Re Ling; Ex parte Enrobook Pty Ltd

[1996] FCA 1105

CATCHWORDS

Bankruptcy - creditors petition for sequestration order - whether bankruptcy notice invalid on ground that petitioning creditor did not have an immediate right to execution of the judgment debt because of existence of Mareva injunction - character of mareva relief - importance of fact that operates in personam not in rem - purpose of Mareva relief - importance of fact that is to prevent defendant from dissipating assets not to prevent creditors from exercising their rights - whether "sufficient cause" under para 52(2)(a) of the Bankruptcy Act 1966 for order not to be made - whether fact that debtor has instituted proceedings against a third party the successful outcome of which will enable annulment of bankruptcy and enable debtor to pay debts constitutes sufficient cause - whether claim is so intimately connected with the debt on which the petitioning creditor relies as to require that it be regarded substantially in the same way as a claim against the petitioning creditor - whether claim is being diligently prosecuted, has good prospects of success, is likely to be determined in the near future and if successful is likely to produce funds sufficient to discharge all claims against debtor - whether fact of a prior pending petition by a third party constitutes sufficient cause - whether prejudice to creditors

Bankruptcy Act 1966 para 52(2)(a), para 52(2)(b), para 40(1)(g), para 41(3)(b), para 52(1)

Re Solomon; Ex parte Reid (1986) 10 FCR 423
Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568
Wiltshire‑Smith v Mellor Olsson (1995) 57 FCR 572
Re Bond; Ex parte Capital and Counties Bank Ltd [1911] 2 KB 988
Re Sedgwick; Ex parte Sedgwick (1888) 5 Morr 262
Boscolo v Botany Council 16 October 1996 unreported
Re Zamtar; Ex parte Deputy Commissioner of Taxation 25 November 1992 unreported
Re Ousley; Ex parte Commissioner of Taxation (1994) 48 FCR 181
Deputy Commissioner of Taxation v Ousley unreported, Supreme Court Vic, 23 March 1992
Jackson v Sterling Industries Ltd (1987) 162 CLR 612
Deputy Commissioner of Taxation v Winter (1988) 92 FLR 327
A J Beckhor & Co Ltd v Bilton [1981] 2 All ER 565
Underhay v Read (1887) 20 QBD 209
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111
Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No. 2) (1994) 51 FCR 14
McLean v Biztole Corporation Pty Ltd, FCA FC 30 August 1996, unreported
Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303
Ling v Commonwealth of Australia (1996) 139 ALR 159

RE: NOEL LING;   EX PARTE: ENROBOOK PTY LIMITED
No. NP 168 of 1996

CORAM:Lehane J

PLACE:Sydney

DATE:18 December 1996

IN THE FEDERAL COURT OF AUSTRALIA  )
GENERAL DIVISION  )
BANKRUPTCY DISTRICT OF NEW SOUTH WALES            )           No. NP 168 of  1996

RE:NOEL LING

Debtor

EX PARTE:ENROBOOK PTY LIMITED

Petitioner

CORAM:Lehane J

PLACE:Sydney

DATE:18 December 1996

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1. A sequestration order be made against the estate of the debtor.

1. The petitioning creditor's costs of and incidental to the petition, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966.

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

IN THE FEDERAL COURT OF AUSTRALIA  )
GENERAL DIVISION  )
BANKRUPTCY DISTRICT OF NEW SOUTH WALES            )           No. NP 168 of  1996

RE:NOEL LING

Debtor

EX PARTE:ENROBOOK PTY LIMITED

Petitioner

CORAM:Lehane J

PLACE:Sydney

DATE:18 December 1996

REASONS FOR JUDGMENT

LEHANE J:  This is a creditor's petition seeking a sequestration order against the estate of the debtor, Mr Ling.  The debt claimed in the petition is the sum of $1,347,018.07, together with interest, owing under a judgment of the Supreme Court of New South Wales.  The judgment in turn was based on a claim for rent and outgoings under a lease.  The act of bankruptcy relied upon is failure by Mr Ling to comply with a bankruptcy notice based on that same judgment debt.  The debt is not disputed.

