordance with paragraph 6(ii) of the judgment. This was subsequently returned to the applicant’s solicitors on 7 June 2006.
The following material was relied upon by the applicants in these proceedings:
a)Affidavit of Matthew Puleo, sworn 25 May 2006. A substantial part of this affidavit was ruled inadmissible on a number of grounds.
b)Affidavit of Matthew Puleo, sworn 9 June 2006.
c)Affidavit of Matthew Puleo, sworn 15 June 2006.
The following material were relied upon by the respondent in these proceedings:
a)Affidavit of Diana Zreik, sworn 7 June 2006. Ms Zreik was cross examined by Mr Slowgrove in respect of the contents of her affidavit.
On 2 June 2006, Registrar Lackenby made orders in relation to the three bankruptcy notices NN1927 of 2006 served on Gabor Fejszes, NN1925 of 2006 served on Robert Luka and NN1926 of 2006 served on Ruth Luka. The Registrar ordered pursuant to s.41(6A) of the Bankruptcy Act 1966 (Cth) (“the Act”) and r.3.03 of the Federal Magistrates (Bankruptcy) Rules 2006 (Cth), on the condition that the three bankruptcy notices were served on the applicants on 17 May (Ruth and Robert Luka) and 24 May (Gabor Fejszes), the time for compliance by the applicants with the requirements of the bankruptcy notices was extended up to and including 13 June 2006. The parties also had liberty to apply to vary or discharge the orders on 24 hours notice.
The Applicants’ claims
A convenient summary of the applicants’ claims in this Court is set out in the written submissions prepared by Mr Slowgrove and filed on
20 June 2006. I adopt paragraphs one to eleven of those submissions:
1.The Bankruptcy Notice is not in accordance with the Judgment. There is only one judgment against the three Applicants which has been stayed. There is no basis for the issue of the three Bankruptcy Notices. (Kleinwort Benson v Crowl (1988) 165 CLR 71).
2.The Short Minutes of Order attached the Bankruptcy Notice shows that they were not filed by the Respondent until 9 May 2006 and were not received by the Applicants’ solicitors until 11 May 2006. The actions of the Respondent in wishing to change the court orders clearly weigh the requirement that time was of the essence as to the first payment. Nor was there any rescission on the basis that that payment was not made of the settlement agreement between the parties.
3.In approaching the court to have the orders changed, the Respondent’s solicitor was acting on behalf of both parties, not just the Respondent. It was the Respondent that was responsible for the drafting of the orders, and subsequently declared ambiguous. The original court order provided for the Respondent company to put up security for costs. The fact that the Respondent chose to satisfy that order by means of a bank guarantee is purely a matter for the Respondent company. The solicitor for the Applicants co-operated with the Respondent’s solicitor in executing a new document that the Respondent’s solicitor claimed required filing as part of the settlement.
4.The Respondent company made no application to the court to have the stay dissolved. It is submitted that he could not do so because the Supreme Court would refuse to dissolve the stay because the Applicants substantially performed the settlement agreement to the best of their ability, given that the Respondent did not file the terms until 9 May 2006. There was no demand by the Respondent’s solicitor on 5 May 2006 that the money should be paid prior to the terms being filed.
5.The Applicants had no opportunity to pay in accordance with the settlement until receipt of the terms on 11 May 2006. The Bankruptcy Notices are an abuse of process and do not correspond to any known bankruptcy policy.
6.The Respondent company fundamentally broke the agreement when it returned the Applicant’s bank cheque for $20,000 under the settlement. The settlement had not been rescinded at that time and there has never been any basis for the issue of the Bankruptcy Notices.
7.This is a matter that is in the Supreme Court which has been settled. It was settled without admission of liability by the Defendants who are unincorporated and had been in a law suit brought by the Respondent company in 2001. The proceedings were stayed for approximately 10 months for the Respondent company to put up security for costs.
8.The only debt owed by the Applicants to the Respondent arises under the Settlement Agreement. The Judgment does not create a real and a true debt independently of the judgment agreement. The Applicants have a counter-claim set-off or cross-demand equal to the judgment debt based on the Settlement Agreement, which could not have been raised in the proceedings in which the judgment was obtained.
