Penning, A.C. v Steel Tube Supplies Pty Ltd
[1988] FCA 302
•17 JUNE 1988
Re: ADRIANUS CORNELIS PENNING
And: STEEL TUBE SUPPLIES PTY. LTD.
No. SA G7 of 1988
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE
OF SOUTH AUSTRALIA
Woodward(1), Fisher(1) and Spender(1) JJ.
CATCHWORDS
Bankruptcy - creditor's petition - order appointing trustee to take control of property of debtor - effect of such an order - whether order had effect of staying execution - bankruptcy notice issued - whether bankruptcy notice was invalid - power to extend time for compliance with bankruptcy notice.
Bankruptcy Act 1966 (Cth) ss.41(3)(b), 41(6A), 41(6C) and 50.
HEARING
ADELAIDE
#DATE 17:6:1988
Solicitors for the Appellant: Norman, Waterhouse and Mutton
Counsel for the Appellant: Mr. J.M. Cudmore
Solicitors for the Respondent: Barratt Lindquist
Counsel for the Respondent: Mr. H.C. Williams Q.C. with Mr. R.J. Lindquist
ORDER
The appeal be allowed.
The bankruptcy notice issued on 24 September 1987 be set aside as invalid.
The sequestration order made on 13 January 1988 be set aside.
The creditor's petition issued on 16 October 1987 be dismissed.
The respondent do pay to the appellant his costs of the appeal.
Note: Settlement and entry of orders is dealt with in Order 36 of
the Federal Court Rules.
JUDGE1
Adrianus Cornelis Penning ("the appellant") has appealed to this Court from two judgments of Forster J. given respectively on 23 November 1987 and 13 January 1988. On 23 November 1987 his Honour dismissed the application of the appellant for an enlargement of time with which to comply with the terms of a bankruptcy notice served on him by Steel Tube Supplies Pty. Ltd. ("the creditor"). On 13 January 1988 he made a sequestration order against the estate of the appellant. The essential facts out of which the appeals arise are relatively few and not greatly in dispute. It is however necessary to relate facts which go beyond those which occurred in the creditor's proceedings against the appellant.
At some time prior to 15 December 1986 the appellant and his wife conducted a restaurant named "Gramps Weinkeller" at Jacobs Creek in the Barossa Valley. It appears that they borrowed very substantial sums of money from the State Bank of South Australia. They gave security for these borrowings, which at 3 December 1986 were said to total $885,119.56, by a registered mortgage and bill of sale. The liability of each under the securities was joint and several. On 3 December 1986 the State Bank filed a creditor's petition seeking a sequestration order against the estates of the appellant and his wife. The petition did not seek an order against a partnership or allege that the appellant and his wife were carrying on business under a firm name. The petition alleged that the appellant and his wife had committed an act of bankruptcy in that they had on 26 August 1986 given notice to the State Bank that they had suspended payment of their debts. The petition also alleged that the estimated value of the State Bank's security was $579,800 leaving an unsecured balance of $305,319.56.
On 11 December 1986 the State Bank made application that Russell Henry Heywood-Smith a Registered Trustee take control of the property of the appellant and his wife (therein described as "the debtors"). Two affidavits were filed in support thereof, both of which, together with the State Bank's application, were by leave tendered during the hearing of the appeal. This application was made pursuant to the provisions of s.50 of the Bankruptcy Act 1966 ("the Act") which, to the extent relevant, are as follows:
"50(1). If, on application by a creditor, it is shown to be necessary in the interests of the creditors, the Court may, at any time after the presentation of a creditor's petition and before sequestration, direct the Official Trustee or a specified registered trustee to take control of the property of the debtor and make such orders in relation to that property as the Court considers just.
(2) ...
(3) ..."
On 15 December 1986 Fisher J. made ex parte an order as sought by the State Bank, namely that:
"1. Russell Henry Heywood-Smith be appointed to take control of the property of the debtors until further order.
2. That the Creditor deposit with Russell Henry Heywood-Smith the sum of $2,000.00 to meet his fees and expenses that may be incurred.
3. There be liberty to each of the debtors to apply within 3 days of service of this Order upon him or her to vary or discharge this order."
The State Bank's petition was heard by Forster J. from time to time during the calendar year 1987, the appellant and his wife contending that they had not committed the alleged act of bankruptcy. Ultimately, on 23 December 1987, his Honour entered judgment in favour of the appellant and his wife on the ground that the State Bank had not established the act of bankruptcy alleged in the petition. No order had, at the date of hearing of this appeal, been made varying or discharging the order of 15 December 1986.
