Re Lattouf

[1994] FCA 679

RE: NOEL MICHAEL LATTOUF
No. NB5251 of 1992
FED No. 679/94
Number of pages - 7
Bankruptcy
(1994) 52 FCR 147

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
BANKRUPTCY DIVISION
WILCOX, EINFELD AND CARR JJ

CATCHWORDS

Bankruptcy - stay of proceedings - conviction, prior to bankruptcy, for fraudulent conversion - accused person signed acknowledgment of debt and agreed to repay by monthly instalments - District Court deferred passing of sentence upon entry into recognisance - condition in recognisance requiring payment of debt by the same monthly instalments as in the acknowledgment of debt - subsequent bankruptcy on debtor's own petition - cessation of monthly payments - call-up for sentence - call-up related to alleged breach of another condition in the recognisance - breach of payment condition mentioned to sentencing judge - application under Bankruptcy Act for stay of District Court proceedings - whether those proceedings "in respect of" non-payment of a provable debt - stay ordered - case stated as to whether Federal Court has power to grant stay application - whether s.60(1)(b) of the Bankruptcy Act is ultra vires the Constitution.

The Constitution s.51(xvii), 106
Bankruptcy Act 1966 (Cth) s.60(1)(b)
Crimes Act 1900 (NSW) s.558

Storey v. Lane (1981) 147 CLR 549
Technical Products Pty Ltd v. State Government Insurance Office (Queensland) (1989) 167 CLR 45
Nintendo Company Ltd v. Centronics Systems Pty Ltd (1994) 121 ALR 577
Re Sutherland-Cropper (1985) 11 FCR 156
Re Tracey; ex parte Ryan (1989) 166 CLR 518
Nationwide News Pty Ltd v. Wills (1992) 177 CLR 1
Polyukhovich v. Commonwealth (1991) 172 CLR 501

HEARING

SYDNEY, 25 May 1994
#DATE 16:9:1994

Counsel for the Bankrupt: Mr B. Debuse

Solicitors for the Bankrupt: Kekatos and Associates

Counsel for the Director of K. Mason QC Solicitor-General for
Public Prosecutions (NSW): the State of New South Wales and

Mr L. Katz

Solicitor for the Director of H.K. Roberts, Crown Solicitor for
Public Prosecutions (NSW): the State of New South Wales

Counsel for the Attorney-General D.J. Rose QC and G.R. Kennett
for the Commonwealth, intervening:

Solicitor for the Intervener: Australian Government Solicitor

ORDER

THE COURT ORDERS THAT:

1. The question asked in the special case should be answered as follows:

(a) Did the Federal Court have power to grant the application under s.60(1)(b) of the Bankruptcy Act 1966 (Cth)? - yes.

2. The matter be remitted to a Judge of this Court.

3. The costs of the bankrupt be paid by the Director of Public Prosecutions for the State of New South Wales.

NOTE: Settlement and entry of Orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

WILCOX, EINFELD and CARR JJ This is a special case stated by Beazley J for this Court to consider questions arising out of the exercise by another Judge of the Court of the power to stay proceedings contained in s.60(1)(b) of the Bankruptcy Act 1966 (Cth) ("the Act"). Section 60(1) of the Act provides as follows:

"60. (1) The Court may, at any time after the presentation of a petition, upon such terms and conditions as it thinks fit -

(a) discharge an order made, whether before or after the commencement of this sub-section, against the person or property of the debtor under any law relating to the imprisonment of fraudulent debtors and, in a case where the debtor is imprisoned or otherwise held in custody under such a law, discharge the debtor out of custody; or

(b) stay any legal process, whether civil or criminal and whether instituted before or after the commencement of this sub-section, against the person or property of the debtor -

(i) in respect of the non-payment of a provable debt or of a pecuniary penalty payable in consequence of the non-payment of a provable debt; or

(ii) in consequence of his refusal or failure to comply with an order of a court, whether made in civil or criminal proceedings, for the payment of a provable debt, and, in a case where the debtor is imprisoned or otherwise held in custody in consequence of the non-payment of a provable debt or of a pecuniary penalty referred to in sub-paragraph (i) or in consequence of his refusal or failure to comply with an order referred to in sub-paragraph (ii), discharge the debtor out of custody."

