Maurice Blackburn Cashman Pty Ltd v Grizonic
[2006] FMCA 126
•23 January 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| MAURICE BLACKBURN CASHMAN PTY LTD v GRIZONIC & ANOR | [2006] FMCA 126 |
| BANKRUPTCY – Authority under s.188 Bankruptcy Act 1966 – application for order to release property from control of controlling trustee and to set aside authority – prior authority not effective – whether special circumstances justifying release of the first respondent’s property from control of the second respondent – whether authority an abuse of process. |
| Bankruptcy Act 1966, ss.30, 40, 188, 188(2AA), 188(4), 189AAA, 189(1A)(d), 208 Legal Profession Act 1987 Bankruptcy Regulations 1996, r.10.02(1) Corporations Act 2001, s.447A(2)(b) |
| Maurice Blackburn Cashman Pty Ltd v Claudio Grizonic & Anor [2005] FMCA 1541 Cain vWhyte (1933) 48 CLR 639 Williams v Spautz (1992) 174 CLR 509 Blacktown City Council v Macarthur Telecommunications Pty Ltd (Administrator Appointed) (2003) 47 ACSR 39 St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd (Administrator Appointed) (2004) 201 ALR 265 Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 Edelsten v Deputy Commissioner of Taxation (NSW) (1989) 86 ALR 257 Re George Zorbas & Nicholas Zorbas; Ex parte F & G Concrete Services Pty Ltd (unreported, Federal Court 28 November 1994 per Sackville J) Deputy Commissioner of Taxation v Johns [2005] FCA 1143 Minister for Community Services and Health v Chee Keong Thoo (1988) 78 ALR 307 Re Alty; Ex parte Muir (1985) 9 FCR 190 Laurence v Mulroney (1987) 15 FCR 268 Dowling v Colonial Mutual Insurance Society (1915) 20 CLR 509 Raschilla v Gulluni (1987) 14 FCR 57 Hooper v Ewins (1997) 79 FCR 389 |
| Applicant: | MAURICE BLACKBURN CASHMAN PTY LIMITED |
| First Respondent: | CLAUDIO GRIZONIC |
| Second Respondent: | CHRISTOPHER MEL CHAMBERLAIN |
| File Number: | SYG2937 of 2005 |
| Judgment of: | Barnes FM |
| Hearing dates: | 24 October 2005, 3 November 2005, 12 December 2005, 18 January 2006 |
| Delivered at: | Sydney |
| Delivered on: | 23 January 2006 |
REPRESENTATION
| Counsel for the Applicant: | Mr J. Johnson |
| Solicitors for the Applicant: | Maurice Blackburn Cashman Pty Ltd |
| Counsel for the First Respondent: | Mr R. Killalea |
| Solicitors for the First Respondent: | Oliveri Attorneys |
| Solicitors for the Second Respondent: | KP Farmer & Associates |
ORDERS
That the application filed on 12 October 2005, for an order pursuant to section 208 of the Bankruptcy Act 1966 releasing the property of Claudio Grizonic from the control of Christopher Mel Chamberlain and a declaration that the authority signed by Claudio Grizonic on 10 October 2005 naming and authorizing Christopher Mel Chamberlain to call a meeting of creditors of Claudio Grizonic and to take control of the property of Claudio Grizonic is and constitutes an abuse of process and an order that the authority signed by Claudio Grizonic on 10 October 2005 naming and authorizing Christopher Mel Chamberlain to call a meeting of creditors of Claudio Grizonic and to take control of the property of Claudio Grizonic be set aside, is dismissed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG2937 of 2005
| MAURICE BLACKBURN CASHMAN PTY LTD |
Applicant
And
| CLAUDIO GRIZONIC |
First Respondent
And
| CHRISTOPHER MEL CHAMBERLAIN |
Second Respondent
REASONS FOR JUDGMENT
The Proceedings
The applicant, Maurice Blackburn Cashman Pty Ltd is a petitioning creditor who in separate proceedings in this Court is seeking a sequestration order in relation to the first respondent Mr Grizonic. Two creditor’s petitions have been presented by the applicant. The creditor’s petitions were listed for hearing on 12 October 2005.
On 10 October 2005 Mr Grizonic signed an authority pursuant to s.188 of the Bankruptcy Act 1966 (C’th) (the Act) naming and authorising the second respondent, Mr Chamberlain, to call a meeting of Mr Grizonic’s creditors and to take control of his property. Under s.189AAA of the Act the giving of an effective authority meant that the proceedings relating to the creditor’s petitions were stayed by force of that section.
By application filed in court on 12 October 2005 the applicant sought a number of orders in relation to the authority signed on 10 October 2005. First a declaration was sought that the giving of the authority was not effective because the Court had not granted leave under s.188(4) (it being the second authority signed by Mr Grizonic as discussed below). The application for such a declaration was heard on 12 October 2005 and dismissed (see Maurice Blackburn Cashman Pty Ltd v Claudio Grizonic & Anor [2005] FMCA 1541). As had been foreshadowed, the applicant then pursued an application for other orders.
The applicant sought an order pursuant to s.208 of the Act releasing the property of the first respondent from the control of the second respondent, a declaration that the authority is and constitutes an abuse of process and an order that the authority be set aside. The second respondent submits to such order as the Court may make except an order against him in respect of costs. I was informed that no order for costs would be sought against him by the applicant provided he adhered to the position that he submitted to such order as the Court may see fit to make in these proceedings.
On the first date fixed for the hearing of the present application the first respondent unsuccessfully sought summary dismissal of the application. The subsequent hearing was adjourned part heard so that the applicant could file and serve points of claim as requested by the first respondent. After further adjournment the hearing was completed on 18 January 2006.
As a decision was needed as a matter of some urgency (in light of s.189(1A)(d) of the Act), at the conclusion of the hearing I reserved judgment and indicated that I would give judgment on 23 January 2006. I did so and indicated that I would publish my reasons as soon as circumstances permitted me to do so. These are those reasons.
Background
The claim by the applicant as petitioning creditor was based initially on a judgment in its favour of 28 June 2004 arising from the filing of a certificate of determination issued by a costs assessor under the Legal Profession Act 1987 in the Local Court of New South Wales. The judgment was in the sum of $16,047.24. The first respondent paid $7,000. He twice unsuccessfully applied to pay the remaining debt of $9,046.24 plus interest by instalments. He executed statements of assets and liabilities in connection with these applications.