Steel Tube Supplies Pty. Ltd., the creditor and respondent in these proceedings, had, prior to 23 December 1987, served a bankruptcy notice on the appellant. This notice was based on a judgment in favour of the creditor obtained in the Local Court of Para Districts for the sum of $2,258.80. It was issued on 24 September 1987 and served on the appellant on 30 September 1987.
On 16 October 1987 the appellant made application for an order extending the time for compliance with the bankruptcy notice. No grounds for the extension were set out in the application but in an affidavit filed the previous day the solicitor for the appellant stated that he had instructions to apply to have the judgment set aside. The creditor presented a petition on 16 October 1987 seeking the sequestration of the appellant's estate. The appellant filed, on 20 October 1987, a notice of opposition to the making of the orders sought by the creditor in the petition. The grounds upon which the appellant relied were stated as follows:
"1. That the judgment debtor denies and disputes that he is jointly and truly indebted to the judgment creditor in the sum specified in the petition.
2. That application has been made to the Local Court of Para Districts to have the judgment referred to in paragraph 2 of the petition set aside.
3. Further, by order made by this Honourable Court dated the 15th day of December 1986 in action No.1214 of 1986 Russell Henry Heywood-Smith was appointed by the Honourable Court to take control of the property of the debtor until further order which order has not been varied or discharged and which order has prevented the debtor from being able to comply with the bankruptcy notice referred to in paragraph 4 of the petition."
Grounds 1 and 2 of this notice of intention to oppose were no longer of any relevance at the time when the trial judge made his orders. At that time attention was essentially directed to the appellant's application for an extension of time to comply with the bankruptcy notice and to ground 3 of the notice of intention to oppose. It is pertinent to note that the appellant did not contend that he was able to pay his debts as they fell due.
Paragraphs 3, 4 and 5 of the affidavit of the appellant in support of his notice of intention were as follows:
"3. An order was made by this Honourable Court on the 15th day of December 1986 in action No. 1214 of 1986 whereby Russell Henry Heywood-Smith be appointed to take control of my property until further order which order has not been varied or discharged. Annexed hereto and marked by me "ACP.1" is a true copy of the said order.
4. Accordingly, I have not been able to comply with the requirement contained in the bankruptcy notice referred to in paragraph 4 of the within petition.
5. A notice of intention to oppose was filed and delivered by me in the said proceedings instituted by action No. 1214 of 1986 in which the State Bank of South Australia seeks a sequestration order against me which proceedings are still pending."
On 30 October 1987 the appellant made application to the Court for the discharge or variation of the order of 15 December 1986.
The creditor's petition came first before Forster J. on 3 November 1987, to which date the appellant's application for an extension of time had been adjourned. Both matters were on that day part-heard and adjourned to 23 November 1986. On the latter date Forster J. dismissed the appellant's application for an enlargement of time, stating that he did not consider he had power to make that order on the proper interpretation of the authority relied upon by the appellant's counsel, namely Streimer v Tamas (1981) 37 ALR 211. He adjourned the application for a sequestration order until 23 December 1987. On that day he dismissed the petition of the State Bank with costs and further adjourned the hearing of the creditor's petition until 13 January 1988.
On the latter date, counsel for the appellant sought a further adjournment of the petition for one week because, he said, there was the possibility of a composition being arranged between the creditor and the appellant. An additional ground upon which an adjournment was sought was to enable the application to discharge the order of 15 December 1986 to be heard. If such an application was successful any funds in the hands of Mr. Heywood-Smith it was said would become available to the appellant to enable the discharge of the creditor's debt.
Each of these grounds was rejected. The creditor denied that there was any prospect of a composition and furthermore stated it would not accept an offer of payment of the judgment debt because the appellant appeared to be insolvent. A sequestration order was then made by the trial judge.
On 19 January 1988 the appellant filed a notice of appeal from each of the orders of the trial judge given respectively on 23 November 1987 and 13 January 1988. The grounds of appeal were stated as follows:
"1. The learned Judge erred in finding that the appellant had committed an act of bankruptcy by failing to comply with a Bankruptcy Notice dated the 24th day of September, 1987 served on him on or about the 30th day of September, 1987 at a time when there was still binding upon him an order of this Honourable Court made in Action No. 1214 of 1986 and dated the 15th day of December, 1986 whereby Russell Henry Heywood-Smith take control of his property.