On 3 April 1996 Mr Ling filed a notice of intention to appear at the hearing of the petition.  The stated grounds of opposition were, first, that Mr Ling was able to pay his debts (Bankruptcy Act 1966 para 52(2)(a)) and, secondly, that there was other sufficient cause why a sequestration order ought not to be made (Bankruptcy Act para 52(2)(b)).  The first ground was not pressed at the hearing.  The "other sufficient cause" has two aspects.  One is that Mr Ling has instituted proceedings against the Commonwealth of
Australia claiming damages for negligent misrepresentation and claims that, if he is successful in those proceedings, he will be able to pay his debts in full.  The other aspect is the existence of a prior pending petition, issued by the Commonwealth, for a sequestration order against Mr Ling.

At the hearing of the petition Mr Ling sought leave to file an amended notice of intention to appear.  The petitioning creditor opposed that application but, for reasons which I then gave, I granted it.  The effect of the amendment was to add a further ground of opposition expressed as follows:

The Bankruptcy Notice is invalid on the ground that the petitioning creditor did not have an immediate right to execution of the judgment debt because of the existence of the Mareva injunction ordered by the Honourable Justice Lockhart in matter No. G182 of 1992 on 2 December 1993.

The basis of that ground is that the substantial effect of the injunction, for present purposes, was that it operated as a stay of execution upon the judgment on which the bankruptcy notice was based: the judgment was, therefore, not one the execution of which had not been stayed (Bankruptcy Act para 40(1)(g)); thus it ought not to have been issued (para 41(3)(b)); and, as it was wrongly issued, failure to comply with it was not an act of bankruptcy.

I shall deal first with the added ground of opposition.

Effect of Mareva Injunction

On 2 December 1993, in proceedings in which the Commonwealth of Australia was the applicant and Mr Ling the first respondent, Lockhart J made an order the first three paragraphs of which are as follows:

1.That until further order either in these proceedings or in any appeal therefrom the First Respondent be restrained from removing, or causing or permitting to be removed from Australia, any of his assets therein, or selling, charging or in any way dealing with, or causing or permitting any of those things to be done to any of his assets wherever situated.  PROVIDED THAT this Order shall not prevent:

(a)The First Respondent paying ordinary living and business expenses.

(b)The First Respondent paying reasonable legal expenses as incurred in these proceedings, proceedings G225 of 1992, G656 and G657 of 1993 or any appeal from any judgment in any of those proceedings.

(c)The First Respondent satisfying any judgment in these proceedings or proceedings G225 of 1992, G656 and No G 657 of 1993.

2.That the First Respondent forthwith upon being notified of this Order direct the Office of the Public Trustee in the State of Queensland to continue to hold the sum of $850,000.00; and any interest which has accrued or will accrue thereon, referred to in the Affidavit of Julie‑Anne Vens sworn 7 April 1992 and filed in these proceedings and to deal with that money only in accordance with either:

(a)any further order of this Court; or

(b)a written direction signed by both the Commonwealth of Australia and Mr Ling (or their respective solicitors).

3.These orders shall continue in force after entry of judgment in this proceeding and proceedings G225 of 1992.  G656 of 1993 and G657 of 1993 in aid of execution.

The remaining paragraphs of the order are immaterial for present purposes.

I was told that that order remains in force.  Certainly it was in force when the bankruptcy notice was issued and served.  In general terms, the effect of the order was to restrain Mr Ling from dealing with any of his assets, or permitting them to be dealt with, in any way except by making the payments specified in subparagraphs 1 (a), (b) and (c).  Paragraph 2 of the order established a particular regime in relation to the sum of $850,000 to which it referred; that sum might be dealt with only in accordance with an order of the court or in accordance with a written direction of both the Commonwealth and Mr Ling.

It was put to me on behalf of Mr Ling that, in the light of a number of authorities binding on me, I should hold that the effect of a Mareva injunction of this kind, affecting the whole of Mr Ling's property is analogous to that of the appointment by the court of a receiver of that property.  Accordingly execution of a judgment against Mr Ling could not, without leave of the court, be levied against any property the subject of the order and should consequently, for the purposes of the Bankruptcy Act, be taken to be stayed.  It may be said at the outset that, if that proposition is generally true, there appears to be one exception to it: Mr Ling may, without leave, satisfy a judgment in favour of the Commonwealth and, because after judgment the injunction is to remain in effect "in aid
of execution", presumably the Commonwealth may enforce any judgment which it may obtain in the specified proceedings by way of execution against Mr Ling's property.  If that is right, the effect of Mr Ling's argument is that a creditor who obtains a Mareva injunction, in this not uncommon form, may levy execution but no other judgment creditor (except, perhaps, one whose judgment is for a debt incurred for ordinary living or business expenses) may do so without leave.

