Otvosi v Gustavo Ferella (No.2)

[2005] FMCA 1653

FEDERAL MAGISTRATES COURT OF AUSTRALIA

OTVOSI & ANOR v GUSTAVO FERELLA (No.2) [2005] FMCA 1653

BANKRUPTCY – Application for leave to take a fresh step in Supreme Court proceedings.

Bankruptcy Act 1966 (Cth), ss.58(3), 58(3)(b), 82, 82(1)
Civil Procedure Act 2005 (NSW), s.98

Ferella v Otvosi [2005] NSWSC 962
Allanson v Midland Credit Limited (1977) 30 FLR 108
Macquarie Bank Limited v Bardetta [2005] FCA 507
Re  Sharpe; Ex parte Tietyens Investments Pty Ltd (in liq) [1998] FCA 1367
ReMcMaster ex parte McMaster (1991) 33 FCR 70
Fraser v Commissioner of Taxation (1996) 69 FCR 99
Kattirtzis v Zaravinos [2001] FCA 1158
Australian Competition & Consumer Commission v The Bio Enviro Plan Pty Ltd [2004] FCA 415
Re British Goldfields of West Africa (1899) 2CH 7
Stein v Blake (1996) AC 243

Applicant: ERVIN OTVOSI & ANOR

Respondent: GUSTAVO FERELLA (No.2)

File Number: SYG2757 of 2005

Judgment of: Barnes FM

Hearing date: 1 November 2005

Delivered at: Sydney

Delivered on: 11 November 2005

REPRESENTATION

Counsel for the Applicant: Mr E White

Counsel for the Respondent: Mr JT Johnson

Solicitors for the Respondent: Landerer & Co.

ORDERS

1. That the application for leave under s.58(3)(b) of the Bankruptcy Act 1966 (C’th) is dismissed. 

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG2757 of 2005

ERVIN OTVOSI & ANOR

Applicant

And

GUSTAVO FERELLA (No.2)

Respondent

REASONS FOR JUDGMENT

1. On 1 November 2005 an oral application was made (by leave of the Court) by Irvin Lloyd Otvosi, Keiko Otvosi, Poppy Purwanti Puroo and the Owners Strata Plan Number 68913 for leave of the Court under s.58(3) of the Bankruptcy Act 1966 (the Act) to take a fresh step in proceedings number 2583 of 2003 in the Supreme Court of New South Wales (the proceedings).

2. This application was made during the hearing of applications by each of Angelo and Gustavo Ferella (the respondents) for a stay of proceedings under sequestration orders made by a Registrar of this Court on 14 October 2005.  The respondents had each sought review of that decision.  The two Otvosis are the petitioning creditors.  According to Mr Johnson (Counsel for the Otvosis) the four applicants for leave were the defendants/cross-claimants in the Supreme Court proceedings.  The respondents Angelo and Gustavo Ferella were the plaintiffs/cross-defendants. Judgment was delivered in Ferella v Otvosi [2005] NSWSC 962 by Hamilton J on 23 September 2005. A copy of that judgment is an exhibit referred to in the affidavit of Leslie Pozniak, the solicitor for the Otvosis, sworn on 17 October 2005 and filed in the substantive proceedings in this Court. In his affidavit Mr Pozniak states that the Supreme Court proceedings were between the applicant creditors as defendants/cross-claimants and the respondent debtors as plaintiffs/cross-defendants although cf Annexure F to his affidavit of 28 October in which Mr Pozniak listed four cross-claimants. However, there is nothing in the copy of the judgment annexed to Mr Pozniak affidavit that indicates that the defendants/ cross-claimants include parties other than the Otvosis.

3. The proceedings were brought by cross-claim for the enforcement of a restrictive covenant by an injunction to restrain the carrying out of a development approved by the Woollahra Municipal Council on land in relation to which the Ferellas are the registered proprietors.  These proceedings followed earlier proceedings between the Otvosis and the Ferellas, in which the Ferellas were ordered to pay the Otvosis’ costs in the sum of $74,656.  The sequestration orders were based on this costs order.  In 23 September 2003 Hamilton J held (at [38]) that “The Otvosis are therefore entitled to an injunction restraining the construction of the development”.  His Honour stated that he would appoint a time for short minutes to be brought in to give effect to his decision and that “Any question as to costs may be raised at that time.” 

4. Before the matter came back before the Supreme Court, the Otvosis pursued creditors’ petitions in relation to each of the Ferellas in this Court.  As indicated, sequestration orders were made on 14 October 2005.  On the date the sequestration orders were made Mr Angelo Ferella unsuccessfully sought adjournments of the hearings of each of the creditor's petitions.

