Owners Corporation Plan No SP023744S v Scarlett
[2024] FedCFamC2G 790
•29 August 2024
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Owners Corporation Plan No SP023744S v Scarlett [2024] FedCFamC2G 790
File number: MLG 1993 of 2023 Judgment of: JUDGE CHAMPION Date of judgment: 29 August 2024 Catchwords: BANKRUPTCY – Creditor’s petition – Application for an extension of time to bring application for a review of a sequestration order made by a Registrar – Where the creditor did not prove service of the bankruptcy notice at the address of the place of residence of the person last known to the person serving the notice – Where debtor able to pay debts – Where it was in the interests of justice to extend time to commence the review application – Creditor’s petition dismissed – Sequestration order set aside Legislation: Acts Interpretation Act 1901 (Cth) ss. 15AB, 28A
Bankruptcy Act 1966 (Cth) ss. 5, 40, 43, 52
Federal Circuit and Family Court of Australia Act s. 256
Bankruptcy Regulations 2021 (Cth) reg. 102
Federal Circuit and Family Court of Australia (Bankruptcy) Rules 2021 rr. 2.02, 4.06
Cases cited: Bechara v Bates (2021) 286 FCR 166; [2021] FCAFC 34
Civic Video Pty Ltd v Warburton (2013) 216 FCR 6; [2013] FCA 934
Culleton v Balwyn Nominees Pty Ltd [2017] FCAFC 8; 343 ALR 632
De Robillard v Carver (2007) 240 ALR 675; [2007] FCAFC 67
Hacker v The Owners – Strata Plan No. 17572 [2005] FCA 1936
Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344
Keenan v Deputy Commissioner of Taxation [1999] FCA 525
Macquarie Leasing Pty Ltd v Culleton [2014] FCCA 1714
Murch, In the matter of Annesley v Annesley [2022] FedCFamC2G 435
Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596; 48 FLR 372
Re Poulson; Ex parte Hempenstall Bros Ltd (No 2) (1929) 1 ABC 54
Robson v Body Corporate Sanderling at Kings Beach CTS 2942 & Anor. (2021) 286 FCR 494; [2021] FCAFC 143
Sandell v Porter (1966) 115 CLR 666
Stratton v Bowles (No. 2) [2015] FCA 43
Toyota Finance Australia Limited v Youssef Berro [2022] FCA 497,
Division: Division 2 General Federal Law Number of paragraphs: 94 Date of last submissions: 7 June 2024 Date of hearing: 7 June 2024 Place: Melbourne Solicitor for the Applicant: Mr Butare of LFS Legal Counsel for the First Respondent: Mr Magowan Solicitor for the Respondent: Schembri & Co Lawyers Pty Ltd Solicitor for the Second Respondent: Mr Lodding of Robert James Lawyers ORDERS
MLG 1993 of 2023 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
IN THE MATTER OF JAMES JULIAN SCARLETT
BETWEEN: OWNERS CORPORATION PLAN NO SP023744S
Applicant
AND: JAMES JULIAN SCARLETT
First Respondent
ORDER MADE BY:
JUDGE CHAMPION
DATE OF ORDER:
29 AUGUST 2024
THE COURT ORDERS THAT:
1.The time for the Respondent to commence an application for review of the Registrar’s order made on 7 March 2024 is extended until 5 April 2024.
2.The creditor’s petition is dismissed.
3.The sequestration order made on 7 March 2024 is set aside.
4.On or before 4.00 pm on 12 September 2024 the Trustee file and serve submissions (not exceeding 5 pages) and any affidavit on which he seeks to rely as to consequential issues.
5.On or before 4.00 pm on 26 September 2024 the Applicant and Respondent file and serve submissions (not exceeding 5 pages) and any affidavit on which they seek to rely as to consequential issues.
6.There is liberty to apply.
AND THE COURT NOTES THAT:
A.In the absence of any application by a party for an oral hearing, consequential issues will be determined on the papers.
Note: The form of the order is subject to the entry in the Court’s records.
Note: The Court may vary or set aside a judgment or order to remedy minor typographical or grammatical errors (r 17.05(2)(g) Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 17.05 Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth).
REASONS FOR JUDGMENT
JUDGE CHAMPION:
WHAT ARE THE ISSUES?
