OVER 50s Mutual Friendly Society Ltd v Jennings

[2005] FMCA 1778

FEDERAL MAGISTRATES COURT OF AUSTRALIA

OVER 50s MUTUAL FRIENDLY SOCIETY LTD & ANOR v JENNINGS [2005] FMCA 1778

BANKRUPTCY – Whether second Bankruptcy Notice is an abuse of process where Creditors Petition pending relying on earlier Bankruptcy Notice – whether an election necessary – Rule 31.04 of the Federal Magistrates Court Rules – whether compliance – whether annexing Affidavit of Service sufficient.

Federal Magistrates Court Rules 2001, r.31.04
Bankruptcy Act 1966, s.52

Genovese v BGC Construction Pty Ltd (2005) FCA 215
Re Fredericke and Whitworth; Ex parte Hibbard [1927] 1 Ch 253

Applicants: OVER 50S MUTUAL FRIENDLY SOCIETY LTD (ACN 087 649 054) and OFM CAPITAL LIMITED (ACN 007 108 509)

Respondent: KENNETH ROSS JENNINGS

File Number: MLG 1117 of 2005

Judgment of: McInnis FM

Hearing date: 23 November 2005

Delivered at: Melbourne

Delivered on: 2 December 2005

REPRESENTATION

Counsel for the Applicants: Mr M.J. Galvin

Solicitors for the Applicants: Logie-Smith Lanyon

Counsel for the Respondent: Mr S.G. Hopper

Solicitors for the Respondent: Mitrakas Savas & Co

ORDERS

1. A sequestration order be made against the estate of Kenneth Ross Jennings.

2. Pursuant to s.52(3) of the Bankruptcy Act 1966 the operation of the sequestration order be stayed for a period of 14 days from the date of this order and accordingly shall be operational on and from

   
   

   17 December 2005.

3. The applicant creditor’s costs be taxed in accordance with the Federal Court Rules and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966.

The Court notes that the date of the act of bankruptcy is 7 September 2005.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
MELBOURNE

MLG 1117 of 2005

OVER 50S MUTUAL FRIENDLY SOCIETY LTD
(ACN 087 649 054) and OFM CAPITAL LIMITED
(ACN 007 108 509)

Applicants

And

KENNETH ROSS JENNINGS

Respondent

REASONS FOR JUDGMENT

1. In this matter the applicants are petitioning creditors in a petition filed on 9 September 2005 seeking a Sequestration Order against Kenneth Ross Jennings (the debtor).  The basis upon which the Sequestration Order is sought is a claim that the debtor owes to the applicant creditors an amount of $175,859.31 pursuant to a judgment obtained in the Supreme Court of Victoria on 18 November 2003 and an order made in that court on 16 November 2004.

2. The creditors petition relies upon a bankruptcy notice issued on 9 August 2000.

3. The debtor has filed a notice of intention to oppose the petition and that notice sets out the following grounds:

   “1.Service of the bankruptcy notice number VN1745/05 and dated 9 August 2005 is an abuse of process.

   2.The affidavit of Nicholas L. E. McKenzie-McHarg made 3 October 2005 does not comply with part 31 rule 4(1) of the Federal Magistrates Court Rules.

   3. The Applicants have not complied with part 31 rule 4(2) of the Federal Magistrates Court Rules.”

4. The debtor, in support of the grounds of opposition, relies upon an affidavit sworn by him on 18 November 2005.

5. The petitioning creditors have relied upon usual affidavits verifying the petition and, relevantly in the present case, at an early stage in the proceedings had sought and obtained an order for substituted service of the creditors petition.  That application for substituted service was supported by an affidavit of William Simon Heath sworn 21 September 2005.  

6. The petitioning creditors otherwise rely upon the affidavit referred to in the debtor's grounds of opposition; namely an affidavit of Nicholas L.E. McKenzie-McHarg sworn 3 October 2005.  It is noted that affidavit incorrectly refers in the introduction to the date "7 September 2005".  Significantly, that affidavit annexes as an exhibit an affidavit of Amy Louise Russell sworn 25 August 2005 relating to service of the bankruptcy notice claimed to have occurred "on 15 August 2005 at 5.15 pm" by prepaid post to the debtor at three different addresses.  The deponent, Ms Russell, also asserts that "on 16 August 2005 at 3.04 pm" she served the debtor with the relevant document at a document exchange address of solicitors purportedly acting for and on behalf of the debtors.

