Morrison Motors Pty Ltd v Shah - [2006] FMCA 256

FEDERAL MAGISTRATES COURT OF AUSTRALIA

MORRISON MOTORS PTY LTD v SHAH

[2006] FMCA 256

BANKRUPTCY – Application to set aside sequestration order under Rule 16.05 of the Federal Magistrates Court Rules – application for stay.

Bankruptcy Act 1966, s.52(3), 54, 153B
Federal Magistrates Court Rules 2001, rr.16.05(1),16.05(2)
Federal Court Rules, Order 35, r.7

Autodesk v Dyason (No.2) (1993) 176 CLR 300
Theo v Official Trustee in Bankruptcy [1998] FCA 862
K M & A Chadwick Pty Limited v Yeung unreported Federal Court 2 June 1995
Registrar of Aboriginal Corporations v Murnkurni Womens Aboriginal Corporation (1995) 137 ALR 404
George Ward Steel Pty Limited v Kizkot Pty Limited (1989) 15 ACLR 464
Austral Brick Co Pty Ltd v Tome Daskalovsk [1998] FCA 782
Sandell v Porter (1966) 115 CLR 666
Powerflex Services Pty Limited v Data Access Corporation (1996) 67 FCR 65
Alexander v Cambridge Credit Corporation Limited (Receivers Appointed) (1985) 2 NSWLR 685
Stedman v Commissioner of Taxation [1999] FCA 539
HVAC Constructions Queensland Pty Limited v Energy Engineering Pty Limited [2002] FCA 1638
Day v Gould [2000] FCA 1377

Applicant:

MORRISON MOTORS PTY LTD

Respondent:

MANVINDER SINGH SHAH

File Number:

SYG1317 of 2005

Judgment of:

Barnes FM

Hearing date:

21 February 2006

Delivered at:

Sydney

Delivered on:

21 February 2006

REPRESENTATION

Solicitors for the Applicant:

Norman Waterhouse

Solicitors for the Respondent:

Heidtke & Co Lawyers

ORDERS

That the amended application filed on 21 February 2006 is dismissed.
That the petitioning creditor’s costs be taxed and paid from the estate of the respondent debtor.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG1317 of 2005

MORRISON MOTORS PTY LTD

Applicant

And

MANVINDER SINGH SHAH

Respondent

REASONS FOR JUDGMENT

(Revised from transcript)