A bankruptcy notice founded on the judgment was served on the first respondent on 10 May 2005. An application to set aside the bankruptcy notice was dismissed by Federal Magistrate Raphael on 28 June 2005. A creditor’s petition was presented by the applicant on 29 June 2005 grounded upon non-compliance with the bankruptcy notice in respect of the judgment debt. On 30 June 2005 the first respondent signed an authority naming and authorising Ivor Worrell as controlling trustee under s.188 of the Act. The proceedings in relation to the creditor’s petition (matter SYG1694 of 2005) were stayed by operation of s.189AAA of the Act. Pursuant to that authority a report to creditors dated 2 August 2005 was issued by Mr Worrell. A meeting of creditors was convened and adjourned. On 19 August 2005 the adjourned meeting of the creditors of the first respondent was held. No resolutions were passed at this meeting.
On 30 August 2005 a second creditor’s petition was filed by the applicant with the leave of Federal Magistrate Raphael in proceedings SYG1691 of 2005. It relies upon an alleged act of bankruptcy arising from the signing of the authority in accordance with s.188 of the Act by the first respondent on 30 June 2005. On 30 August 2005 the creditor’s petitions were listed for hearing before me on 12 October 2005. There is no evidence before the Court in these proceedings as to whether the creditor has made an election as to which petition it wishes to pursue.
On 29 September 2005, in proceedings between the first respondent and Mr Worrell, a Registrar of this Court declared by consent that the authority signed on 30 June 2005 was not effective for the purposes of Part X of the Act within the meaning of s.188. It is not disputed that this was because the controlling trustee did not give the debtor the information prescribed by s.188(2AA) of the Act and reg 10.02(1) of the Bankruptcy Regulations. The authority presently in issue was signed by Mr Grizonic on 10 October 2005.
Circumstances relied on by the applicant
The applicant relied on a combination of circumstances in support of the contention that the signing of the authority on 10 October 2005 constitutes an abuse of process and that ‘special circumstances’ exist that justify the Court making an order under s.208 of the Act releasing Mr Grizonic’s property from the control of Mr Chamberlain.
First, it was contended by Counsel for the applicant that the authority was signed in circumstances where the creditor was prima facie entitled to a sequestration order. It was submitted that the first respondent is and was insolvent at all relevant dates from 28 June 2005 (the date of the first alleged act of bankruptcy, being non-compliance with the requirements of the bankruptcy notice) to 12 October 2005 (the date which had been fixed for hearing of the creditor’s petitions). It was submitted that it was relevant to have regard to matters such as the nature of the proposal under each authority, the report of the first controlling trustee (the Worrell Report), the evidence about Mr Grizonic’s circumstances and of his disclosure of his financial circumstances.
It was further contended that there is no dispute about the debt owed to the creditor. No issue has been taken with the existence of the debt in these proceedings. The applicant submitted that even if the bankruptcy notice on which the first petition was based is potentially the subject of challenge (there being an issue about whether the notice was in accordance with the form prescribed in relation to the identification of the statutory provision under which interest was claimed), the second creditor’s petition is uncontested. It was not disputed in these proceedings that the signing of the authority was an act of bankruptcy under s.40 of the Act.
The applicant also claimed that the first respondent had not produced any sustainable ground upon which the Court could exercise any discretion not to make a sequestration order or could be satisfied that there was other sufficient cause why a sequestration order ought not to be made in relation to the estate of Mr Grizonic. This was disputed by counsel for the first respondent by reference to a possible challenge to the bankruptcy notice forming the basis for the first creditor’s petition for relying upon what was said to be the wrong interest provisions and based on the general circumstances of the matter which were said to include the fact that the first respondent had an action for negligence in the Supreme Court against the applicant and a contention that the applicant had ‘forced’ the first respondent to issue the s.188 authority.
Nonetheless, in these circumstances it was submitted for the applicant that having regard to what the High Court stated in Cain v Whyte (1933) 48 CLR 639 prima facie the applicant would have been entitled to a sequestration order on each occasion the creditor’s petition was listed for hearing, absent some intervening act such as the signing of a s.188 authority or the establishment by the debtor of some sufficient cause against the making of a sequestration order. Counsel for the first respondent conceded that it was probably true to say that it was more likely than not that a sequestration order would have been made on the basis contended for by counsel for the applicant.
It was also said to be relevant to have regard to what had occurred pursuant to the s.188 authority signed on 30 June 2005 (the first authority) even though that authority was subsequently found not to be effective. After the first authority was signed, the hearing of the creditor’s petition was automatically stayed and was stood over to enable the meeting of creditors to be convened. Pursuant to that authority the controlling trustee nominated (Mr Worrell) conducted an investigation and prepared a report to creditors (the Worrell Report) dated 2 August 2005 which analysed the then proposal of Mr Grizonic. The creditors considered this report. Mr Grizonic’s proposal was not adopted by his creditors.
The proposal put to the creditors at that time was that a third party would pay $3,711.66 plus trustee’s fees and statutory charges of $15,540.15 and that those funds would be available for equal distribution among Mr Grizonic’s creditors after payment of the fees and charges. According to the Worrell Report this represented a potential dividend of one half of one cent in the dollar. The report identified 39 creditors in the amount of $742,333 (although the amounts were not verified at the time of the report).
The Worrell Report recommended adoption of Mr Grizonic’s proposal as in the interests of creditors as offering a greater commercial return than under a bankruptcy. Mr Worrell expressed the view that there would be no realisable assets in a bankruptcy of Mr Grizonic (there being, according to the report, virtually none of value) and that Mr Grizonic (who was in receipt of a Newstart Allowance) would not be liable for income contributions. The Report stated that no transactions recoverable under the provisions of the Bankruptcy Act 1966 had been identified.