7. Apart from annexing the affidavit of service of Ms Russell, Mr Nicholas McKenzie-McHarg also deposes to undertaking a search of records held by the Registrar of the Federal Court of Australia and Federal Magistrates Court of Australia and specifically states the following:

   “4.  My search of the Federal Court and the Federal Magistrates’ Court database revealed that Kenneth Ross Jennings has not filed any Affidavit of counterclaim, set-off, or cross-claim as referred to in the Bankruptcy Notice in the Federal Court.  Nor has Kenneth Ross Jennings filed any Affidavit of counterclaim, set-off, or cross‑claim as referred to in the Bankruptcy Notice in the Federal Magistrates’ Court.  Kenneth Ross Jennings has not filed any application to set the Bankruptcy Notice aside.”

8. The applicant creditors also rely upon an affidavit of Mip Henry Curtis-Grant sworn 9 November 2005 deposing to service on the debtor with, amongst other things, the creditors petition, the affidavit verifying the petition and the McKenzie-McHarg affidavit together with other documents which do not need to be referred to in this judgment.  The service is claimed to have been effected by post on "the 10th day of October 2005 at 5.27 pm".

9. To understand further the claim of an abuse of process now raised by the debtor it is noted that in this case another bankruptcy notice, number VN91985/04 (the first bankruptcy notice), was issued on 7 December 2004.  The first bankruptcy notice was served on the debtor on 17 December 2004.  No application was made to set aside the first bankruptcy notice and on 20 January 2005 a creditors petition was issued by the applicant creditors relying upon the first bankruptcy notice.

10. When the matter came before a registrar on or about 4 August 2005, it would appear to be common ground that during the hearing concerns were raised in relation to the validity of the first bankruptcy notice.  It does not appear to be disputed that the Registrar pointed out that an order attached to the first bankruptcy notice was not the order giving rise to the debtor's liability.  The first petition was then adjourned to 22 August 2005. 

11. It will be noted, as set out earlier in this judgment, that the second bankruptcy notice which is the subject of the current petition was issued on 9 August 2005 just five days after the hearing before the Registrar of the first petition.

12. It appears from correspondence referred to in the debtor's affidavit that the applicant creditors at some point had decided to withdraw the first petition.  Although it was claimed in court that this occurred on 15 August 2005, it is not clear from the affidavit material before the court that instructions were indeed given on that date to the solicitors for the applicant creditors to withdraw the first petition.  On the evidence, what does appear is the following chronology of events set out in the debtor's affidavit sworn 18 November 2005, where he deposes:

    “7.  On 15 August 2005 the applicants' solicitors wrote to my solicitors by facsimile transmission stating that:

    'On 22 August 2005 we will be seeking to withdraw the Creditors’ Petition [being the First Petition] with no order as to costs.'

    8.    On 15 August 2005 my solicitor wrote to the applicants' solicitor referring to their facsimile of 15 August 2005 and stating that:

    '1.We assume from the tenor of your letter of today's date that you do not intend to pursue the creditor’s petition on account of the defects in it identified by the Registrar and counsel for Mr Jennings on 3 August 2005.  Registrar Wood at the hearing did not make an order for Mr Jennings' costs and reserved the applicants' costs.  Registrar Agnew on 19 July 2005 reserved the costs of that day.  Accordingly, our client will only consent to the withdrawal of the creditor’s petition if your client pays his costs of this proceeding, currently at $1,200 which are his costs other than the costs of the hearing on 3 August 2005.

    2.    We note that Registrar Wood declined at the last hearing to make a further order with respect to filing and service of a notice of objection and supporting materials by the respondent.  However, it was clear from the Registrar's comments and from the order of Registrar Agnew of 19 July 2005 that continues to stand that the respondent is expected to file and serve those documents.  In light of your open letter of 15 August 2005, we assume that your client does not require the respondent to file and serve a notice of objection and a supporting affidavit.  Please let us know if that is not the case.'

    9. ...

    10.      On 16 August 2005 at 3.05 pm the applicants' solicitors wrote to my solicitors by facsimile transmission stating that (emphasis added):

    ‘Our clients do not accept that there are any defects with the Creditors’ Petition [being a reference to the First Petition] and, in any event, note that there are no costs orders in your client's favour.

    If your client is not prepared to consent to the [First] Petition being withdrawn with no order as to costs, on 22 August 2005 we will produce a copy of this letter in support of an application that your client pay not only the costs of that day, but also the costs reserved to our client by Registrar Mussett on 27 May 2005, by Registrar Agnew on 19 July 2005 and by Registrar Wood on 3 August 2005.'”