This is an application that comes before the Court by way of an amended application filed in Court by the respondent, with the leave of the Court, seeking, in the alternative, an order pursuant to Rule 16.05 of Federal Magistrates Court Rules setting aside a sequestration order made against the estate of the respondent by a Registrar of this Court on 9 February 2006 or, pursuant to Section 52(3) of the Bankruptcy Act 1966, an order that the sequestration order be stayed until 2 March 2006. There is, however, no application for review of the sequestration order or appeal on foot.
The background to these proceedings is, relevantly, that on 8 April 2004 the petitioning creditor, Morrison Motors Pty Limited (trading as Morrison Motors) obtained judgment against the respondent debtor, Manvinder Singh Shah, in proceedings 5019/03 in the District Court of New South Wales in the sum of $135,775.14 plus costs of $1,840 together with interest. A bankruptcy notice was issued on 14 February 2005 and served on the respondent (service is not disputed in these proceedings) on 19 February 2005. On 20 May 2005 a creditor’s petition was presented. The hearing of the petition appears to have been adjourned on a number of occasions. Most recently it was listed for hearing on 9 February 2006. It is not disputed that there was no appearance by or on behalf of the respondent debtor on 9 February 2006. A Registrar of this Court made a sequestration order against the estate of the respondent on that date.
The respondent now seeks an order under Rule 16.05 of the Federal Magistrates Court Rules 2001 setting aside the orders of 9 February 2006. It emerged in submissions that the ground relied on is that the order was made in the absence of the respondent under Rule 16.05(2)(a). Rule 16.05 is, relevantly, in the same terms as Order 35 Rule 7 of the Federal Court Rules.
The power to set aside an order or judgment is to be exercised with great caution and generally is not to be done unless, where an applicant is relying on the fact that an order was made in his or her absence, the applicant can show that by accident and without fault on his or her part, the order was made without the applicant being heard: Autodesk v Dyason (No.2) (1993) 176 CLR 300 and Theo v Official Trustee in Bankruptcy [1998] FCA 862.
It is necessary to look at the whole of the relevant circumstances and to consider whether there is an adequate explanation for the non-appearance and also whether there is an arguable case or question raised by the person seeking to set aside the orders. It was said in K M & A Chadwick Pty Limited v Yeung (unreported Federal Court 2 June 1995) that the “relevant touchstone” was whether there was an arguable case or question raised by the party seeking to set aside the order.
Registrar of Aboriginal Corporations v Murnkurni Womens Aboriginal Corporation (1995) 137 ALR 404 involved an application to set aside a winding up order which had been made in the absence of an appearance on behalf of the company that was wound up and also an application for a stay of that order. In considering an application under Order 35 Rule 7 of the Federal Court Rules, Nicholson J considered not only whether there was a satisfactory explanation for non-appearance but also, critically, whether there was, as his Honour stated (at [12]) an arguable defence to the application for winding up. This in turn required the Court to consider whether solvency was arguable.
His Honour referred to a number of authorities in support of this approach. In particular, in George Ward Steel Pty Limited v Kizkot Pty Limited (1989) 15 ACLR 464 an application was made to set aside a winding up order pursuant to the rules of the Supreme Court of New South Wales (which relevantly are in the same terms as the Federal Court Rules and the Federal Magistrates Court Rules). In that case Hodgson J stated at 465:
In my view, if an order winding up a company is made in the absence of the defendant company and an application is brought promptly by the company with notice being given to the liquidator to the plaintiff and to any creditor who appeared at the hearing, and if the evidence shows an explanation for the non-appearance at the hearing and indicates solvency of the company; and if there is consent to setting aside, or at least non-opposition; and if the liquidator indicates that nothing in his investigations to date shows a reason for the company to be stopped from trading, then the Court will normally set aside the order.
In Murnkurni there was no consent or non-opposition to the setting aside of the order. However Nicholson J was of the view (at [12]) that the dicta of Hodgson J was not confined to situations where there was consent, and that the effect of the authorities was to require the Court to consider whether there was an arguable defence “which in turn requires the Court to consider whether solvency is arguable”. A distinction was drawn between establishing solvency as a fact and evidence which “indicates” solvency “in the sense of showing it to be arguable that the company was solvent”. In Murnkurni Nicholson J was satisfied on the evidence before him that there was a satisfactory explanation for non-appearance (based on confusion as to which solicitors were appearing for the company). His Honour also found that there was an arguable case as to solvency. There was before the Court detailed evidence as to the assets and liabilities of the company and an arguable case was established in relation to certain other matters (such as whether or not particular debts existed and whether or not there had been service of a notice). The Court ordered that the winding-up order be set aside. I have considered whether there is evidence which “indicates” solvency of the debtor in this sense.
As in Murnkurni the creditor in this case does not consent to the orders sought. There is affidavit evidence from Paul Weston, the Trustee in Bankruptcy, of the debtor’s estate advising of the steps taken and costs incurred and that he has “no objections” to the Court making orders as the Court sees fit.