Factual Background
2. The following summary of facts is extracted from the amended Statement of Facts annexed to the Special Case. On 4 February 1992 Noel Michael Lattouf, having previously pleaded guilty to a charge of fraudulent conversion of a motor vehicle appeared before his Honour Judge Gibson QC in the District Court at Parramatta for sentencing. Mr Lattouf gave sworn evidence in those proceedings about his financial circumstances, including the facts that his house had been sold the previous year and that all of the sale proceeds had been paid to a bank (presumably as mortgagee). The following exchange then took place before the Judge.

Counsel: "Have you had the capacity to pay in cash or borrow the sum of twenty-four, twenty-five thousand dollars to pay to the insurance company? Have you in the last 12 months been physically, financially able to do that?" Mr Lattouf: "If I can do it, I'll do it, I'll do what I can to pay it. If I have to borrow, I'll borrow." Judge: "Well let me put it to you this way Mr Lattouf, unless I get a concrete proposition to pay this $24,638 back to the insurance company, you will be going to jail. Now do you understand?"

1. A short adjournment followed during which Mr Lattouf signed a document in which he acknowledged a debt due by him to "Suncorp Insurance and Finance" in the amount of $24,638 and promised to pay that debt by monthly instalments of $1,000 with the first payment to be made on 14 February 1992.

2. His Honour then convicted Mr Lattouf but deferred passing sentence on condition that Mr Lattouf enter into a recognisance in the sum of $1,000 to be of good behaviour for a period of three years, with two further conditions. The first was that Mr Lattouf subject himself to the supervision of the Probation and Parole Service and obey all reasonable directions of that Service. The second further condition was that Mr Lattouf pay to Sun Corporation Insurance Company ("Suncorp") the sum of $24,630 by monthly instalments of $1,000 ("the compensation payments"). Mr Lattouf immediately entered into a recognisance in those terms save that in the relevant condition instead of a reference to the Probation and Parole Service there was a reference to the Community Corrections Service. The recognisance was expressed as being entered into under s.558 of the Crimes Act 1900 (NSW), which, so far as is relevant, provides as follows:
   

"558. (1) A Court before which a person comes to be sentenced for any offence may if it thinks fit defer passing sentence upon the person and order his release upon his entering into a recognizance, with or without sureties, in such amount as the Court directs, to be of good behaviour for such period as the Court thinks proper and to come up for sentence if called upon.

(1A) . . . .

(2) A recognizance mentioned in subsection

(1) shall be conditioned upon and subject to such terms and conditions as the Court shall order.

(3) . . . .

(4) Where the penalty provided by law in respect of an offence is a sentence of imprisonment or a fine or both, nothing in this section prevents the imposition of a fine for the offence when sentence for the offence is deferred under subsection

(1).

(5) . . . .

(6) A person may be called up for sentence and sentenced on the breach by him of any of the terms or conditions of a recognizance entered into by him under this section if the breach occurs during the period of the recognizance fixed under subsection

(1), notwithstanding that the period has expired.

(7) Any power conferred upon a Court by the operation of this section shall be in addition to, and not in substitution for, any power conferred upon the Court otherwise."

1. As at 4 February 1992 Mr Lattouf's financial position was that his liabilities exceeded his assets by $537,333.46, his income was $30 per week and his expenditure was $405 per week.

2. On 23 April 1992 Mr Lattouf and his wife were served with bankruptcy notices. On 26 May 1992 Mr Lattouf presented a debtor's petition under s.56 of the Act and was declared bankrupt by order of the Federal Court.

3. On 13 August 1992 Judge Gibson QC directed that Mr Lattouf be called up for breach of the recognisance, the breach being failure to accept the supervision and guidance of the Community Corrections Service. On 16 October 1992 Mr Lattouf appeared before his Honour in respect of the alleged breach of the recognisance. At that time his Honour was advised of a breach of the condition relating to the compensation payments. Mr Lattouf had made compensation payments (with money provided by his family) totalling $6,000 but had ceased making further payments on the advice of the Official Receiver. The matter was stood over on that and two subsequent occasions and was due for hearing at the District Court at Wollongong on 26 March 1993. Mr Lattouf did not appear at the District Court at Wollongong on that day and the matter of his alleged breach of recognisance was stood over to 30 April 1993. On that day Judge Gibson QC directed the Director of Public Prosecutions to investigate the sentencing options in view of the stay ordered by the Federal Court.

4. Meanwhile, on 19 March 1993 Mr Lattouf applied to the Federal Court of Australia for an order pursuant to s.60(1)(b) of the Act staying the District Court proceedings in respect of his alleged breach of recognisance. This application was served upon the Official Receiver in Bankruptcy, Insolvency and Trustee Service Australia and the District Court Criminal Registry but not the Director of Public Prosecutions. The application was heard unopposed on 20 April 1993 when Sheppard J ordered that the proceedings in the District Court be stayed so far as they were based upon any alleged breach of the condition of the recognisance that Mr Lattouf pay compensation to Suncorp. Sheppard J also ordered that liberty be reserved to the Crown to apply to vary his order.