13. It will be noted from the extracts of correspondence that assumptions were made concerning the first petition and then the parties seemed to be locked in a somewhat unnecessary dispute about the issue of costs, with the applicant creditors' solicitors on the one hand intimating that they would seek to withdraw the creditors petition with no order as to costs and then, upon receiving a response from the debtor's solicitors, seek to assert that they do not "accept that there any defects with the creditors petition".  The applicant creditors' solicitors then seem to suggest that they would pursue further costs despite, presumably, withdrawing the petition. 

14. Perhaps not surprisingly, the debtor then deposes in his affidavit sworn 18 November 2005 as follows:

    “11.     On the evening of 16 August 2005 I received a second BN by Post.  On receipt of the second BN I did know whether I was required to comply with the second BN or whether the First Petition was being pursued by the applicants and, if so, for what purpose.

    12.      Accordingly, on 17 August 2005 my solicitors wrote to the applicants' solicitors consenting to the withdrawal of the First Petition with no order as to costs.”

15. The debtor has sought to argue that there is an analogy to be drawn between the facts and circumstances of this case and those cases dealing with circumstances where a creditor issues two bankruptcy notices and fails to make an election as to which bankruptcy notice it is with which the debtor is required to comply.  Reference was made to the chronology set out earlier in this judgment and specifically it was submitted that the applicant creditors' solicitor's letter of 16 August 2005 constitutes an election to pursue the first bankruptcy notice. 

16. It is then argued that service of the second bankruptcy notice on the debtor on 15 and 16 August 2005 left the debtor in the impossible situation that he was unable to determine whether the applicants were pursuing the first petition and, if so, for what purpose.  Emphasis was placed upon the applicants maintaining that the first petition and first bankruptcy notice were valid and the threat to apply to the court for an order for costs. 

17. Whilst it was conceded that the only sensible reason for withdrawing the first petition is that it was defective by reason of the invalidity of the first bankruptcy notice, it was argued that this is inconsistent with the letter from the applicants' solicitors dated 16 August 2005 and the claim for costs.  If anything, it was argued, the debtor should have been entitled to the costs of the first petition if indeed the first bankruptcy notice was defective.

18. It is otherwise argued for and on behalf of the debtor that upon receipt of the second bankruptcy notice on 16 August 2005, the debtor would then be unable to determine whether he was required to comply with that bankruptcy notice or defend the first petition.  Accordingly, it is argued, that confusion is created in the mind of the debtor and by creating that confusion the applicant creditors had committed an abuse of process by purporting to make an election to pursue the first bankruptcy notice and the first petition and then issuing the second bankruptcy notice, or at the very least, at the time of issue and service of the second bankruptcy notice, failing to make an unequivocal election as to which notice would be pursued.

19. It is argued that the abuse of process was complete on 16 August 2005 and the second bankruptcy notice is tainted by that abuse and should be set aside.  During the hearing it was further argued, however, that in this instance the appropriate order is that the petition be dismissed given that there has been no application to set aside the bankruptcy notice in the notice of opposition.  The effect, however, would be the same in the sense that it was argued that if the second bankruptcy notice is tainted by reason of the abuse of process, then that argument would persist with any subsequent creditors petitions filed which rely upon the second bankruptcy notice.

20. It was argued that the only option available to the debtor in the light of the election of the applicant creditors and upon receipt of the second bankruptcy notice was to forego any entitlement to costs in the first petition and consent to its withdrawal and then contest the second bankruptcy notice and second petition on the grounds that it is an abuse of process.

21. The applicant creditors submitted that in this instance the court should find that there has not been any abuse of process.  Specifically it was argued that the debtor needs to satisfy the court that there has been a substantive abuse of process.  It was further argued that this is not a case where there are competing bankruptcy notices given that a petition was filed arising out of the first bankruptcy notice and that although that petition was pending, the time periods had well and truly expired for any further action to be taken on the first bankruptcy notice and that there is no prohibition on the creditors then issuing a second bankruptcy notice and ultimately a second petition.

22. Reference was made to authorities which confirm that a creditor may issue more than one bankruptcy notice in respect of the same debt even before the first has expired or been set aside, though as I understand it, it is common ground that in those circumstances the creditor must make an election as to which notice it relies upon and that election should be conveyed to the debtor and, if proceedings are on foot, to the Court (see Genovese v BGC Construction Pty Ltd (2005) FCA 215).