2. Alternatively, the learned Judge should have held that there was sufficient cause for which a sequestration order ought not to be made against the appellant, namely that he had been unable to comply with the said Bankruptcy Notice within the time set by the Court for compliance therewith because there was then binding upon him the said order made by this Honourable Court made in Action No. 1214 of 1986.
3. Alternatively, the learned Judge erred in dismissing an application made on the 16th day of October, 1987 seeking an extension of time within which to comply with the said Bankruptcy Notice pending the hearing of an application of the appellant seeking a discharge or variation of the said order made in Action No. 1214 of 1986."
This third ground of appeal, being from an interlocutory order, required leave from this Court. The application was not opposed and is granted.
On the hearing of the appeal counsel for the appellant based his case primarily upon the order made on 15 December 1986 under s.50 of the Act. He also disputed the trial judge's finding that he had no jurisdiction to extend time within which to comply with the bankruptcy notice.
In relation to the order under s.50, counsel's contention was that the appellant could not be held to have committed an act of bankruptcy in failing to comply with the terms of the bankruptcy notice. The effect of the s.50 order, he said, was to restrain his client from dealing in any way with his assets and to put him in contempt of court if he attempted to comply by making payment or giving security for payment. He also argued that the order under s.50 operated as a stay of execution of the creditor's judgment and thus that the bankruptcy notice was invalid.
Counsel for the creditor submitted that the trial judge had correctly exercised his discretion in making the sequestration order and was correct in holding that he had no jurisdiction to extend time for compliance with the bankruptcy notice. On the matter of the impact of the s.50 order, he said that it did not restrain the appellant from complying with the bankruptcy notice as it only placed a trustee in control of his property and was not directed to him personally. He also contended that the order did not operate as a stay of execution as the trustee was directed to "take control of the property of the debtors", namely the appellant and his wife. In these terms the order was, he argued, limited to partnership property and did not extend to the separate property of the appellant. It is appropriate to mention at this stage that, although this argument had not been presented to the trial judge, the grounds of appeal and the appellant's notice of opposition were conceded to be wide enough to enable this appellate court to consider and rule upon it.
The appellant's contention was that he should have had an order from the trial judge extending the time for compliance with the bankruptcy notice so as to enable him to apply to vary or set aside the s.50 order. A consequence of a successful application would be that he would be enabled to pay the judgment debt. The Act specifically provides for extensions of time for compliance with a bankruptcy notice. Sub-section 41(6A) states -
"(6A) Where, before the expiration of the time fixed by the Court or the Registrar for compliance with the requirements of a bankruptcy notice -
(a) proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or
(b) an application to set aside the bankruptcy notice has been filed with the Registrar,
the Court may, subject to sub-section (6C) extend the time for compliance with the bankruptcty notice."
Sub-section (6B) grants a like power to the Registrar and sub.s (6C) states:
"(6C) Where -
(a) a debtor applies to the Court or the Registrar for an extension of time for complying with a bankruptcy notice on the ground that proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; and
(b) the Court or the Registrar, as the case may be, 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 or the Registrar, as the case may be, shall not extend the time for compliance with the bankruptcy notice".
The relevant facts on this topic are that the creditor's bankruptcy notice was served on the appellant on 30 September 1987. Thus the period of 14 days specified therein for compliance expired on 14 October and had in fact expired when the affidavit of the solicitor was filed on 15 October 1987. On 16 October the appellant made application for an extension of time for compliance with the terms of the bankruptcy notice. However, as the time for compliance had at this time expired, the appellant prima facie could not rely upon sub.s 41(6A). That sub-section specifically requires that, before the expiration of the time fixed for compliance, proceedings to set aside the judgment have been instituted or an application to set aside the bankruptcy notice has been filed. The solicitor for the appellant deposed in the affidavit sworn and filed on 15 October 1987 that he had instructions to apply to the District Court to have the judgment set aside. However that application had not at that date been filed because an affidavit in support had not been sworn. The application which was made in this Court by the appellant, and filed on 16 October 1987, sought an order that the time for compliance be extended and that the time for making that application be extended.
Counsel for the appellant acknowledged that his client could not bring himself within either of the requirements of sub.s 41(6A) of the Act because he had not commenced proceedings to set aside either the judgment or the bankruptcy notice before the expiration of the time fixed for compliance with that notice. He contended however that notwithstanding this the court had jurisdiction to extend the time in appropriate circumstances. In support he referred, as he had to the trial judge, to the Full Court decision of Streimer v Tamas. The trial judge was of opinion that that case was not, in the circumstances of this matter, authority for him to extend the time. In our view he was correct in rejecting the contention. In that decision the initial application for an order setting aside the bankruptcy notice had been made within time.
