Re Rollond, Robert Edward & Anor

[1998] FCA 606

FEDERAL COURT OF AUSTRALIA

BANKRUPTCY - creditor’s petition based on non-compliance with bankruptcy notice - bankruptcy notice founded upon default judgment against debtors in Supreme Court of Western Australia - petition previously adjourned while debtors sued petitioning creditor in subsequent separate Supreme Court proceedings seeking injunctive relief and damages - that action struck out by Supreme Court - debtors then applied to set aside default judgment - Master refused that application - appeal against Master’s decision heard by Full Court comprising two judges - one of those judges would have allowed the appeal and set aside the default judgment - the other judge would have dismissed the appeal - debtors exercised right to have appeal re-heard by Full Court comprising at least three judges - in the meantime, expiry date of petition extended - petition due to lapse one month before hearing, in Supreme Court, of Full Court appeal to set aside default judgment - whether “for other sufficient cause a sequestration order ought not to be made” - factors relevant to exercise of Court’s discretion under s 52(2)(b) of the Bankruptcy Act 1966.

Bankruptcy Act 1966 (Cth) s 52(2)(b)

Ahern v Federal Commissioner of Taxation (1987) 76 ALR 137 considered
Adamopoulos v Olympic Airways SA (1990) 95 ALR 525 considered

RE: ROBERT EDWARD ROLLOND AND ROBYN MARY ROLLOND;
EX PARTE BANK OF WESTERN AUSTRALIA LTD

No. WP 831 of 1996

CARR J
PERTH

19 MAY 1998

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WP 831 of 1996

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE
OF WESTERN AUSTRALIA

RE:	ROBERT EDWARD ROLLOND and ROBYN MARY ROLLOND Debtors
EX PARTE:	BANK OF WESTERN AUSTRALIA LTD (ACN 050 494 454) Petitioner

JUDGE:	CARR J
DATE:	19 MAY 1998
PLACE:	PERTH

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1. The petition be dismissed.

1. In the event that the debtors’ appeal to the Full Court of the Supreme Court of Western Australia against the Master’s decision, given on 11 July 1997, (to dismiss the debtors’ application to set aside the default judgment entered on 17 January 1996 in Supreme Court Action No. CIV 1614 of 1995) is dismissed and that Full Court judgment is not subsequently set aside by the High Court of Australia, the debtors shall pay the petitioning creditor’s costs of the petition, including any reserved costs.

1. In the event that the Full Court of the Supreme Court of Western Australia shall (in the proceedings referred to above) allow the appeal and set aside the abovementioned default judgment and that Full Court judgment is not subsequently set aside by the High Court of Australia, the parties shall have liberty to apply on the question of the costs of the petition.

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

IN THE FEDERAL COURT OF AUSTRALIA
WESTERN AUSTRALIA DISTRICT REGISTRY	WP 831 of 1996

GENERAL DIVISION
BANKRUPTCY DISTRICT OF THE STATE
OF WESTERN AUSTRALIA

RE:	ROBERT EDWARD ROLLOND and ROBYN MARY ROLLOND Debtors
EX PARTE:	BANK OF WESTERN AUSTRALIA LTD (ACN 050 494 454) Petitioner

