O'Meara v Hitwise Pty Ltd
[2006] FMCA 1927
•22 December 2006
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| O’MEARA v HITWISE PTY LTD | [2006] FMCA 1927 |
| BANKRUPTCY – Application to set aside sequestration order – whether creditor’s petition can be amended once sequestration order made. BANKRUPTCY – power of the court to order the substitution of a creditor after sequestration order made. BANKRUPTCY – Sequestration Order – solvency. BANKRUPTCY – Review of Registrar’s decision. |
| Bankruptcy Act 1966; ss.33, 40, 43, 44, 49, 52 Federal Magistrates Court (Bankruptcy) Rules 2006, r.16.05(2), 20.03 |
| Allesch v Maunz (2000) 203 CLR 172 Barber v Bone Thorpe International Pty Ltd [2001] FMCA 4 D’Onofrio; ex parte Blyth (1983) 76 FLR 136 Ex parte Dearle; Re Hastings (1884) 14 QBD 184 Griffiths v Boral Resources (Qld) Pty Limited [2006] FCAFC 149 Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637 MacDonald v Official Trustee in Bankruptcy (2001) 107 FCR 72 MacIntosh v Lobel (1993) 30 NSWLR 441 Matthews v Collett [2000] FCA 224 Miles v Shell Company of Australia (1998) 156 ALR 133 Nicholas v Hills (2004) 136 FCR 201 Re Brindle; ex parte FB & FA McMahon Pty Ltd (1992) 35 FCR 506 Re Buckley; ex parte James Hardie & Co Pty Ltd (1976) 13 ALR 291 Re Faulkner (1960) 19 ABC 34 Re Lakatos; ex parte Lakatos v DCT (1996) 33 ATR 145 Re Sarina; ex parte Wollondilly Shire Council (1980) 32 FLR 596 Re Touma; Saparas v Touma (2000) 171 ALR 275 Sandell v Porter (1966) 115 CLR 666 Shortall v Keily [2005] FCA 1930 Wren v Mahony (1972) 126 CLR 212 2000 Olympic Games Pty Ltd v Daly [2000] FCA 1286 |
| Applicant: | HEDLEY NED O’MEARA |
| Respondent: | HITWISE PTY LTD |
| File number: | MLG 985 of 2005 |
| Judgment of: | Wilson FM |
| Hearing date: | 24 August 2006 |
| Date of last submission: | 2 September 2006 |
| Delivered at: | Brisbane |
| Delivered on: | 22 December 2006 |
REPRESENTATION
| Counsel for the Applicant: | N/A |
| The Applicant in person: | Mr O’Meara |
| Counsel for the Respondent: | Mr Catlin |
| Solicitors for the Respondent: | Matthew Shaw & Associates |
ORDERS
That the orders of Federal Magistrate Riethmuller made on 3 July 2006 be set aside.
That the application for review of the Registrar’s orders made on
27 September 2005 be dismissed.
That the application filed 16 November 2005 be dismissed.
That the applicant pay the respondent’s costs of both applications, including reserved costs, to be assessed.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT BRISBANE |
MLG 985 of 2005
| HEDLEY NED O’MEARA |
Applicant
And
| HITWISE PTY LTD |
Respondent
REASONS FOR JUDGMENT
The applicant bankrupt seeks to set aside a sequestration order made against his estate on 27 September, 2005. The respondent creditor seeks to maintain that sequestration order, or alternatively seeks to obtain a sequestration order on its own application against the estate of the applicant. The matter has a lengthy, and somewhat convoluted, history. In order to understand the applications that are required to be dealt with by the court, it is necessary to recount that history.
On 27 September 2005 a sequestration order was made against the estate of the applicant by a Registrar of this court. The petitioning creditor was Hall & Wilcox, a firm of solicitors which had previously acted on behalf of the applicant, including in litigation against the present respondent.
Hall & Wilcox had obtained a default judgment in the Magistrates’ Court of Victoria. A bankruptcy notice was served on the applicant on 11 May, 2005 in reliance or non-satisfaction of the judgment. He did not comply with it. He therefore committed an act of bankruptcy on
1 June 2005: s.40(1)(g) Bankruptcy Act 1966 (“the Act”).
Hall & Wilcox then served a creditor’s petition. On 19 September 2005 the applicant gave notice of his intention to oppose the creditors’ petition. The applicant appeared on his own behalf of the hearing of the creditors’ petition, as he did before me. Notwithstanding his opposition, a sequestration order was made by Registrar Wood on
27 September 2005. Warren Brian White was appointed the trustee of the applicant’s bankrupt estate. Mr White has also consented to be the trustee if a new sequestration order is made on the application of the present respondent.