On the question of the impact of an order under s.50, the primary contention of the appellant is that he would be in contempt of Court if he applied an asset of his towards compliance with the bankruptcy notice. It is right to note that the s.50 order did nothing more than direct the trustee "to take control of the property of the debtor". Section 50 provides that the Court "may make such orders in relation to that property as the Court considers just". It would have been open for the Court to make, on the application of the State Bank, an order restraining the appellant from dealing with the property in any way other than to deliver it to the trustee. It is a fact that no such order was sought or made. However, as McLelland J. said in Corporate Affairs Commission (NSW) v Transphere Pty. Ltd. (1984-85) 9 ACLR 820 at p 822, consideration must be given when an order is made in general terms to -
"...the desirability of making explicit provision in respect of after acquired property and income earned thereafter, as also in respect of such things as chattels used for household purposes, or, indeed, for business purposes, personal effects and the paying of ordinary living and business expenses."
A pertinent question is whether, in the absence of any explicit restriction upon the appellant applying whatever funds or assets he might have in his hands prior to the trustee taking control thereof towards compliance with the bankruptcy notice, there was implicit in the order made by the Court such a restriction and that, for the appellant to satisfy the requirements of the bankruptcy notice, could constitute a contempt.
A judgment creditor may not, without the leave of the Court which appointed a receiver, levy execution against the property comprised in the appointment of the receiver: see o'Donovan, Company Receivers and Managers 1981 at 321.
In Meagher Gummow and Lehane Equity Doctrines & Remedies, 2nd ed. 1984 at 663, the learned authors say:-
"Any interference with a receiver appointed by the court in the conduct of the receivership, and any interference with his possession, is a contempt of court, unless the leave of the court is first obtained... It has been said in several cases that the appointment of a receiver operates as an injunction, (quoting Lindley L.J. in Re Sartoris' Estate; Sartoris v Sartoris (1892) 1 Ch 11 at 19 and in Brown Janson & Co. v Hutchinson & Co. (1895) 1 QB 737) but that only means that interference with a receiver's possession attracts the same sanction as if it had been prohibited by injunction: indeed, the statement is inaccurate, because it is not only parties to the action who are obliged not to interfere. Thus, for example, it is a contempt for a judgment creditor to levy execution against property of which a receiver has been appointed (Ames v Birkenhead Docks Trustees (1855) 20 Beav.332; 52 ER 630)..."
In that case, Sir John Romilly, Master of the Rolls, said at (353) 52 ER 638:-
"There is no question but that this Court will not permit a receiver, appointed by its authority, and who is therefore its officer, to be interfered with or dispossessed of the property he is directed to receive, by anyone, although the order appointing him may be perfectly erroneous; this Court requires and insists that application should be made to the Court, for permission to take possession of any property of which the receiver either has taken or is directed to take possession, and it is an idle distinction (which could not be maintained if it were attempted, which it is not by counsel at the Bar although suggested by the affidavits), that this rule only applies to property actually in the hands of the receiver. If a receiver be appointed to receive debts, rents, or tolls, the rule applies equally to all these cases, and no person will be permitted, without the sanction or authority of the Court, to intercept or prevent payment to the receiver of the debts, rents, or the tolls, which he has not actually received but which he has been appointed to receive."
An attempt to levy execution is merely one way a person not specifically enjoined might interfere with the receiver's possession or right to possession.
If it be the case that "no person will be permitted without the sanction or authority of the court to ... prevent payment to the receiver of the (property the subject of the receivership order)", a person who, with knowledge that a trustee had been appointed to "take control of the property of the debtor", prevented that trustee from, or interfered with that trustee in, taking control of property (for instance, by paying part of it to a judgment creditor), could well be in contempt.
In Russell v East Anglian Railway Company (1950) 3 Mac. & G.104; 20 L.J. Ch.257; 42 ER 201, property in the possession of a receiver appointed by the court in a suit was in two instances seized by the sheriff under writs of fi, fa, issued by judgment creditors of the defendant. Vice-Chancellor Knight had refused a motion by the plaintiff, for the committal of the sheriff.
