Naudi v Baig
[2022] FedCFamC2G 14
•17 January 2022
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Naudi v Baig [2022] FedCFamC2G 14
File number(s): ADG 154 of 2021 Judgment of: JUDGE BROWN Date of judgment: 17 January 2022 Catchwords: BANKRUPTCY – Application for review of sequestration order made by registrar – application for litigation guardian – application for adjournment – submissions made by relative of applicant – applicant asserted to be unable to attend court hearing – intervention by trustee – nature of review hearing – application dismissed – sequestration order made.
COSTS – Application for costs against non-party – matters to be considered – costs ordered to be paid out of estate.
Legislation: Bankruptcy Act 1966 (Cth), ss.40, 41, 43, 52, 153B, 154
Federal Circuit and Family Court of Australia Act 2021 (Cth), ss.190, 214, 254, 256
Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021, Pt.13, rr.2.02, 2.03
Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021, ss.11.02, 11.07, 11.08, 21.04
Federal Court Rules 2011Cases cited: Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225
Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8
Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal & Torres Strait Islander Corporations (No 4) (2012) 200 FCR 154
MZZGY v the Minister for Immigration and Border Protection [2014] FCA 488
Re Sarina; Ex parte Council of the Shire of Wollondilly [1980] 43 FLR 163
SFTB v Minister for Immigration & Multicultural & Indigenous Affairs [2003] FCAFC 108
Totev v Sfar (2008) 167 FCR 193Division: Division 2 General Federal Law Number of paragraphs: 129 Date of hearing: 16 December 2021 Place: Adelaide Counsel for the First Applicant: Mr Devonish Solicitor for the First Applicant: Oakbridge Lawyers Counsel for the Second Applicant: Mr Kelly Solicitor for the Second Applicant: Leventis Lawyers The Respondent: No personal appearance by the Respondent ORDERS
ADG 154 of 2021 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: ROBERT WILLIAM NAUDI
First Applicant
NICHOLAS DAVID COOPER IN HIS CAPACITY AS REGISTERED TRUSTEE IN BANKRUPTCY OF THE RESPONDENT
Second Applicant
AND: MIRZA FURQAN BAIG
Respondent
ORDER MADE BY:
JUDGE BROWN
DATE OF ORDER:
17 JANUARY 2022
THE COURT ORDERS THAT:
1.The Application for Review filed by the Respondent on 14 September 2021 is dismissed.
2.The costs of the applicant and Mr Cooper arising out of these proceedings be paid out of the bankrupt estate of Mirza Furqan Baig.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE BROWN:
INTRODUCTION
These proceedings arise under the Bankruptcy Act 1966 (Cth) and concern two inter-related bankruptcies, concerning the same bankrupt. On 25 August 2021, Registrar Colbran made an order sequestrating the estate of Mirza Furqan Baig[1] on the petition of Robert William Naudi.[2]
[1] Hereinafter referred to as “the bankrupt”.
[2] I will refer to this as “the second bankruptcy”.
In addition, Registrar Colbran fixed costs in an amount of $6,577.27, to be paid in Mr Naudi’s favour, out of the bankrupt’s estate. Her order also noted that Nicholas David Cooper had consented to be the trustee of the bankrupt’s estate.
Mr Naudi had been appointed Mr Baig’s bankruptcy trustee, when his estate was first sequestrated on 21 March 2019.[3] The first bankruptcy was subsequently annulled but Mr Naudi claims that costs awarded, in his favour, from his administration of the estate, prior to its annulment, remained unsatisfied. It was this judgment debt, which formed the basis of the second bankruptcy petition.
[3] I will refer to this as “the first bankruptcy”.
On 14 September 2021, the bankrupt filed an application for review of the Registrar Colbran’s decision of 25 August 2021. He denied that he was liable for the debt to Mr Naudi, on which his second bankruptcy had been founded.
It is essentially his position that he was unaware of the issue of costs relating to Mr Naudi’s administration or in the alternative, as his first bankruptcy was annulled, it is not fair that he should be liable for costs. He also asserts that any consent, which is asserted he provided to the costs order made in Mr Naudi’s favour was “defective … due to the mental health state during that time”.[4]
[4] See affidavit of the bankrupt filed 12 September 2021.
These reasons for judgment are directed towards the disposition of the review proceedings relating to the second bankruptcy, of which Mr Cooper is the trustee. Mr Cooper’s has an interest in ensuring that he does not incur unnecessary fees in his administration of the bankrupt’s estate. Given his statutory obligations to other potential creditors of the bankrupt, Mr Cooper has sought to be joined as a party to the proceedings. This application has been granted.
Essentially, it is Mr Cooper’s position that there is ample evidence to demonstrate that the bankrupt remains insolvent, irrespective of the controversial debt to Mr Naudi, and therefore it would not be in the interest of the other various creditors, to whom he owes a statutory duty to obtain the best rate of recovery for them, to allow the proceedings to be unnecessarily protracted, with the inevitable corollary of further costs being incurred on the estate.
The bankrupt filed an affidavit in support of his Application for Review on 14 September 2021, in which he deposed as follows:
The application is written and being tutored by my family and in specific by my elder brother, Dr Mirza Salman Baig, 280 Pitt street Sydney NSW 2000.
The advice the provided by my family and treating mental health team.[5]
[5] See the bankrupt’s Affidavit filed 14 September 2021 at [4]-[5].
Dr Mr Mirza Salman Baig is not legally qualified. He has sought to make submissions on behalf of the bankrupt, via telephone, from Sydney. He has not personally instructed solicitors to act on either his behalf or that of the bankrupt.