9.Before any bankruptcy notice could issue for any alleged breach of settlement, the Applicants had a right to be heard on an application to dissolve the stay in the Supreme Court. The Respondent company has made no application to dissolve that stay and it is submitted that its failure to do so because the court would not grant such an application which would be opposed by the Applicants. Settlement is not self-enforcing and the representations of the Respondent’s solicitor concerning the form of the Short Minutes and the re-lodging of the Short Minutes on 9 May 2006 means that the Respondent company was never in a position to enforce the Settlement Agreement on 5 May 2006 because it had not entered the Judgment pursuant to delay caused by the Respondent company’s own actions.
10.The Respondent’s solicitors in filing the Short Minutes had not only fiduciary duties to her own client but fiduciary duties to the Applicants. The Respondent’s solicitor should not have been approaching the register except with the consent of the Applicant’s solicitor. That consent was given pursuant to the consented filing of the Short Minutes as requested by the Respondent’s solicitor from the Applicants’ solicitor who was out at Castle Hill and not in the city. It was a breach of fiduciary duty for the Respondent’s solicitor to issue bankruptcy notices based upon the judgment, when the Judgment was entered on behalf of both parties.
11.The proceedings are an abuse of process motivated essentially by spite through the use of a corporate structure. The Respondent company does not appear to have any assets beyond its rights under the Settlement Agreement with the Applicants. The settlement with the Applicants was inclusive of costs which the Respondent must pay to its solicitors.
Reasons
The first issue Mr Slowgrove addressed was the stay as part of the orders made by Nicholas J on 2 May 2006 and the substituted orders made on 9 May 2006. Mr Slowgrove argued that the power to issue a bankruptcy notice comes from a judgment, the execution of which has not been stayed. It was argued that the stay on this judgment had to be dissolved before any bankruptcy notice could be issued. Mr Slowgrove contended two bases for this submission. Based on the wording of both sets of orders, a stay of the orders was produced on both 2 May and 9 May. Therefore, there was no power to issue a bankruptcy notice.
Mr Slowgrove argued that if the intention was that the orders made on 9 May was to have a different effect than those made on 2 May, then the applicants would not have agreed to the second set of orders. They would instead have sought a listing before Nicholas J to resolve any differences between the two. That course was not pursued by the applicants as they did not perceive any difference between the two sets of orders.
Mr Slowgrove further argued that the orders of 9 May were drafted by the respondent’s solicitors and that any ambiguity should be construed against them. Also it cannot be correct that the stay order could automatically be dissolved without putting on evidence before the primary judge. It would upset the settlement of litigation if one party unilaterally acted without first applying to have the stay dissolved. Further, an appearance before the primary judge would resolve dispute about the stay, before the matter comes to a Court exercising bankruptcy jurisdiction.
Mr Slowgrove submitted that the orders were not self-executing unless they had been drafted to that effect in the agreement. He also submitted that it is common for settlement orders to have notations which stay the judgment. This Court should not upset that stay by accepting that the respondent could subjectively decide that the applicants were in breach of the orders and issue bankruptcy notices, yet fail to put on an application before the primary judge who made the orders.
Ms Kaur-Bains submitted that the issue of whether or not there was a stay of the judgment must be addressed by looking at the terms of the agreement as embodied in the judgment of 9 May 2006. The pertinent question is whether there was a stay in place on 11 May 2006 when the bankruptcy notice was issued. Ms Kaur-Bains argued that no stay was in place at that time. The second order of the judgment clearly states “Execution of judgment is stayed pending the Defendants complying with the terms of payments referred to in paragraphs 6 and 7”. Therefore, a failure to comply with the order meant that a stay was no longer in place. No further steps needed to be taken by the respondent. The applicants have not pointed to any authority to suggest that there would be a stay in place. Ms Kaur-Bains argued that one should look at the terms of the judgment, orders and agreement as a whole to ascertain the parties’ intentions. In light of paragraph 7 of the orders (time of payment is of the essence) and paragraph 8 (failure of the applicants to pay by each of the listed dates would entitle the respondent to proceed to execution of the judgment), it is clear that no stay would operate once the applicants were in default of the judgment. It matters not that by the time the Supreme Court made the revised orders on 9 May 2006, the applicants were already in default of paragraph 6(i) of the orders.