23. Counsel for the petitioning creditors argued that if, while an earlier bankruptcy notice is still available, a petitioner's second bankruptcy notice is issued in bad faith or to embarrass the debtor, then that may amount to an abuse of process.  Reference was made to the decision of the court in Re Fredericke and Whitworth; Ex parte Hibbard [1927] 1 Ch 253 where the court states at 261 the following:

    "If, while an earlier bankruptcy notice were still available for a petition, a second notice were given in bad faith or to embarrass the debtor, the Court could prevent oppression by declining to act.  But in my view there has been nothing of this sort here.  The first bankruptcy notice had been withdrawn, objections had been taken to the second notice which had not been conclusively satisfied, and I think that the third notice was served to escape from those objections, and to place the petitioning creditors in a stronger and less challengeable position than they had previously occupied.  The failure to comply with this third notice was attributable not to the existence of the second notice, but to the entire inability of the debtors to pay the remainder of their debt.  The petitioning creditors have complied with the statutory formalities necessary to establish the insolvency of the debtors; and I see no sufficient reason for refusing the statutory consequences of the insolvency so established.”

24. It was submitted in the present case that there is no evidence of bad faith or an attempt to embarrass the debtor in this application.  Any argument that issuing the second bankruptcy notice was an abuse of process in reliance upon the decision of the court in Genovese is misconceived on the grounds that this is not a case of a second bankruptcy notice being issued during the currency of a previous notice given that the first bankruptcy notice had expired in January 2005 and the second notice was not issued until August 2005.  Accordingly, it is argued that this is not a case where the petitioners were obliged to make an election as to which of two notices they intended to rely upon as they could only rely upon the second bankruptcy notice, and hence the facts in Genovese are distinguishable from the present case. 

25. In the alternative it was submitted that the second bankruptcy notice was served in circumstances where the petitioning creditors had indicated their intention not to proceed with the first petition and therefore not to rely upon the first bankruptcy notice, and indeed the respondent consented to its withdrawal.  It was argued that in this case it is plain, and the debtor understood, that the purpose of the second notice was to overcome any anticipated challenge to the validity of the first notice.

26. During the course of submissions it was further argued on behalf of the petitioning creditors that even if there was a period of confusion in the mind of the debtor, that period of confusion lasted for a very short period of time; namely between the date of issue and service of the second bankruptcy notice and the date when the parties by consent reached agreement that the first petition should be withdrawn with no order as to costs.  The consent order appears to have occurred within two days of service of the second bankruptcy notice.

Reasoning

1. In my view it may be arguable that there is to some extent an analogy between the current circumstances of this case and those cases where there are indeed two bankruptcy notices issued, one after the other.  Whilst it is true that the first bankruptcy notice in the present case has expired, it is equally true that it continues to have force and effect whilst proceedings by way of the first petition are pending.  Those proceedings clearly rely and depend upon the first bankruptcy notice. 

2. To that extent one might properly describe the first bankruptcy notice as still having "life" in the sense that it may be used as a foundation stone for a Sequestration Order based upon an act of bankruptcy arising from that bankruptcy notice.  I should add that neither party could assist the court by providing any direct authority in relation to this issue before the Court. 

3. It seems to me further that although the analogy may be valid to the extent that I have noted, I do not accept that in this instance it is accurate to refer to an "election" being made of the kind referred to in the relevant authorities.  The election referred to in the authorities is between two bankruptcy notices, both of which are current and which both require action to be taken within a time period.  Clearly an election is required in those circumstances. 

4. In the present case, however, it is not correct to refer to any "election" as such but rather to consider whether in all the circumstances the Court may still be satisfied that there has been an abuse of process merely by the lack of finalisation of the pending petition relying on the first bankruptcy notice before the issuing and service of the second bankruptcy notice. 

1. Whilst I can understand that there may potentially be some confusion as to whether or not the debtor should pursue objections and/or other issues in relation to the first pending petition, it is my view that in the circumstances of this case, certainly by the date of withdrawal of the first petition, that is 17 August 2005, any confusion would have abated. 

2. Having been served with the second bankruptcy notice, the debtor would not then have any misunderstanding concerning obligations to deal with the second bankruptcy notice within the remaining time available from the date of service of that notice, and in this case it would appear that the date of the act of bankruptcy is 7 September 2005.

3. Whilst the debtor deposes to not knowing whether he was “required to comply with the second BN or whether the First Petition was being pursued by the applicants and, if so, for what purpose”, it is my view that any difficulties encountered by the debtor upon receipt of the second bankruptcy notice by post on 16 August 2005 would only have subsisted until the debtor consented on the next day to orders permitting withdrawal of the first petition with no order as to costs.

4. In my view the debtor was entitled to be somewhat confused by the correspondence between the parties and in particular what I would describe as a "mixed message" from the petitioning creditors' solicitors, who on the one hand clearly indicated an intention to withdraw the petition and then curiously denied any suggestion of any invalidity in the first bankruptcy notice and perhaps somewhat boldly suggested that the petitioning creditors in the petition should be entitled to costs upon withdrawal of the petition.

