Obeid v The Council of the City of Sydney

[2012] FMCA 450

FEDERAL MAGISTRATES COURT OF AUSTRALIA

OBEID v THE COUNCIL OF THE CITY OF SYDNEY [2012] FMCA 450

BANKRUPTCY – Bankruptcy notice – whether court should set aside or extend time for compliance where an appeal has been made against the judgment upon which the notice was based.

Bankruptcy Act 1966, ss. 40, 41

McPhee v Glentham [2006] FMCA 1508
Porter v OAMPS Ltd (2004) 207 ALR 635
Byron v Sutherland Star Group Pty Ltd (1997) 73 FCR 264
Jenkins v National Australia Bank [1999] FCA 1758

Applicant: MOSES EDWARD OBEID

Respondent: THE COUNCIL OF THE CITY OF SYDNEY (ABN 22 636 550 790)

File Number: SYG 417 of 2012

Judgment of: Raphael  FM

Hearing date: 3 May 2012

Date of Last Submission: 3 May 2012

Delivered at: Sydney

Delivered on: 30 May 2012

REPRESENTATION

Counsel for the Applicant: Mr M Aldridge SC

Solicitors for the Applicant: Colin Biggers & Paisley

Counsel for the Respondent: Mr D Robinson SC, Mr D Cook

Solicitors for the Respondent: Holding Redlich

ORDERS

1. Application dismissed.

2. Any bankruptcy petition presented in relation to the applicant be made returnable before me on a date agreed with the Registry.

3. The Applicant to pay the Respondent’s costs to be assessed if not agreed in accordance with the Federal Magistrates Court (Bankruptcy) Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 417 of 2012

MOSES EDWARD OBEID

Applicant

And

THE COUNCIL OF THE CITY OF SYDNEY (ABN 22 636 550 790)

Respondent

REASONS FOR JUDGMENT

1. On 1 February 2012 in Supreme Court of New South Wales proceedings 2009/298673 the Council of the City of Sydney[1] obtained judgment against Mr Obeid for $12,123,470.09.  The judgment was obtained after a case heard by Einstein J over fifty days during 2011.  His Honour’s substantive judgment, which was given on 11 October 2011 and was supplemented by a judgment given on 1 February 2012, was of some 543 paragraphs in length.  On 7 February 2012 the City caused the Official Receiver to issue a bankruptcy notice to Mr Obeid.  On 16 February 2012 Mr Obeid filed a notice of appeal in respect of the judgment in the New South Wales Court of Appeal.  That notice of appeal was itself of some 128 paragraphs.  On 23 February 2012 Mr Obeid filed a notice of motion in the appeal seeking to stay the execution of the primary judgment pending the determination of the appeal.  On 27 February 2012 Mr Obeid commenced proceedings in this court seeking, alternatively, the setting aside of the bankruptcy notice or an extension of time for compliance with it until the determination of his appeal. 

   [1] “The City”.

2. The application for a stay of execution was heard on Thursday 15 March by Young JA who dismissed the notice of motion on 3 April 2012. I note that his Honour says at [6] of his reasons:

   “The motion was considered on the basis that there was nothing to suggest that there were not arguable grounds of appeal…”

3. This was the position in the matter at the hearing before me and I was not otherwise asked to take any view upon Einstein J’s judgment or the prospects of success in any appeal.  Young JA was aware of the existence of the bankruptcy notice when he considered the application for a stay and that if a stay was not granted Mr Obeid’s appeal may be rendered nugatory by a sequestration order having been made against him.  Notwithstanding these facts, his Honour concluded at [38] and [39]:

   “Where a family organises their affairs in a very complicated way, that may be very advantageous fiscally and may be protection against creditors. However, where they have to show a court that they are virtually impecunious, the fact that there is a complicated trust structure with discretionary trusts, where it appears that the people whose means are being examined, are in the words of Mr Thackery’s Vanity Fair, exploiting the doctrine “How to Live Well on Nothing a Year”, then they should not be surprised if the court is unable to find that they have made a full and frank disclosure of their assets and are unable to pay the judgment.

   Accordingly, in my view, the application fails and must be dismissed with costs as the appellants have not established the key fact to my satisfaction on the balance of probabilities. This being so, I cannot make an order that it would be appropriate that there be a stay if a percentage of the $12,000,000 was paid into the Court.”

4. I shall deal with each of the claims for relief sought by the applicant separately.

Setting aside the bankruptcy notice

1. The provisions that relate to bankruptcy notices are found in s.41 of the Bankruptcy Act 1966 (Cth)[2]:

   [2] The “Act”.

   “41  Bankruptcy notices

   (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; or

   (b)  2 or more final judgments or final orders that:

   (i)  are of the kind described in paragraph 40(1)(g); and

   (ii)  taken together are for an amount of at least $5,000.

   (2)  The notice must be in accordance with the form prescribed by the regulations.