Dr Baig, who is medically qualified, has provided a number of medical reports, including one dated 15 November 2020, from a consultant psychiatrist, Dr Sandu, which indicates as follows:
Mirza [the bankrupt] meets criteria for a panic disorder with features of generalised anxiety disorder. While it is possible he has had previous major depressive episodes it is difficult to currently ascertain if this is a current major depressive episode as there is a marked stressor that is impacting his current mood suggesting a possible adjustment disorder rather than a major depressive episode.
Dr Sandu, in the history which he obtained from the bankrupt via a video consult, indicated that Mr Baig had been a building constructor, whose company had gone into liquidation due to embezzlement, which had precipitated significant legally related issues for him. It was further indicated, in the report, that the bankrupt had been prescribed anti-depressant medication and had been consulting a psychologist. Dr Sandu described the bankrupt’s mood as being anxious and depressed.
On 23 September 2021, the bankrupt forwarded the following letter headed Authority Letter to the court:
I, Mr Mirza Farqan Baig of address: 125 Budjik Street, Kaniva Vic 3419 give authority to Dr Mirza Baig and Saira Zane-Mirzan to represent, act and instruct (as deemed appropriate) on my behalf in the court matter ADG154 of 2021 or any other (as necessary) until such time, I am declared fit and capable by my treating medical professionals, psychiatrist and clinical psychologist.
The latter person referred to in this letter is apparently the bankrupt’s sister.
The review application was originally listed on 9 November 2021. On which occasion, Ms Zane-Mirzan indicated that she was in discussion with Mr Naudi with a view to seeing if the monies ostensibly owing to Mr Naudi could be compromised. As I recall, she indicated she and members of her family might be in a position to help in this regard.
On this basis, the case was adjourned until 23 November 2021. On that occasion counsel for Mr Naudi indicated that no such accommodation could be reached and, from Mr Naudi’s perspective, the relevant debt remained unsatisfied and he wished to proceed with the petition.
It was also on 23 November 2021 that Mr Cooper was joined as a party to the proceedings. In addition, on this occasion Dr Baig also attended court by telephone and made what I characterise as an inchoate application to be appointed the bankrupt’s litigation guardian, or in the alternative what is commonly referred to as a McKenzie Friend.
The bankrupt himself did not attend court and has not, in fact, attended any of the proceedings listed before me. What is clear to me, however, is that both the bankrupt and Dr Baig strongly seek the discharge of the second bankruptcy. The review application is supported by an affidavit, deposed on 12 September 2021, by the bankrupt himself and referred to above.
Pursuant to section 175 of the Federal Circuit and Family Court of Australia Act 2021 (Cth) a person is not entitled to be represented by anyone other than a duly qualified and admitted legal practitioner. As previously indicated, Dr Baig is not legally qualified.
The rationale for this rule is easily stated. Axiomatically, lawyers have the training, skills and experience which enables them to represent clients, which lay persons do not have. In addition, lawyers are subject to rules of professional conduct and are insured in respect of any potentially negligent action. Again, lay persons do not have these attributes and the protections they provide to litigants.
However, in certain circumstances, the court retains a discretion to allow a litigant to access an unqualified support person, in court as a McKenzie Friend. Their role is limited and they do not have any automatic right to address the court. Rather, the court’s ability to allow a person to utilise such a person is most usually a response to the genuine difficulties facing an unrepresented person.
Specifically in bankruptcy proceedings, pursuant to the provisions of Rule 2.03 of the Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021, the court may grant a person leave to be heard in proceedings in which that person is not otherwise a party. If such leave is granted it may be subsequently revoked and the court retains a discretion to order costs against such a person if it causes additional costs to another of the parties concerned in the applicable proceedings.
In oral submissions Dr Baig has made to the court, he has indicated his view that the bankrupt is unable to prosecute his review application due to ill-health, particularly the fact that he currently suffers a major depression rendering him suicidal.
In addition, it is Dr Baig’s view that his brother has been the subject of a gross injustice, or series of injustices, and therefore it is in the interest of justice that a litigation guardian be appointed. He seeks to be that litigation guardian and has appeared in court to make this submission.
Finally, Dr Baig has indicated that if he is so appointed, he will instruct a solicitor to prepare the case required to remedy the relevant injustices suffered by his brother. However, he will not do so until he has been appointed the bankrupt’s litigation guardian.
In order to determine whether Dr Baig should become the bankrupt’s litigation guardian, or should take some further part in the proceedings, it is necessary to set out more fully the background to the case, which is somewhat complex.
From the perspective of Mr Naudi and Mr Cooper, the issue of the appointment of a litigation guardian is something of a distraction. It being there position that it is in the interests of Mr Baig’s creditors, of which Mr Cooper asserts there are many, that the review proceedings be expedited by the court.
BACKGROUND
The bankrupt was a builder. He was the sole director of a company Softec Homes Pty Ltd. Softec Homes has been placed into liquidation. I am unaware of the identity of the liquidator and what was the company’s level of indebtedness. It seems to be the position that the bankrupt provided some form of guarantee in respect of at least some of the company’s debts.
As previously indicated, the bankrupt has been subject to a previous bankruptcy, although this bankruptcy has been subsequently annulled pursuant to the provisions of Section 153B of the Act. Mr Naudi was the relevant trustee.
Section 153B grants the court a discretion to annul a bankruptcy if it accepts that a creditor’s petition should not have been accepted. Section 154 deals with the effect of an annulment. Dispositions of property made by the relevant trustee remain valid and the trustee remain able to utilise any property remaining vested in him to pay his remuneration. Otherwise property previously vested in the trustee reverts to the bankrupt.