The applicant filed an application for review of the Registrar’s decision on 11 October, 2005, within the time permitted by Rule 2.03(1) Federal Magistrates Court (Bankruptcy) Rules 2006. Not surprisingly, each of the grounds of review related to the proceedings brought against the applicant by Hall & Wilcox. No amended application has been filed by the applicant, although a further application has been filed, as referred to in paragraph [9] below.
The sequestration order was stayed by Connolly FM on 24 October 2005. The power to stay the sequestration order has been questioned, but nothing turns on that fact in the present case.
The judgment in favour of Hall & Wilcox was set aside after the making of the sequestration order. On 14 November 2005 Riethmuller FM permitted Hall & Wilcox to withdraw from the proceedings, on the basis that it no longer had a judgment debt, but ordered the applicant to pay its costs. Those costs have not yet been paid. I refer to this further, below. A creditor then sought to be substituted but did not have a judgment against the applicant. Riethmuller FM therefore adjourned the further hearing of the application to review the decision of the Registrar to 25 November 2005, to enable fresh affidavit material from both creditors and the applicant to be put before the court.
It is significant to note that Riethmuller FM did not disturb the sequestration order that had previously been made. Curiously, the sequestration order remained on foot, notwithstanding that the petitioning creditor had withdrawn from the proceedings.
By application filed 16 November 2005 the applicant bankrupt sought the following orders:
(1)The orders made by Federal Magistrate Riethmuller on Monday 14th November 2005 be varied as follows:
The sequestration order made by Registrar Wood on the
27th October 2005 to be set aside.(2)The Creditor’s Petition dated 10th August 2005 to remain in force pending application from any other intervening creditor to be substituted. Filing of any application of substitution together with supporting affidavits to be filed by 18th November 2005. If any such application is made, then a further hearing of the Creditor’s Petition in this matter be adjourned until the
25th November 2005.(3)An order for costs only if this application is opposed by either respondent or any other party.
By application filed 23 November 2005 the present respondent applied for leave to be substituted as petitioning creditor pursuant to s.49 of the Act. The respondent additionally sought a sequestration order against the estate of the applicant.
The respondent obtained a judgment in the Magistrates Court of Victoria at Melbourne, on 17 October 2003, in the sum of $17,750.33. That judgment was extant and unsatisfied at the time the sequestration order was made by Registrar Wood. By the time the respondent filed its application on 23 November 2005, the applicant had twice unsuccessfully applied to set the judgment aside, and incurred adverse costs orders totalling $910.00.
The respondent had earlier initiated its own bankruptcy proceedings.
A bankruptcy notice was issued against the applicant on 28 April 2005 and served on the applicant on 9 June 2005. He did not comply with it, and therefore committed a further act of bankruptcy. The bankruptcy notice claimed a total owing of $21,365.32, which included amounts said to be owing for post judgment interest. On the hearing of this matter, the applicant did not make any submissions contesting the validity of either bankruptcy notice served upon him.
A creditors’ petition was prepared by the respondent, but was not filed or served.
In his affidavit filed 25 November 2005 in support of the respondent’s application, Mr Shaw, the solicitor for the respondent, says: “Hitwise now seeks to be substituted as Petitioning Creditor in relation to the Hall & Wilcox proceeding and in the Sequestration Order which has been made in that proceeding”.
On 25 November 2005 Tuscany Designs Pty Ltd appeared as a supporting creditor but has taken no further part in these proceedings.
On 25 November 2005 Riethmuller FM ordered that the respondent be granted leave to be substituted as creditor. His Honour ordered the respondent to file and serve an amended creditor’s petition. His Honour stayed the sequestration order until 22 December 2005, being the date to which the matter was adjourned for further hearing.
An amended creditor’s petition was filed by the respondent on
7 December 2005. It purports to substitute the present respondent for the original petitioning creditor. It contains particulars of the debt owing to it, and details of the judgment that had been obtained by it against the applicant. It also specifies as the act of bankruptcy, failure to comply with the bankruptcy notice issued and served by it.
Thereafter the hearing of this matter was adjourned on a number of occasions, in part due to the applicant’s poor health, and in part because of other interlocutory skirmishes between the parties.
The applicant made a third application to set aside the judgment in favour of the present respondent, which was refused on 24 May 2006.
On 3 July 2006 the application filed 11 October 2005 was dismissed by Riethmuller FM because of non appearance by the applicant, and the stay of the sequestration order was lifted. The applicant was granted liberty to apply to set aside the orders within 28 days. He did so by application filed 19 July 2006. It does not appear that orders have been made reinstating his application.