It is necessary, however, to turn to the authorities.  The first is Re Solomon; Ex parte Reid (1986) 10 FCR 423. A receiver of the property of the debtor had been appointed under para 573(1)(h) of the Companies (NSW) Code.  After the appointment of the receiver, a bankruptcy notice was served on the debtor.  Beaumont J held, in accordance with long standing authority, that, the receiver having been appointed by the court, any interference with his possession without leave, including the levying of execution, was a contempt of court.  Accordingly, a judgment creditor could not issue immediate execution upon the judgment and it was consequently to be regarded as stayed.  The bankruptcy notice was therefore bad and the petition based on the debtor's failure to comply with it must be dismissed.

Then in Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568 the Full Court approved Re Solomon and applied it to a case where a trustee had been appointed under s 50 of the Bankruptcy Act to take control of the debtor's property.  The court held that interference with the possession of such a trustee was a contempt in exactly the same way as interference with the possession of a receiver appointed by the court: the appointment
of the trustee must, therefore, be taken to result in a stay of execution with the consequence that a bankruptcy notice issued after the appointment was bad.

That brings me to the decision of the Full Court in Wiltshire‑Smith v Mellor Olsson (1995) 57 FCR 572. A sequestration order had been made against the debtor by a single judge of the court. Under the authority of an order made by the Family Court, the debtor's wife had appointed a receiver of the assets of a newsagency business in which the debtor and his wife were interested. Those assets did not constitute the entire property of the debtor. The Full Court considered, however, whether the principle established by Solomon and Penning produced the result that the bankruptcy notice, upon which the petition was based, was bad.  After referring to a separate principle that a judgment creditor may be precluded from proceeding to execution if some act or omission of the judgment creditor has put it out of the power of the debtor to discharge the judgment debt (e.g. Re Bond; Ex parte Capital and Counties Bank Ltd [1911] 2 KB 988), the Court said at 586, 587:

The matter which Beaumont J held disentitled the judgment creditor in [Solomon] from issuing a bankruptcy notice was not conduct of the judgment creditor, but the appointment of the receiver by order of the Supreme Court under the Companies (NSW) Code.  Once it is recognised that a petitioning creditor may be disqualified from issuing a bankruptcy notice by reason of a restraint imposed by order of a court on all the property of the judgment debtor thereby removing his ability to make payment, there is no reason why a court order imposed on some only of the property of the judgment debtor which has the same practical effect should not be recognised as a relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution.  In our opinion such an order will have this consequence where in practical reality, although not strictly in law, the order "in any way prevent(s) the debtor from paying his debt" (Re Bond; Ex parte Capital and Counties Bank Ltd at
991) or where it "deprives or may well deprive the judgment debtor of assets which he could otherwise use to pay the judgment creditor and thus comply with the bankruptcy notice ..." to adapt the test proposed by Lord Esher MR in Re Sedgwick; Ex parte Sedgwick [(1888) 5 Morr 262)] ..., the factual inquiry to determine the practical effect of the order is whether in the eyes of ordinary fairness in business it will be said that the order has in a business sense prevented the debtor from paying.