Lord Chancellor Truro on appeal held that the sheriff was not warranted in making the seizures and, on motions in the suit to commit the sheriff, the Court held that the sheriff could not justify the seizures by questioning the propriety of the order under which the receiver was appointed and, on the submission to the sheriff, an order was made in each case for him to withdraw from possession and to pay the costs, the Court considering this order as sufficient under the circumstances for the maintenance of its jurisdiction.
In our view, no material distinction is to be drawn between the appointment by a court of a trustee to take control of a debtor's property under s.50 of the Bankruptcy Act 1966 and the appointment by a court of a receiver to take possession of the property of a named person.
In either case, and independently of whether there is an injunction requiring any particular person to deliver the goods into the control or possession of the receiver or trustee, any conduct without the sanction or authority of the court which prevents or hinders the taking of control or entry into possession by receiver or trustee of the property the subject of the court order, if done in knowledge of the court order, would appear to constitute a contempt.
However, whether the appellant in the circumstances of the present case would, or would not, be in contempt by complying with the bankruptcy notice prior to the trustee taking control of his property is not the relevant inquiry. Because it is our opinion that the appeal must be allowed on another ground it is not necessary for us to express a concluded view on that question. The crucial matter for determination is whether, during the currency of an order under s.50 directing a trustee to take control of the appellant's property, the judgment creditor was barred by para.41(3)(b) of the Act from issuing a bankruptcy notice because execution on the judgment had been stayed.
This is also a matter of some difficulty upon which we have not had the benefit of the opinion of Forster J. as this aspect was raised for the first time on the hearing of the appeal by this Court. These difficulties arise from the provisions of s.41(3) of the Act, the relevant portions of which are as follows:
"41(3) A bankruptcy notice shall not be issued in relation to a debtor -
(a) ...
(b) if, at the time of the application for its issue, execution of the judgment or order to which it relates has been stayed; or
(c) ... "
The form of application for issue of a bankruptcy notice (form 3) requires the solicitor for the judgment creditor to state that "Execution of the final judgment (or order) has not been stayed at the time of the making of this application". Likewise the bankruptcy notice states in the preamble that the creditor is claiming on a judgment "the execution of which has not been stayed".
It appears to be settled law both in the United Kingdom and, at least at first instance, in this country, that the words in sub.s 41(3) "execution of the judgment or order to which it relates has been stayed" are not restricted to an order expressly staying a judgment. They have been construed as having a much wider meaning. In certain circumstances execution is deemed to have been stayed if the execution creditor is for some reason not in a position to issue execution upon his judgment. Reference to such circumstances is to be found in Halsbury Laws of England 4th Ed. Vol.3 para 262.
In Ex parte Ide, In re Ide (1886-87) 17 QBD 755 the Court of Appeal considered the proper construction of these words in sub.s 1(g) of s.4 of the Bankruptcy Act 1883. The comments of the members of that Court have been accepted as directly applicable to para 41(3)(b) of the Australian Act. On p.759 Bowen L.J. said:
"With regard to the construction of sub-s. 1(g) of s.4, I also agree that, in order to entitle a creditor to issue a bankruptcy notice, he must be in a position to issue execution on his judgment at the time when he issues the bankruptcy notice. It would be absurd to suppose that sub-s. 1(g) admitted of this construction, that in a case in which execution could have gone at once, but for the order of the Court staying it, a bankruptcy notice could not be issued, and yet that, in a case in which execution could never have gone at all without the leave of the Court, a bankruptcy notice could be issued, and the debtor could be adjudged a bankrupt. We must look carefully at the words to see if there is not an implication to be found in them, and it seems to me that, from the collocation of the words 'final judgment' and 'execution thereon not having been stayed,' a necessary implication arises of this character, viz., that the creditor must not merely have obtained a final judgment but must be in a position to issue immediate execution upon it."
The other two members of the Court of Appeal agreed, giving separate reasons, with this construction of the particular words.
The Bankruptcy Courts in this country have, on a number of occasions, adopted this construction, but it does not appear to have received consideration by an appellate court. In Re Richards, Ex parte Sommers (1947) 14 ABC 112 at p 114, Clyne J. stated in respect of the same words in the Bankruptcy Act 1921-1946,
"At the same time, however, such a legal assignee must be in a position to issue execution on the judgment or order. I think this conclusion is necessarily implied from the following words contained in s.52(j) 'and execution thereon not having been stayed'."
His Honour then cited the above passage from the reasons for judgment of Bowen L.J. in Ex parte Ide. In Re Richards the legal assignees of an order made in the Matrimonial Causes Jurisdiction of the Supreme Court could not issue a bankruptcy notice without having first obtained leave of the Court. Until they obtained such leave, execution was deemed to have been stayed.