With that background, it seems to me that I must decide:
a)Whether the applicant should be permitted to reactivate his application for an order of review, with a view to setting aside the sequestration order made against his estate;
b)If so, whether the sequestration order made by Registrar Wood should be set aside;
c)As part of deciding that issue:
i)what is the status of the creditor’s petition presented by Hall & Wilcox, once the sequestration order was made, i.e. can it be subsequently amended;
ii)if so, what is the effective date of the amended creditor’s petition, i.e. does it pre-date the making of the sequestration order;
iii)if not, can the fact that the applicant was indebted to the present respondent pursuant to a judgment be taken into account or relied upon as justifying the making of the sequestration order;
d)If not, whether a sequestration order should be made on the amended Creditors’ Petition presented by the respondent.
The course that these proceedings have taken has presented a number of difficulties. The principal one which occurred to me, and which I raised with the parties, is the power of the court to order the substitution of a creditor, and the filing of an amended petition, after a sequestration order had already been made. I will return to that question shortly.
The parties treated the hearing before me as the final hearing of the matter. Each adduced evidence, and witnesses were cross examined. The parties principally dealt with the merits of whether the applicant was in fact indebted to the present respondent, and whether a sequestration order could be made on the application of the present respondent. Each seemed to approach the matter as turning on whether the applicant could succeed in disputing the debt of the respondent, and did not assist the court in resolving the complex issues which have arisen because of the orders previously made. It is not said that any further evidence could or would have been given, depending upon my resolution of what are essentially procedural difficulties, albeit ones which may affect substantive rights.
The applicant has provided an explanation as to why he did not appear before the court on 3 July 2006. I consider that, in the circumstances, I should set aside the orders of Riethmuller FM made on 3 July, and allow the applicant to pursue his applications. Mr Caitlin, on behalf of the respondent, did not submit that I should not follow that course. The orders of Riethmuller FM expressly provided for their setting aside, and I consider that in those circumstances I have power to make the order which I propose: Rule 16.05(2) Federal Magistrates Court Rules.
Rule 20.03 of the Federal Magistrates Court Rules provides:
“The review of an exercise of power by a Registrar:
(a)must proceed by way of a hearing de novo; and
(b)may receive as evidence any affidavit or exhibit tendered before the Registrar;
(c)may with leave receive further evidence;
(d)may receive as evidence:
(i)any transcript of the proceeding before the Registrar; or
(ii)if there is no transcript, an affidavit sworn by a person who was present at the proceedings before the Registrar as a record of the proceeding.”
Neither party objected to my receiving further affidavits that each of them had filed since the making of the sequestration order. Each party proceeded on the basis that all affidavit evidence was to be considered by me. Given the events that have occurred since the making of the sequestration order, it would be nonsensical to do otherwise. In those circumstances, I propose to grant leave to each party to rely on the affidavits filed by them, as well as on the oral evidence given at the hearing.
On a hearing de novo, I am required to consider the matter afresh, regardless of whether or not there was error at first instance: Allesch v Maunz (2000) 203 CLR 172 at 180; Re Brindle; ex parte FB & FA McMahon Pty Ltd (1992) 35 FCR 506; Nicholas v Hills (2004) 136 FCR 201. In those circumstances, I will proceed to look at the issue of whether a sequestration order should have been made on 27 September 2005, in light of all of the evidence now before the court: Shortall v Keily [2005] FCA 1930.
Section 43(1) of the Act provides:
(1)“Subject to this Act, where:
(a)a debtor has committed an act of bankruptcy; and
(b)at the time the act of bankruptcy was committed, the debtor:
(i)was personally present or ordinarily resident in Australia;
(ii)had a dwelling house or place of business in Australia;
(iii)was carrying on a business in Australia, either personally or by means of an agent or manager; or
(iv)was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager;
the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.”
As observed above, the debtor had, by the time the sequestration order was made, committed two separate acts of bankruptcy by reason of his non-compliance with bankruptcy notices issued by each of Hall & Wilcox and the present respondent. The applicant also satisfied each of the first three subparagraphs of s.43(1)(b) of the Act. Therefore, on
27 September 2005 the court had the power to make a sequestration order on a petition presented by a creditor. Whether, on the hearing of an application for a review order, a sequestration order made on a petition presented by one creditor may be justified if a creditor’s petition had been filed on behalf of another creditor, or a debt is found to be owing to such a creditor, but not to the petitioning creditor, are two issues that arise in the present case.