Their Honours proceeded to hold that it had not been demonstrated that the appointment of the receiver had the practical effect referred to and consequently the appeal was dismissed.  The language used by the Court is, however, obviously capable of meaning that the principle established by Solomon and Penning is to be regarded as extending beyond cases in which a receiver, trustee or other official is appointed by the court to take control of a debtor's property to any case where there is "a restraint imposed by order of a court on all the property of the judgment debtor thereby removing his ability to make payment" or, in certain cases, such an order relating to some only of the debtor's property.  The case, however, was one in which a receiver had been appointed under the authority of an order of the court: what their Honours said, so far as it extends beyond receivers and similar officials, may properly, I think, be regarded as obiter though of course, if not strictly binding, highly persuasive.  With great respect, however, two comments may be made.  First, Solomon and Penning do not put the proposition that the appointment of a receiver or trustee operates as a stay of execution on the footing that it prevents the debtor from making payment; it operates as a stay because interference with the receiver's (or trustee's) possession, including by way of an attempt to levy execution, is a contempt.  Secondly, the principle in Re Bond, which clearly is a separate principle, is to the effect that a creditor whose own actions have prevented the debtor from paying
may not issue a bankruptcy notice; thus a judgment creditor who has levied execution on the property of the judgment debtor may be precluded from having a bankruptcy notice issued.  But that principle does not prevent any other judgment creditor (who has not taken such action) from issuing a bankruptcy notice.

The last in the series of Full Court decisions is Boscolo v Botany Council, 16 October 1996 unreported.  A bankruptcy notice was issued founded on a final order of the Land and Environment Court for costs.  There was in force an order of the Family Court restraining the debtor from "transferring, assigning or further encumbering by way of mortgage or charge or otherwise" a parcel of land.  The Family Court order had not, of course, been obtained by the petitioning creditor.  The Full Court proceeded on the basis that the propositions laid down in Wiltshire‑Smith were applicable but held that the Family Court order was not one which "in a business sense prevented the debtor from paying" the judgment debt.  It is clear that the majority of the Full Court not only expressed no disapproval of Wiltshire‑Smith but assumed that it stated the law to be applied.  The third member of the Court, Sackville J, was content to proceed on the same assumption, while expressing some reservations about the propositions laid down in Wiltshire‑Smith.  What is clear is that the precise issue in question before me did not arise, and no doubt was not argued, in Boscolo.

Two decisions of single judges of the court should be mentioned.  One is the decision of Ryan J in Re Zamtar; Ex parte Deputy Commissioner of Taxation, 25 November 1992 unreported.  The Deputy Commissioner petitioned for a sequestration order against the debtor, alleging failure to comply with a bankruptcy notice; in other proceedings, however, and before the issue of the notice, the Deputy Commissioner had obtained a Mareva injunction against the debtor in terms substantially similar to the order of Lockhart J in question here.  Not surprisingly, his Honour applied the principle in Re Bond and dismissed the petition: the Deputy Commissioner, by obtaining the injunction, had put it out of the power of the debtor to discharge the judgment debt.

The other decision is that of Heerey J in Re Ousley; Ex parte Commissioner of Taxation (1994) 48 FCR 181. The facts were not unlike those of Zamtar.  Again, the petitioning creditor was the Deputy Commissioner; again, the Deputy Commissioner had obtained in other proceedings a Mareva injunction in wide terms.  The act of bankruptcy relied on, however, was not failure to comply with a bankruptcy notice but the ground specified in  subpara 40(1)(d)(ii), that "execution has been issued ... under process of a court and has been returned unsatisfied".  Heerey J distinguished Zamtar on the basis that it was a case in which the petitioning creditor founded his petition on an alleged failure to comply with a bankruptcy notice; his Honour made a sequestration order.  The distinction on which his Honour relied does not arise in this case and it is unnecessary for me to consider it.  His Honour did not refer directly to the principle in Re Bond; he did, however, refer to Solomon and Penning and the principle for which those cases stand, that any attempt to interfere with property under the control of a court‑appointed receiver or trustee is an interference with an officer of the court in the performance of his functions and, if done without leave of the court, a contempt of court.  His Honour continued, at 138, 139:

The existence of a Mareva injunction does not in my opinion impose similar restrictions on execution.  As to the nature and function of Mareva relief, I respectfully adopt what was said by Hedigan J in granting the injunction against the present debtor: Deputy Commissioner of Taxation v Ousley (unreported, Supreme Court Vic, 23 March 1992, at p 11):

"The principle underlying Mareva injunctions is to prevent the court's process being frustrated or abused by the dissipation of assets so as to affect the enforcement of orders lawfully made by the court.  This description emphasises the limited scope of the Mareva injunction which exists to enable a court to protect its process from abuse in relation to the enforcement of its orders and not to create additional rights.  As Jackson v Sterling Industries Ltd (1987) 162 CLR 612 demonstrates, it is neither a species of anticipatory execution nor a method to give a form of security in advance for a judgment which might be ultimately obtained.  Moreover the plaintiff does not obtain any right in the assets, the subject of the order, as a consequence of any Mareva injunction granted, prior to the obtaining of judgment.  A plaintiff may later acquire such rights if he obtains judgment and successfully levies execution upon them (sic), but until that event occurs the plaintiff's only rights are against the defendant personally.  Put another way, it creates rights in personam but not in rem."