The meaning of the judgment is a question of interpretation.
The judgment is in the exact same terms as the short minutes of order signed by counsel for both sides at the conference on 1 May 2006 and there is evidence before the Court to this effect. Furthermore, both sets of solicitors and the parties themselves were present. The parties were in agreement about the content of those orders when they put their signatures to it. The question of interpretation is directed to whether the stay was lifted. First, was there a stay on the order? Secondly, if there was a stay, under what circumstances could it be lifted?
The first order in question states that judgment be entered against the three defendants in the Supreme Court proceedings in the sum of $44,000. The second order is quite specific:
2.The execution of judgment be stayed pending the defendants complying with the terms of payments referred to in paragraphs 6 and 7 below.
I believe that this order means that execution of the judgment is stayed, as long as the defendants comply with the terms of payment referred to in paragraphs 6 and 7 of the orders. Paragraph 6 of the orders, which sets out the terms of payment, is quite specific. Paragraph 7 states where the cheques are to go, and then includes the words “time of payment is of the essence”. This means that the money has to be paid strictly on or before those dates. If the payments arrive after the specified dates, payment has not been made in accordance with paragraphs 6 and 7 and there has been non-compliance with the judgment. The parties’ choice of the words “time of payment is of the essence” indicates their intention to adhere to strict time limits for each payment.
Failure to adhere to the criteria in paragraph 6 causes paragraph 8 to come into effect:
8.In the event that the first, second and third defendants do not pay by each of the dates specified in paragraph 6 or the cheque is dishonoured then the plaintiff is entitled to proceed to execution of the judgment.
The term “execution of the judgment” should be given its usual meaning, which is any action open to the respondent to seek, being bankruptcy, writ of possession or garnishee order. Again, the parties were quite specific as to what was agreed.
This leaves the meaning of Order 2. Mr Slowgrove again submitted that if a breach of the judgment has occurred, it is inappropriate for the respondent to take action before making an application to the primary judge who made the orders. As submitted by Ms Kaur-Bains, no authority has been placed before the Court in support of this contention, nor have I been able to locate a case which supports this view. The Uniform Civil Procedure Rules 2005 (NSW) do not assist in this interpretation. Consequently I agree with Ms Kaur-Bains that it is a matter of considering the terms of the orders to ascertain the intention of the parties. If Mr Slowgrove’s contention is correct, I believe that the parties would have expressed themselves differently from that which appears in Order 2. The order clearly states that the judgment is “stayed pending”. Again, the parties were specific as to what was agreed. In order for Mr Slowgrove’s contentions to be correct, the stay would have to have a provision for further orders should the circumstances change. As the stay was expressed as pending, I find it difficult to accept that the status of the stay would not be affected by circumstances as expressed in the remainder of the orders if they were to occur. I cannot accept the argument advanced by Mr Slowgrove in respect of Order 2.
The next issue raised was whether Order 2 as made on 2 May 2006 has the same effect as Order 2 made on 9 May 2006. There does not appear to be any dispute between the parties that the meaning remains the same as there is no difference in the language used. The dispute arises over the operation of the stay. Both sides accepted that the order made on 2 May had a stay operating. Mr Slowgrove submitted that one cannot come to the view that there is any difference between the orders of 2 May and 9 May; nor were the 2 May orders operative because they were subsequently discharged on 9 May. Mr Slowgrove submitted that the format of the agreement was adopted to cut down the workload of the Court and to effectively settle matters. However, any ambiguity should be construed against the respondent who drafted the document. The orders were based on the premise that both sets of orders had the same status other than the agreed change made to Order 3. However the stay was automatically dissolved without either side putting on evidence about what occurred before the primary judge.