Owners Corporation Plan No SP023744S is the Applicant Creditor for a sequestration order under s. 43 of the Bankruptcy Act 1966 (Cth). The Applicant is the Owners Corporation of property in Altona, Victoria. Mr James Scarlett is the Respondent Debtor. The Respondent Debtor is a lot owner at the Altona Property. The Creditor’s Petition relates to the Respondent Debtor’s overdue contribution fees as a lot owner at the Altona Property. Two Magistrates’ Court judgments have been entered against the Respondent Debtor as to those contribution fees together totalling $20,767.59. Although the Respondent Debtor, in his affidavit, says that he disputes that he owes those contribution fees, he has not taken any steps to set aside those two Magistrates’ Court judgments.
In the bankruptcy proceeding before me, there are two main issues for decision:
(1)has the Applicant Creditor proved service of the bankruptcy notice?
(2)if service of the bankruptcy notice is proved, should I exercise my discretion not to make a sequestration order because the Respondent Debtor has satisfied me of his solvency?
The Applicant Creditor has not proved service of the bankruptcy notice. For that reason, the Creditor’s Petition must be dismissed.
Alternatively, if I am wrong about the service of the bankruptcy notice, I am satisfied that the Respondent Debtor has established that he is able to pay his debts within the meaning of s. 52(2)(a) of the Act. Had I been satisfied of the service of the bankruptcy notice because the Respondent Debtor has established that he is able to pay his debts, I would have in any event dismissed the Creditor’s Petition.
A Registrar of the court initially heard this matter under the Registrar’s delegated power. The Registrar made a sequestration order on 7 March 2024. By commencing this review, the Respondent Debtor effectively demands that this matter be heard by a judge. The Respondent Debtor requires an extension of time to commence an application for a review of the Registrar’s sequestration order because he brought his application for review after the 21 days permitted by the Federal Circuit and Family Court of Australia (Division 2) (Bankruptcy) Rules 2021 (Bankruptcy Rules). I accept the Respondent Debtor’s evidence that he did not appear before the Registrar because he did not know of the proceeding. Because of the underlying merit to his opposition to the Creditor’s Petition, it is in the interests of justice to extend time for the commencement of the review application.
I will make orders extending time to commence this review application, dismissing the Creditor’s Petition and setting aside the sequestration order. My reasons follow.
WHAT IS THE NECESSARY BACKGROUND?
As already noted, the Applicant Creditor is the Owners Corporation of the Altona Property in suburban Melbourne.
The Respondent Debtor is a registered lot owner at the Altona Property.
The evidence as to the disputed service of the bankruptcy notice by and large focused on a different address, in a different Melbourne suburb, which in these reasons I will refer to as the Reservoir Address.
A compendious affidavit of Mr Daniel Butare, lawyer for the Applicant Creditor, made on 17 May 2024 set out a detailed history and annexed relevant documents (Annexures DB-01–DB-55). Mr Butare was not cross-examined. There were some limited objections to elements of Mr Butare’s affidavit and parts of annexures to it. The most significant objection was to a conclusory statement of a process server, Mr Justin Hogg, that he served the bankruptcy notice “by leaving the documents at the last known address of the respondent”. The Applicant also tendered, without cross-examination, an affidavit of Mr George Williams (albeit an affidavit which the Respondent Debtor had prepared) made on 21 May 2024.
The Respondent Debtor relied on his own affidavit made on 18 April 2024 and was cross-examined.
The Applicant Creditor said that there was a long history of the Respondent Debtor not paying his contribution fees for the Altona Property.
On 13 April 2022, the Magistrates’ Court made an order in favour of the Applicant Creditor and against the Respondent Debtor as to unpaid contribution fees for his lot at the Altona Property in the amount of $5,885.34.
On 11 September 2023, the Magistrates’ Court made a further order in favour of the Applicant Creditor and against the Respondent Debtor as to unpaid contribution fees for the Altona Property in the amount of $14,176.99.
As a result, by 11 September 2023, the Applicant Creditor had obtained two judgments in the Magistrates’ Court against the Respondent Debtor as to overdue contribution fees of $20,767.59 he owed to the Owners Corporation/Applicant Creditor as to the Altona Property.