In addressing the reason for non-appearance of the debtor in this case, the solicitors for the respondent debtor are hampered by the absence overseas of the debtor. There is no evidence before the Court from the debtor personally either to explain his absence on 9 February 2006 or to address issues such as solvency. The evidence and submissions from the solicitor for the debtor suggest that the debtor would have understood or may have understood, that his attendance was not required at Court on 9 February 2006 because he would have understood, or may have understood, that he had entered into an agreement with the petitioning creditor in relation to repayment of the debt on which the bankruptcy notice was based and which formed the basis for the creditor’s petition. All of these matters are put to the Court on the basis that they are arguable.
There is a dispute between the parties as to whether or not there was such an agreement. The evidence before the Court includes a copy of an undated document described as “Heads of Agreement” signed for and on behalf of Morrison Motors, which states that the parties (named as the applicant and respondent) agree to resolve the “matter” by the debtor making certain payments in a prescribed manner on specified dates (commencing with a payment of $25,000 on 1 February 2006) and that in the event of default the total amount of the debt shall become due and payable forthwith. Also before the Court is a copy of a letter from Morrison Motors’ managing director to the debtor dated 20 January 2006 which refers to the creditor’s petition proceedings and states:
This is to confirm that, subject to the Agreement between you and this Company entered into today, we will rescind our Creditor’s Petition under Section 43 [sic] of the Bankruptcy Act 1966 in the Federal Magistrates Court.
However there is no evidence of signature of such agreement by the respondent debtor.
Annexed to the affidavit of Mr Orlizki, solicitor for the debtor, is a copy of a bank cheque. Mr Orlizki gave evidence that this was a copy of a cheque, the original of which was on the debtor’s file in his office. The cheque dated 30 January 2006 is made out to Morrison Motors and is in the sum of $25,000. There is no explanation as to why that cheque is in the debtor’s solicitor’s file. It is suggested that this cheque may represent the first payment to which the heads of agreement refers ($25,000 to be paid on 1 February 2006). However, there is no evidence that that amount has been paid to the creditor. Further, in an affidavit affirmed by Mr Ekanayake (the creditor’s financial controller) on 20 February 2006, it is stated that he had not received either the original countersigned heads of agreement document or the cheque that is annexed to Mr Orlizki’s affidavit. In that sense, at least, the parties are at one, because the evidence of Mr Orlizki is that the original of that cheque still remains on his file. Indeed, I note that, in any event, apart from the fact that there is a dispute as to whether or not the heads of agreement reflect a concluded agreement, that document refers to payments being made by bank cheque payable not to Morrison Motors, but to Heidtman & Co. There is no evidence that any such payment has been made, so that even if it is arguable that there was an agreement between the debtor and the creditor there is no evidence of any payment in accordance with the asserted agreement.
Taking it at its highest, this material does not establish is an adequate explanation for the debtor’s non-appearance or failure to be represented on the date fixed for hearing of the creditor’s petition. There is no suggestion that he takes issue with service of the creditor’s petition. There is no suggestion that he was not aware of the date of the hearing of the petition. Indeed the affidavit of Mr Orlizki annexes a copy of the creditor’s petition on which it is indicated that the date of the hearing of the petition was amended on a number of occasions, most recently to 10.15am on 9 February 2006.
The fact that no issue is taken with service of the creditor’s petition distinguishes this case from Austral Brick Co Pty Ltd v Tome Daskalovsk [1998] FCA 782 which was relied on by the debtor. In that case an application under Order 35 Rule 7 was made on the basis that the creditor’s petition had not been served personally on the debtor. While Emmett J suggested that the Federal Court could make an order pursuant to Order 35 Rule 7 to set aside a sequestration order made in the absence of a debtor in circumstances where the debtor was not served with the petition (although such an order would be inappropriate where the estate had already been administered in bankruptcy) in that case the estate had already been administered in bankruptcy. There had been a full statement of affairs filed. Emmett J made an order pursuant to section 153B of the Bankruptcy Act 1966 annulling the bankruptcy on the basis of the financial information before him. In this case there is no such financial information before the Court.
The evidence before the Court is that the debtor is presently overseas in New York City. Mr Orlizki’s understanding is that the debtor went overseas at some time after early February, but he is not able to assist the Court with precisely when that occurred or with information as to the circumstances of the debtor’s departure for overseas. In these circumstances, the applicant has not established that he has an adequate explanation for non-attendance on 9 February 2006.
In any event, even if I should accept that there was some confusion and that the debtor was proceeding on the basis that the creditor’s petition would either be dealt with in some way by dismissal or withdrawal (or at the least adjourned from 9 February 2006 based on the somewhat ambiguous letter of 20 January 2006 which is expressed to be subject to the agreement but nonetheless indicates an intention to “rescind” the creditor’s petition) I am not satisfied that the applicant has established an arguable case in the relevant sense.