In Re John Perkins Seers (1954-1955) 17 ABC 11 Clyne J. applied the same reasoning and again referred to Ex parte Ide. In that case r 17 of the Rules of the County Court was under consideration. At p 12 Clyne J. said:
"The next question is whether by virtue of r 17 there has been a stay of execution. In my opinion there has been such a stay. The words in s.52(j) of the Bankruptcy Act "and execution thereon not having been stayed" are not, I think, restricted only to cases where there is an express stay by order of the court.
It is clearly established that in order to entitle a creditor to issue a bankruptcy notice he must be in a position to issue execution on his judgment at the time when he issues the bankruptcy notice. See Ex parte Ide In re Ide (1886) 17 QBD 755, at p 759 per Bowen L.J.
In the present case when the Deputy Commissioner in December 1954 applied for the issue of a bankruptcy notice he was not then entitled to levy execution on a judgment obtained by him in June 1950, in so far as it was unsatisfied, and he cannot now levy such execution unless and until he has obtained the leave of the County Court or a judge thereof to do so."
Riley J. canvassed the matter in Re Pannowitz Ex parte Wilson, in (1974-75) 6 ALR 287 at pp 291-2. After referring to Ex parte Ide and Re Richards he said at p 291,
"In none of those cases had execution in fact been stayed. In each the defect in the creditor's case was simply that he had not put himself in the position of being able to issue execution. 'For this purpose execution is considered to be stayed if, at the date of the issue of the notice, the judgment creditor is not entitled to issue immediate execution on the judgment': 3 Halsbury (4th ed.) par.262; for example where the judgment creditor must be taken to have agreed to suspend his right to execution: Re a Debtor per Fletcher Moulton L.J. (1908) 1 KB 344, at p 349.
The English Bankruptcy Act of 1914 consolidated the relevant provisions of the Acts of 1883, 1890 and 1913 into its s.1(1)(g) and in the process cast them into the form in which, with minor differences, they appeared in s.52(j) of the Commonwealth Act of 1924 and later in s.40(1)(g) of the Commonwealth Act of 1966.
Though the literal meaning of the words 'execution thereon not having been stayed' had been considerably departed from, those words have remained in the English and Commonwealth legislation substantially unchanged from 1883 to the present day."
In our opinion this Court should adopt and affirm the meaning of the words which have for so long been accepted and acted upon.
The crucial question for this Court is whether the creditor in this matter was in a position to issue execution on his judgment against the property of the appellant even though a trustee had been directed by the Court, pursuant to s.50 of the Act, to take control of the appellant's property. On this aspect counsel for the creditor referred us to the decision of Beaumont J. in Re Solomon Ex parte Reid (1986) 66 ALR 571. In that matter the Supreme Court of New South Wales had appointed a receiver, under the provisions of the Companies (NSW) Code, of the property of two companies and of the debtor. It had also made orders restraining the debtor from disposing of his assets. Subsequently a bankruptcy notice was issued and served on the debtor. Beaumont J. said on p 573
"It was first submitted on behalf of the debtor that the bankruptcy notice was bad because its issue was prohibited by s.41(3)(b) of the Act. Under that provision, a bankruptcy notice shall not be issued if, at the time of the application for its issue, 'execution of the judgment to which it relates has been stayed'. Accepting that no stay of execution had in fact been granted, it was contended by the debtor that the 'freezing' effect of the receivership meant that execution should, within the meaning of the authorities, be considered to be stayed.
Section 156(3) of the District Court Act 1973 (NSW) confers a general discretion upon that court to grant a stay of execution: cf Alexander v Cambridge Credit Corporation Ltd (Receiver Appointed) (1985) 2 NSWLR 685 at 693-4. But, as has been noted, no stay of execution has, in fact, been granted. Can it none the less be said that, for the purposes of s.41(3)(b) of the Act, execution should be deemed to have been stayed?