It is well established that one of the functions of a Mareva injunction is the aid of execution.  Thus an injunction can be continued in force in aid of execution after judgment has been obtained ... .  This is what happened, to the knowledge of the debtor and without his protest, in the present case.  An injunction can also be granted after judgment and before execution ... .

Both Zamtar and Ousley preceded Wiltshire‑Smith and Boscolo but neither is referred to in either of the Full Court judgments.  For completeness, I should mention that I was referred to the decision of Yeldham J in Deputy Commissioner of Taxation v Winter (1988) 92 FLR 327. Certainly it is true that his Honour appeared to have no difficulty, in that case, in contemplating both execution and successful bankruptcy proceedings in
circumstances where a Mareva injunction was on foot; it is clear, however, that the precise matter now before me was not then before his Honour.

The authorities to which I have referred at some length thus do not (with the possible exception of Ousley) either consider or decide the question with which I am confronted though of course they offer substantial guidance.  It is important, in my view, to bear in mind the precise character of Mareva relief such as the order made by Lockhart J.  It is referred to in the passage from the judgment of Hedigan J quoted by Heerey J in Ousley.  A number of particular aspects of it are important for present purposes.  It deprives the party subject to its restraint neither of title to nor of possession of the property to which it extends.  It does not create a security interest, confer priority or in any sense rewrite insolvency law (A J Beckhor & Co Ltd v Bilton [1981] 2 All ER 565 at 579, 580 per Ackner LJ; Jackson v Sterling Industries at 625 per Deane J); it is an order in personam restraining the party to whom it is directed from disposing of assets or removing them from the reach of creditors.  The administration of the property is not placed in the hands of a receiver, trustee or other officer of the court, nor is it assumed by the court itself.  For those reasons, to speak of a Mareva injunction as "freezing" assets may, with respect, be somewhat misleading: it operates as a personal restraint against the party to whom it is directed.  It is perhaps not insignificant that in Wiltshire‑Smith, a case where a receiver had been appointed, the Court's observations were directed to orders which imposed "a restraint ... on ... property of the judgment debtor".

Thus it would be an odd conclusion that the existence of a Mareva injunction of the kind now under consideration prevented a mortgagee or chargee of property, the mortgagor of which is restrained from dealing with it, from taking possession of the property, selling it and using the proceeds to discharge the secured debt.  I know of no authority suggesting such a conclusion and cannot see how it could be supported in principle.  By contrast, although the authorities are sparse and ancient, it seems to be clear that unless the order appointing a receiver expressly preserves the rights of mortgagees, a mortgagee of property in the possession of a receiver appointed by the court may not, without leave, take possession of the property or sell it: see, e.g., Underhay v Read (1887) 20 QBD 209 at 218, 219 per Fry LJ.

More importantly, however, the purpose of a Mareva injunction is to prevent a defendant from dissipating assets, or putting them beyond the reach of creditors, in circumstances where there is a real fear that, unless restrained, the defendant will do so.  Its purpose is not to prevent creditors from exercising their rights.  And the way in which such an injunction is commonly framed - the way in which Lockhart J's order is framed - reflects the limited purpose: all it does in terms is restrain, in this case, Mr Ling from dealing with assets.  There appears to be no good reason why the exercise or enforcement of a creditor's rights, including by execution, where no dealing by Mr Ling is required to effect it, should be regarded as contrary to the order.

Although I regard that conclusion as correct in principle, I reach it with some hesitation: there are obvious difficulties in reconciling it with some of the observations in Wiltshire‑Smith and with the basis on which Boscolo proceeded.  Nevertheless, as I have explained, in my view authority does not preclude me from reaching it.  In my opinion para 41(3)(b) did not prohibit the issue of the bankruptcy notice and the judgment debt was one in respect of which, under para 40(1)(g), a bankruptcy notice might be issued.  The attack on the bankruptcy notice accordingly fails.