The circumstances surrounding the first bankruptcy are as follows. On 29 November 2018, following the service of a Bankruptcy Notice, dated 5 November 2018, Stair Lock Pty Ltd filed a creditor’s petition against Mr Baig, on the basis of what was asserted to be an unsatisfied judgment issued in its favour, entered in the Adelaide Magistrates Court, on 20 June 2018, in an amount of $49,122.03, against Mr Baig.
On 21 March 2019, Registrar Colbran ordered that the bankrupt’s estate be sequestrated and fixed Stair Lock’s costs in an amount of $8,371.00 to be paid from his estate. The Registrar further noted that Mr Naudi had consented to act as trustee.
On 26 March 2019, the bankrupt sought to review the relevant decision on the basis that the judgment entered in the Magistrates Court, in favour of Stair Lock, had been incorrectly entered against him on the basis of misleading evidence, which had been unethically and unprofessionally obtained.
Mr Naudi was informed of the bankrupt’s application and, on 5 April 2019, filed an affidavit in court, in which he indicated that had begun to incur fees and disbursements for his professional work in administering the bankrupt’s estate and meeting his various statutory obligations.
In early 2020, Mr Naudi formally intervened in the bankruptcy review proceedings between Stair Lock and the bankrupt as an interested party. Throughout the first half of 2019, it appears to be the case that proceedings to set aside the original judgment debt proceeded through the Adelaide Magistrates Court, whilst Judge Heffernan, formerly a member of this court, adjourned the review application from time to time.
Judgment was ultimately handed down in the Magistrates’ Court proceedings on 9 August 2019, which set aside the judgment upon which the creditor’s petition of Stair Lock had been based. Accordingly, issues arose, before Judge Heffernan, as to what were the implications of this decision for the review application.
On 3 September 2019, Judge Heffernan noted the setting aside of the relevant judgment debt by the Adelaide Magistrates’ Court but further noted the case was apparently still before that court. On this basis, the review application was adjourned until 4 February 2020.
On 4 February 2020 the review application was fixed for hearing on 1 April 2020. In addition, Judge Heffernan noted, in the preface to the relevant order, Mr Naudi’s position that the bankruptcy in question should be annulled rather than set aside. This order was made in the presence of Mr Baig, who by this time was acting on his own behalf.
Thereafter, both Mr Naudi and Mr Baig filed lengthy affidavits.[6] In his affidavit, Mr Naudi set out the orders sought by him as either:
·The bankruptcy be annulled pursuant to section 153B of the Act and the bankrupt pay his fees and costs, as authorised by the Australian Financial Security Authority[7] to enable the bankruptcy to come to an end; or
·The application for the bankruptcy to be set aside be dismissed.
[6] Mr Naudi on 25 February 2020; Mr Baig on 30 March 2020.
[7] Hereinafter referred to as “the AFSA”.
In support of his primary position – the annulment – Mr Naudi pointed to the fact that he had been administering Mr Baig’s estate for a period of around ten months and this had been a complicated process as he had to attend proceedings, in his capacity as Mr Baig’s trustee, brought by another of the bankrupt’s creditors, HST Building Group Pty Ltd, which had sought immediate possession of real properties said to be owned by the bankrupt.
In addition, Mr Naudi asserted that Mr Baig had not been cooperative with him in respect of providing information about his financial affairs and this had further complicated the bankruptcy. Further, Mr Naudi deposed that Mr Baig had made threats of improper conduct against him including that he had conspired with the liquidator of Softec Homes.
It was also Mr Naudi’s view, from information provided to him by other creditors, that the bankrupt remained insolvent. Mr Naudi provided a copy of his remuneration approval report, which estimated his costs up to that stage as being $19,085.50.
In response, Mr Baig asserted that he was solvent. He conceded that Softec had been placed in liquidation but attributed this to the misconduct and embezzlement of its employees. These factors had, in turn, compromised his mental health.
More significantly, he challenged Mr Naudi’s reported level of remuneration on the basis that he (Mr Naudi) was under a duty to reduce his fees, when there was a review in train regarding the bankruptcy being administered by him. Accordingly, it cannot be said Mr Baig was unaware, in March of 2020, that Mr Naudi sought his fees or what was their likely quantum.
The matter proceeded to hearing before Judge Heffernan on 1 April 2020 but the hearing did not conclude on that day but rather it was adjourned part heard until 16 June 2020. Both Mr Naudi and Mr Baig attended court on 1 April.
It is apparent from the orders made on this day what issues were ventilated on this occasion and what remained controversial. Mr Baig objected to the costs sought by Mr Naudi. In these circumstances, Mr Naudi sought to have his costs approved by AFSA. Each party was directed to file any further affidavit material, in respect of this issue, in advance of the 16 June hearing.
On 29 May 2020, Mr Naudi filed a further affidavit in which AFSA approved his fees in an amount of $33,431.50. However he agreed to discount his fees to $28,000.00 plus GST, if the court elected to annul the bankruptcy.
Mr Baig did not file a further affidavit. However, in 12 June 2020 a firm of solicitors in Sydney filed a notice of address for service on his behalf. On 16 June Mr Baig was represented by Mr Simons. Those currently representing Mr Naudi have provided me with a copy of the relevant transcript. [8]
[8] See affidavit of Mr Naudi filed 20 August 2021.