The report suggested that the only prospect of a return to a bankrupt estate would be to continue Supreme Court legal proceedings commenced by Mr Grizonic and outlined in the report. The report referred to Supreme Court proceedings by Mr Grizonic against McDonald, Leroy and Sutton (No 0475 of 2005), against Suttor, Suttor and Find-A-Flat Pty Ltd (No.20002 of 2005), against Suttor and Find-A-Flat Pty Limited (No.006141 of 2003) and against Maurice Blackburn Cashman Pty Ltd. There is also some evidence before the Court as to the nature and progress of the first three of these proceedings from Mr Oliveri the solicitor for the Mr Grizonic that indicates that the proceedings are each at an early stage. There is no evidence before the Court as the nature of or any progress in the proceedings against Morris Blackburn Cashman Pty Ltd, although it is said that there is a claim of negligence. According to the Worrell report, Mr Oliveri (who was described as representing Mr Grizonic on an unfunded basis and who was also identified as a creditor) gave advice about the nature of the claims, the progress of each of the proceedings and likely costs to see the matters to conclusion. The Report expressed the view that, given the substantial cost of pursuing these matters, it was likely that a trustee in bankruptcy would not do so without some form of third party funding and an indemnity for adverse costs and noted that Mr Grizonic had not advised of any party who would be willing to fund the ongoing litigation. On this basis Mr Worrell concluded that there would be no return to creditors in bankruptcy and the nominal return offered by the proposal was better than the alternative of bankruptcy. However the proposal was not accepted by the creditors.
The draft personal insolvency agreement signed by Mr Grizonic in connection with the authority of 10 October 2005 contains a different proposal. The proposal in the draft agreement is that there should be a personal insolvency agreement fund which should comprise sufficient moneys to pay 100 cents in the dollar to all proven creditors on or before 30 June 2006. The applicant took issue with the genuineness of such a proposal, particularly in light of the differences between the two proposals and the fact that the second proposal depended on continuance and successful resolution of the Supreme Court proceedings by 30 June 2006. However in cross-examination Mr Grizonic told the Court that he had recently put to the second respondent that a different proposal that should be put to his creditors. Details were not provided to the Court except that Mr Grizonic stated that it would still be for 100 cents in the dollar but that there would be a time delay. There is no report to creditors from Mr Chamberlain before the Court. In cross-examination Mr Grizonic said that under the first authority he had been prepared to pay his creditors whatever his third party was prepared to pay. He agreed that the first proposal was put as a serious proposal to be considered by his creditors to satisfy their debts.
The applicant also drew attention to the fact that the proposal put to creditors on 19 August 2005 involved a fund provided by a third party whereas there is no provision in the draft personal insolvency agreement for any third party contribution to be made. Rather the proposal in the draft personal insolvency agreement involves making available all divisible property of the debtor for distribution.
It was contended that it was relevant to the question of whether the authority of 10 October 2005 constitutes an abuse of process that it could be inferred that if the creditors voting at the meeting on 19 August 2005 had approved the first proposal the applicant would not have challenged the effectiveness of the first authority and that the proposal in the draft personal insolvency agreement was ‘less advantageous’ on the financial circumstances disclosed by the first respondent than the proposal considered by the creditors on 19 August 2005.
The applicant relied on the fact that the Worrell Report had identified no realisable assets of value. It was contended that it was not likely that the Supreme Court legal proceedings which had been nictitated by Mr Grizonic (and also identified in an affidavit of Mr Oliveri sworn on 24 August 2005) would be pursued, even if the controlling trustee was prepared to do so, because of the substantial costs that had been identified by Mr Worrell. It was pointed out that the return available under the first proposal was nominal. While the proposal in the draft insolvency agreement is for a return of 100 cents in the dollar, the applicant contended that this is not realistic and hence is not genuine.
On the evidence before the Court in relation to the proposal in the draft personal insolvency agreement the only assets that appear to be available for distribution to creditors (apart from an amount said to be owed by a person who has himself entered a Part X agreement) consist of amounts that Mr Grizonic states he is owed, in particular amounts that he seeks to recover in Supreme Court proceedings. Counsel for the applicant drew the Court’s attention to the fact that given the anticipated cost (based on advice from Mr Grizonic’s solicitor Mr Oliveri) Mr Worrell had indicated in his report that he considered it improbable that a trustee in bankruptcy would continue to prosecute such matters without funding and an indemnity from some other party. I note that Mr Worrell was addressing the position of a trustee in bankruptcy and that Mr Worrell also stated that he had been unable to form any opinion or take any advice about the likely prospects of success of the Supreme Court matters in which claims had not been finalised. Mr Grizonic’s evidence was that he understood that he would have had control of the proceedings if the first proposal had been adopted and that under the second proposal Mr Chamberlain would have control of the proceedings. There is no evidence from Mr Chamberlain before the Court.
It was submitted for the applicant that the first respondent had an intention to proceed with actions in the Supreme Court that had been the subject of comment in the Worrell Report and in respect of which no substantial or viable evidence had been put before this Court to substantiate the allegations in those proceedings. It was suggested that in contrast, if a sequestration order was made, a full and complete investigation of the examinable affairs of the first respondent could be conducted and, if appropriate, proceedings could be commenced and maintained or continued by the trustee in bankruptcy in relation to any causes of action vested in him.
However, as noted, no report to creditors from the present controlling trustee has been provided to the Court and indeed there is no evidence that such a report has yet been prepared. Hence there is no evidence as to precisely what the proposal will be, whether the second respondent intends to recommend adoption of any proposal put by Mr Grizonic or of his attitude to the Supreme Court proceedings.
The draft agreement proposes a return to creditors on or before 30 June 2006. On the material before the Court the satisfaction of such proposal would be dependent on to be dependent on successful finalisation of the Supreme Court proceedings which are at present part of the debtor’s property subject to control by the second respondent under Division 2 of Part X of the Act (see s.189). Mr Oliveri gave evidence that he had been instructed by the second respondent to continue with the proceedings until after the creditors’ meeting and do whatever he thought was necessary. He had not sought directions to progress the matters since then and, by consent, each matter had been adjourned until after the creditors’ meeting has taken place. When asked about whether particular proceedings were likely to be completed by June 2006 he said that he would not think so. He also told the Court that in one of the proceedings a defence had not yet been put on, while in the action for an account Mr Grizonic’s costs would depend on the approach taken by the defendant. He acknowledged that he would expect that the defendant would be defending these proceedings but said that she had not yet done so. He also told the court that it was not correct to say that he was conducting the proceedings ‘on spec’. I accept that it is unlikely, based on Mr Oliveri’s evidence, that the Supreme Court proceedings will be completed by June 2006. However I also note that Mr Grizonic has indicated that he has another proposal to put to creditors which involves a delay.