Section 44 of the Act provides:
(1)“A creditor’s petition shall not be presented against a debtor unless:
(a)there is owing by the debtor to the petitioning creditor a debt that amounts to $2,000 . . .
(b)that debt, or each of those debts, as the case may be:
(i). . .
(ii)is payable either immediately or at a certain future time; and
(c)the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition.”
At the time the sequestration order was made, Hall & Wilcox was entitled to present its petition against the applicant. By the time of the hearing before me it would not be entitled to seek a sequestration order because its judgment had been set aside and its debt was disputed. At the same time, the present respondent would have been (but had not) entitled to also present a creditor’s petition at the time the sequestration order was originally made. There is a dispute, which it will be necessary for me to resolve, as to whether the applicant is indebted to the respondent. The respondent has a judgment for in excess of the statutory amount which prima facie satisfies the requirements of s.44(1)(a) and (b)(ii) of the Act. In the case of each of Hall & Wilcox and the present respondent, s.44(1)(c) of the Act was satisfied, as at
27 September, 2005. Further, if the date upon which the presented respondent filed its amended creditor’s petition be relevant, s.44(1)(c) of the Act was satisfied vis a viz the bankruptcy notice served by the present respondent, but not that served by Hall & Wilcox. Further, by amending the creditor’s petition to reflect non-compliance with its own bankruptcy notice, the present respondent has attempted to avoid the need for the court to consider the sort of problems discussed in Matthews v Collett [2000] FCA 224.
Putting aside for one moment the indebtedness of the applicant to the present respondent, if I am satisfied of that fact, the respondent had the right, as at 27 September 2005 to present a creditor’s petition against the applicant. If the sequestration order made in September 2005 is set aside, the present respondent would also be entitled to present its own creditor’s petition and seek a fresh sequestration order, based upon the act of bankruptcy committed by non-compliance with the bankruptcy notice served by it, subject to consideration of s. 52(4) of the Act: Griffiths v Boral Resources (Qld) Pty Limited [2006] FCAFC 149.
Hall & Wilcox had the right to present the petition at the time it did, as its judgment against the applicant was then effective and in force. However, once that judgment was set aside, and the debt owed to Hall & Wilcox was disputed, that firm was no longer entitled to proceed with its petition against the applicant. That is no doubt why that firm sought to be released from the proceedings in November 2005.
Any creditor may petition on an act of bankruptcy whether or not it was the creditor that issued the bankruptcy notice: Ex parte Dearle; Re Hastings (1884) 14 QBD 184. In the present case, both Hall & Wilcox and the respondent had issued bankruptcy notices that were not complied with.
In Australian Bankruptcy Law & Practice (Darvall & Fernon) 5th ed at para [44.1.05] the learned authors state that in order to maintain a bankruptcy petition there must be a good petitioning creditor’s debt, a good act of bankruptcy and the proper petitioning creditor: Ex parte Dearle; Re Hastings (1884) 14 QBD 184 at 190.
The question which therefore arises is whether the sequestration order made on 27 September 2005 can be sustained, notwithstanding that the creditor upon whose petition the order was made has subsequently become disentitled to seek a sequestration order on that petition; where there was another creditor who could have petitioned for the sequestration order, but had not in fact done so by 27 September 2005.
This in turn gives rise to a need to consider the effect of the orders made by Riethmuller FM on 25 November 2005 and, in turn, the terms of the application filed on 16 November, 2005 (referred to at paragraph [9] above).
Section 49 of the Act provides:
“Where a creditor’s petition is not prosecuted with due diligence or where for any other reason the Court considers it proper to do so, the Court may permit to be substituted as petitioner or petitioners another creditor or other creditors to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor, and the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor.”
There is no doubt, in my opinion, that if the present respondent had applied to be substituted as petitioning creditor before 27 September 2005, then subject to arguable proof of indebtedness, an order for substitution could have been made, and the matter could have proceeded to a hearing on 27 September. The question is whether any difficulty arises because the order for substitution was made on
16 November, after the sequestration order had been made.
In Australian Bankruptcy Law & Practice, supra at [49.0.10] it is stated that such substitution will occur at a hearing “before any sequestration order is made”. At paragraph [49.0.15] the learned authors state:
“A substituted petitioning creditor stands in the shoes of the original petitioning creditor, and the petition proceeds as though the substituted petitioning creditor had always been the petitioning creditor. The original act of bankruptcy is relied upon. To satisfy the requirements of s. 44(1) of the Act, the substituted creditor’s debt must accordingly have been in existence, liquidated and owing at the time of commission of the act of bankruptcy alleged in the petition.”
Almost identical views are expressed by the learned authors of The Laws of Australia at [3.44].