The case that the debtor has sought to put before the Court today relates to an explanation for whether or not there was an agreement between the debtor and the creditor and whether that, in fact, makes the creditor “not a creditor”. The evidence does not address more generally the issue of solvency of the debtor. There is no evidence before the Court on which it can determine whether there is an arguable case as to the ability of a debtor to pay his debts as and when they fall due as was required in Murnkurni. As is clear from the discussion in Murnkurni of the meaning of the requirement that a debtor be able to pay his debts as and when they fall due (in the context of considering the insolvency of a corporate debtor) and the reference to well known principles such as those in Sandell v Porter (1966) 115 CLR 666, insolvency is to be considered based on a debtor’s financial position in its entirety (see Murnkurni at [76]).
There is no evidence before the Court as to the debtor’s financial position in its entirety. There is no evidence as to his assets and liabilities or as to whether there are any other creditors or the position of any such creditors. There is evidence from the debtor’s solicitor that the debtor has entered into an agreement for purchase of a property for $1.9 million in relation to which a deposit has been paid. Settlement was postponed but was hoped to occur in the immediate future, indeed, today. There is also evidence before the Court of settlement instructions which indicate a first and second mortgage to be registered immediately after settlement and a number of bank cheques for sums in the order of $35,000-odd for land tax, $309 registration fees, over $6,000 for stamp duty and also amounts for other fees and for settlement costs (although such amounts may be to be paid from the loan amount). In the absence of any evidence from the debtor to clarify the circumstances of the proposed transaction the possibility is raised that some further disposition of assets may be involved in this transaction.
Moreover, while it was urged upon me that I could draw the inference that the petitioning creditor was not a creditor at the time of the petition, it is indisputable, on the evidence before me, that the creditor has not been paid in full the amount in the bankruptcy notice and creditor’s petition. There is no suggestion that there has been compliance with the bankruptcy notice. There is disputed evidence in relation to whether or not some form of agreement has been mooted or entered into in relation to payment of the debt by instalments. Even if there is such an agreement, on the evidence before me I cannot be satisfied that the agreement has been complied with given the unexplained and unresolved issue in relation to the cheque dated 30 January 2006. There is no evidence of payment of any instalments in accordance with the suggested agreement. The evidence before me is not such as to enable me to draw an inference or to conclude that the creditor was not a creditor at the time of the hearing of the creditor’s petition.
In all of the circumstances the applicant has not satisfied me that I should exercise my discretion to set aside the sequestration order that was made on 9 February 2006.
In Murnkurni, as in this case, there was not only an application to set aside an order but also an application for a stay (albeit pending an appeal). Nicholson J observed at [2] that it had been accepted on behalf of the applicant that, although there were different tests applicable to each application, the facts and the evidence should be treated as applicable to both and that, if the applicant could not succeed in the application under Order 35 Rule 7(2)(a), it “will not” succeed on the stay application. I have, however, considered the application for a stay independently, bearing in mind that the approach is somewhat different and the test is different. The stay that is sought is a stay under section 52(3) of the Bankruptcy Act limited in duration until 2 March 2006. The general principles in relation to the grant of a stay are well known. In particular in Powerflex Services Pty Limited v Data Access Corporation (1996) 67 FCR 65 the Federal Court stated that the approach of the New South Wales Court of Appeal in Alexander v Cambridge Credit Corporation Limited (Receivers Appointed) (1985) 2 NSWLR 685 should be followed in that Court. Similarly it should be followed in this Court. (Also see generally the decision of Sackville J in Stedman v Commissioner of Taxation [1999] FCA 539.)
In Cambridge Credit, the Court of Appeal stated at 694:
The onus is on the applicant [for a stay] to demonstrate a proper basis for a stay that would be fair to all parties. The mere filing of an appeal will not of itself provide a reasonable demonstration of an appropriate case, nor will it discharge the onus which the applicant bears. The Court has a discretion whether or not to grant the stay and if so as to the terms that would be fair. In the exercise of its discretion the Court will weigh considerations such as the balance of convenience and the competing rights of the parties before it. Where there is a risk that if a stay is granted the assets of the applicant will be disposed of, the Court may, in the exercise of its discretion, refuse to grant a stay. [citations omitted]
In this case the applicant seeks a stay, but not for the purposes of instituting an appeal. From the bar table it was submitted that the applicant intended to seek review of the decision of the Registrar to make the sequestration order. As in relation to an appeal the mere anticipation of such a proceeding or, indeed, the filing of an application for review, will not of itself provide a reason for a stay or discharge the onus which the applicant bears in seeking a stay. The affidavit evidence before the Court seems to raise the possibility that it is suggested that the fact that the applicant wishes to proceed with the purchase of a property in Wollstonecraft provides some justification, albeit that justification is expressed in terms of a concern that in the event the sequestration is not set aside and the purchase of the property does not settle, the financiers would withdraw and the debtor would lose the sale and be liable for substantial damages.