Mr Simons sought to adjourn the proceedings on the basis that he was recently instructed. Judge Heffernan indicated that the case had been before the court for a significant period of time and was in effect part heard, with the only issue outstanding being the quantum of costs to be awarded in Mr Naudi’s favour and whether it would be approved by AFSA.
In these circumstances, he invited Mr Simons to seek his client’s instructions as to his (Judge Heffernan’s) view that the bankruptcy should be annulled and costs awarded in favour of Mr Naudi in the amount sought by him, which had been formally approved by the Authority.
The case was held over for approximately fifteen minutes, whilst Mr Simons apparently sought his client’s instructions. When the case resumed the transcript shows that Mr Simon indicated that his client had no objection to the course proposed by Judge Heffernan and in these circumstances, Judge Heffernan annulled the bankruptcy pursuant to section 153B of the Act and awarded Mr Naudi costs in the sum of $28,000.00.
The relevant hearing, due to the pandemic emergency, was conducted electronically. Whether Mr Baig physically heard the pronouncement of the relevant order is not clear to me. What is clear and uncontroversial is that the order for costs remains outstanding. This order has not been subject to appeal in the Federal Court and has only been challenged by the bankrupt (and more recently by Dr Baig) when it has constituted the basis of the current creditor’s petition now under review by this court.
THE SECOND PETITION
On 11 January 2021, Mr Naudi applied for a bankruptcy notice, directed towards Mr Baig, as a consequence of the unsatisfied costs order made by Judge Heffernan on 16 June 2020. The bankruptcy notice was served on Mr Baig on 30 March 2021. It was not complied with by the specified date.
As a consequence, solicitors acting for Mr Naudi filed a creditor’s petition on 1 June 2021 on the basis of the costs order of $28,000.00 together with interest calculated pursuant to the relevant statutory rule in a further amount of $1,095.95. The petition was made returnable on 16 July 2021.
The petition was personally served on Mr Baig on 1 July 2021. By this stage, the solicitors acting for Mr Naudi calculated their costs, on the petition to be $5,560.44. Mr Baig filed a short affidavit on 13 July 2020 in which he denied being bankrupt and sought an adjourned of six to eight weeks.
On 16 July 2021 Registrar Parkyn adjourned the petition to 24 August 2021 and directed that the bankrupt file any further affidavit evidence in opposition on or before 13 August, with the petitioner to file any responding material by 20 August.
Mr Naudi complied with this direction filing the aforementioned affidavit to which was attached the transcript of the proceedings of 16 June 2020 and correspondence which had passed between him and Mr Baig, which indicated his view that Mr Baig had consented to the costs order in his favour in open court.
Mr Baig did not comply with the filing order of 16 July. On 24 August 2021, the petition came before Registrar Colbran. It is apparent that an oral application was made to adjourn the case further. In these circumstances, it was directed that any material in support of such an application be filed by close of business that day and the petition was adjourned until the following afternoon.
Late on 24 August, a solicitor acting for Mr Baig filed an affidavit in which he indicated his client did not agree that the amount specified in the petition was in fact owing and any consent said to have been provided by Mr Baig in respect of the costs order was both defective and not informed.
The solicitor sought to adjourn the proceedings for a period of between six and eight weeks on the basis of his client’s compromised mental health. A medical certificate was provided from a Dr Rimi, dated 23 August 2021 indicating that Mr Baig was suffering severe anxiety and depression and would be for a period of at least six weeks.
As is implicit in the orders made by Registrar Colbran on 25 August 2021, the application for adjournment was unsuccessful and as indicated above, the sequestration order, which is currently subject to review, was made.
APPLICABLE LEGAL PRINCIPLES
The court’s jurisdiction to make a sequestration order is founded in section 43(1) of the Bankruptcy Act 1966 (Cth). It depends upon the petitioning creditor establishing the commission of an act of bankruptcy by the debtor concerned. In addition, the section provides a number of other conditions which must be satisfied which include residence in Australia, at the time of the commission of the act of bankruptcy. It is also clear that the authority to make a sequestration order is discretionary in nature.
Section 40 provides an exhaustive list of circumstances which constitute an act of bankruptcy. Of particular relevance in the following matter is section 40(1)(g) which provides as follows:
(g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:
(i) where the notice was served in Australia--within the time specified in the notice; or
(ii) where the notice was served elsewhere--within the time fixed for the purpose by the order giving leave to effect the service;
comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained;[9]
[9] See Bankruptcy Act 1966 (Cth) s 40(1)(g).
The power granted to the Official Receiver, to issue bankruptcy notices, arises pursuant to section 41(1)(a) of the Act, which reads as follows:
(1) An Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor:
(a) a final judgment or final order that:
(i) is of the kind described in paragraph 40(1)(g); and
(ii) is for an amount of at least $5,000;[10]
[10] Ibid s 41(1)(a).
In this case, the bankruptcy notice issued to Mr Baig was in an amount of $31,895.95. It issued from the Official Receiver on 11 January 2021 and had attached to it the order of Judge Heffernan made on 16 June 2020. The relevant notice required payment of this sum within 21 days of service of the notice on Mr Baig.
There is no dispute that Mr Baig did not satisfy the bankruptcy notice. As indicated, it is his position that the debt is not outstanding and the issue of the notice is, in general terms, an abuse of process, given the annulment of his earlier bankruptcy. In tandem with these submission, it is asserted by Dr Baig, on his behalf, that the proceedings should be adjourned or subject to some form of moratorium, until he has regained his health.
Bankruptcy proceedings are often emotionally charged. Necessarily, the process of being found to be insolvent and the engagement of the legal processes to satisfy debts, particularly the vesting of assets in any trustee appointed are wrenching for the individual concerned and those associated with him or her. It is not uncommon for such proceedings to precipitate an extreme psychological reaction.