In my view, there is no power to make an order for the substitution of a petitioning creditor, after a sequestration order is made. Ordinarily, at common law, an action ends with a judgment. It is said that the cause of action merges in the judgment. The position should be no different with a statutory right of action, such as an application in bankruptcy, unless the statute expressly provides to the contrary. Here it does not. It is also trite to say that an order, once made, is valid until set aside. Acts done in accordance with an order are protected, if otherwise legal, notwithstanding that it is subsequently set aside: MacIntosh v Lobel (1993) 30 NSWLR 441.
The service of a bankruptcy notice, and the presentation of a creditor’s petition are proceedings with a view to obtaining a sequestration order. Once that order is made, there is no longer any need for a petitioning creditor. There is nothing left to petition for. There is certainly no power to substitute one creditor for another, in the sequestration order, after it has been made, as was sought by the present respondent.
In the present case, a sequestration order has been made against the estate of the applicant. It subsists until set aside. There is (and was) no lis pendens for the present respondent to be substituted into. I am therefore of the view that the orders made by Riethmuller FM on
25 November 2005 were beyond jurisdiction. However, until set aside on appeal, those orders remain in force. It is not open to me to set them aside. If I had the power to do so, I would.
The next question which arises is, assuming the validity of the orders of Riethmuller FM, what right did the present respondent have to make the amendments that it did to the creditor’s petition. One would expect that consequent upon an order for substitution, the new petitioning creditor would amend the petition to reflect its identity as the petitioning creditor. It should also amend the petition to reflect its judgment debt. Otherwise, it would not be able to satisfy the requirements of s. 52(1)(a) and (c) of the Act. However, I query whether the substituted creditor ought be permitted to amend the act of bankruptcy relied on. Section 33(1)(b) of the Act is wide in its terms, but it is inimical to the notion of substitution, and the language of s. 49 of the Act, for the substituted creditor to be entitled to rely on a different act of bankruptcy. In those circumstances, the substituted creditor would be effectively be presenting its own petition, rather than being substituted into an extant proceeding, or standing in the shoes of the original creditor. Once a creditor has been substituted as petitioner, it is not open to that creditor to present a second petition in respect of the same debt: Re Faulkner (1960) 19 ABC 34. I therefore doubt that the present respondent had the right to effect amendments to the petition to alter the date of the commission of the act of bankruptcy. If it wished to rely on a separate act of bankruptcy it should have filed its own petition. That is certainly the view of the learned authors of Australian Bankruptcy Law & Practice who cite MacDonald v Official Trustee in Bankruptcy (2001) 107 FCR 72 as authority for the proposition that an amendment permitted under s. 33(1) of the Act must not set up an act of bankruptcy different from that originally relied on.
The fact that such amendments were in fact made is beside the point. If the substituted creditor could not lawfully effect them, the purported amendments would be ineffectual and ought be disregarded. This would not change the result in this case because, as I have pointed out, the order for substitution was made within six months of the commission of the act of bankruptcy by the applicant (by non-compliance with the bankruptcy notice issued by Hall & Wilcox) and the effect of substitution would be that the present respondent would be treated as if it were the petitioning creditor, relying on the same act of bankruptcy as Hall & Wilcox. Accordingly, its petition (the amended petition) would be treated as being filed within the time allowed by the Act, following the commission of the first act of bankruptcy.
In those circumstances, as the orders of Riethmuller FM did not specify the amendments which were allowed to be made to the creditor’s petition, I will disallow the amendments which were made to the act of bankruptcy in paragraph 4 of the creditor’s petition.
I then turn to the issue which was argued at length before me, namely whether the applicant could (and perhaps should) be made bankrupt on a debt owed to the present respondent. The order for substitution, if properly made, does not create an issue estoppel preventing the debtor from raising the question of indebtedness: Re Buckley; ex parte James Hardie & Co Pty Ltd (1976) 13 ALR 291. The time at which the substituted creditor must ordinarily prove its debt is at the time the sequestration order is made: Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637.
Section 52(1) and (2) of the Act provide:
(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.
(1A)If the Court makes a sequestration order, the creditor who obtained the order must give a copy of it to the Official Receiver for the District in which the order was made.
(2)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.
I will deal first with the issues raised by ss.52(1)(c) and 52(2)(a) of the Act.
The applicant advanced two reasons as to why a sequestration order ought not be made at the request of the present respondent:
a)he is not indebted to the respondent;
b)he is solvent.