Mr Slowgrove contended that in order for the orders to be self-executing and to resolve the stay issue, such an approach would have had to be drafted into the agreement.
Mr Slowgrove acknowledged that there was no payment made by the applicants to the respondent on 5 May 2006. However this was irrelevant, whether the solicitor realised that omission or not.
He suggested that if Jackson Smith Solicitors had made an application to Nicholas J seeking to have the stay removed because the first payment had not been made, that application would have been unsuccessful. Mr Slowgrove argued that on the facts, even if one took the view that non-payment on 5 May was a breach of the orders, relief against forfeiture would have been granted by a Court in these circumstances. He contended that there was confusion between both sets of solicitors and that the respondent was attempting to take unconscionable advantage of the applicants. Also that if Jackson Smith Solicitors had indicated before filing the orders on 9 May 2006 that the replacement orders did not contain a stay, the applicants could have disagreed and sought a re-listing before the Court.Ms Kaur-Bains handed up in Court a chronology of relevant events and drew the Court’s attention to an entry which notes that the Supreme Court matter had been settled and the terms were signed on 1 May 2006.(Affidavit of Ms Zreik, paragraph 8) Three photocopied sets of the executed short minutes were provided to Mr Slowgrove for his clients. It was submitted that the short minutes made clear what the agreed terms were. On 2 May 2006, Nicholas J made orders in accordance with the short minutes which were entered forthwith. Under r.36.11(2A) of the Uniform Civil Procedure Rules,
(2A) If the court directs that a judgment or order be entered forthwith, the judgment or order is taken to be entered:
(a) when a document embodying the judgment or order is signed and sealed by a registrar
A copy of the judgment of 2 May 2006, sealed and signed by a Registrar on that date, was tendered in these proceedings as evidence.
Paragraph 11 of the Affidavit of Ms Zreik is evidence of the discussion between Nicholas J and Ms Kaur-Bains in relation to Order 3 and the possible difficulties that that order may cause when seeking to release the guarantee lodged with the Court Registry. This problem did arise when Ms Zreik approached the Supreme Court’s finance section seeking release of the guarantee. On 2 May 2006 at 5.02pm, Ms Zreik sent an email to Mr Puleo in the following form:
The reason I am sending this email is because the Finance Section of the Supreme Court has said to us today that it will not release the Bank Guarantee because order number 3 of the Short Minutes dated 1 May 2006 is too ambiguous.
We have amended paragraph 3 of the orders to satisfy the Court registry’s concerns. Please find attached a copy of the amended Short Minute of Orders… (Affidavit of Ms Zreik, p.9)
Ms Zreik indicated that only Order 3 had been changed while the rest of the orders remained as was agreed and entered.
Ms Kaur-Bains submitted that there is nothing in the above email that could show any unconscionable conduct on the part of Ms Zreik.
The email continues:
The Associate to Justice Nicholas has informed me that His Honour will enter the new Short Minutes forthwith if they are by consent and delivered to His Honour before 10am tomorrow morning.
We would be grateful if you would execute the attached Short Minutes and fax them back to us so that we may have our clerk deliver the Short Minutes to His Honour tomorrow morning for them to be entered. (Affidavit of Ms Zreik, p.9)
On Friday 5 May 2006 Ms Zreik send a further email to Mr Puleo indicating that she had only received the first page of the short minutes and requested that the entire document be sent to her. At 3:48pm,
Mr Puleo’s firm faxed to Ms Zreik the amended short minutes initialled by Mr Puleo, without a cover letter. Although only Order 3 had been amended, His Honour vacated all the orders of 2 May 2006 and replaced them with the revised orders on 9 May 2006.
Ms Kaur-Bains submitted that this Court is required to:
(a)Determine whether there was any unconscionable conduct on the part of Ms Zreik;
(b)Construe the judgment;
(c)Determine what the judgment says;
(d)Determine whether the applicant has made a successful cross-claim or demand for the purposes of s.40(1)(g) of the Act.