An issue was raised as to the likelihood of these proceedings being continued given the absence of evidence before the Court as to any funding for legal costs. A notice to produce was issued by the applicant in relation to any costs agreements between Mr Grizonic and Mr Oliveri and Mr Grizonic and Mr Killalea. Only two such agreements, relating to limited matters, were produced. Mr Grizonic told the Court in cross-examination that he had given his copies of other costs agreements to Mr Chamberlain. It was submitted that it was relevant that there was no evidence as to whether anyone would fund Mr Chamberlain in relation to the Supreme Court proceedings, no evidence as to the merits of the proceedings or any evidence of the proceedings commenced against the applicant. Reference was made to the statement in the Worrell Report that Mr Oliveri had been representing Mr Grizonic on an unfunded basis and that Mr Grizonic had no money to pay the cost of such proceedings. Counsel for the respondent contended that the absence of evidence in these proceedings as to how the costs of the Supreme Court proceedings would be met was not indicative of abuse of process. It was submitted that Counsel had been briefed in all those proceedings and the Court could not properly make a finding that Mr Grizonic was unlikely to be successful in the proceedings. It was also pointed out that the controlling trustee might choose to assign the control of the proceedings to Mr Grizonic and that the absence of ‘funding’ had not stopped prior proceedings by Mr Grizonic (with legal representation) and was not a bar to the continuation of the proceedings.
Under the draft personal insolvency agreement the antecedent transaction provisions of the Act are to apply. Reference was made to evidence from Mr Grizonic about a number of transactions. It was submitted that there was an absence of clear and consistent evidence about the use of the proceeds of sale of a property sold in June 2005, a lack of an explanation for payments to companies, evidence of a transfer of control of a company by Mr Grizonic and no explanation for a recent significant increase in liability to Mr Oliveri for legal costs. It was suggested for the applicant that there must be a real question as to whether such payments would be covered by the antecedent transaction provisions.
It was contended for the applicant that it was also relevant to the question of whether the authority of 10 October 2005 was an abuse of process that there were inconsistencies in the disclosure by Mr Grizonic of creditors in relation to the first and second authorities (as described in the Worrell report and contained in the statement of affairs signed by Mr Grizonic on 2 October 2005) and also in the two affidavits as to assets and liabilities forming part of his applications to pay the debt to the applicant by instalments. It is not disputed that there are such inconsistencies and that the affidavits as to assets and liabilities were incomplete. Some limited explanation was proffered by Mr Grizonic. In cross-examination he told the Court that he did not have all the bills when completing the affidavits in connection with his application to pay by instalments and had not included the bills from the receivers of his former business. He stated that when he competed a statement of affairs for Mr Worrell he had only put in the partnership debts not his personal debts because he thought they were ‘in Court’ because of the partnership dissolution which had caused the loss of his house, business and livelihood. He also stated in his affidavit of 12 December 2005 that he had sent an amended list of creditors to Mr Chamberlain after consideration and had subsequently further amended the list.
Mr Johnson for the applicant also contended that the timing of the second authority was relevant and that it should be inferred that there was urgency in the signing of the second authority because the hearing of the creditor’s petitions would otherwise have proceeded on 12 October 2005, that Mr Grizonic had had the advantage of an earlier stay of proceedings because of the first authority and that the authority was signed on 10 October 2005 with the intention of bringing about a further stay and prolonging proceedings. Mr Grizonic gave affidavit evidence of attempts to find a person willing to act as controlling trustee (Mr Worrell having indicated he would not do so again) under a second authority. He had approached about 8 trustees from mid-September 2005 to 10 October 2005. On or about 8 October 2005 he approached Mr Chamberlain, who consented to be trustee on 10 October 2005. It was suggested for the applicant that it was “curious” that Mr Grizonic had to go to Wagga Wagga to find a controlling trustee and that the remoteness of the Trustee from both debtor and creditors was relevant to whether the authority should be set aside.
The applicant’s contention in these proceedings is that while the authority executed by Mr Grizonic on 10 October 2005 naming Mr Chamberlain as controlling trustee became effective for the purposes of Part X of the Bankruptcy Act 1966 on that day, for a number of reasons it was and is an abuse of the process provided for under Part X of the Bankruptcy Act 1966. The applicant relied on both s.208 of the Act and the powers of the Court under s.30 of the Bankruptcy Act 1966 to stay proceedings permanently for abuse of process.
The law and reasoning
Section 208 of the Act provides:
The Court may make an order releasing the debtor’s property from control under this Division if:
(a) An interested person applies to the Court for such an order; and
(b) the Court is satisfied that special circumstances justify it making the order.
Counsel for the first respondent did not dispute that the Court has power to stay permanently the procedural process arising from the signing of a s.188 authority if it constitutes an abuse of the process provided for by the Bankruptcy Act 1966 or that the Court may make an order under s.208 in such circumstances. Rather it was contended that it has not been established that the authority is and constitutes an abuse of process such that it should be set aside or that the circumstances are such that an order should be made pursuant to s.208 of the Act.
The applicant relies on the same arguments and circumstances in relation to the grounds of abuse of process and the application under s.208 of the Act. Counsel for the applicant referred to what was said by the High Court in Williams v Spautz (1992) 74 CLR 509 (albeit in relation to court proceedings). In that case the majority of the High Court took the view that proceedings were brought for an improper purpose and an abuse of process where the purpose was “not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed … or some collateral advantage beyond what the law offers” (per Mason CJ, Dawson, Toohey and McHugh JJ at 527) and that the criterion was whether the improper purpose was the predominant purpose (ibid at 529). The notion of a procedure instituted for an ‘improper’ or ‘ulterior’ purpose has also been applied in relation to the statutory power of a court to terminate voluntary administration of a company pursuant to s.447A(2)(b) of the Corporations Act 2001 because provisions of Part 5.3A of that Act are being abused (see Blacktown City Council v Macarthur Telecommunications Pty Ltd (Administrator Appointed) (2003) 47 ACSR 391 and St Leonards Property Pty Ltd v Ambridge Investments Pty Ltd (Administrator Appointed) (2004) 201 ALR 265 at [15] – [16] per Barrett J).
In Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 599 per Gibbs CJ, Murphy, Brennan and Dawson JJ and Edelsten v Deputy Commissioner of Taxation (NSW) (1989) 86 ALR 257 at 261 it was accepted that presentation of a debtor’s petition for a purpose ‘foreign to the bankruptcy laws’ constitutes an abuse of process. In Clyne the High Court held that the Court had power to annul a bankruptcy based on a debtor’s petition if the presentation of the petition was an abuse of the process provided for in the Act. It is not disputed that this Court has power under s.30 of the Bankruptcy Act 1966 to stay proceedings permanently as an abuse of process or that the applicable test is as was stated in Clyne and Edelsten.
In written submissions Counsel for the applicant contended that in the absence of evidence from Mr Grizonic to contradict any inference that may arise as to a collateral or improper purpose for the signing of the second authority, the burden of proof imposed on the applicant had been satisfied. It was acknowledged that Mr Grizonic subsequently gave evidence. However it was evidence that he would have accepted the first proposal if the creditors had voted in favour of it (which he understood would have given him control of the Supreme Court proceedings) and that under the second proposal control of the proceedings would pass to Mr Chamberlain and that it was intended that Mr Chamberlain would have control of these proceedings. It was suggested that in these circumstances the Court should be satisfied that there was an abuse of process given the other factors relied upon. I note that Mr Grizonic also gave evidence that he had signed the second authority after the first was found to be ineffective, that he had not been aware of the rules about voting on resolutions at a creditors’ meeting (this being the information Mr Worrell had failed to give him), that he was now aware of those rules and that he wanted to put a Part X settlement proposal before his creditors for their consideration.
Moreover, as discussed below, the burden of proof rests on the creditor to demonstrate a purpose foreign to the bankruptcy laws (Re George Zorbas and Nicholas Zorbas; Ex parte F and G Concrete Services Pty Ltd unreported, Federal Court 28 November 1994 per Sackville J at [13]). As Mason CJ, Dawson, Toohey and McHugh JJ pointed out in William v Spautz (at 529) the onus is a ‘heavy one’ and the power to grant a permanent stay (or in this instance to set aside the authority) is one to be exercised only in the most exceptional circumstances.
The applicant appears to contend that if the signing of the authority is an abuse of process that of itself also brings s.208 into play. Neither party addressed the Court on the scope of s.208. However in Deputy Commissioner of Taxation v Johns [2005] FCA 1143 Edmonds J considered and applied the meaning of “special circumstances” adopted by Burchett J in Minister for Community Services and Health v Chee Keong Thoo (1988) 78 ALR 307 at 324 in a different statutory context:
… The core of the idea of “special circumstances” is that there is something unusual or different to take the matter out of the ordinary course …
I agree that, as Edmonds J stated in Johns at [110]:
The phrase “special circumstances” is obviously designed to accommodate a great variety of circumstances which are “out of the ordinary course” in the sense used by his Honour. However, they must be circumstances which justify an order releasing the debtor’s property from the control of the controlling trustee.
In Johns Edmonds J considered whether a s.208 order should be made or whether there was an abuse of process where a debtor signed a s.188 authority on the morning of a hearing of a creditor’s petition which was due to expire shortly thereafter. His Honour found that there were not special circumstances justifying a s.208 order. Nor was there an abuse of process. The applicant in this case contends that the present case, which involved the signing of a second authority where an earlier proposal had been assessed and rejected, could be distinguished from Johns. Nonetheless it is helpful to have regard to the approach taken in that case.
The applicant in Johns relied on a number of considerations in support of a contention that there were special circumstances in s.208 or an abuse of process, including the debtor’s alleged inability to pay his debt to the applicant creditor, his unsuccessful attempts to pay the debt by instalments, adjournments to enable this to occur, inconsistencies in descriptions of assets and sales of assets, the fact that the proceeds of sale of some personalty had been disposed of to a person other than the applicant despite ongoing assertions that such proceeds would be paid to the creditor, the limited assets in the possession of the debtor and the existence of antecedent transactions requiring investigation and giving rise to a possible causes of action in a bankruptcy, the fact of a shortfall in assets over liabilities such that it must allegedly have been obvious to the debtor at the time of giving a charge to a third party that the purpose of an asset-realisation programme to pay out a creditor’s debt could not be met, that it became apparent that the applicant’s debt was not going to be paid, that the applicant had indicated that it would seek a sequestration order and that there could be no doubt that such a sequestration order would have been made on the date it was listed or shortly thereafter. His Honour suggested that these circumstances seemed to provide strong grounds for ensuring that control of the debtor’s property stayed with the controlling trustee. Edmonds J also found it irrelevant that the petitioning creditor would not be in a position to seek a costs order on the then petition and that contentions that the debtor’s proposal was not likely to be as beneficial to creditors as a bankruptcy and the suggestion that Part X of the Act was never intended to operate in the same manner as a bankruptcy not to be specified with sufficient particularity to warrant serious consideration.
His Honour considered the contention that, faced with what was said to be an inevitable sequestration order being made, the debtor’s response (on the morning that in that instance the creditors petition was listed for hearing) had been to sign an authority under s.188 of the Act which brought s.189AAA into play; that this defeated the creditor’s petition because it would expire prior to any creditor’s meeting (and with it the benefit of a significant relation-back period during which certain transactions had occurred) and that, whether deliberate or not, the execution of the authority had “at the death knell” brought to an effective end a properly presented and pursued creditor’s petition in circumstances where the Court and the petitioning creditor had extended every indulgence to the debtor and enabled him to avoid an otherwise inevitable bankruptcy and that the Part X authority could not be seen as a genuine response to a recently realised insolvency.