The present respondent has obtained a judgment against the applicant in the Magistrates Court of Victoria at Melbourne. The action brought by the respondent was for monies allegedly owing between 1 July 2002 and 31 October 2002. The amount claimed was $13,238.50 together with amounts for interest and costs. The judgment was obtained on
17 October 2003 in the amount of $17,750.33. Since that date further costs orders have been made against the applicant.
Notwithstanding the existence of a judgment, in appropriate cases, a court in bankruptcy may itself determine whether a debt is in fact and in law due: Wren v Mahony (1972) 126 CLR 212. However, it will not do so as a matter of course. As Barwick CJ observed, at 224:
“The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor’s debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof.”
In Miles v Shell Company of Australia (1998) 156 ALR 133 at 136 Sundberg J said:
“The basis of the present application is that despite the judgment the applicant was not in truth indebted to the respondent. When a court exercising bankruptcy jurisdiction is invited to go behind a judgment, the first question is whether it should accept the invitation. The court does not as a matter of course go behind a judgment simply because it is asked to do so. The case an applicant must make out before the court will intervene depends on the circumstances, in particular those in which the judgment came to be entered. When the judgment followed a full investigation at trial in which both parties participated, the court will not reopen the matter unless a prima facie case of fraud or collusion or miscarriage of justice is made out. Where judgment has been entered in pursuance of a compromise, ground must be shown for challenging the compromise as such before the judgment will be reopened. In the case of a default judgment, the court will always go behind it if there is what it regards as a bona fide allegation that no real debt lay behind the judgment. Whether the judgment is to be reopened will often involve some preliminary investigation of the merits of the attack on it. But when the court decides that it will go behind the judgment, the question is whether there was in fact and in law a debt which could legally found the judgment.”
The judgment obtained against the applicant was effectively a default judgment. There has been no trial on the merits between the applicant and the present respondent. There have been applications to set aside the default judgment, and I bear in mind that the applicant has been unable to persuade a magistrate that there is reason to set the judgment aside. As I understand, a relatively low threshold is imposed on such applications, the applicant being required to show no more than an arguable case, as well as reason for his delay. The present applicant has not been able to overcome that threshold. Accordingly, I must first look to see if there is a bona fide case on behalf of the applicant that no debt is owing to the respondent. Before me each of the applicant and Mr Appel of the respondent gave evidence and were cross examined.
The essence of the respondent’s claim to be entitled to monies from the applicant arises out of advertising conducted on the internet for an on-line business conducted by the applicant or an entity which he effectively controls. Essentially, the applicant engaged the respondent to arrange an advertising campaign with an internet search provider.
Such advertising was to be paid for on a “per click” basis, meaning that on each occasion a person clicked on the hyperlink advertising the business on the internet, a fee had to be paid. The respondent effectively acted as agent for an internet search engine provider, in this case Looksmart. At one stage the applicant asserted that he had been the victim of “click fraud”, apparently a practice where the number of “clicks” is erroneously (whether deliberately or accidentally) and artificially inflated. The applicant expressly abandoned this argument.
It is relevant, as I have said, to observe that the applicant has thrice unsuccessfully applied to set the judgment aside. He is now pursuing an application for judicial review in the Supreme Court of Victoria. That application alleges a lack of procedural fairness, amongst other grounds, by the magistrate. I am not concerned with those matters, but rather with whether, on the evidence before me the applicant has shown an arguable case that he is not indebted to the respondent.
The applicant had engaged the respondent, then called Sinewave, to provide such services on an earlier occasion. The contract for such services was put into evidence (exhibit D4). Mr Appel gave evidence, which I accept, that although the contract price was for $12,000, the applicant only paid $8,000, and the respondent has effectively written off the balance. He explained that it did so because the applicant proposed to enter into a further contract. He in fact did so. This contract was for a campaign to be conducted with the internet search engine “Looksmart”. It is that contract which led to the Magistrates Court proceedings which culminated in the judgment to which I have referred.
The applicant described himself as a “recalcitrant debtor”, a phrase he no doubt borrowed from Re Sarina; ex parte Wollondilly Shire Council (1980) 32 FLR 596, a case upon which he relied. He complained that he had not been given proper particulars of the amount said to be owing to the respondent. In cross examination the applicant was shown two documents (exhibits D1 and D2) respectively described as a “Campaign Implementation Agreement” and a “Campaign Renewal Agreement” and four invoices relating to the work undertaken for him (exhibit D5). Each of the invoices relate to the Looksmart campaign. They total $13,238.50, identical to the amount for which the respondent sued the applicant in the Magistrates Court of Victoria. I do not accept the applicant’s evidence that he had not seen the invoices before. The applicant was confronted by emails, sent by him to an employee of the respondent, promising to make payment for the “Looksmart” advertising campaign. Such cheques were never sent. The applicant accepted, under cross examination, that there was an amount owing to the respondent, but queried the quantum of the debt. He also eventually accepted that the business had received what it had paid for, that is all of the clicks were provided.