In respect of (a) above, Ms Kaur-Bains submitted that Ms Zreik’s email of 2 May to Mr Puleo said that she would arrange for the document to be delivered to the Associate to Nicholas J and that was precisely what she did. Ms Zreik did not sign the short minutes for anyone other than her own client. Mr Puleo signed the document on behalf of his clients. The amended short minutes made quite clear what had been agreed to by the parties. It also reiterated that the first payment was to be made on 5 May 2006. The amended short minutes were attached to
Ms Zreik’s email of 2 May and it was only due to the delay in a response from Mr Puleo that the orders were not entered until 9 May.
I am satisfied on the evidence before me that the claim of unconscionable conduct on the part of Ms Zreik in relation to the amended orders, and placing them before the Supreme Court, cannot be sustained.
In respect of (d) above at [30], Ms Kaur-Bains submitted that in the absence of full payment of the debt, the Court has to be satisfied for the purposes of s.40(1)(g) of the Act that there is a “counter-claim, set-off or cost demand equal to or exceeding the amount of the judgment debt”.Rule 3.02 of the Federal Magistrates Court (Bankruptcy) Rules sets out the requirements of what evidence is needed to be filed in affidavit form to establish such a claim:
(1)An application to set aside a bankruptcy notice must be accompanied by:
(a) A copy of the bankruptcy notice; and
(b)An affidavit stating:
(i) The grounds in support of the application; and
(ii)The date when the bankruptcy notice was served on the applicant; and
(c) A copy of any application to set aside the judgment or order in relation to which the bankruptcy notice was issued and any material in support of that application.
Ms Kaur-Bains submitted that no application under r.3.02 has been made by the applicants to set aside the judgment or orders of the Supreme Court. Nor have they established that they can make a cross-claim or cross-demand in the Supreme Court. Ms Kaur-Bains submitted that r.36.15 of the Uniform Civil Procedure Rules makes clear that there are limited grounds on which a judgment which has been entered can be set aside:
(1) A judgment or order of the court in any proceedings may, on sufficient cause being shown, be set aside by order of the court if the judgment was given or entered, or the order was made, irregularly, illegally or against good faith.
(2) A judgment or order of the court in any proceedings may be set aside by order of the court if the parties to the proceedings consent.
Also relevant is r. 36.16 of the Uniform Civil Procedure Rules:
(1) The court may set aside or vary a judgment or order if notice of motion for the setting aside or variation is filed before entry of the judgment or order.
(2) The court may set aside or vary a judgment or order after it has been entered if:
(a) the judgment or order has been entered under Part 16 (Default judgment), or
(b) the judgment or order has been given or made in the absence of a party, whether or not the absent party had notice of the relevant hearing or of the application for the judgment or order, or
(c) in the case of proceedings for possession of land, the judgment or order has been given or made in the absence of a person whom the court has ordered to be added as a defendant, whether or not the absent person had notice of the relevant hearing or of the application for the judgment or order.
(3) Without limiting subrules (1) and (2), the court may set aside or vary any order (whether or not part of a judgment) except so far as the order:
(a) determines any claim for relief, or determines any question (whether of fact or law or both) arising on any claim for relief, or
(b) dismisses proceedings, or dismisses proceedings so far as concerns the whole or any part of any claim for relief.
(4) Nothing in this rule affects any other power of the court to set aside or vary a judgment or order.
Ms Kaur-Bains submitted that the onus is on the applicants to prove they fall within the exception to the Rules. I accept her submission that there is nothing before this Court to suggest that the applicants intend to make such an application or that there is any evidence of this nature before the Court: Harvey v Phillips (1956) 95 CLR 235 at 243.
I do not believe that items (b) and (c) at [30] above require detailed consideration. The parties make no specific submissions in respect of them.
Mr Slowgrove in his written submissions claimed that all three bankruptcy notices should be set aside with costs. The respondent did not elect to proceed on any one of the notices and to do so would discriminate against the other two debtors. It was argued that all three notices are defective and cannot be cured under s.306 of the Act.
Mr Slowgrove alleged that:(a)under the Act only one bankruptcy notice should have been issued against the three applicants because they were joint debtors;
(b)if the applicants were to comply with each of the bankruptcy notices they would pay three times the amount of the judgment debt.