   (3)  A bankruptcy notice shall not be issued in relation to a debtor:

   (a)  except on the application of a creditor who has obtained against the debtor a final judgment or final order within the meaning of paragraph 40(1)(g) or a person who, by virtue of paragraph 40(3)(d), is to be deemed to be such a creditor;

   (b)  if, at the time of the application for the issue of the bankruptcy notice, execution of a judgment or order to which it relates has been stayed; or

   (c)  in respect of a judgment or order for the payment of money if:

   (i)  a period of more than 6 years has elapsed since the judgment was given or the order was made; or

   (ii)  the operation of the judgment or order is suspended under section 37.

   (5)  A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.

   (6)  Where the amount specified in a bankruptcy notice exceeds the amount in fact due and the debtor does not give notice to the creditor in accordance with subsection (5), he or she shall be deemed to have complied with the notice if, within the time allowed for payment, he or she takes such action as would have constituted compliance with the notice if the amount due had been correctly specified in it.

   (6A)  Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

   (a)  proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or

   (b)  an application has been made to the Court to set aside the bankruptcy notice;

   the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.

   (6C)  Where:

   (a)  a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and

   (b)  the Court is of the opinion that the proceedings to set aside the judgment or order:

   (i)  have not been instituted bona fide; or

   (ii)  are not being prosecuted with due diligence;

   the Court shall not extend the time for compliance with the bankruptcy notice.

   (7)  Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, the debtor has applied to the Court for an order setting aside the bankruptcy notice on the ground that the debtor has such a counter‑claim, set‑off or cross demand as is referred to in paragraph 40(1)(g), and the Court has not, before the expiration of that time, determined whether it is satisfied that the debtor has such a counter‑claim, set‑off or cross demand, that time shall be deemed to have been extended, immediately before its expiration, until and including the day on which the Court determines whether it is so satisfied.”

2. An order of the court setting aside a bankruptcy notice can only be made if the bankruptcy notice is deficient as provided in s.41(3) or the circumstances outlined in s.41(5) occur or where a debtor makes a claim that he has a counter claim, set off or cross demand of the type referred to under s.40(1)(g) of the Act. A notice is not set aside if it has not been served, but time for compliance but does not run until it is. A notice is not set aside if it is not served within six months or after any extension granted, it becomes stale. In these proceedings it is not argued that the creditor does not have a final judgment or order or that the order has been stayed or that a period of six years has elapsed since the judgment or order for payment of money was made or that the order has been suspended under s.37 of the Act. It has not been suggested that the judgment debt is for a sum less than $5,000.00 as required by s.41(1). The amended application filed in court on 12 March 2012 does not seek the setting aside of the notice on the grounds contained in s.41(7). It is not suggested that the amount claimed in the bankruptcy is in excess of the amount of the judgment or the amount in fact due. It would seem that there is therefore no ground upon which this court could set aside the notice at this time.

Extending time for compliance

1. The respondent creditor accepts that the appeal instituted by the applicant constitutes proceedings to set aside a judgment or order for the purposes of s.41(6A). It is accepted that the court has a discretion to extend the time where an appeal has been lodged provided that the discretion is not limited under s.41(6C). In exercising the court’s discretion I will be guided by what fell from Lucev FM in McPhee v Glentham [2006] FMCA 1508 at [20] where his Honour identified the following relevant criteria:

   “a)  whether there is an arguable case on appeal;

   b)  whether a stay of execution has been sought or obtained;

   c)  prejudice to the debtor;

   d)  prejudice to the creditor and other creditors;

   e)  the impact on the date of bankruptcy;

   f)  the impact on any related legal proceedings;

   g)  delay; and

   h)  whether or not undertakings have been given, or conditions can be imposed, in relation to, for example:

   i) payment of monies on trust by the debtor;

   ii) non-disposal of assets by the debtor;

   iii) notification of significant expenditure by the debtor; and

   iv) further borrowings on real property owned by the debtor, and the debtor’s ability to fulfil or comply therewith.”

2. In Porter v OAMPS Ltd (2004) 207 ALR 635[3] I considered a similar application. I said at [21 and 22]:

   [3] “Porter”.

   “[21] It cannot be said that courts are insensitive to the impact that bankruptcy proceedings will have upon a debtor. A creditors petition, if successful, results in serious and long term consequences. As the full bench of the Federal Court said in Ahern v DCT (1987) 76 ALR 137 at 148:

   It is also well-established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds: Re Rhodes; Ex parte Heyworth (1884) 14 QBD 49; Bayne v (1907) 5 CLR 64 and Re Verma; Ex parte DCT (1985) 4 FCR 181.

   These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences.

   Indeed it was the acknowledgment of the potential gravity of an act of bankruptcy which led the court in Re Baker; Ex parte Baker v Staples [1995] FCA 703; BC9502879 to apply the Ahern principle to applications for an extension of time to comply with a bankruptcy notice. Her Honour was of the opinion that such applications should generally be granted providing that the appeal proceedings are genuine and arguable.