However a stay will not prevent the change in the debtor’s status that occurred on the making of the sequestration order or the vesting of the property in the trustee that occurs by virtue of section 58(1) of the Bankruptcy Act 1966 (see Stedman v Commissioner of Taxation at [18]). The Court is required to exercise caution in relation to a stay application so as not to unduly delay the trustee or hinder his or her capacity to carry out the duties imposed by the Bankruptcy Act. There is thus a clear onus on the applicant for a stay to make a positive case: see HVAC Constructions Queensland Pty Limited v Energy Engineering Pty Limited [2002] FCA 1638. While that case related to a review of a winding up order made by a Registrar, the suggestion that the power be exercised with caution is relevant in the present situation as well.
The difficulty that the application faces is that there is insufficient evidence to allow consideration of the merits of the proposed review, the current financial position and solvency of the debtor and any detriment or risk of detriment to creditors. There is no evidence before the Court as to whether there are creditors other than the petitioning creditor (except the evidence in relation to the proposed purchase and settlement instructions). The general legislative policy against delay to the process under the Bankruptcy Act 1966 is also a matter to be taken into account. The interests of third parties and the community are relevant, not simply the status of the bankrupt. As indicated above, the debtor has not in this case addressed the question of his current financial position or solvency except that there is evidence of a proposed purchase. There is no indication of the basis for a review application. In those circumstances the evidence is not such as to persuade me that a case has been established by the debtor for a stay of the operation of the sequestration order.
I note that there is authority that a stay of a sequestration order can be granted for a short period to allow an unrepresented bankrupt the opportunity to formulate and file grounds of review in circumstances where his property is not in jeopardy and where the bankrupt files a statement of affairs as is required under section 54 of the Bankruptcy Act 1966: Day v Gould [2000] FCA 1377. The debtor in this case is not unrepresented and the evidence before me is not such as to establish that the property of the debtor is not in jeopardy in light of the foreshadowed desire to, it appears, potentially incur further expenses in relation to the acquisition of a property. The contract for the purchase of such property was entered into on 20 December 2005, with payment of a deposit (which is said to be in the order of $150,000) despite the apparent existence at that time of a debt to the creditor pursuant to the District Court judgment.
In all of the circumstances the evidence put before me by the debtor does not establish that the stay sought should be granted. Accordingly, the amended application filed on 21 February 2006 should be dismissed. I will hear submissions in relation to costs.

RECORDED : NOT TRANSCRIBED

I further order that the petitioning creditor’s costs be taxed and paid from the estate of the respondent debtor.

I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate:

Date: 3 March 2006