Mr Slowgrove indicated his reliance on Kleinwort Benson v Crowl (1988) 165 CLR 71, where the High Court held that a bankruptcy notice must be in accordance with a judgment. Mr Slowgrove argued that in this case none of the bankruptcy notices were in accordance with the judgment. The notices would only be valid if there were three separate judgments. Also that the creditor would stand to gain if all three debtors paid in accordance with the notices issued.
Mr Slowgrove’s complaint was that there had been no election of which one of the notices the creditor wished to proceed on; and on that basis all three bankruptcy notices should be set aside.
Ms Kaur-Bains submitted that in Kleinwort Benson v Crowl, the validity of a bankruptcy notice was challenged on the basis that the interest amount had been understated in it. The High Court held that a bankruptcy notice is a nullity if it fails to meet a requirement made essential by the Act or if the notice reasonably misleads the debtor as to what is necessary to comply with it. In such cases the notice is a nullity whether or not the debtor is in fact misled.
In relation to the three separate bankruptcy notices, Ms Kaur-Bains referred the Court to s.41(2) of the Act:
(2) The notice must be in accordance with a form prescribed in the regulations.
The form that was used by the respondent in this matter followed the form that has been specified and is in evidence.(Affidavit of Matthew Puleo, sworn 5 May 2006) Ms Kaur-Bains then referred the Court to the commentary in McDonald, Henry and Meek, Australian Bankruptcy Law and Practice at 41.2.05:
Compliance with Form 1 is mandatory, non-prescriptive, and non-compliance in essential respects makes the notice invalid and able to be set aside.
Schedule 1, Form 1 of the Bankruptcy Regulations 1996 (Cth) (Bankruptcy Notices) specifically refers to “the debtor” in the singular. Ms Kaur-Bains submitted that when there are joint debtors whose liability is joint and several, a creditor can proceed against just one debtor for the whole of the debt. There is no requirement to divide the debt between the three individuals. In the matter before this Court, the bankruptcy notices were issued to each of the applicants in accordance with the requirements of s.41(1) and (2) of the Act. It was argued that when each applicant may take a different view upon receipt of each bankruptcy notice. Ms Kaur-Bains submitted that it is important to issue separate bankruptcy notices for each debtor because non-compliance with a bankruptcy notice results in an act of bankruptcy for the purposes of s.40 of the Act. Section 40 is very specific as to when the act of bankruptcy occurs, being non-compliance with the notice for moneys unpaid. It was submitted that s.41(1) requires separate notices to be issued for reason of fairness to the debtor and also between the parties.
Mr Slowgrove further relied on Hubner v Australia and New Zealand Banking Group [1999] FCA 385 (“Hubner”) as authority that the appropriate procedure is to issue one bankruptcy notice based on one judgment and serve it on all three joint debtors.
Ms Kaur-Bains submitted that in Hubner one bankruptcy notice was indeed issued against three joint debtors. However, the debtors in Hubner contended that the notice was invalid because a separate notice should have been issued to each of the debtors. Ms Slowgrove is arguing the reverse of that decision. In considering the matter, the Full Federal Court said that joint debtors to the judgment debt were each obliged to pay the full debt: Hubner at [19] - [20]. The Court held that the one bankruptcy notice issued to joint debtors was not misleading because the bankruptcy notice made clear that “payment was required in relation to each debtor within a specific time”: Hubner at [22].
The Court also referred to other cases where the issue had been debated: Hubner at [13] - [22]. Ms Kaur-Bains submitted that there is no requirement in the Act which specifies that one bankruptcy notice has to be issued to joint debtors, nor has Mr Slowgrove identified any provision within the Act with this requirement or any authority supporting that contention.
Ms Kaur-Bains argued that given that joint debtors to a judgment debt are each obliged to pay the full amount of the judgment, it is a matter for the creditor to choose whether one bankruptcy notice is issued to all three debtors, or alternatively, separate notices to each debtor. In the case before this Court where one of the debtors is not related to the other two, it is prudent to serve separate notices because each may be served at a different time and the time for compliance will depend on when the debtor is served. If the creditor in this case served one notice on each of the debtors, the debtors could have argued that the notice be set aside because Gabor Fejszes was served at a different time to the others and was misled as to the time for compliance.