   [22] With respect, this approach appears to overlook the fact that the service of a bankruptcy notice simply marks the start of a process and that the commission of an act of bankruptcy, while undoubtedly of significance to the debtor, does not affect the actual status of the debtor: Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264; Shephard v Chiquita Brands (South Pacific) Ltd [2001] FCA 1394; BC200106197; Re Geard; Ex parte Reid (unreported, Fed C of A, Sheppard J, 11 February 1994); Liew v JNS Technologies [1999] FCA 1428; BC9906724; Jenkins v National Australia Bank Ltd [1999] FCA 1758; BC9908483; Warner v Frost [1999] FCA 830; BC9903321. The court in these cases when considering whether to grant an extension of time for compliance with a bankruptcy notice has been mindful of balancing the interests of creditors, noting the potential impact of a later act of bankruptcy in the event that the appeal is unsuccessful and proceedings continue. In Liew v JNS Technologies, above, Kenny J referred to the comments of Heerey J in Re Nguyen; Ex parte Cmr of Taxation (1995) 54 FCR 403 at 407:

   “Extension of time for compliance with the bankruptcy notice may have important adverse consequences for the judgment creditor. For example, if a sequestration order is subsequently made the commencement of the bankruptcy may be later than would otherwise have been the case, which in turn may affect rights of recovery by the trustee in relation to property.

   An appropriate safeguard for debtors was seen to exist as the court is always able to exercise its discretion and adjourn any petition for sequestration until after the appeal has been heard.”

   before listing at [23] the factors which weighed against extending the time for compliance, of which the relevant ones to this application are:

   ·    The possible disadvantage to creditors if the relation back period was extended for a significant period of time, as it would most likely be;

   ·    The fact that the committal of an act of bankruptcy does not prevent the debtor from continuing his appellate proceedings; and

   ·    The fact that the court will have control over the timing of the hearing of the creditor’s petition at which time the situation regarding the appeal will be clearer as will its likely prospects of going ahead.

   To which I would add, the fact that the application for a stay has been refused by Young JA , and the applicant has abandoned his review of that decision by the Court of Appeal.

3. I have been informed that the case has been set down for the hearing of an appeal on 26 November 2012 for 4 days.  If the appeal is heard then, it is unlikely that a decision will be made upon it for some months so that time for compliance will be extended by over a year from the date of issue of the notice.  This will cause a significant prejudice to the creditor in terms of the date of the act of bankruptcy and the relation back date.  The relation back date is particularly important in a case such as this where the applicant appears to have no assets of his own but has available to him very significant assets through the use of trusts.  These are matters which concerned Young JA on the application for a stay and drew from him some considered and critical comments.  The only prejudice to the debtor, on the other hand, is the existence of an act of bankruptcy should he not comply with the notice and the possibility that this may affect his commercial dealings.  However, it would appear, from the evidence given before Einstein JA and Young JA that Mr Obeid has many avenues open to him under which commercial dealings can be pursued other than those in his own name.  I note that Mr Obeid has not made any offer to pay or secure all or any part of the judgment.

4. It will be clear from the extracts from my decision in Porter that I believe that there is very considerable force in the dicta of Lehane J in Byron v Sutherland Star Group Pty Ltd (1997) 73 FCR 264 when he said at [270]:

   “The commission of an act of bankruptcy is, undoubtedly, a serious matter; it is, however, of a different order of gravity from the change of status brought about by the making of a sequestration order; and there is also to be taken into account the interest of both the judgment creditor and other creditors of the judgment debtor in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs earlier rather than later.”

5. Having taken these matters into account, I am of the view that it would not be appropriate to extend time for compliance with the bankruptcy notice until the determination of the appeal.  However, I do accept that the debtor may well be able to put forward cogent arguments as to why a sequestration order should not be made against his estate whilst the appeal is being run.  In Jenkins v National Australia Bank [1999] FCA 1758, Ryan J. said:

   “[5] In these circumstances, it seems to me that the Court should not sanction a delay in the commission of a prima facie available act of bankruptcy, but should allow the pending proceedings in the High Court to be taken into account in the exercise of a discretion of the kind discussed by the Full Court in Ahern's case. That is, a discretion whether or not to adjourn the hearing of a creditor's petition if one should issue founded on such acts of bankruptcy.

   [6] To facilitate that exercise of discretion on a full understanding of the material presently before the Court, I shall direct that any petition issued by the respondent against either of the debtors be made returnable before myself.”

6. I believe that this is the appropriate order to make in this case.  The application having failed, the applicant must pay the respondent’s costs.  Such costs to be assessed if not agreed in accordance with the Federal Magistrates Court (Bankruptcy) Rules.  

I certify that the preceding twelve (12) paragraphs are a true copy of the reasons for judgment of Raphael  FM

Date:  30 May 2012