Subsequent to that second judgment in the Magistrates’ Court, on 26 September 2023 when the judgment debts remained unsatisfied, a bankruptcy notice was issued (DB-40).
On 2 October 2023, Mr Justin Hogg, a process server, made an affidavit of service in which he deposed that he had served the bankruptcy notice on the Respondent Debtor by leaving the bankruptcy notice “in a sealed envelope addressed to the respondent and by leaving that envelope addressed in the letterbox at [the Reservoir Address]”. I note that it was significant that Mr Hogg’s affidavit of service comprised the totality of the evidence as to the service of the bankruptcy notice, service of which was the foundation for the ensuing proceedings in this Court’s bankruptcy jurisdiction. As I explain below, the Applicant Creditor has not proved that service in this way complied with the requirements of the Bankruptcy Act 1966 (Cth).
The Respondent Debtor’s own evidence under cross-examination was to the effect that although he had spent some time at an address in Reservoir, leading up to February 2023, he had not primarily lived there. Rather, his son had primarily lived there up until February 2023.
Relying upon service by Mr Hogg of the bankruptcy notice, the Applicant Creditor submitted that the Respondent Debtor’s act of bankruptcy was his failure to comply with the bankruptcy notice within 21 days after service on him of that bankruptcy notice, that being the permitted period for compliance with the bankruptcy notice. The act of bankruptcy therefore was on 23 October 2023 (21 days after Mr Hogg “served” the bankruptcy notice, although service on the application before me is disputed).
On 14 November 2023 the Applicant Creditor issued its Creditor’s Petition in this Court.
On 7 March 2024 a Registrar of this Court made an order that the estate of the Respondent Debtor be sequestrated and made a costs order. As noted, the Respondent Debtor did not appear in the proceeding before the Registrar. The Court noted that Mr David Charles Quin had consented to act as Trustee. The Court noted that the date of the act of bankruptcy was 23 October 2023.
The Respondent Debtor submitted that he first received the bankruptcy notice on 4 or 5 April 2024 and learned of the proceedings in the bankruptcy jurisdiction of this Court (when the Court Registry provided him with a copy of the sequestration order made on 7 March 2024), and on 10 April 2024, when the Applicant’s lawyers emailed him a copy of the sequestration order.
On 5 April 2024 the Respondent Debtor applied for a review of the exercise of the Registrar’s power under s. 256 of the Federal Circuit and Family Court of Australia Act 2021 (Cth).
On 22 April 2024, by way of directions on the review application before me, I stayed all proceedings under the sequestration order until further order (Order 6).
On 7 June 2024 the Trustee, as in intervener in relation to his costs and disbursements of administering the bankrupt estate of the Respondent, attended at the commencement of the hearing before me. Mr David Quin (Trustee) had made an affidavit on 10 May 2024 detailing that from 7 March 2024 (the date the sequestration order) the Trustee and his employees have performed work in administering the bankrupt estate. Although the Trustee made some initial submissions at the hearing, I excused his further attendance on the basis that I would hear from him as to consequential issues as to costs incurred in the administration of the estate and the Trustee’s costs in the proceeding.
HAS THE APPLICANT CREDITOR PROVED SERVICE OF THE BANKRUPTCY NOTICE (ISSUE 1)?
The Respondent’s unchallenged evidence (as set out in his affidavit dated 18 April 2024) was that he learned of his bankruptcy only in early April 2024: that is, after the date the Registrar made the sequestration order.
Proof of service of the bankruptcy notice is a necessary ingredient of proof that the Respondent Debtor has committed an act of bankruptcy. In the absence of proof that the Applicant Creditor “served … a bankruptcy notice” under s. 40(1)(g) of the Act, it follows that the Applicant Creditor will not be able to prove that “the debtor has committed an act of bankruptcy” under s. 43(1)(a) of the Act by a failure to comply with the notice and the Court’s bankruptcy jurisdiction will not be enlivened.
The only evidence as to service of the bankruptcy notice was the evidence of Mr Hogg, a process server, who made an affidavit of service that he had left the bankruptcy notice in the letterbox at the Reservoir Address on 2 October 2023. I upheld an objection as to Mr Hogg’s conclusory statement that the Reservoir Address was the address of the person last known to the person serving the document.