5. The applicants for leave have filed no evidence before the Court in support of the application for leave under s.58(3) of the Bankruptcy Act1966 although reference was made to material before the Court in relation to the review of the orders for sequestration of the estates of each of the Ferellas.  Written submissions were filed.  Mr Johnson told the Court that on 1 November 2005 Hamilton J had been informed of the making of the sequestration orders and was ‘uncertain’ as to whether he could make any orders to finalise the proceedings.  Mr Johnson also told the Court that the Official Trustee was aware of the application for leave and would impose a condition that any costs order could only be recovered by way of a claim in the respective bankruptcies and that the applicants for leave would consent to such a condition being imposed on any leave that was granted.

6. Section 58(3) of the Bankruptcy Act1966 provides:

   (3)     Except as provided by this Act, after a debtor has become a bankrupt, it is not competent for a creditor

   (a)     to enforce any remedy against the person or the property of the bankrupt in respect of a provable debt; or

   (b)     except with the leave of the Court and on such terms as the Court thinks fit, to commence any legal proceeding in respect of a provable debt or take any fresh step in such a proceeding. 

7. It was suggested by Mr Johnson that while the restriction imposed by s.58(3)(b) does not apply in relation to the injunctive relief to be sought in the Supreme Court proceedings as that that is not in respect of a ‘provable debt’ (see s.58(3) and s.82 of the Bankruptcy Act 1966), the applicants for leave considered that an application for an order for costs flowing from the delivery of the judgment prior to the date of bankruptcy of each of the Ferellas would be taking a fresh step in a legal proceeding within s.58(3) having regard to s.82(1) which provides:

   (1)     Subject to this Division, all debts and liabilities, present or future, certain or contingent, to which a bankrupt was subject at the date of the bankruptcy, or to which he or she may become subject before his or her discharge by reason of an obligation incurred before the date of the bankruptcy, are provable in his or her bankruptcy.

8. It was contended that the ability of the Supreme Court to order costs in favour of the applicants would arise under s.98 of the Civil Procedure Act 2005 (NSW) and that the ordinary principles in relation to the question of costs justify the proposition that costs generally follow the event (noting the discretion must be exercised judicially). It was suggested that it would be necessary for some material to be put before the Supreme Court to override that proposition. It was also suggested that as the entitlement to costs was an entitlement arising as a result of the judgment delivered prior to the date of bankruptcy it would be a provable debt and that therefore, before any costs order could be made, leave was required and that this was consistent with public policy. The applicants for leave drew the Court’s attention to extracts from McDonald, Henry and Meek, Australian Bankruptcy Law and Practice which deal with the expression ‘in respect of a provable debt’ in s.58(3) and set out general principles in relation to when leave to proceed is granted.

9. Counsel for the Ferellas opposed the granting of leave, noting out that the Otvosis were aware that further costs orders may be made against the Ferellas following the Supreme Court litigation, yet they chose to take out bankruptcy notices in circumstances where, it was suggested, assets were available for execution. 

10. Both bankruptcy notices were issued on 19 May 2005 founded on a judgment against the Ferellas for costs dated 27 April 2005. 

    
    

    A bankruptcy notice was served on Angelo Ferella on 26 May 2005 and on Gustavo Ferella on 30 August 2005.  The creditor's petition in relation to Angelo Ferella was filed on 26 August 2005.  An order for substituted service was sought and obtained.  Angelo Ferella was served on 26 September 2005.  The creditor's petition in relation to Gustavo Ferella was not filed until 28 September 2005.  The creditors’ petitions came before the Court for hearing on 14 October 2005 and were dealt with on that day. 

11. Counsel for the Ferellas contended that having placed the Ferellas into bankruptcy, the Otvosis now sought leave to take a further step in securing further debts from the estates despite the fact that such debts were costs that have not even been calculated much less assessed.  It was submitted that if the applicants were allowed to take such fresh steps in relation to yet to be made costs orders, that would amount to providing those creditors with an unfair advantage over other creditors contrary to the spirit of the Bankruptcy Act 1966. 

12. The Court may grant leave under s.58(3)(b) of the Act where the “issues would be better or more comprehensively dealt with by a contested trial of the action in the [other] Court then could possibly be the case if [the creditor] were required to lodge a proof of debt in respect of its claim against [the bankrupt] alone” and where the procedure for lodgement of proof of debt and an appeal from a decision of a trustee in relation to it would result in the issues having “been determined in a less satisfactory way and questions between the bankrupt and other parties to the action not being resolved” (see Allanson v Midland Credit Limited (1977) 30 FLR 108 at 114 and Macquarie Bank Limited v Bardetta [2005] FCA 507). The applicants for leave have not established that this is such a case. This is not a case in which there are pending proceedings which are close to trial, where it has been established that the facts are complex or that the issues would be better and more comprehensively dealt with by a contested trial of the action as discussed in Allanson at 114-115. Nor is this a case in which there are proceedings commenced which cannot be effectively prosecuted without the active participation of the bankrupt or which have been shown to involve claims against other parties or allegations of fraud or other debt within s.153(2) (see Re Sharpe; Ex parte Tietyens Investments Pty Ltd(in liq) [1998] FCA 1367).