Fundamentally, the perception of imminent bankruptcy is a potentially unpleasant and humiliating experience, which, for obvious reasons, its subjects, for understandable and human reasons, may seek to defer or avoid.
In Culleton v Balwyn Nominees Pty Ltd[11] the Full Court discussed what were the relevant principles applicable to whether bankruptcy proceedings should be adjourned. In so doing, it reminded first instance courts, such as this one, not to forget the human reality of bankruptcy and the potential emotional significance it held for the individuals affected by it.
[11] Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8 at [55].
However, as the Full Court pointed out, bankruptcy proceedings are fundamentally about a person’s solvency. The Full Court said as follows:
The question of an adjournment of a creditor’s petition is often not easy. Bankruptcy lists, by their nature, have many litigants who are insolvent, who may be insolvent, and who may be desperate to avoid bankruptcy. A desire to delay and prevaricate is not uncommon. Often delay is in no one’s (including an insolvent debtor’s) interests. Sometimes, however, an adjournment will be necessary to avoid injustice. Each case should be dealt with on the merits. Central to the decision will generally, if not invariably, be the consideration of solvency or insolvency, because of its essentiality in the exercise of the jurisdiction.[12]
[12] Ibid at [54].
As a consequence of the non-payment of the judgment debt, Mr Naudi presented a petition seeking the sequestration of Mr Baig’s estate, on the basis of the unsatisfied bankruptcy notice. This engaged the provisions contained in section 52(1) of the Act, which reads as follows:
(1) At the hearing of a creditor’s petition, the Court shall require proof of:
(a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);
(b) service of the petition; and
(c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing;
and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.[13]
[13] Bankruptcy Act 1966 (Cth) s 52(1).
As the Full Court indicated in Culleton, the court’s jurisdiction under the Act is fundamentally concerned with the solvency of the respondent in the proceedings before it. This follows from the terms of section 52(2) of the Act, which reads as follows:
If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:
(a) that he or she is able to pay his or her debts; or
(b) that for other sufficient cause a sequestration order ought not to be made;
it may dismiss the petition.[14]
[14] Ibid s 52(2).
Accordingly, after determining that a debt remains outstanding and that the creditor has been properly served, the court is furnished with a discretion to dismiss a petition if there exists sufficient cause to do so. It would appear to be Mr Baig’s position that the petition should be either deferred or dismissed because there is sufficient cause to do so.
Pursuant to section 254 of the Federal Circuit and Family Court of Australia Act 2021 (Cth) the court, through its rules, is authorised to delegate its powers to a registrar of the court. One such power is the power to make a sequestration order pursuant to the Act.[15] The Registrar in this case was exercising power delegated to her.
[15] Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021 r 2.02 and Schedule 1.
Section 256(1) of this Act authorises the court to review any delegated exercise of power to a registrar pursuant to section 254. In particular, section 256(2) provides as follows:
(2) The Federal Circuit Court and Family Court of Australia (Division 2) may, on application under subsection (1) or on its own initiative, review an exercise of power by a delegate under section 254, and may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised.[16]
[16] Federal Circuit and Family Court of Australia Act 2021 (Cth) s 256(2).
On an application for review of a registrar’s decision, the court:
·is engaged in a fresh proceedings;
·does not scrutinise the original reasons to ascertain error;
·makes its own decision on the merits of the case; and
·in an application for review of a sequestration order, where a sequestration order is still sought, the petitioning creditor is required to prove all necessary matters, including those specified in section 52(1) of the Act.
The review hearing arising is a hearing de novo. This is specified by rule 21.04(10) of the Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021,[17] which also authorises the court to receive additional evidence.
[17] Hereinafter referred to as “the Rules”.
Accordingly, in my view, in general terms, I am required to resolve the following matters in the application to review the sequestration order:
·Has an act of bankruptcy occurred?
·Have the requirements of section 52(1) of the Act been met?
·Is there other sufficient cause, pursuant to section 52(2) of the Act that a sequestration order not be made?[18]
[18] See also Totev v Sfar (2008) 167 FCR 193 at 197,[14].
Ancillary to this task, I consider that I am required to consider whether the proceedings should be adjourned due to the bankrupt’s ill health and, if so, on what terms and conditions. Further, whether Dr Baig should be given further leave to be heard and, if so, on what terms and conditions. Finally, whether a litigation guardian should be appointed on the bankrupt’s behalf.
In my view, these issues are to be determined by reference to the nature of the proceedings as a whole. In Culleton the Full Court recognised the special nature of bankruptcy proceedings, which deal not only with the private rights and obligations of debtors and creditors, but also the public’s interests in ensuring the proper administration of insolvent estates, which have the consequence of change in the status of a bankrupt person.
As such, the question of solvency and its implications for the community as a whole, were categorised as being central to the bankruptcy jurisdiction. By way of example, the Full Court endorsed an earlier Full Court decision of Re Sarina; Ex parte Council of the Shire of Wollondilly[19] in which it was held that the use of sequestration was inappropriate in a case of a person who was otherwise solvent but refused to pay a judgment debt entered against him.
[19] See Re Sarina; Ex parte Council of the Shire of Wollondilly [1980] 43 FLR 163.
In Culleton the Full Court said as follows:
Re Sarina demonstrates the centrality of the question of solvency to the jurisdiction of bankruptcy. Whilst one must recognise the permissive “may” in s52(2), the circumstances where a sequestration order would be made if the debtor satisfied the Court of his or her solvency are difficult to imagine. Proof of solvency may not necessitate dismissal of the petition; an adjournment may be the appropriate course.