I may add, by way of footnote, that I do not think this is a surprising or unjust result.  As I have said, a Mareva injunction is not a form of administration of a debtor's property and should not be taken to have the effect on creditors' rights or claims that an administration in bankruptcy, or an external administration under the Corporations Law, has.  If a person restrained by such an injunction wishes to discharge a legitimate claim, and has the means to do so, he or she may seek the court's leave to do so.  If a debtor, subject to a Mareva restraint, can satisfy the court that he or she nevertheless is solvent, a sequestration order will not be made.

Claim against the Commonwealth

It is necessary to describe some of the background.  For the purpose of what follows I have borrowed heavily from the judgment of Sundberg J in Ling v Commonwealth of Australia (1996) 139 ALR 159 at 162‑165.

Mr Ling provided courses of study, particularly intensive courses in the English language, to students from the Republic of China. Before the Tiananmen Square incident, in June 1989, the Commonwealth readily issued visas to students from the Republic wishing to undertake such courses. Thereafter the Commonwealth adopted a much more restrictive policy towards the grant of such visas. As a result, a number of those who had enrolled in courses provided by Mr Ling and had paid fees were unable to come to Australia to undertake the courses. They became entitled to refunds of fees paid in advance. The Commonwealth took assignments of those entitlements and sued Mr Ling to recover the refunds. The Commonwealth was successful before Beaumont J, who gave judgment in favour of the Commonwealth for $7.9 million (1993) 44 FCR 397; an appeal to the Full Court was dismissed: (1994) 51 FCR 88. The High Court refused special leave to appeal.

The Commonwealth took proceedings in this Court for a sequestration order against Mr Ling's estate.  The petition alleged an act of bankruptcy constituted by failure to comply with a bankruptcy notice based on the Commonwealth's judgment.  Mr Ling opposed the petition on the ground that he had a claim against the Commonwealth for an amount greater than the judgment debt.  That claim was the subject of proceedings begun in the Supreme Court of Victoria and transferred to this Court; in those proceedings (the negligence action) Mr Ling claims damages against the Commonwealth for negligent misrepresentation.  It is alleged that the Commonwealth negligently represented that it would facilitate the entry into Australia of students wishing to undertake courses such as those provided by Mr Ling.

The Commonwealth moved that the statement of claim in the negligence action be dismissed or struck out, or alternatively that the negligence action be stayed.  That motion came before me on 29 April 1996.  Its basis was that, applying the principle expounded in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589, Mr Ling should be held to be estopped from asserting his claim. I upheld the Commonwealth's motion and made an order the effect of which was to dismiss the action. Then on 14 May 1996 I heard the Commonwealth's bankruptcy petition. My earlier order had the result that the ground of opposition could not succeed and I made a sequestration order. Mr Ling appealed from both the orders which I had made and was successful in the Full Court ((1996) 139 ALR 159); the High Court has since dismissed the Commonwealth's application for special leave to appeal against the Full Court's decision. The orders made by the Full Court included orders remitting the negligence action to me for pre‑trial directions and adjourning the Commonwealth's bankruptcy petition until the determination of the negligence action or any earlier date determined by a judge of the court.

In the result, the negligence action remains on foot; no doubt in due course directions will be made in relation to its future conduct and there will be a trial.  The Commonwealth's petition against Mr Ling also remains on foot but is adjourned.  Of the negligence action, Sundberg J (with whom the other members of the Full Court agreed) said at 172:

The viability of the appellant's negligence action appears not to have been explored before Lehane J [I may interpolate that it was not], and was not explored on the appeal.  In those circumstances I propose to say no more than that, although his claim has its difficulties, as his counsel conceded, it has in my view sufficient validity to justify a dismissal or adjournment of the petition: ...

The principal question now to be determined is whether the existence of the negligence action justifies equally the dismissal or adjournment of the present petition.