Edmonds J concluded that even if one could infer (and his Honour was not prepared to draw such inference) that the debtor had signed the authority when he did so for the purpose of bring s.189AAA of the Act into play that would not, in his view, provide a “special circumstance” to justify the making of the order sought or constitute an abuse of process. His Honour stated at [112]:
“Subsection 189AAA(1) in its very terms, contemplates the timing of the authority becoming effective vis a vis the timing of the presentation of the creditor’s petition as being totally irrelevant to its operation and effect in staying proceedings relating to the petition. The fact that a debtor … signs an authority which becomes effective shortly before a creditor’s petition is about to lapse through effluxion of time cannot, in my view, by reason of the operation and effect of subs.189AAA(1) provide a “special circumstance” to justify an order releasing [the debtor’s] property from the control of [the controlling trustee] pursuant to s.208 of the Act”.
In contrast, in Re Alty; Ex parte Muir (1985) 9 FCR 190 and Laurence v Mulroney (1987) 15 FCR 268 circumstances which were considered “special” were extraneous to the operation of the Act (in Alty the circumstances went to the issue of the validity of the trustee’s appointment and whether the debtors knew what they were doing in making the appointment and in Laurence went to the issue of whether the effect of the authority could be and was designed to be, to stultify contempt proceedings in the Supreme Court). In Johns case Edmonds J had regard [at 13] to the fact that in those cases the circumstances had not arisen by reason of the operation of the provisions of the Bankruptcy Act 1966 but rather were extraneous circumstances which could be properly described as “out of the ordinary course”. His Honour rejected the argument that the operation and effect of s.189AAA was out of the ordinary course and found that the applicant had not made out any special circumstances justifying the making of the order sought.
Edmonds J also rejected the contention that there was an abuse of process. Despite the fact that the authority was signed on the morning of the date the creditor’s petition was to be heard and despite the imminent expiration of the creditor’s petition, his Honour stated at [123]:
“There is no evidence to support any finding or inference that Mr Johns had at all relevant times intended, and gave effect to that intention in his dealings with the applicant, to refrain from authorising a trustee to take control of his property pursuant to Pt X of the Act until late in the life of the creditor’s petition. The decision to authorise a trustee to take control of the property pursuant to Pt X of the Act was, I find, soleley a function of his realisation that if he did not do so when he did, there was a strong likelihood, indeed almost a certainty, that the Court would made a sequestration order against the estate, contrary to what had always been his first priority. Prior to the end of March 2005, that prospect did not loom so large as to cause him to do what he did on the morning of 7 June 2005. But there is nothing in that which constitutes an abuse of process warranting the setting aside of the authority. Indeed, it is something which the Act contemplates in express terms: See s.188(1) – in particular the introductory words. Nothing in the terms or operation of s.189AAA alters that result.”
In essence it is contended that in this case, faced with an inevitable sequestration order being made, Mr Grizonic’s response had been first to give an authority to Mr Worrell and then, when that proved for technical reasons to be ineffective, shortly before the creditor’s petition was again to come before the Court for hearing, to give a second authority, this time to Mr Chamberlain. It was submitted that this had occurred in circumstances where pursuant to the first authority (albeit that it was subsequently found to be ineffective) there had been a stay of the creditor’s petition, a report from the first controlling trustee and a creditors’ meeting at which the debtor’s proposal had been rejected.
It was submitted that the fact that the authority in issue was a second authority distinguished this case from the situation in Johns. It was also submitted that it was relevant that the first proposal had not been accepted by the creditors and contended that there was no evidence before the Court to indicate any ability to satisfy creditors on the basis put forward in the draft personal insolvency agreement or in any other way (given that Mr Grizonic now proposes an alteration to the proposal to be put to creditors). It was argued that the actions of Mr Grizonic were intended to defeat the making of a sequestration order to which the applicant would otherwise have been prima facie entitled.
I have considered all of the matters raised by the applicant and all of the evidence before me. However, it has not been established that the signing of the authority by Mr Grizonic on 10 October 2005 is and constitutes an abuse of process. Nor am I satisfied that special circumstances exist which justify me in making an order releasing the debtor’s property from control under Division 2 of Part X of the Act within s.208.
The ‘proceedings’ in this case involve the signing of an authority under s.188 of the Act after a prior authority was declared not to be effective. It is relevant to bear in mind that the procedure in Part X is one provided for in the Bankruptcy Act 1966. The Courts have drawn a distinction between the use of a process for the very purpose for which it was designed and the abuse of the process. (See Dowling v Colonial Mutual InsuranceSociety (1915) 20 CLR 509 at 524 per Isaacs J). Thus in William v Spautz at Mason CJ, Dawson Toohey and McHugh JJ stated at 526 – 527:
“To say that a purpose of a litigant in bringing proceedings which is not within the scope of proceedings constitutes, without more, an abuse of process might unduly expand the concept. The purpose of the litigant may be to bring the proceedings to a successful conclusion so as to take advantage of an entitlement or benefit which the law gives the litigant in that event”.
Their Honours drew a distinction between a situation where the purpose of bringing proceedings was not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they were not designed or for some collateral advantage beyond what the law offered (which would be an abuse of process) and a situation where the ultimate purpose (in that instance of the litigant) was not within the scope of the proceedings instituted but the immediate purpose was within that scope. In relation to the latter situation their Honours stated at 526:
“The existence of the ultimate purpose cannot constitute an abuse of process when that purpose is to bring about a result for which the law provides in the event that the proceedings terminate in the prosecutor’s favour”.
On this basis, if Mr Grizonic’s purpose was to use the Part X process of appointment of a controlling trustee to bring about the result for which it was designed, then that would not of itself constitute an abuse of process. In all the circumstances of this case it has not been established that Mr Grizonic sought to use Part X for a purpose essentially foreign to the purpose it is designed to serve or otherwise foreign to the purpose of the bankruptcy laws. Part X contemplates that it will be used in precisely the circumstances in which it was used by Mr Grizonic, as an alternative to a sequestration order in circumstances where an applicant is or appears to be insolvent and prima facie it is likely that a sequestration order would be made. It can be inferred from his evidence that Mr Grizonic wished to avoid bankruptcy. However in the context of the Bankruptcy Act 1966 this cannot be said to be a collateral or improper purpose (see Johns at [123]). Nor does it constitute special circumstances.