I am satisfied that there are a number of ways in which the debtors could have complied with the bankruptcy notices to avoid an act of bankruptcy. They could come to an arrangement amongst themselves, or between themselves and the creditor. Section 41(6) of Act also provides:
(6) Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with subsection (5), he or she shall be deemed to have complied with the notice if, within the time allowed for payment, he or she takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it.
Finally, Mr Slowgrove relied on Lindholdt v Merrit Madden Printing Pty Ltd [2002] FCA 260 (“Lindholdt”). In this case, the Local Court made an instalment order requiring that payment of a judgment debt be made in a specific manner. The debtor sent a cheque to the creditor in accordance with the instalment order. Despite that however, the creditor applied to the Local Court for discharge of the instalment order without referring to the fact that it had received the instalments. The Local Court discharged the instalment order which resulted in the creditor then pursuing a bankruptcy notice. Justice Weinberg held that the Federal Court had implied jurisdiction to set aside a bankruptcy notice when there was an abuse of process: at [42]. The Federal Court could do so because the Local Court set aside the instalment order without knowing that the debtor had in fact paid monies in accordance with the order. Mr Slowgrove submitted that the judgment was the subject of an instalment order staying execution, where the lifting of the stay was done without providing the other party with an opportunity to challenge the relevant facts.
Mr Slowgrove relied on Lindholdt to contend that the behaviour of Jackson Smith Solicitors constituted an abuse of process and that the Court should exercise its implied jurisdiction and set aside the bankruptcy proceedings. Ms Kaur-Bains submitted that the facts in Lindholdt were very different to the case before this Court. The Court in Lindholdt had evidence, which it accepted, that the debtor had paid the debt and the creditor had not brought that fact to the Local Court’s attention when discharging the order for instalments. Ms Kaur-Bains submitted that there is no evidence of any abuse of process on the part of Ms Zreik or Jackson Smith Solicitors. Also that this is a very serious allegation and abuse must clearly be established before the Court exercises its inherent jurisdiction. I accept the evidence of
Ms Zreik provided in her affidavit, the admission of which was unchallenged when formally placed before the Court. Further, I have had the benefit of the cross-examination of Ms Zreik on the contents of her affidavit. I am satisfied that there is no evidence of abuse of process, unconscionability or breach of any fiduciary duties on the part of Ms Zreik or the firm of Jackson Smith Solicitors.
I have set out at [27] – [29] above the sequence of events in respect of filing of consent orders on 2 and 9 May 2006. If there was any misunderstanding on the part of Mr Puleo, that evidence has not been placed before me nor subject to any cross-examination in Court. However, I do not believe that would substantially affect the issues currently before me.
Conclusion
I am satisfied that the question of a stay of judgment is answered by the terms of the agreement as embodied in the judgment dated 9 May 2006. Order 2 of the judgment clearly states how the stay was to operate and the circumstances in which it was dissolved. Further, I am satisfied that no stay operated once the applicants (debtors) were in default. The meaning of the words within Order 2 must be the same at 2 May 2006 and 9 May 2006 and have the same effect. I am not satisfied that any material has been placed before the Court which indicates that the applicants (debtors) have a cross-claim or cross-demand in an amount equal to the judgment debt. Neither is there any indication that the applicants have taken any steps seeking that the judgment of Nicholas J of the Supreme Court of New South Wales be set aside.
I am also satisfied that there is no requirement in the Act which specifies that one bankruptcy notice has to be issued to joint judgment debtors. In these circumstances, where the judgment debtors are individuals, I accept that it is prudent to serve separate notices on each individual as the time for compliance will vary depending on when each individual debtor was served. There are a number of ways the debtors could have complied with the bankruptcy notices, to settle the debt and avoid an act of bankruptcy. The three applications should be dismissed.
I certify that the preceding forty-seven (47) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM.
Associate:
Date: 13 September 2006
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