The applicant’s denial that copies of the invoices have been provided to him in the litigation was expressly contradicted by Mr Shaw, the respondent’s solicitor, who gave evidence that copies of the invoices were provided during disclosure. I accept Mr Shaw’s evidence in that regard.
Mr Gavin Appel in his affidavit filed 25 May 2006 and in his oral evidence responded to the applicant’s alleged grounds of defence to the claim. Mr Appel gave evidence, which I accept, that services were provided pursuant to the second agreement. He explained that the applicant was also provided access to technical information (eg exhibit D6) and could follow the number of clicks that the business was provided and which had been used. Mr Appel said that the applicant did not make any complaints regarding the Looksmart campaign, and certainly made no allegations of fraud until he was pursued for the debt. I accept Mr Appel’s evidence that the four invoices were sent to the applicant, and that no payment has been made in respect of them.
On considering the evidence, I am left with the firm impression that the applicant accepts that he was provided with the services for which he contracted, but professed confusion with how the amount owing was calculated. Having accepted that he was sent the four invoices on which the respondent’s claim was based, and that no payment has been made in respect of them, the result is clear. The applicant owed the money to the respondent. He has not paid it. The applicant has not shown that there is any bona fide reason to question the judgment in the respondent’s favour. His first ground of attack fails.
At paragraph 10 of his affidavit filed 21 October 2005, the applicant stated:
“I believe I am solvent, as my assets far outweigh my liabilities.”
Before the court the applicant accepted that there was no current evidence as to his solvency but said that he was willing to swear that he is able to pay his debts.
In his affidavit filed 21 October 2005 the applicant exhibited a Statement of Affairs, in which he asserted:
a)that he was a self employed businessman;
b)that he had $850.00 in the bank, and credit card debts of $29,500;
c)that he owned a motor vehicle which was encumbered, with a net value of some $2,435.00;
d)his tools of trade were worth $3,000;
e)household contents and other assets were listed with an estimated valued at $12,150.00; and
f)he owned no real estate, shares, or other investments.
The applicant claimed that he was owed $314,085 by his wife as second mortgagee of the property in which they reside. The applicant asserts that he advanced monies to his wife to enable her to buy the property. A copy of the mortgage was exhibited to his affidavit but he adduced no evidence to support the assertion that the property has been valued in excess of $850,000 by the trustees of his wife’s bankrupt estate. The applicant’s wife became bankrupt on 9 February 2005. At paragraph 15 of his affidavit the applicant accepts that this asset is not available to him due to his wife’s bankruptcy. In any event an interest in a matrimonial home is not a readily realizable asset: D’Onofrio; ex parte Blyth (1983) 76 FLR 136.
The applicant has also claimed that he transferred a business to a discretionary family trust (The HJ O’Meara Trust) such that the trust in turn owned units in the Fussy.com.au Unit Trust said to be worth $100,000. The business is an online retailer of flowers, gifts, hampers and the like. However, no evidence of the value of this business was put before the court, other than assertions as to how much another unit holder paid for their units.
The applicant contends that he can raise sufficient money from his assets within a reasonable time. He does not descend to any particularity of how he will be able to do so.
In contrast to the submissions of the applicant that he is solvent, the respondent points to a number of matters. In the affidavit of Tony Tsiavis, exhibited to the affidavit of Matthew Shaw filed 30 March 2006 it is revealed that:
a)The applicant has been bankrupt previously, between 7 September 1998 and 16 September 2003;
b)A warrant is outstanding in New Zealand against the applicant relating to charges of false pretences, and New Zealand police believe the applicant left the country to avoid prosecution.
Further, the applicant’s trustee in bankruptcy filed an affidavit on
9 November 2005 in which he stated that the applicant had failed to disclose:
a)a debt of $14,699.33 for goods sold and delivered by Tuscany Designs Pty Ltd;
b)a judgment in favour of the present respondent of $18,143.33
In his affidavit filed 25 November 2005 Mr Shaw also refers to judgments in favour of Graniflora Nurseries Pty Ltd ($5,808.56) and The Business Leader Australia Pty Ltd ($8,528) which remain unsatisfied.
The applicant is also presently liable for costs orders made in the Magistrates Court of Victoria ($1,445) and of the original petitioning creditor (referred to at paragraph [7] above). A Bill of Costs has been delivered by Hall & Wilcox in the amount of $7,328.80.