5. I have no doubt that that correspondence caused a degree of uncertainty, though of course in the chronology referred to in this judgment the uncertainty was of a very transient nature.  By 17 August 2005 when consent orders were made providing for the withdrawal of the first petition with no order as to costs, there could be little doubt that the second bankruptcy notice was relied upon and the debtor should address that second bankruptcy notice accordingly or face the consequences of a second petition based upon non-compliance with the second bankruptcy notice.

6. Whilst the conduct of the petitioning creditor in issuing and serving the second bankruptcy notice before the first petition was the subject of withdrawal is unusual, I am satisfied in the present case, having regard to the chronology and the short duration of the overlap between the pending first petition and the issue and service of the second bankruptcy notice, that there is an insufficient basis upon which the Court could conclude that there has been substantial abuse of process.

7. This is not a case where the Court would conclude that the issue of the second bankruptcy notice was undertaken in bad faith or to embarrass the debtor.  Whilst I acknowledge that those principles in the authorities to which reference has been made apply to different circumstances, namely where two bankruptcy notices are issued and are both current, requiring an election, it seems to me the principles are still usefully applied in the circumstances of the present case when considering whether there has indeed been an abuse of process.  However, as indicated, I am not satisfied there has been an abuse of process, and accordingly this ground of objection should fail.

Rule 31.04

1. Rule 31.04 the Federal Magistrates Court Rules 2001 provides as follows:

   “31.04 Petition founded on failure to comply with bankruptcy notice or set up counter-claim etc

   (1) If the petition is founded on an act of bankruptcy mentioned in paragraph 40 (1) (g) of the Bankruptcy Act, the affidavit verifying the petition must state:

   (a) that an application was made for an order setting aside the relevant bankruptcy notice and that the application has been finally decided; or

   (b) that an application was made for an order extending the time to comply with the bankruptcy notice and that the application has been finally decided; or

   (c) that the Court records and the records of the Federal Court have been searched and that no application in relation to the bankruptcy notice has been made.

   (2) The affidavit must be accompanied by an affidavit of service of the relevant bankruptcy notice.

   (3) If an application mentioned in paragraph (1) (a) or (b) has been made, the affidavit must also be accompanied by a copy of the order finally deciding the application.”

2. Two arguments were advanced for and on behalf of the debtor arising out of that rule. The first is that Rule 31.04(c) has not been complied with in the affidavit of McKenzie-McHarg referred to earlier in this judgment. In particular it is argued that paragraph 4 of that affidavit set out earlier in this judgment does not comply with the rule as it does not state specifically that:

   “No application in relation to the bankruptcy notice has been made.”

3. The petitioning creditor submits that the affidavit does comply with the rule as the deponent swears that he has searched the relevant court databases and confirmed that no application has been made in relation to the second bankruptcy notice.  In my view the sentence where the deponent states “Kenneth Ross Jennings has not filed any application to set the bankruptcy notice aside” together with confirmation that the appropriate databases have been searched and that no affidavit of counterclaim nor set-off or cross‑claim has been filed, taken together is sufficient to comply with the rule, and accordingly this ground should fail.

4. Further, reference is made to Rule 31.04(2) and it is argued that the affidavit of McKenzie-McHarg exhibits an affidavit purporting to be an affidavit of service, and in the event that the ordinary course is that exhibits are not filed with the court, it is argued the affidavit in support of the creditors petition was not "accompanied by" an affidavit of service.

5. The petitioning creditor submits that by exhibiting the affidavit of service to the McKenzie-McHarg affidavit, that is sufficient compliance with rule 31.04(2).

6. In my view the manner in which the affidavit of service has been annexed, regardless of what might be the ordinary course of providing original documents to the court, does not detract from the compliance with the rule by this method of incorporating an affidavit of service.  I am satisfied that there is sufficient compliance with this rule where an affidavit annexes as an exhibit the affidavit of service, and I am further satisfied that that process is sufficient to constitute compliance with the rule requiring the affidavit to be ‘accompanied’ by an affidavit of service of the relevant bankruptcy notice.

7. Accordingly this ground should also fail.

Conclusion

1. It is noted that in the petition two dates of service are provided in relation to the bankruptcy notice; namely 15 August and 16 August 2005. Taking the latter of those two dates I accept that the date of the act of bankruptcy is 7 September 2005. The court is otherwise satisfied that the petitioning creditors have complied with the requirements of s.52 of the Bankruptcy Act 1966, and accordingly it is appropriate to make a Sequestration Order in the usual form.

I certify that the preceding forty-five (45) paragraphs are a true copy of the reasons for judgment of McInnis FM

Associate: 

Date:  2 December 2005