There is, of course, a significant difference between the position of the Commonwealth as petitioner and that of the present petitioning creditor.  As Sundberg J expressed it (at 168) Mr Ling's claim in the negligence action, if made good, impeaches the debt on which the Commonwealth's petition relies in the sense in which that expression is used in relation to equitable set‑off.  That is because, if the claim is made good, the conduct of the Commonwealth giving rise to the claim produced also the circumstances which resulted in Mr Ling becoming indebted to the Commonwealth.  In that context, Sundberg J (again with the concurrence of the other members of the Court) accepted a submission made on behalf of Mr Ling that:

The allegation that the conduct of the Commonwealth caused the debtor's acknowledged breaches of his contract with numerous overseas students is a matter which necessitates the conclusion that the debtor ought not to be made bankrupt in respect of liabilities incurred as a direct consequence of the debtor's reliance on that conduct.

It was submitted on behalf of Mr Ling in this case that I ought to take the acceptance of that submission as, in effect, an endorsement of it as a general proposition, not merely as a statement that in the circumstances mentioned Mr Ling ought not to be made bankrupt on the petition of the Commonwealth.

I do not think that is right.  It is true that on Mr Ling's undisputed evidence, there is a connection between the debt owed to the petitioning creditor and the matters in contest between Mr Ling and the Commonwealth: Mr Ling required a lease of the premises owned by the petitioning creditor for the purpose of providing courses and he expected to be able to pay the rent out of fees which students had paid or would pay; but because the Commonwealth imposed restrictions on the issue of visas, students did not come and Mr Ling was found liable to refund the Commonwealth a very large amount of fees that had been paid in advance; Mr Ling had no use for the premises and was unable to pay the rent.  There is no suggestion, however, that the petitioning creditor is in any sense implicated in what is alleged against the Commonwealth; the petitioning creditor's position is no different from that of any other creditor of Mr Ling, whether the debt owing to the creditor was incurred in carrying on the business of providing courses or not, whose debt cannot be paid because of financial difficulties resulting from the collapse of the business.  It cannot be said that the petitioning creditor's claim is "impeached" by the claim asserted by Mr Ling against the Commonwealth in the negligence action.

Counsel for Mr Ling referred me to authorities in which it has been held that the existence of a counter‑claim or cross‑demand against the petitioning creditor may, in some circumstances at least, be sufficient cause, within subs 52(2), to refuse a sequestration order or to adjourn a petition, even where the counter‑claim or cross‑demand may not, in the sense referred to in Ling, impeach the debt on which the petitioning creditor relies: Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115, 116; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No. 2)
(1994) 51 FCR 14 at 18‑20. However, I do not think they are of much assistance in a case such as the present. As a general proposition (and those authorities say nothing to the contrary) there is no apparent reason why a petitioning creditor should not be entitled to have a sequestration order made, if the requirements of s 52 are otherwise satisfied, simply because the debtor may have a counter‑claim or cross‑demand against some other creditor.

Can there then be circumstances in which sufficient cause to adjourn or dismiss a petition will be found on the basis that the debtor has a claim against a person (whether a creditor or not) other than the petitioning creditor?  Principle suggests, and authority appears to confirm, that the answer is "yes", in at least two categories of case.  One is where the claim against the third party is so intimately connected with the debt on which the petitioning creditor relies as to require that it be regarded substantially in the same way as a claim against the petitioning creditor.  The circumstances of McLean v Biztole Corporation Pty Ltd, FCA FC 30 August 1996, unreported, is an example of the sort of case where that may be so.  A bank, exercising its powers under a security document, appointed a receiver of the property of a company; the receiver, purporting to exercise his powers, took action to recover a debt leading ultimately to the presentation of a petition for the sequestration of the debtor's estate.  In other proceedings, the debtor claimed against the bank and the receiver that the receiver had been invalidly appointed.  Thus, the collateral proceedings directly attacked the authority of the person who had authorised the taking of the proceedings in bankruptcy.  It is easy to see that a connection so close between collateral proceedings and the debt on which a petitioning creditor relies
may - not must - constitute sufficient cause to dismiss or adjourn a petition.  Plainly no connection of that order exists in this case.