The first issue is whether the Applicant Creditor has proved that the bankruptcy notice was served in compliance with the requirements of the Act and the Regulations.
Was there service in compliance with the Bankruptcy Act 1966 because of s. 28A of the Acts Interpretation Act 1901?
The Respondent Debtor gave unchallenged evidence that he did not know about the bankruptcy notice until 10 April 2024: that is, after the Registrar made the sequestration order. The Respondent Debtor’s statement that he did not know about the bankruptcy notice until 10 April 2024. Proof of service was hearsay because he made no admission of service or receipt of the bankruptcy notice.
Buchanan J held in De Robillard v Carver (2007) 240 ALR 675; [2007] FCAFC 7 at [67] that in the bankruptcy jurisdiction “a strict approach to satisfaction of the elements of service remains appropriate”. That is so because of the seriousness of the consequences to a debtor of a sequestration order.
Although the Respondent Debtor had no personal knowledge of the bankruptcy notice, that is not the end of the matter. Although there is no reverse onus and it remains for the Applicant Creditor to prove service of the bankruptcy notice, previous requirements for personal service of a bankruptcy notice have been relaxed. The provisions of the Bankruptcy Act 1966 and the Bankruptcy Regulations 2021 (Cth) made under that Act now countenance service of a bankruptcy notice other than by way of personal service. In particular, I will next consider the relevance of s. 28A of the Acts Interpretation Act 1901 (Cth) and reg. 102(1) of the Regulations as to what the Applicant must prove to prove service of the bankruptcy notice.
Section 40(1)(g) of the Bankruptcy Act 1966 (Cth) refers to a creditor having “served on the debtor … a bankruptcy notice.” The provision is not more explicit as to what is required for service. Section 28A(1)(a) of the Acts Interpretation Act 1901 provides as follows:
28A Service of documents
(1) For the purposes of any Act that requires or permits a document to be served on a person, whether the expression “serve”, “give” or “send” or any other expression is used, then the document may be served:
(a) on a natural person:
(i) by delivering it to the person personally; or
(ii) by leaving it at, or by sending it by pre‑paid post to, the address of the place of residence or business of the person last known to the person serving the document;
Counsel for the Respondent Debtor submitted that if there was not personal service — or, alternatively, service in accordance with reg. 102(1) of the Regulations (see discussion below) — there was no direct and binding decision as to whether service of the bankruptcy notice was effective if the bankruptcy notice was served in compliance with the provisions of s. 28A(1)(a)(ii) of the Acts Interpretation Act 1901.
As a matter of statutory interpretation, I see no reason why if the Applicant Creditor proved that the bankruptcy notice was served in accordance with s. 28A(1)(a)(ii) of the Acts Interpretation Act 1901 that would not constitute effective service for the purposes of s. 40(1)(g) of the Bankruptcy Act 1966.
Assuming service of the bankruptcy notice in accordance with s. 28A(1)(a)(ii) of the Acts Interpretation Act 1901 is sufficient, the issue is that the Applicant Creditor has not proved service in accordance with that provision.
The gap — the missing ingredient in its proof — is that the Applicant Creditor has not proved that the Reservoir Address was the “place of residence … of the person last known to the person serving the document”.
I interpret the phrase “the person serving the document” as being a reference to the Applicant Creditor – in this case, the Owners Corporation – not a reference to the process server, Mr Hogg.
There was no evidence that the Reservoir Address where Mr Hogg left the bankruptcy notice was the place of residence of the Respondent Debtor “last known” to the Applicant Creditor.
I had substantial evidence that the Applicant Creditor had difficulty serving legal documents as to his outstanding contribution fees on the Respondent Debtor.
On 19 August 2019, the Owners Corporation had sent a final fee notice to a post office box address in Edenhope (not the Reservoir Address) associated with the Respondent Debtor.
On 8 March 2022, Mr Hogg had personally served the Defendant with a complaint in one of the Magistrates’ Court proceedings at the address of the Owners Corporation manager in Keilor East.
Before the purported service of the bankruptcy notice at the Reservoir Address on 2 October 2023, earlier in time, on no fewer than 15 occasions between 16 October 2022 and 11 February 2023, Mr Hogg, the process server, attended at the Reservoir Address in connection with the Respondent Debtor’s overdue owners’ corporation fees “without making contact with any occupants” of the Reservoir Address.