5. The Director of Public Prosecutions applied to the Federal Court to set aside the stay order made on 20 April 1993. In the course of that application and at the suggestion of Sheppard J a special case was referred (by Beazley J - Sheppard J then being on leave) for the consideration of this Court. The questions asked in the special case were as follows:-
   

(a) Did the Federal Court have power to grant the application under s.60(1)(b) of the Bankruptcy Act 1966 (Cth)?; and

(b) If the answer to (a) is in the affirmative, did the Federal Court err in the exercise of its discretion in granting the application?

1. At the hearing before this Court we were asked only to consider the first question. Both the bankrupt and the Director of Public Prosecutions appeared by counsel. Notices having been given pursuant to s.78B of the Judiciary Act 1903 (Cth), the Attorney-General for the Commonwealth intervened by counsel to support the constitutional validity of s.60(1)(b).

The Contentions
11. The major issue argued before us was whether, as Mr Lattouf contended, the notice calling him up for alleged breach of his recognisance was "legal process ... in respect of the non-payment of a provable debt", within the meaning of sub-para (i) of s.60(1)(b). He did not contend that the recognisance constituted "an order of a court ... for the payment of a provable debt", so as to render relevant sub-para (ii).

1. The Director of Public Prosecutions accepted that the acknowledgment signed outside the District Court on 4 February 1992 created a provable debt by Mr Lattouf to Suncorp. However he contended that the callup was not legal process in respect of the non-payment of that debt but in respect of an alleged breach of a condition of the recognisance. Mr Mason QC, Solicitor General for New South Wales and counsel for the Director, pointed out that the callup was based solely on breach of the reporting condition, not the failure to pay the monthly instalments. But he said that, even if action was taken against Mr Lattouf because of failure to pay the instalments, this would not be process in respect of the non-payment of a provable debt. A person who is called up and sentenced after breach of a condition of a recognisance is not sentenced for the breach but for the original offence. He referred to The Queen v. Champion (1992) 64 A Crim R 244 and The Queen v. Kerr (unreported, New South Wales Court of Appeal, 12 November 1993). A civil action based on the acknowledgment of debt could be stayed under s.60(1)(b), but there was not a sufficient relationship between the acknowledgment and the condition of the recognisance to enable the callup to be in respect of the non-payment of the instalments promised in the acknowledgment. The case, according to Mr Mason, is distinguishable from the High Court decision in Storey v. Lane (1981) 147 CLR 549 where there were orders to pay wages and holiday pay to a named employee with a provision for imprisonment upon default. There was no such order in the present case.

2. We agree that, in one sense, s.60(1)(b) has been used prematurely. Mr Lattouf has not yet been called upon to answer for breach of the condition concerning the compensation payments. However, it is likely that this matter will be raised when the case is next dealt with by Judge Gibson QC. Mr Mason conceded that, in the absence of a stay order, the breach of the condition regarding compensation payments is likely to be reported to his Honour. In these circumstances it is appropriate for us to answer the first question posed by Beazley J.

The application of s.60(1)(b)
14. We are of the opinion that s.60(1))b) does apply. In our view the case is covered by Storey v. Lane. We appreciate that in that case there was an order for payment. But it seems to us that the distinction between an order and a condition, suggested by counsel, is one of form rather than substance. Criminal law and bankruptcy law are concerned with very practical matters. In practical terms there is little difference between:

. an order that an offender make payment of compensation, coupled with a provision that in default of making payment the offender will be imprisoned; and

. an order deferring the sentence of the offender provided that the offender enters into a bond a condition of which is that the offender make already agreed compensation payments, the deferral of sentencing to continue only so long as the compensation payments continue to be made.

1. It seems to us that it does not matter for the purposes of s.60(1)(b) that the District Court did not impose an order for payment but, rather, made a condition to that effect in the recognisance. In either case the event which exposes Mr Lattouf to the prospect of sentence for the fraudulent conversion is his failure to make the compensation payments. That circumstance is sufficient to characterise the proceedings against Mr Lattouf in the District Court, insofar as they involve his breach of the recognisance condition concerning the monthly payments, as being legal process in respect of the non-payment of a provable debt.