It is well established that, for the purposes of s.41(3)(b), execution is deemed to have been stayed where a judgment creditor is not 'in a position to issue immediate execution upon it': per Bowen LJ Ex parte Ide; In re Ide (1886) 17 QBD 755 at 760; Re Pannowitz; Ex parte Wilson (1975) 38 FLR 184 at 187-8; 6 ALR 287; cf Re a Debtor (1984) 2 All ER 257 at 265-6. It is also trite law that a judgment creditor may not, without leave of the court which appointed the receiver, levy execution against the property comprised in the appointment of the receiver: see O'Donovan: Company Receivers and Managers (1981) at p.321; Meagher, Gummow and Lehane: Equity: Doctrine and Remedies 2nd ed (1984) at p 663. Any attempt to interfere with that property is an interference with an officer of the court in the performance of his functions. If done without leave of the court, it is a contempt of court. It will not be permitted even if the property concerned is not yet in the actual possession of the receiver: see Ames v Trustees of Birkenhead Docks (1855) 20 Beav 332 at 353; 52 ER 630 at 638.
It follows, in the light of the construction of the order by McLelland J, that it was not open to the petitioning creditor, at the time of issue of the bankruptcy notice, to execute against any of the property of the debtor without the leave of the Supreme Court, subject to one exception which is not here material. The exception lay in the operation of the proviso to the injunction. Its operation could not be material here because the proviso is limited to the payment of living expenses of the debtor and his family: it did not purport to authorize, expressly or by implication, the payment of the judgment debt out of the property the subject of the receivership. Nor, in my view, did any of the powers conferred upon the receiver, whether specifically or generally, authorize any such payment.
Since, at the time of the issue of the bankruptcy notice, no leave has been obtained from the Supreme Court permitting the petitioning creditor to levy execution against any of the debtor's property, it must follow that the prohibition contained in s 41(3)(b) applies, with the consequence that the bankruptcy notice was bad."
Neaves J. considered the purpose and effect of s.50 in The Deputy Commissioner of Taxation v Clyne (1983) 50 ALR 118 at p.123. He said:
"Section 50 of the Bankruptcy Act 1966 has no operation until a creditor's petition has been presented. To found such a petition the debtor must have committed an act of bankruptcy (s 43(1)(a) of that Act) and, at the time when that act of bankruptcy was committed, have satisfied one or other of the requirements set out in s 43(1)(b). Before exercising power under the section it must be shown that relief of the kind which the section envisages is 'necessary in the interests of the creditors'. The direction that may be given to the Official Trustee or a specified registered trustee is to 'take control' of the property of the debtor.
The section is clearly a provision in aid of the creditors of a debtor who has already committed an act of bankruptcy and has a creditor's petition pending against him. It is a necessary and ancillary provision designed to enable appropriate steps to be taken to preserve and protect the property of a debtor so that, in the event of a sequestration order being made, that property will be available for distribution equitably amongst them in accordance with the statutory provisions contained elsewhere in the Bankruptcy Act
1966. That this is its purpose is reinforced by a consideration of the provisions contained in s 50(2) with their emphasis on obtaining information concerning the debtor or his trade dealings, property or affairs."
Neaves J.in that matter made an order under s.50 for the Official Trustee to take control of all of the property of the debtor. He also made a number of ancillary orders restraining the debtor from dealing with his property. In the second paragraph of the passage cited from his Honour's reasons, he clearly spells out his view that the purpose and effect of an order is to preserve and protect the property of a debtor so that, if a sequestration order is made, it will be available for equitable distribution amongst his creditors.
In subsequent passages in his reasons in Re Solomon Beaumont J. doubted a proposition asserted in Kerr: Law & Practice as to Receivers 16 ed. (1983) at p 131. Dealing with the appointment of a receiver the author said:
"Nor does it amount to a stay of execution within section 1(1)(g) of the Bankruptcy Act 1914 so as to disentitle the judgment creditor's obtaining the order to issue a bankruptcy notice in respect of the same debt."
Re Bond (1911) 2 KB 988 was cited as authority for this proposition.
In our opinion Beaumont J. was correct in deciding that Re Bond was not authority for that proposition and that in any event it could be distinguished from the case before him. The present matter falls into the same category. His Honour was also correct when he said at 66 ALR 575:
"No doubt, an 'equity' of the type envisaged by Lord Esher (in Re Sedgwick (1888) 5 Morr 262) would disentitle a judgment creditor from proceeding to immediate execution but, in my view, this is not an exhaustive statement of the matters that may disqualify a judgment creditor from issuing a bankruptcy notice. There is no reason, of logic or otherwise, to limit the operation of s 41(3)(b) to cases where the debtor can establish an 'equity'. In my opinion, the existence of any relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution falls within the implied prohibition contained in s 41(3)(b)."