The Respondent Debtor’s own evidence was that he had not resided at the Reservoir Address since February 2023.
A Mr Gavin Williams deposed (Ex. A7) that he lived across the road from the Reservoir Address and:
2. A person now known to me as James Scarlett [the Respondent Debtor] lived at the premises for some years
3. He and his son shifted out of the premises in early 2023 Jan/Feb
4. The house has been occupied by a male since unknown to me
Judge Altobelli (as His Honour then was) summarised the principles as to the interpretation of the phrase “last known address” in Macquarie Leasing Pty Ltd v Culleton [2014] FCCA 1714 at [18], and relevantly said:
…
(i) the question of what address has been made known by the debtor is to be determined objectively on all the facts of the case. In some instances it may be information that has been supplied to the world at large. In others it may be the most recent address supplied to the creditor;
Jacobson J held in Civic Video Pty Ltd v Warburton (2013) 216 FCR 6; [2013] FCA 934 at [70] that “the phrase [last known address] is to be construed in light of the fact that the purpose of the rule is that the court process should be brought to the person’s attention”.
There is critical gap, fatal to proof of service and therefore fatal to the Applicant Creditor’s overall application, that the Reservoir Address was the place of residence of the Debtor last known to the Owners Corporation as the person serving the document.
There was no evidence before me from any member of the Committee of Management of the Owners Corporation as to the last known address of the Respondent Debtor.
Ms Claire Balaburova, Owners Corporation Manager, made an affidavit of debt on 6 June 2024 (Ex. A6) that the debt on which the Applicant Creditor relied was still owing for the purposes of r. 4.06(4) of the Bankruptcy Rules. Neither Ms Balaburova, nor any other person involved in the management of the Owners Corporation gave evidence that the Reservoir Address was the place of residence of the Respondent Debtor last known to the Owners Corporation as the Applicant Creditor.
The Applicant Creditor did not call evidence from any relevant person as to its state of mind as to why the Reservoir address was the address of the Respondent Debtor last known to it. I note at issue were Owners Corporation fees for an address in Altona, a different Melbourne suburb, not the Reservoir Address where the bankruptcy notice was purportedly served. By 2 October 2023 (the asserted date of service of the bankruptcy notice), the Owners Corporation must have had significant doubt that the Respondent Debtor was resident at the Reservoir Address given that the process server (Mr Hogg) had attended this address no fewer than 15 times between October 2022 and February 2023 without making contact with the occupants.
The Applicant Creditor may have given evidence that the Reservoir Address was the last known address of the Respondent known to it by various means: on the basis that the Respondent Debtor had supplied that information to the “world at large” — for example, if it appeared as his address on the electoral roll — or by evidence that the Respondent Debtor had supplied specific information to the Applicant Creditor that it was his most recent address (see: Macquarie Leasing, above).
The Applicant Creditor’s reference to the obligation of a lot owner under s. 135(1) of the Owners Corporation Act 2006 (Vic) who does not occupy a lot or who will be absent from a lot for more than 3 months to advise the Owners Corporation of the lot owner’s mailing address in Australia for service of notices does not assist me. Section 135(2) of that Act provides that if an address is not nominated service may be effected for the purposes of that Act “by posting the notice to the last known address of the lot owner in Australia”. There was no evidence as to whether the Respondent Debtor had or had not nominated an address under s. 135(1) of that Act. The critical missing evidence from the Applicant Creditor was evidence that the Reservoir Address was the Respondent Debtor’s “last known address” or even any evidence that it believed the Reservoir Address to be the last known address of the Respondent Debtor and the basis for that belief.
The difficulty for the Applicant Creditor’s application, however, is that it called no evidence as to why and how it says that the Reservoir Address was the last known address of the Respondent Debtor known to it. Because it seeks a sequestration order, with its significant impact on the Respondent Debtor, as Buchanan J said in De Robillard “a strict approach to satisfaction of the elements of service remains appropriate”.
Was there service under reg. 102(1) of the Bankruptcy Regulations 2021?
The Bankruptcy Regulations 2021 (Cth) do not alter this analysis.