Whilst it is legitimate for a creditor to proceed in bankruptcy for the purpose of recovering a debt that does not mean that bankruptcy should be viewed in its essential character as part of the process of execution of judgment debts. It is the changing of the status of an insolvent person: A sequestration order, as demonstrated by Re Sarina, will not be made against the estate of someone who refuses to pay a debt if that person can prove (the onus being on him or her) that he or she is solvent.[20]
[20] Ibid at [43]-[44].
Accordingly, in determining whether to adjourn the proceedings or to appoint a litigation guardian, I must consider and balances the interests of the various individuals concerned, not just the bankrupt, within the evidentiary context of the proceedings as a whole. If the evidence indicates that an act of insolvency has occurred, it seems to me to be improbable that any useful purpose will be served in the court adopting either the course of adjourning the proceedings or appointing a litigation guardian.
Division 11.02 of the Rules deals with the appointment of litigation guardians. Rule 11.07 stipulates a person needs a litigation guardian if he or she satisfies one of two limbs. Firstly, he or she is unable to understand the nature and possible consequences of the relevant proceedings. Secondly, he or she is not capable of adequately conducting or giving adequate instruction for the conduct of the proceedings.
In respect of the first alternative, I accept the bankrupt is highly depressed and suffers from panic attacks. However, Dr Sandu’s report does not indicate that the bankrupt does not comprehend the nature of the proceedings in which he is a party.
To the contrary, the history provided by Mr Baig to Dr Sandu indicates he does understand the nature of the proceedings and their potential consequences for him. I am satisfied that he is aware that he has been made bankrupt and contests the grounds on which that occurred.
In respect of the second alternative, Dr Sandu opines that the bankrupt has difficulty in concentrating and has low energy levels. However, Dr Sandu did not consider that there was any formal thought disorder demonstrated by the bankrupt.
In my view, this diagnosis is congruent with the application for review, which the bankrupt ostensibly prepared on his own behalf. In his application, he denies committing an act of bankruptcy. The supporting affidavit, which the bankrupt has ostensibly personally executed is a lucid document, which outlines his consistent position that Mr Naudi’s fees are excessive given the fact that he was challenging the original judgment debt in the Adelaide Magistrates’ Court. Mr Baig concluded this affidavit with the following statement:
I have prepared this affidavit with assistance of the lawyer, my family has helped me prepare the affidavit today as their opinion, including is that I may end up in psychiatric care facility, as during writing this information in portions over week I have faced anguish situation and had several panic attacks and nightmares.[21]
[21] See affidavit of the bankrupt filed 14 September 2021 at [25].
I accept the potential for the process of engagement with these proceedings to cause mental distress for the individual concerned. However, that is not one of the criteria to be satisfied for the appointment of a litigation guardian. Rather, incapacity must be demonstrated either in the form of non-comprehension of the relevant proceeding or an inability to provide an instruction to one’s legal representative. In my view, the fact that the provision of such an instruction may have the potential to cause mental distress, even of an extreme kind, is not of itself a sufficient basis to justify such an appointment.
In addition, pursuant to the provisions of Rule 11.08 a person who needs a litigation guardian may only start proceedings via his/her litigation guardian but not otherwise. In the submission of Mr Kelly, counsel for Mr Cooper, creates something of a conundrum for the bankrupt, given the fact that he commenced the proceedings in his own name. In Mr Kelly’s submission, if the bankrupt is found to require a litigation guardian, he cannot have validity commenced the current review proceedings legally and therefore his application should be dismissed.
I am concerned about the circularity of this argument. I accept that Mr Baig is unwell. That is not of itself grounds for the appointment of a litigation guardian or sufficient to give his brother the right to be heard on his behalf. In my view, the issue is to be resolved by a consideration of what are the legislative objects of the court itself and of the Rules generally, including those which apply to the appointment of a litigation guardian.
Section 190 of the Federal Circuit and Family Court of Australia Act 2021 (Cth) provides that the overarching purpose of these Rules is to facilitate the just resolution of disputes according to law as quickly, inexpensively and efficiently as possible[22]. For reasons upon which I will expand in due course, I do not consider that the appointment of a litigation guardian, in all the circumstances of this case or their general adjournment, will achieve these objective. Certainly, these outcomes will not be in the interests of other potential creditors of the bankrupt.[23] In this context, in my view, the evidence of Mr Cooper is crucial.
[22] Federal Circuit and Family Court of Australia Act 2021 (Cth) s 190.
[23] SFTB v Minister for Immigration & Multicultural & Indigenous Affairs [2003] FCAFC 108 at [10].
THE EVIDENCE OF MR COOPER
Mr Cooper has provided two affidavits filed on 9 and 15 December 2021 respectively. The second affidavit, in effect, is an up-date of the first. Mr Cooper has deposed that, as at 15 December, in his capacity as the trustee of the bankrupt’s estate, he had received eight proofs of debt in respect of the bankrupt in a combined amount of $9,257,657.31. One of these proofs relates to the Australian Taxation Office and relates to income tax in an amount of $10,380.72.
In addition, Mr Cooper deposes that one of the creditors, HST Building Group Pty Ltd, the proof of which is in an amount of $519,609.28, has indicated a willingness to be substituted as a crediting petitioner in the sequestration proceedings against Mr Baig.