2. Mr Mason QC, while conceding the width of the words "in respect of" relied upon a passage in Technical Products Pty Ltd v. State Government Insurance Office (Queensland) (1989) 167 CLR 45 at p 47 for the proposition that the words "in respect of" require the existence of some discernible and rational link. In our view, the circumstances to which we have just referred disclose a discernible and rational link or nexus with the non-payment of the debt. A similar conclusion was reached by Beaumont J in Re Sutherland-Cropper (1985) 11 FCR 156 at p 161, a decision with which we respectfully agree. The facts in Re Sutherland-Cropper were very similar to those in the present matter save that (a) Mr Sutherland-Cropper did not execute an acknowledgment of debt prior to entry into a recognisance which contained a condition that he pay compensation to the defrauded company, and (b) Mr Sutherland-Cropper was bankrupt when he entered into the recognisance.

3. In this case the nexus between the non-payment of the debt and the alleged breach of the compensation payment condition is demonstrated by the fact that each compensation payment automatically had the legal effect of reducing the amount of the provable debt. The provable debt is identical to the compensation sum. Accordingly, the legal process whereby Mr Lattouf is exposed to the possibility of being sentenced in respect of his conviction for fraudulent conversion because he stopped making the compensation payments cannot, in our opinion, be viewed as being independent of the non-payment of the provable debt. There is no independence of the one from the other to prevent one from being "in respect of" the other in the manner recently referred to by the High Court of Australia in Nintendo Company Ltd v. Centronics Systems Pty Ltd (1994) 121 ALR 577 at p 584. In our view the legal process which it is agreed will occur before Judge Gibson QC constitutes "legal process, whether civil or criminal" within the meaning of s.60(1)(b) of the Act. We have therefore come to the conclusion that there is sufficient nexus between the foreshadowed proceedings before Judge Gibson QC (being "legal process, whether civil or criminal") and the non-payment of the provable debt for the former to be "in respect of" the latter.

The constitutional validity of s.60(1)
18. In the event that we came to that conclusion, Mr Mason QC invited us to hold that s.60(1)(b), in what was described as this "extended context", was ultra vires the Constitution. He sought to distinguish the decision in Storey v. Lane on the basis that the High Court was there concerned only with the characterisation of the enactment. He submitted that the High Court's subsequent decision in Re Tracey; ex parte Ryan (1989) 166 CLR 518 makes plain that there is a separate principle independent of characterisation, derived from s.106 of the Constitution, that even federal laws falling within the scope of a placitum cannot be framed in such a form that they interfere with the exercise of the constitutional functions of State courts. Mr Mason said that principle was not considered in Storey v. Lane. The declaration made in that case "cannot be read as upholding the validity of the paragraph regardless of its proper interpretation". He submitted that the bankruptcy power, s.51(xvii) of the Constitution, does not support s.60(1)(b) in such "extended" application because it was not reasonably proportional to the purpose of that placitum. Its application in a case such as the present causes adverse consequences unrelated to the achievement of the objects of s.51(xvii). Reliance was placed on Nationwide News Pty Ltd v. Wills (1992) 177 CLR 1 and Polyukhovich v. Commonwealth (1991) 172 CLR 501.

1. Storey v. Lane was a unanimous decision of six justices of the High Court of Australia resulting in the following declaration:
   

"Declare that s.60(1) of the Bankruptcy Act 1966 as amended by the Bankruptcy Amendment Act 1980 is a valid law of the Commonwealth."

1. In essence, Mr Mason asked us to qualify that declaration so as to exclude from its scope one application of s.60(1)(b). It is not for us to take that step. If doctrinal developments since 1981 require any variation to the decision in Storey v. Lane, this step must be taken by the High Court itself.

Orders
21. For the above reasons we answer the first question "(a) Did the Federal Court have power to grant the application under s.60(1)(b) of the Bankruptcy Act 1966 (Cth)?," - yes. As previously indicated, the parties invited us not to answer the second question at this stage. They preferred that the issue between them regarding the proper exercise of the Court's discretion be referred back to a primary Judge before whom they might adduce further evidence, if they wish. We will accede to that request. It is important to emphasise that s.60(1)(b) confers a discretion on the Court. It ought not be thought that this power must be exercised in favour of a bankrupt in every case. To take that view would be to risk turning the paragraph into a "rogue's charter" whereby unmeritorious bankrupts could avoid the usual incidents of the criminal law. The exercise of the discretion must be carefully considered in each case.

1. The Director of Public Prosecutions should pay the bankrupt's costs. There should be no order in respect of the costs of the intervenor.