This is not the hearing of the creditor’s petition. Even if prima facie the applicant would be entitled to a sequestration order under one of the creditor’s petitions (but for the intervention of the s.188 authority), this does not, of itself or in combination with the other circumstances of this case, establish an abuse of process or special circumstances justifying the setting aside of the authority under s.208. Indeed there is nothing in the Bankruptcy Act 1966 to suggest it is not open to an insolvent debtor who has committed an act of bankruptcy and who would face the prospect of an inevitable sequestration order (unless he or she established other sufficient cause) to use the procedure in Part X of the Act as an alternative to the prospect of bankruptcy.
The applicant relied on Re Zorbas; Ex parte F & G Concrete Services Pty Limited (unreported Federal Court of Australia, 28 November 1994) in which Sackville J accepted that the presentation of a debtor’s petition would constitute an abuse of process if it was presented for a purpose, whatever that purpose may be, which was foreign to the bankruptcy laws (see Edelsten v Deputy Commissioner of Taxation NSW) (1989) 86 ALR 257 at 261 applying Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 598). This principle is not in dispute. However I note that in Clyne Gibbs CJ, Murphy, Brennan and Dawson JJ stated at 599-600 that it was a purpose foreign to the bankruptcy laws for a debtor to present a petition:
“for the purpose of making it impossible for a creditor to obtain a sequestration order on a pending petition and with a further purpose of shortening the period of relation-back, possibly placing beyond the reach of the trustee property which would otherwise vest in him.”
This is not such a case. It has not been established that the debtor gave the authority to the Mr Chamberlain for the purpose of making it impossible for the applicant as petitioning creditor to obtain a sequestration order on either of the creditor’s petitions which are presently stayed by virtue of the operation of s.189AAA and for the purpose of shortening the period of relation-back or otherwise placing property beyond the reach of a trustee in bankruptcy. The applicant raised the possibility that some prior transactions may require investigation but the evidence does not establish that Mr Grizonic sought to appoint a controlling trustee to obtain a delay in order to enable him to dissipate assets that would otherwise be available for satisfaction of his debts or to otherwise avoid his obligations. I note that the antecedent transaction provisions are to apply under the draft personal insolvency agreement. The issue of whether certain transactions warrant investigation may be addressed in that context. Further, as Sackville J pointed out in Zorbas at [13]:
“It is not a purpose foreign to the bankruptcy laws merely to show that the debtor intends to prevent the creditor succeeding on its petition: Re Cornish; Ex parte English”.
While the Court may draw inferences as to the debtor’s purpose from material before it if there is no direct evidence of the debtor’s purpose, the debtor gave some evidence (albeit it was limited and mostly emerged in cross-examination). Moreover the material before the Court does not in any event warrant the drawing of an inference that the applicant was using the procedure for a purpose essentially foreign to the purpose it was designed to serve. He sought to prevent the creditor succeeding on its petition on 12 October 2005 by obtaining a stay at least until his creditors considered his new proposal. I accept that he is aware that if the creditors accept his proposal this may enable him to avoid bankruptcy. This however is precisely the purpose contemplated by Part X. If the creditors do not accept the proposal the stay will end and the creditor will have the opportunity to pursue a sequestration order. While this involves delay and some expense, there is nothing in this case to establish such disadvantage to a creditor as to support the contention that the giving of the authority is an abuse of process. In circumstances where the first authority was found to be ineffective and a second authority was then signed these factors do not, either alone or in all the circumstances, constitute special circumstances or factors suggesting an abuse of process. Nor in the context of the operation of the provisions of the Bankruptcy Act 1966, do Mr Grizonic’s inability to pay his debt to the applicant, his unsuccessful attempts to pay it by instalments and the steps taken by him in the proceedings in relation to the first bankruptcy notice and the creditor’s petition, constitute special circumstances or indicate any abuse of process.
There are admitted inconsistencies in the various statements Mr Grizonic has provided of his assets and liabilities. As indicated, the applicant contends that there may be transactions subject to the antecedent transactions provisions of the Act. However, as in Johns, such factors would suggest that it is appropriate that the control of Mr Chamberlain continue. This will also enable him to prepare a report to put before creditors.
The applicant submitted that the present proposal is and was not a genuine proposal, that it is not likely to be accepted by the creditors at a creditors’ meeting, and that the authority was exercised for the purposes of avoiding the consequences of a sequestration order being made and a proper investigation into the examinable affairs of the first respondent and hence that the authority constitutes an abuse of the process provided for under Part X of the Bankruptcy Act 1966. It was contended that as a matter of public policy in circumstances where there was no suggestion of solvency or an available advantage to creditors or an available fund to be drawn upon to provide an expeditious distribution to creditors it was important that an insolvent person not be permitted to continue to incur expenses and cause other persons to incur expenses in proceedings presently constituted.
However, as indicated, the Bankruptcy Act1966 provides in Part X of the Act a procedure for a bankrupt in precisely these circumstances to appoint a controlling trustee. It is then a matter for the creditors to determine whether or not to adopt the proposal put to them. It is the case that the signing of the authority shortly before the creditor’s petitions were listed for hearing before this Court may well have caused the creditors to incur expenses in relation to the anticipated proceedings which were then stayed. However this is a consequence of the operation of Part X of the Act. I am not persuaded that that fact is such as to indicate, either alone or together with other circumstances a collateral purpose or otherwise an abuse of process. (Also see Johns at [12] per Edmonds J).
In the circumstances of this case, a detailed assessment of the ‘merits’ of the present or any modified proposal is a matter for the controlling trustee’s report and the creditors’ consideration. While I am satisfied on Mr Grizonic’s evidence that an inference should be drawn that if the creditor’s voting on 19 August 2005 had approved the first proposal he would not have challenged the first authority this is not determinative. It is clear that he wishes to avoid bankruptcy. He wants a Part X settlement approved by his creditors. The fact that the current proposal differs from that rejected by the earlier creditors’ meeting is not indicative of an improper purpose. On the contrary, were the first respondent merely seeking to put the same, rejected, proposal to a meeting of creditors it might more readily be established that his purpose in signing the second authority was foreign to the Bankruptcy Act 1966. However this is not the case.