In his capacity as trustee of Mr Baig’s estate, Mr Cooper has, as of 10 November 2021, provided a report to his creditors. Mr Cooper has ascertained that the bankrupt is a joint proprietor of six real properties in South Australia and one in Victoria. The South Australian properties are mortgaged to the ANZ Bank securing an amount of approximately $1.5m. The properties are also subject to caveats from other individuals who purport to be creditors of the bankrupt.
Significantly, Mr Cooper has ascertained that the other joint proprietor of the properties is Dr Baig. In these circumstances, Mr Cooper is concerned that Dr Baig may have a conflict of interest with that of his brother, the bankrupt. Mr Cooper is critical of Dr Baig that he has not previously disclosed this state of affair to either the court or to him until he (Mr Cooper) ascertained it to be the position.
Up to this stage, Mr Cooper has not been able to ascertain that the bankrupt has any other assets or sources of income. In these circumstances, it is the submission of Mr Kelly that it is apparent that the bankrupt is insolvent.
CONCLUSIONS
In this case, I am satisfied that the matters specified in the petition of Mr Naudi have been established, namely the judgment debt entered in his favour by Judge Heffernan remains unsatisfied. I am also satisfied that the relevant petition was properly served on Mr Baig. Accordingly the matters specified in section 52(1) of the Bankruptcy Act 1966 (Cth) are satisfied and the court has the authority to make a sequestration order.
On the basis of the evidence of Mr Cooper, I am satisfied that the bankrupt is not able to pay his debt. In my view, this evidence indicates that the bankrupt is insolvent. More significantly, in the context of the current matter, I do not consider that Mr Baig is able to establish any other sufficient cause as to why the sequestration order should not be made.
Certainly, his assertion of ill health is not sufficient cause, although it may precipitate sympathy for his situation. In my view, what the evidence available to me indicates is that he was aware of the costs implications of the earlier annulment proceedings and the quantum of the costs applicable to Mr Naudi, his first bankruptcy trustee.
In these circumstances, the fact that there are no proceedings on foot in respect of the relevant order of Judge Heffernan, made on 16 June 2020 must be a central consideration. The order made by His Honour, ostensibly with the consent of Mr Baig, has no obvious defects. It appears to have been regularly entered.
The order was made following protracted proceedings, in which Mr Baig took part. Throughout these proceedings, there can be no doubt that Mr Naudi consistently voiced his positon that he remained entitled to costs notwithstanding Mr Baig was challenging the basis on which the debt leading to his bankruptcy was based in another court.
Mr Naudi also indicated that his costs would be greater than that usually awarded in bankruptcy petition cases due to the complexity of Mr Baig’s financial affairs. Given the matters raised by Mr Cooper, in respect of the second petition, it appears clear that this level of complexity is real, given the insolvency of the construction company of which Mr Baig was formerly a director.
In addition, due to a desire to ensure that there can be no subsequent challenge made to the level of costs sought by him, Mr Naudi sought to have his costs assessed by AFSA. Accordingly, when the costs order was made, Mr Baig was fully aware of the quantum of the costs sought against him.
As a consequence of the current petition, Mr Baig has sought to impugn the actions of the solicitor who appeared on his behalf on this date and has asserted that he acted without his instructions in his apparent consent to the entry of the relevant costs order, which founds the current petition.
Apart from Mr Baig’s assertion of this fact, there is no other evidence to support it. In my view, the assertion must be viewed in the light of the other circumstances leading to the entry of the judgment, namely the length of time the original bankruptcy proceedings had been on foot and the fact that Mr Baig objected to the quantum of Mr Naudi’s costs and, as a consequence, Mr Naudi sought their ratification from AFSA.
In these circumstances, there can be no doubt that Mr Baig was aware of the amount of costs sought by Mr Naudi. In my view, it also significant that it was only when the costs orders formed the basis of the second petition that Mr Baig has sought to impugn the actions of his former solicitor. Previously he had not sought to challenge the costs order through any process of appeal.
By necessary inference, Mr Baig (and those associated with him) now seek to retard the process of the bankruptcy proceedings brought against him by Mr Naudi on the basis of a judgment debt which remains unsatisfied and in respect of which he has no legitimate prospects of having it set aside. In addition, the appointed trustee has mustered unchallenged evidence that he has other significant debts, including to statutory authorities, with no apparent means to satisfy those debts.
Mr Baig seeks to achieve his purpose on the basis that he is unwell. Members of his family seek the same outcome on the basis that he requires the assistance of a litigation guardian. The evidence that Mr Baig is unwell comes mainly from his psychiatrist and his brother, who is medically qualified. It needs to be emphasised that a party to proceedings is not entitled to deferral of proceedings solely on the basis of ill-health.
In granting any adjournment application, the court is required to consider not only the interests of the applicant concerned but also the overall interest the community has in the efficient and timely administration of justice. In bankruptcy proceedings, in particular, the court must also consider the interests of any potential creditors of the person seeking such a deferral.
As the High Court indicated in Culleton in bankruptcy proceedings, the court is concerned primarily with one issue – the solvency of the debtor concerned. It is in this framework, in my view, the court must consider what is likely to be achieved by firstly granting an adjournment and secondly appointing a litigation guardian other than delaying the inevitable outcome of the proceedings and incurring more legal costs.
Dr Sandu has opined that Mr Baig is depressed, anxious, has difficulty in concentrating and low energy levels. He is not suffering a thought disorder. For the reasons previously elicited, I find that he understands the nature of the proceedings in which he is currently involved and their consequences. Clearly, he wishes to avoid those consequences, as does his brother, who has not refuted the assertion that he has a vested interest in the outcome of the bankruptcy proceedings against Mr Baig.