Regulation 10(1)(a) prescribes that the bankruptcy notice must be served within a six-month period of its date of issue but does not set out the mode of service.
Regulation 102(1) of the Bankruptcy Regulations 2021 provides additional modes of effecting service of a bankruptcy notice as follows:
Service of documents
(1) Unless the contrary intention appears, if a document is required or permitted by the Act or this instrument to be given or sent to, or served on, a person (other than the Inspector-General, the Official Receiver or the Official Trustee), the document may be:
(a) sent by a courier service to the person at the address of the person last known to the person serving the document; or
(b) left, in an envelope or similar packaging marked with the person’s name and any relevant document exchange number, at a document exchange where the person maintains a document exchange facility.
Note 1:
See also section 28A of the Acts Interpretation Act 1901
Regulation 102(1)(a) is not engaged in this case as the bankruptcy notice was not “sent by a courier service”. In Hacker v The Owners – Strata Plan No. 17572 [2005] FCA 1936 at [39] Emmett J held that a process server was not a “courier service” within the meaning of the predecessor regulation to reg. 102(1)(a) which as to this issue was in materially similar form.
Regulation 102(1)(b) is not engaged because the bankruptcy notice was not left at a “document exchange”.
I do however refer to “note 1” to reg. 102 which suggests that service may be effected in accordance with the means set out in s. 28A of the Acts Interpretation Act. Although this is a note to the regulations, rather than a note which appears in the Bankruptcy Act itself, I am entitled to have regard to extrinsic material under s. 15AB of the Acts Interpretation Act in interpreting the meaning of ‘served” in s. 40(1)(g) of the Bankruptcy Act. Note 1 to reg. 102(1) the regulations fortifies me in my conclusion that service in accordance with s. 28A of the Acts Interpretation Act 1901 is effective service under s. 40(1)(g) of the Bankruptcy Act.
Service of a bankruptcy notice may be effected by way of personal service, by leaving it at or sending it by prepaid post to the address of the place of residence or business of the person last known to the person serving the document in accordance with s. 28A of the Acts Interpretation Act 1901 or by the additional means provided for in reg. 102 namely by use of a courier service or a document exchange.
Has there been service of the bankruptcy notice?
In conclusion, because the Applicant Creditor has not proved service of the bankruptcy notice under s. 40(1)(g) of the Bankruptcy Act because it led no evidence as to the Respondent Debtor’s last known address and service of the bankruptcy notice is a necessary foundation for all that followed, the Creditor’s Petition must be dismissed.
Because service of the bankruptcy notice has not been proved it is not necessary to consider ground 2 of the Respondent Debtor’s opposition to the making of the sequestration order that the bankruptcy notice was not served within a period 6 months from its date of issue.
SHOULD THE CREDITOR’S PETITION BE DISMISSED BECAUSE THE DEBTOR HAS SATISFIED THE COURT THAT HE OR SHE IS ABLE TO PAY HIS OR HER DEBTS?
Because the Applicant Creditor has not proved service of the bankruptcy notice, the second issue as to whether the Creditor’s Petition ought to be dismissed because the Debtor has satisfied me that he or she is able to pay his or her debts does not strictly arise. Nonetheless, as the matter was argued before me, I should set out my reasons as to the arguments raised.
As Beach J noted in Stratton v Bowles (No. 2) [2015] FCA 43 at [27]:
A petitioning creditor has a “prima facie right” to a sequestration order once proof of the matters required by s 52(1) has been satisfied
Had service of the bankruptcy notice been proved (which it has not) there is no argument that as a result of the Magistrates’ Court judgments, the Respondent Debtor still owes the Applicant Creditor the amount of $20,767.59. As a result, the Creditor has proved each of the matters set out in s. 52(1)(a)–(c) of the Act.
There was no issue that the formal matters as to an affidavit of debt and search under r. 4.06 of the Bankruptcy Rules had been proved.
Nevertheless, there is a discretion to refuse the sequestration order and dismiss the Creditor’s Petition if the court is satisfied by the debtor that “he or she is able to pay his or her debts” under s. 52(2)(a).