As to the contention that the present proposal is ‘less advantageous’ – that is a matter for the creditors. It has not been established that the proposal is so obviously without merit that it can be said to be indicative of an improper purpose. This is not a case where it can be concluded on the evidence before the Court that there is, without doubt, no property at all available for distribution to creditors. The proposal in the draft insolvency agreement to which it is relevant to have regard in the absence of full description of the mooted alternative, depends substantially on the first respondent’s prospects of success in the Supreme Court proceedings. There is nothing to suggest that the further proposal is not similarly dependent on the success of those proceedings – albeit involving delay. The Worrell Report suggested that a trustee in bankruptcy may be unlikely to continue the proceedings. This will no doubt be a matter which may be taken into account by the second respondent in his report and by creditors in determining whether to accept Mr Grizonic’s proposal.
The question that arises is whether the Court should make any assessment in these proceedings about the ability of the debtor to satisfy creditors participating in the personal insolvency agreement by payment of 100 cents in the dollar by 30 June 2006 or at all. The applicant suggested that to the extent it is available the evidence points to the opposite result. It is the case that on the limited evidence before me it is not possible to make any findings about the likely time until resolution or likely success of any of the pending Supreme Court actions initiated by Mr Grizonic except that the litigation is not likely to be resolved before 30 June 2006. However the applicant bears the onus of establishing an abuse of process such as to warrant the Court setting aside an authority. It has not met that burden. There is no obligation in these proceedings for the debtor to establish to the Court that he has an arguable case or likely prospects of success in the Supreme Court proceedings in order to ‘dispel’ the contention that the present proposal is not genuine. The evidence put before me by the applicant does not establish that such proceedings are without merit or doomed to fail or so unlikely to be pursued that it can be said that the proposal to creditors in the draft personal insolvency agreement (or a modified proposal involving delay) is not genuine or is indicative of an improper purpose such that Mr Grizonic should not have the opportunity to have his proposal considered by his controlling trustee and voted on by creditors with the benefit of the recommendation of the controlling trustee. Nor do I consider the nature of the ‘property’ and the absence of evidence as to the likelihood of success or as to the willingness or ability of the second respondent to pursue or enable the first respondent to pursue the proceedings is such as to establish with other factors ‘special circumstances’ in s.208. These are not circumstances ‘out of the ordinary course’ which justify an order releasing the debtor’s property from the control of the controlling trustee.
There is no evidence as to Mr Chamberlain’s attitude to the Supreme Court proceedings, as to whether there is any prospect of funding for the proceedings or for Mr Grizonic to be enabled to continue the proceedings. In the absence of a report or evidence from Mr Chamberlain I do not consider that any inference can be drawn at this stage as to what proposals might be made about future conduct of the Supreme Court proceedings as part of the circumstances relevant to any recommendation of the controlling trustee. The fact that control of the proceedings has passed to Mr Chamberlain as controlling trustee does not of itself or in combination with the other circumstances (including Mr Worrell’s attitude to whether a trustee in bankruptcy would have continued the proceedings) establish that the signing of the authority is an abuse of process.
The timing of the authority to Mr Chamberlain does not, either of itself or in conjunction with the other circumstances referred to, constitute an abuse of process or special circumstances. Mr Grizonic has explained, and I accept, that when (and indeed in advance of the court’s declaration) the first authority was found to be of no effect he took steps to find a person who would act as controlling trustee. There is no evidence to support a finding or inference that he delayed signing an authority until shortly before the hearing date. Indeed I note that the circumstances in this case are not as extreme as those in Johns. This is not a case where it is clear that the creditor’s petition will lapse because of the appointment of the controlling trustee. On the contrary, if the creditors’ meeting does not adopt the proposal of Mr Grizonic then there should be time for the creditor’s petition to be pursued thereafter in the ordinary course of events.
In all the circumstances I do not consider the fact that the controlling trustee is located in Wagga Wagga to be such as to support the applicant’s case. The first respondent has explained that he had some difficulty finding a controlling trustee. There is nothing ‘curious’ in the location of Mr Chamberlain in the sense considered in Raschilla v Gulluni (1987) 14 FCR 57. That case considered whether a composition should be set aside. The Court expressed concern not simply about the geographical remoteness of the trustee from creditors and debtors, but also about the lack of justification or an explanation for the appointment (in a case involving the collection and payment of $6,000 from each of two debtors in Perth) of a person in Melbourne whose appointment would have been “perhaps understandable” in the case of “a large and complex composition perhaps involving creditors resident in more than one state of Australia” (at p.64 per French J). No such concerns arise in this case.
The fact that this is the second authority signed by Mr Grizonic and what occurred in relation to the first authority are the significant matters relied on by the applicant and the basis on which it is suggested that Johns can be distinguished. However the first authority was of no effect. Moreover it was of no effect because the first controlling trustee had failed to comply with his statutory obligations to provide to the applicant specified information. The information in question was information which related to the nature of voting required at the creditors’ meeting to adopt the debtor’s proposals (that there was a requirement in relation to the number of creditors voting for the proposal as well as a requirement according to the proportionate amount of the debts owed to such creditors). Mr Grizonic has given evidence of the importance of this information to him. This is not a case in which some mere technical shortcoming in the first authority was the reason for it not being effective. The provisions of Part X of the Act entitle the debtor to sign a second authority if the first is ineffective and, as I held in Maurice Blackburn Cashman Pty Ltd v Grizonic [2005] FMCA 1541, to do so without the leave of the Court under s.188(4). There is nothing in the Act in general or in Part X in particular that would operate to prevent a debtor in such circumstances from signing a second authority. It is the case that a creditors’ meeting was held pursuant to the first authority and it may well be said that implicit in s.188(4) is an intention to prevent the giving of successive effective authorities. However that provision is not intended to prevent the giving of a second authority where the first authority is ineffective (see Hooper v Ewins (1997) 79 FCR 389). It has not been established that in the present case the giving of the authority was contrary to the interests of creditors or had the appearance or the actuality of being used for a collateral or improper purpose unrelated to the legitimate objectives of the Bankruptcy Act 1966.
Having regard to all of the circumstances I am not satisfied that special circumstances justify my making an order releasing the debtor’s property from control under s.208 of the Bankruptcy Act 1966 or that the signing of the authority is and constitutes an abuse of process. According the application must be dismissed. I will hear submissions in relation to costs.
I certify that the preceding sixty-seven (67) paragraphs are a true copy of the reasons for judgment of Barnes FM
Associate:
Date: 17 February 2006
10
4