This matter differs from that before Beaumont J. only in that he was considering the appointment of a receiver by a Court under the Companies Code whereas here the appointment was by a Court of a trustee to take control of the property of a debtor. However a receiver is appointed by a Court for the same purpose and with the same effect on the relevant property as a trustee under s.50. As is stated in Meagher Gummow & Lehane Equity: Doctrine & Remedies 2nd ed. (1984) at p.654 -
"The appointment of a receiver by the Court is necessarily an interim measure. He is appointed at the instance of a party to an action to take possession of and get in... the property which is the subject matter of the action or the title to which, or control of which, is in dispute between the parties; his purpose is to hold the property so that it may be preserved for the benefit of the party found entitled, or, ultimately, distributed amongst the parties in accordance with their entitlements."
That statement of the position of a receiver appointed by a Court is, in our opinion, equally applicable to a trustee under s.50 of the Bankruptcy Act.
Counsel for the creditor conceded that the trustee was in the same position as the receiver in Re Solomon except that the s.50 order vested in him nothing more that a bare right for him to take control. He also conceded that, as a matter of principle, other creditors could not levy execution on property which was under the control of the trustee as an officer of the Court. His submission was that, properly construed in the light of the circumstances, the order did not extend beyond certain property which was referred to in the application. As this property was, he said, partnership property, the order had no application to any property of the appellant and his wife other than partnership property. In our opinion this Court cannot in the circumstances accept this argument. Counsel for the creditor asked us to look at the evidence before the Court at the time of the s.50 application, because he said it required us to construe the order in this manner.
The order as previously set out ordered the trustee to take control of "the property of the debtors". As such it was exactly in accordance with the application. Furthermore, liberty was granted to each of them to apply to vary or discharge the order. Counsel's contention was that it had application only to specified property, namely that referred to in exhibit A.N.B.7 to the affidavit of Mr. Broome previously referred to. That property was, he said, at the time the subject of an application to the Supreme Court for recovery by the appellant and his wife. However, at the conclusion of that affidavit the receiver said that, if that property was delivered by the Supreme Court to the appellant, he was "fearful that if a Trustee was not appointed over the estates of the debtors that the items of property referred to in annexure 'A.N.B.7' will not be properly disposed of and in that event the interest of all the creditors would be prejudiced". We have added the emphasis. In the affidavit of Mr. Bertram filed in support of the application, the deponent stated that he had ascertained from the appellant and his wife that their only assets apart from those subject to the Bank's security were items of personal property. These were said to be those items specified in the exhibit 'A.N.B.7' to Mr. Broome's affidavit and Mr. Bertram only sought an order in respect of these particular items of property. There was thus conflicting information before the Court in this regard. There was a further difficulty in that whereas exhibit 'A.N.B.7' was said to itemise the personal property not subject to the Bank's security, in fact it included with other property the chattels which were subject to the Bank's Bill of Sale, which were already under the control of the Bank's receivers. In our opinion there is little support for the contention that the order related or was intended to relate only to the specified property in exhibit 'A.N.B.7'.
Nor do we accept counsel's contention that, because this specified property was partnership property, the order should be construed as covering only partnership property. The affidavit of Mr. Bertram refers to this property as being "items of personal property situated at the Weinkeller Restaurant" although the exhibits indicate that most but not all the items comprised articles necessary for the conduct of a restaurant business. It may be a matter of reasonable inference that the appellant was conducting a business in partnership with his wife, but nowhere is this spelt out in the documents. They were not said to be "trading under the name Weinkeller Restaurant" and the assets are nowhere spelt out as being partnership assets. In our opinion there is no necessary reason in these circumstances why the s.50 order must be construed as relating only to partnership assets and expressly excluding the separate "property of the debtors". If it had been intended to cover only those specified items of property which were said to be partnership property unencumbered by the Bank's securities, it would have been easy for the Bank to make such an application, based on an affidavit establishing the relevant facts. However such an application by the Bank would have been most unlikely in the present matter because there was a substantial deficiency in meeting the Bank's claim after realization of its securities. Moreover, it would be difficult to ascribe the suggested intention to the application or the order because the difficulties of a trustee would be compounded if he had to wait until he established the existence of a partnership and the identity of the assets thereof, separating out therefrom assets of the separate estates, before he could take control in accordance with the Court's order.
In our opinion, execution on the judgment in favour of the creditor was deemed to have been stayed at the time of issue of the bankruptcy notice. It follows that the notice was not validly issued and must be set aside. The sequestration order of 13 January 1988 must therefore be quashed and the bankruptcy petition, issued on 16 October 1987, dismissed. The appeal must be allowed with costs to be paid to the appellant by the creditor.
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