A Full Court said in Re Sarina; Ex parte Wollondilly Shire Council (1980) 32 ALR 596; 48 FLR 372 at ALR 599:
If a debtor is able to pay his debts but is recalcitrant, his creditors may resort to the remedies otherwise afforded by the law such as execution against his property and garnishee proceedings. The words "able to pay his debts" ins 52(2) of the Act do not mean "willing and able" to do so.
The Full court in Re Sarina also said (at ALR, 600) that if a debtor were able to establish that he or she could pay his or her debts:
The power conferred upon the court by s 52(2) is permissive, not mandatory, although it seems that the occasions on which the discretion not to dismiss the petition might be exercised would not be frequent.
These observations draw further support from what a Full Court said in Culleton v Balwyn Nominees Pty Ltd 343 ALR 632; [2017] FCAFC 8 at [44]:
[44] Whilst it is legitimate for a creditor to proceed in bankruptcy for the purpose of recovering a debt, that does not mean that bankruptcy should be viewed in its essential character as part of the process of execution of judgment debts. It is the changing of the status of an insolvent person: [citations omitted] A sequestration order, as demonstrated by Re Sarina, will not be made against the estate of someone who refuses to pay a debt if that person can prove (the onus being on him or her) that he or she is solvent.
As Kiefel J (as Her Honour then was) framed it in Keenan v Deputy Commissioner of Taxation [1999] FCA 525, acknowledging that a refusal of an order for sequestration would involve the Deputy Commissioner of Taxation in “the cumbersome process of execution” at [7]: “sequestration is not an alternative form of execution. It is concerned with situations where someone is unable to pay their debts”.
The debtor bears the onus of establishing that he or she is solvent and able to pay his or her debts (Re Poulson; Ex parte Hempenstall Bros Ltd (No 2) (1929) 1 ABC 54). Solvency means being “able to pay all … debts, as and when they become due and payable” (Bankruptcy Act, s. 5(2); Sandell v Porter (1966) 115 CLR 666 at 670).
In Murch, In the matter of Annesley v Annesley [2022] FedCFamC2G 435 Judge Kelly at [63] said:
the test of solvency is a mixed asset and cash flow test that is often expressed in terms of whether a debtor is able to pay his or her debts as and when they fall due from the assets and resources which are reasonably available to him or her within an appropriate period of time:
In Murch, Judge Kelly found that although the debtor “‘asserted solvency’… the evidence did not demonstrate it”.
In Toyota Finance Australia Limited v Youssef Berro [2022] FCA 497, Burley J noted at [78] “the onus lies on [the respondent debtor] to establish solvency”. It was of significance to Burley J who in that case was not satisfied that the respondent debtor was solvent that the respondent debtor had not provided “documentation and evidence” to support the assertions of his solvency (see Berro, [70]).
In this case, the Respondent Debtor gave evidence in relation to his finances that (Respondent Debtor, Affidavit, [14(a)]):
I own and run a construction business which earns a net profit of approximately $300,000 annually
He further said that he owns the Reservoir Property which is worth about $1,000,000 and derives gross rental income from it of about $30,000 annually. He owns a lot at the Altona Property which is worth approximately $1,000,000 and provides him with a gross rental income of about $30,000. He owns real estate in Essendon worth about $3.3 million and that provides him with annual rental income of about $60,000. He owns other real estate in Reservoir, Victoria worth about $1.35 million. He owns a one-half share of real estate in Apsley, Victoria, which is worth about $3,000,000. He has available cash reserves of $45,000. He says he has no debts save for $2.5 million in bank loans secured by mortgages over various real estate. The Respondent Debtor deposed that he has a:
total income of about $30,000 per month which is more than sufficient to pay my recurring expenses
Although it is true that the Respondent Debtor did not provide documentary evidence in support of these assertions, the Applicant Creditor did not challenge the Respondent Debtor on any of this evidence as to his capacity to pay his debts as and when they fall due from his assets and cash flow. What level of detail in the evidence as to what is required to establish solvency will depend upon the facts of the case.
Further, on 24 April 2024, at a time when the review proceeding was pending, the Respondent Debtor made an open offer by a letter from his lawyers to pay the Applicant Creditor the sum of $20,767.59 (the outstanding contribution fees). I note that the offer included another proposal that the Applicant Creditor “pay the fees of the trustee in bankruptcy and indemnify our client in relation to same” (Ex. R5). The offer was not accepted.