Dr Sandu’s opinion has not been subject to testing through any process of cross-examination. It relies, to a large extent on the truthfulness and objectivity of the history provided to him by Mr Baig, who is clearly anxious to delay the bankruptcy proceedings. In such circumstances, the court must be cautious in its acceptance of such medical reports to found de facto adjournment applications.[24]
[24] MZZGY v the Minister for Immigration and Border Protection [2014] FCA 488.
In my view, prior to the appointment of a litigation guardian, the court must consider what such an appointment will achieve vis-à-vis the administration of justice. It seems improbable in the extreme that such a litigation guardian will be able to unearth evidence to indicate either that Mr Baig is currently solvent or has some legitimate prospects of challenging the unsatisfied judgment debt on which the current petition is based or on satisfying any other judgment debtor who may be substituted for Mr Naudi.
In any event, it is not the function of a litigation guardian to perform such an investigative role. Rather, such a person is required, in effect, to be a model litigant and to refrain from exposing the person he is assisting to unnecessary costs. In my view, no useful purpose will be served, in the present matter, by such an appointment.
The effect of adjourning the proceedings on the basis of Mr Baig’s asserted incapacity, which I have found does not necessarily have implications for the level of his understanding of the proceedings, is likely to be that Mr Cooper’s administration of his estate would be held in limbo, potentially indefinitely, given no prognosis has been provided as to when Mr Baig will regain his psychological equilibrium. Such an outcome is clearly not in the interest of Mr Baig’s other creditors or in the administration of justice.
The Full Court, in Totev v Sfar has indicated as follows:
[T]he great importance of bankruptcy matters being dealt with in a highly expeditious fashion. Courts exercising bankruptcy jurisdiction must be assiduous in avoiding delay in dealing with any question concerning the making of a sequestration order.[25]
[25] Totef v Sfar (supra) at 198 [17].
In the present matter, neither Mr Baig nor his brother have indicated when the bankrupt can be anticipated to be restored to a position in which he can engage with the proceedings. Does this mean the case should be adjourned indefinitely? This might suit their interests but no one else’s. In this context, I ask myself what new issues can any litigation guardian usefully ventilate in the circumstances of this case. The answer to these rhetorical questions must, in my view, be negative on both accounts.
In these circumstances, although I appreciate these proceedings are a hearing de novo, I am concerned that the matters raised by the bankrupt himself and as further articulated by Dr Baig are a delaying tactic and must be disregarded. As such, I am satisfied Mr Naudi has provided satisfactory proof of the matters raised in his petition and that it was validly served.
As indicated above, I am satisfied that the debt to Mr Naudi remains outstanding and no matter has been raised or has the potential to be raised which would lead the court to exercise any of the discretions conferred upon it by section 52(2) of the Act.
For these reasons, I have come to the conclusion that the review application should be dismissed. This will have the effect of confirming the earlier sequestration order.
COSTS
The normal course is that the respondent’s costs and those of the interested party should be paid out of the bankrupt estate of the applicant. In the current matter, Mr Cooper has sought that his costs should be paid by Dr Baig on an indemnity basis.
Pursuant to section 214(3) of the Federal Circuit and Family Court of Australia Act 2021, the court is granted a discretion to award costs subject to the application of any specific rule of court. Part 13 of the Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021 authorises the application of the Federal Court Rules 2011 as the means by which costs are to be calculated other than if a short form bill of costs is submitted.
Accordingly, in general terms, it is open for the court to award indemnity costs and, in theory make such an award against a person who is not a party to the proceedings concerned. There is no closed category of cases in which indemnity costs may appropriately be awarded.
However, in Colgate Palmolive Co v Cussons Pty Ltd,[26] the Full Court of the Federal Court indicated that the kinds of situation in which indemnity costs might be considered included those in which a litigant had:
•Commenced or continued an action knowing it to have no chance of success;
•Made false or irrelevant allegations of fraud;
•Made groundless allegations, which prolonged the case concerned; and
•Imprudently refused an offer to compromise.[27]
[26] Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.
[27] Ibid 231-233 (Sheppard J).
Essentially, there must be some form of egregious misconduct or act of exceptional or reckless imprudence, which had led to the prolongation of proceedings with a concomitant increase in the exposure of other parties to costs.
Similar considerations relate to an awards of costs against a third party. There must be a connection between the conduct of the third party concerned and the costs incurred by the party claiming them and the circumstances involved in the case must be exceptional.[28]
[28] Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal & Torres Strait Islander Corporations (No 4) (2012) 200 FCR 154.
In the current matter, I accept that the conduct of Dr Baig is materially connected to costs incurred by both Mr Naudi and Mr Cooper. It was he who raised issues in respect of the potential appointment of a litigation guardian. These issues have had the effect of protracting the proceedings to some degree.
The question is whether this current circumstances of such an exceptional nature to justify an award of costs against Dr Baig personally. I am not persuaded that they do. In this context, I bear in mind the Full Court’s admonition concerning the danger of courts, such as this one, losing sight of the human reality of bankruptcy.
In these circumstances, I can appreciate why Dr Baig and his sister elected to intervene informally in the case and plead their brother’s cause. It was a response likely to be dictated by feelings of filial loyalty and support. In these circumstances, I decline to make an order for costs against Dr Baig personally and the costs of these proceedings will be paid out of the estate.
For all these reasons, the orders of the court will be as set out at the commencement of these reasons for judgment.
I certify that the preceding one hundred and twenty nine (129) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Brown. Dated: 17 January 2022
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