13. There is authority to suggest that in determining whether to grant leave to proceed under s.58(3) the Court should consider whether the objectives of the Bankruptcy Act 1966 in ensuring fair and rateable distribution of the bankrupt's assets among creditors, preventing one creditor from gaining an undue advantage over other creditors, and releasing the bankrupt from further liability in respect of provable debts will be subverted by allowing the proceeding to go ahead (see in particular ReMcMaster; Ex parte McMaster (1991) 33 FCR 70 and Fraser v Commissioner of Taxation (1996) 69 FCR 99). The Court should also consider the policy behind s.58(3). In Re Sharpe; Ex parte Tietyens Weinberg J stated, at pages 7 to 8, that the policies which lie behind s.58(3) are (a) to free the bankrupt from any claims which might be made in respect of the period prior to bankruptcy, (b) to permit the Trustee in Bankruptcy (if he accepts the proof of debt) to treat the claim against the estate as he treats the claims of all other creditors, and (c) to ensure the Trustee is not put to expense in defending proceedings which he has no money to defend. In Kattirtzis v Zaravinos [2001] FCA 1158, in the context of a case where creditors were pursuing both bankruptcy proceedings and Supreme Court proceedings at the same time, Gyles J stated at [8] that:

    “there may be circumstances where it is inappropriate to do that.  It is also clear enough that there are many types of proceedings which it would be quite inappropriate to regularise by the grant of leave.  Generally speaking, if there is any disadvantage to the bankrupt estate arising out of the proceedings then leave should not be granted.”

14. In that case the relief sought in the Supreme Court proceeding was to set aside transactions entered into between the bankrupt husband and his wife before the bankruptcy and the Court found that proceeding to be for the benefit of the bankrupt estate.  However, relevantly, his Honour continued at [10]: 

    The same would not apply to any collateral claims in that proceeding for monetary relief or indeed costs against the bankrupt because that would be to the disadvantage of the bankrupt estate.

15. It has been suggested (in Keay’s Insolvency, 5^th ed at 4.55) that generally leave under s.58(3)(b) is not granted or sought.

16. While there may well be some issues about the application of s.58(3)(b) in this instance, particularly in relation to whether the fresh step (as to which see Australian Competition & Consumer Commission v The Bio Enviro Plan Pty Ltd [2004] FCA 415 at [6] – [9]) is to be taken in proceedings in respect of a ‘provable debt’ (see Re British Goldfields of West Africa (1899) 2CH7 and Stein v Blake (1996) AC 243), I am prepared to assume for present purposes that the leave of the Court is required. However, having regard to all of the circumstances of the case, I am not persuaded on the material before me that it has been established that this is an appropriate case in which I should exercise my discretion to grant the leave sought under s.58(3). It is not clear from the Supreme Court judgment that Poppy Purwanti Puroo and the Owners Strata Plan Number 68913 are in fact parties in the relevant Supreme Court proceedings. Further, although the transactions giving rise to the asserted claim may be said to have preceded the bankruptcy, the Otvosis chose not only to initiate one but also to pursue both the creditor’s petitions after the date of judgment and before determination of any application for costs in Supreme Court. Importantly, in contrast to many cases where leave has been granted, it cannot be said that the Supreme Court proceedings are for the benefit of the bankrupt estate. (See Kattirkzis v Zaravinos).  Nor has it been established that there are complex facts and unresolved issues to be better and more comprehensively dealt with by a contested trial.  The Ferellas have not acknowledged any liability for an amount of costs in those proceedings (cf ACCC v The Bio Enviro Plan Pty Ltd).  They did not seek bankruptcy (cf ACCC). This is relevant in considering whether the effect of the bankruptcies would be to frustrate the making of orders that would otherwise be made. 

17. While I accept that the Trustee in Bankruptcy of the Ferellas is aware that the applicants seek costs in the Supreme Court proceedings and that Hamilton J was informed on behalf of the Trustee that there should be a condition that any costs order could only be recovered by way of a claim in the estate of the respective bankrupts, there is nothing in the material before me to suggest that the leave sought would be in the interests of the general body of the creditors of either of the Ferellas.  The extent of the creditors is yet to be determined as no statement of affairs had been filed by either of the Ferellas at the date of this hearing (see Macquarie Bank Limited v Bardetta).

18. Having regard to the policy behind s.58(3) and the objectives of the Bankruptcy Act1966 and the particular circumstances of this case, I am not persuaded on the material before me that it is appropriate to grant the leave sought, rather than to leave to the Trustee in Bankruptcy (subject of course to the determination of the respondents’ current applications for review of the sequestration orders) the usual powers under the Act of assessing competing claims of creditors who have a right to prove against the estates. Accordingly the application for leave pursuant to s.58(3)(b) is refused.

I certify that the preceding eighteen (18) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate: 

Date:  11 November 2005.