The Applicant Creditor noted that as of the date of hearing, the Respondent Debtor still had not paid the contribution fees to the Owners Corporation. The debts under the Magistrates’ Court judgments remain unsatisfied. The Trustee noted that the Respondent Debtor had not filed a statement of affairs. Although those factors may be relevant to an assessment of solvency I must consider the evidence as a unified whole.
In all the circumstances, with particular regard the apparent substantial excess of assets over liabilities in combination with current cashflow and the offer to the pay the outstanding debt, the Respondent Debtor has satisfied me “that he … is able to pay his … debts” within the meaning of s. 5(2) of the Act by reference to the unchallenged material in his affidavit. He is apparently unwilling, rather than unable, to pay his contribution fees to the Applicant Creditor.
Had service of the bankruptcy notice been proved, the Respondent Debtor has proved that he is able to pay his debts and I would have refused to make the sequestration order because of the provisions of s. 52(2)(a) of the Act.
SHOULD THE COURT GRANT AN EXTENSION OF TIME TO BRING THE REVIEW OF THJE REGISTRAR’S DECISION?
A party may apply for a review of a delegate’s decision under s. 256 of the Federal Circuit and Family Court of Australia Act 2021 (Cth) “within the time prescribed by the Rules” or “within any further time allowed in accordance with the Rules of Court”. On a review, the Court “may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised”. The review is a de novo review and creditor must prosecute its case (Bechara v Bates [2021] FCAFC 34, [27]).
Under r. 2.02(3) of the Bankruptcy Rules “subject to any direction by the Court or a Judge to the contrary” an application for review must be made by filing an application “within 21 days after the day on which the power was exercised”.
The Registrar made the sequestration order on 7 March 2024. The Respondent Debtor brought the review application on 5 April 2024, approximately one week later than the 21-day period. Because the Respondent debtor filed the review application more than 21 days after the Registrar exercised the delegated power to make the sequestration order, the Respondent requires an extension of time to bring his review application.
I may extend the prescribed time for the commencement of the review in the interests of justice. It appears in any event I may make a contrary direction as to the time commencing the review under the terms of r. 2.02(3) of the Bankruptcy Rules. Wilcox J set out the principles guiding decisions whether to extend time in Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344 at 348-349. Those principles, which are non-exhaustive of the factors which may be relevant include that “[t]he merits of the substantial application are properly to be taken into account in considering whether an extension of time should be granted”.
For the reasons set out above, I am satisfied that the Applicant Creditor has not proved that the bankruptcy notice was served. The bankruptcy notice is the foundation for the commission of an act of bankruptcy and the subsequent Creditor’s Petition. As a result, it is in the interests of justice that I extend time for the making of the review application. I accept that the Respondent Debtor did not know about this proceeding until on or about 2 April 2024 after the Registrar made the sequestration order. Once he learned of the sequestration order he moved promptly to bring his review application on or about 5 April 2024. The evidence before me about the disputed service of the bankruptcy notice was not before the Registrar, who did not have the benefit of the arguments that the Respondent Debtor has put before me.
I will extend time for the making of the review application.
WHAT IS MY CONCLUSION?
Because the Applicant Creditor has not proved service of the bankruptcy notice, I will make an order dismissing the creditor’s petition.
As the Full Court did in Robson v Body Corporate for Sanderling at Kings Beach CTS 2942 & Anor. (2021) 286 FCR 494; [2021] FCAFC 143, for the reasons Allsop CJ set out at [3], I will set aside the sequestration order as an appropriate consequential order.
I indicated to the Trustee when I excused him from the trial that I would hear him on consequential issues including trustee’s remuneration and legal costs. As to those consequential issues, I refer the parties to Robson at [254]–[258].
It may be of assistance to the parties if the Trustee files his submissions and any affidavit material as to consequential issues in the first instance. I have made orders accordingly.
The parties may approach chambers if they agree that another process is more efficient. I propose consequential issues will be determined on the papers but if any party seeks a hearing as to consequential issues the court will list the matter for further oral hearing.
I certify that the preceding ninety-four (94) numbered paragraphs are a true copy of the Reasons for Judgment of Judge Champion. Associate:
Dated: 29 August 2024
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