The other type of case in which principle suggests, and authority appears to confirm, that the existence of a claim against a third party may be sufficient cause to dismiss or adjourn a petition is one where the debtor, although not presently solvent, establishes that there is a claim which is being diligently prosecuted, has good prospects of success, is likely to be determined in the near future and is likely, if determined favourably, to produce funds sufficient to discharge all claims against the debtor.  The relevant authority is Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303, particularly the quotation at 307 from the judgment of the trial judge, Lee J. The Full Court quoted his Honour's remarks with evident approval; it may be observed, however, that the case was one in which despite the existence of collateral litigation Lee J made a sequestration order and an appeal from his decision was dismissed. Lee J suggests a number of matters which are relevant to the exercise of the Court's discretion case such as this. They include whether the claim is likely to yield sufficient funds to discharge the claimant's debts; whether litigation has been prosecuted vigorously; whether an early determination is likely; whether there are prospects of a beneficial settlement and whether the petition has already been extended and is nearing the end of its life, so that it is necessary for a decision to be made.

In this case the life of the petition is capable of extension.  The litigation against the Commonwealth has not advanced far.  There is an amended statement of claim from which it is possible to gain a general understanding of the nature of the claim asserted by
Mr Ling and its amount.  Mr Ling's own evidence is that if he is successful, the fruits of the litigation will enable him to discharge all claims against him including that of the petitioning creditor.  He does not go into detail; the size of the claim as asserted, however, is so large as to suggest that Mr Ling's evidence is not surprising.  In the circumstances, as I have already described them and as the Full Court referred to them, it is impossible to form a clear view of Mr Ling's prospects of success, beyond the obvious propositions that the claim has some complexities and will evidently be strongly contested.  No doubt the parties can be expected to cooperate in dealing with interlocutory steps with reasonable promptness and directions can be made with the object of ensuring that that happens; it is unlikely, however, that it will be possible for the action to be heard before the latter part of 1997; and it would be unrealistic to regard an appeal as anything other than likely should Mr Ling succeed at trial.  In short, I do not think it is open to me to conclude that it is likely that within a relatively short space of time the litigation will produce funds sufficient to discharge Mr Ling's debts.  All that can be said is that it may do so in due course.

It was put to me that even on that footing I should at least adjourn the petition because, given the Mareva injunction, the petitioning creditor suffers no prejudice.  The negligence action is being funded by third parties, though exactly on what terms, as between them and Mr Ling, the evidence does not disclose.  It was submitted on behalf of the petitioning creditor that the Mareva injunction permitted not only the payment of ordinary living expenses but also the payment of ordinary business expenses: Mr Ling, on the evidence, is not presently solvent; there is no evidence before me as to the extent to
which, if at all, he is presently carrying on business.  In any event, given that Mr Ling is at present insolvent, that it is impossible to say that there is a clear prospect of realisation in the reasonably near future of funds to pay Mr Ling's creditors and, finally, that the making of a sequestration order need not prevent the negligence action from proceeding, I do not think it is proper to require the petitioning creditor to accept a deferral of its rights against Mr Ling until the litigation is finally determined or even until the prospect becomes significantly clearer.

Thus, in my opinion Mr Ling has not established "other sufficient cause" arising from the existence of the negligence action.

The Commonwealth's petition

It was, I think, in the end accepted on both sides that there was no ascertainable prejudice to creditors generally should a sequestration order be made on the petitioning creditor's petition rather than (should it ultimately prove appropriate) the Commonwealth's earlier petition.  The Commonwealth itself appeared in support of the making of a sequestration order on the petition now before me.  The Commonwealth made some submissions in relation to the costs of its petition, but that petition is not before me and it is inappropriate to deal with those submissions now.

Conclusion

In the result, Mr Ling's grounds of objection fail.  Ms Nash, who appeared at the hearing for the petitioning creditor, read evidence which satisfies me as to the matters which subs 52(1) requires to be proved.  Accordingly I make a sequestration order against the estate of the debtor, and I order that the petitioning creditor's costs of and incidental to the petition, including reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966.

I certify that this and the preceding 21 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lehane.

Associate:

Dated:  18 December 1996

Heard:  17 September and 1 November 1996

Place:  Sydney

Decision:  18 December 1996

Appearances:  Ms S S Nash of Sally Nash & Co appeared for the petitioning creditor.

Mr F Kunc of counsel instructed by the Australian Government Solicitor appeared for the supporting creditor.

Mr M R Aldridge of counsel instructed by Gadens Ridgeway appeared for the debtor.