On 30 June 2006 an order was made by this court dismissing an application for further discovery and the applicant was ordered to pay costs of $1,125.
In a letter dated 30 May 2004 to the respondent’s solicitors (ex MCH2 to affidavit of MC Ham sworn 6 August 2004, which is in turn exhibited to the affidavit of Shaw filed 25 November 2005) the applicant stated:
“Most importantly, our financial situation is not good. My wife is not working, and my only income is an e-commerce web site that earns us a minimal income after expenses. Our debts are extensive – particularly credit cards.”
He suggested an informal arrangement with creditors, failing which he proposed a Part X composition with creditors.
In his affidavit filed 24 November 2005 in support of his contention that he was solvent the applicant exhibited an account balance enquiry showing that as at 23 November 2005 an account bearing his name with the Westpac bank had available funds of $25,764.69. The source of these funds is not disclosed, nor whether they are still available. Even if all of these funds were available, they would not be sufficient to pay all of the debts to which I have referred.
It is well established that a debtor who is in a position to pay all the debts he owes within a reasonable time ought not be the subject of a sequestration order. Further the debtor does not have to have sufficient cash at hand to pay all creditors in full immediately, if he has realizable assets: Sandell v Porter (1966) 115 CLR 666 at 670.
As was said in Re Lakatos; ex parte Lakatos v DCT (1996) 33 ATR 145 the onus to establish solvency and also that the discretion should be exercised in the favour of the debtor, is one placed on the [debtor]: See also Re Touma; Saparas v Touma (2000) 171 ALR 275 at [11], also referred to by the applicant.
In the present case, the applicant has not come near to discharging that onus. His only substantial assets are the alleged loan owed to him by his wife, who is a bankrupt, and which is secured against the matrimonial home; and the internet business which is owned by a trustee on behalf of a trust, and in respect of which there is no valuation evidence. Even if the applicant has available to him the cash which he asserts, it is not sufficient to pay the debts which he presently owes.
The applicant’s second ground of attack fails.
Assuming the orders made by Riethmuller FM on 25 November, 2005 remain in force (as I must), the present respondent is the petitioning creditor. I am satisfied of the matters required by s. 52(1) of the Act, so far as the amended petition is concerned, ignoring the amendment to the act of bankruptcy. Service of the petition has been proved, and is not disputed. I have already dealt with my acceptance of the evidence of Mr Appel that the debt is still owing. The amended petition has been verified.
Therefore, I am of the view that, in the circumstances, and on the evidence which has been produced to this court, that a sequestration order was properly made on 27 September 2005. I would therefore dismiss the application for review.
I should add that I would reach the same practical result, even if the orders of Riethmuller FM of 25 November 2005 were set aside.
In those circumstances, I would conclude that the Registrar ought not to have made a sequestration order on the petition of Hall & Wilcox. It could not satisfy the court that its debt was still owing. I would therefore set aside the sequestration order. However, I would thereupon grant the application of the present respondent to substitute as petitioning creditor. Substitution can be permitted in a case where it was doubtful whether the original petitioning creditor was owed its debt at the date of presentation of the petition (or in this case, at the hearing of the petition, in light of events that subsequently occurred) but there was no doubt about the validity of the act of bankruptcy and the substituted creditor’s debt, which is the situation in this case: 2000 Olympic Games Pty Ltd v Daly (2000) FCA 1286 at [3] and [6].
The applicant himself seems to accept, in his application filed 16 November 2006 that if the sequestration order is set aside, the creditor’s petition should remain in force to enable substitution, relying on Barber v Bone Thorpe International Pty Ltd [2001] FMCA 4.
The order for substitution could be made nunc pro tunc. Section 52(4) does not seem to affect this course of action because a sequestration order has been made on the petition. Therefore, the creditor’s petition has not lapsed, and the sort of difficulties confronted in Griffiths v Boral Resources (Qld) Pty Ltd do not have to be addressed.
Once the present respondent was properly substituted as petitioning creditor, the same result would follow as I have reached at paragraphs [81] and [82] above.
My orders will therefore be:
(1)The orders of Riethmuller FM made on 3 July 2006 be set aside.
(2)
The application for review of the Registrar’s orders made on
27 September 2005 be dismissed.
(3)That the application filed 16 November 2005 be dismissed.
(4)The applicant pay the respondent’s costs of both applications, including reserved costs, to be assessed.
I certify that the preceding eighty-nine (89) paragraphs are a true copy of the reasons for judgment of Wilson FM
Associate: Lynnette Chin
Date: 22 December 2006
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