JUDGE:	CARR J
DATE:	19 MAY 1998
PLACE:	PERTH

REASONS FOR JUDGMENT

This is a creditor’s petition by Bank of Western Australia Ltd for a sequestration order against the estates of the debtors, Mr Robert Edward Rollond and his wife Mrs Robyn Mary Rollond. The petition was presented on 22 May 1996. The debtors opposed the petition. I heard the petition on 25 and 26 February 1997 and reserved judgment. On 18 March 1997, for reasons which I then published, I ordered that the hearing of the petition be adjourned until further order, subject to two conditions. The factual background and the contentions advanced by each side at that time are fully set out in those reasons. I shall not repeat them, but I incorporate them by reference into these reasons. The first of the two conditions to which I have just referred was that the debtors prosecute action number CIV 2445 of 1996 in the Supreme Court of Western Australia against the petitioning creditor with all due expedition. I shall refer to those proceedings as “the debtors’ Supreme Court action”. I described the debtors’ Supreme Court action in my earlier reasons. In summary, the debtors sued the petitioning creditor for allegedly contravening s 52 of the Trade Practices Act 1974 (Cth) when read with s 51A of that Act. An essential part of the misleading or deceptive conduct alleged against the petitioning creditor was a representation that if the debtors made application to the Rural Adjustment Finance Corporation (“RAFCOR”) for financial assistance under two nominated farm debt adjustment schemes then it (the petitioning creditor) would not sue them to recover the balance of any debt due to it by them (which was secured by mortgages over their three farming properties) and, after the sale of the farms under those schemes, would write off the residual debt. In the alternative, the debtors sued the petitioning creditor for breach of contract. They claimed a permanent injunction restraining the petitioning creditor from taking any further step to enforce the Supreme Court judgment founding the bankruptcy notice, non-compliance with which forms the basis of the petition. The debtors also sought damages and other relief. The default judgment was for the balance of $349,349.82 due under the mortgages referred to above. I shall refer to that judgment as “the Default Judgment”. At the time when I adjourned the hearing of the petition, the Acting Principal Registrar of the Supreme Court of Western Australia had, on the petitioning creditor’s motion, struck out the debtors’ statement of claim on the grounds that it was an abuse of process. An appeal to the Master of the Supreme Court from that decision was then pending. That appeal was heard on 20 March 1997. On 26 March 1997, the Master dismissed the appeal. One basis upon which the Master dismissed the appeal was that the issues which the debtors sought to raise should have been litigated in the earlier proceedings which resulted in the Default Judgment. The Master applied the principles explained in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589. The other basis was that the proceedings amounted to a collateral attack on the Default Judgment. The Master referred to the fact that it was open to the debtors to seek to set aside the Default Judgment and said that it was “a little curious that they have not sought to do so”. On 10 April 1997 the Supreme Court ordered that the debtors’ Supreme Court action be dismissed with costs. On the same date (10 April 1997) the debtors applied to the Master for an order setting aside the Default Judgment. The Master heard that application on 8 July 1997 and reserved judgment. On 11 July 1997, the Master dismissed that application, holding, in effect, that the judgment debtors did not have a good defence on the merits. He also relied upon the delay on the debtors’ part in taking action to set aside the Default Judgment, which he described as inordinate and which he said was not adequately explained. The debtors then appealed from the Master’s decision to the Full Court of the Supreme Court of Western Australia. That appeal (strictly an application for leave to appeal but I shall refer to it as an appeal) was heard on 5 December 1997 by a Full Court comprising two judges, namely, Ipp and Wallwork JJ. Their Honours delivered their judgments on 2 February 1998. Ipp J would have dismissed the appeal, whilst Wallwork J would have allowed the appeal. On 26 February 1998, the debtors exercised their rights under s 62(2) of the Supreme Court Act 1935 (WA) to require that appeal to be reheard before a Full Court consisting of not less than three judges. There is evidence that the appeal may be heard next month.

In my view, the debtors have complied sufficiently with the first condition imposed when I adjourned the petition on 18 March 1997.  Technically, the prosecution of the debtors’ Supreme Court action came to an end when that action was dismissed on 10 April 1997.  However, the course which the debtors have adopted since that date (being the taking of the steps which I have just described) seems to me to be directed to the same end as prosecuting that action further, for example, by way of further appeal.  If they are successful in having the Default Judgment set aside and are given leave to defend, the debtors propose not only to defend the proceedings in which that judgment was obtained, but also to counterclaim.  A draft defence and counterclaim has been exhibited to an affidavit which has been filed in these bankruptcy proceedings.  Apparently the debtors intend to seek leave to put that draft before the Full Court which hears the appeal from the Master’s refusal to set aside the Default Judgment.  The draft defence and counterclaim is based on the matters which I have just described as forming the basis of the debtors’ Supreme Court action.  The debtors seek also to plead unconscionability.  I propose to regard the debtors as having, in substance, complied with the first of the two conditions upon which I adjourned the petition on 18 March 1997.  The petitioning creditor has not contended to the contrary. 

The second condition was that the debtors jointly, within 21 days, file and serve a statement verified by affidavit of their assets and liabilities as at 30 June 1996 and as at the date of such affidavit.  The debtors have also substantially complied with that condition.

When the petition was heard on 25 and 26 February 1997 it was conducted on the basis that the issue was one arising under s 52(2)(b) of the Bankruptcy Act 1966 (Cth) i.e. whether the debtors had satisfied the Court that for sufficient cause a sequestration order ought not to be made. The Court was not asked to go behind the Default Judgment (see, for example, the transcript of proceedings at 110). It was common ground that the same situation applied when the hearing of the petition resumed last week.

When I adjourned the petition on 18 March 1997 I did so on two main bases. The first was that I came to the conclusion that the debtors’ claims against the petitioning creditor in the Supreme Court action had sufficient validity to amount to “sufficient cause” within the meaning of s 52(2)(b) not to make a sequestration order at that stage. In reaching that conclusion I had regard to the fact that the debt comprising the Default Judgment was intertwined or related to the relief which the debtors were then seeking in the debtors’ Supreme Court action. I also had regard to the public interest in the administration and enforcement of the Trade Practices Act. I also considered that the omissions and delay on the debtors’ part were not sufficiently serious to tilt the balance against them in respect of the exercise of the discretion under s 52(2)(b).  Nevertheless, I expressed the view that I did not consider that the circumstances warranted dismissal of the petition.  I thought that the appropriate course was to adjourn the petition subject to the conditions which I have mentioned.

As can be seen from my recital of the events which have taken place in the Supreme Court of Western Australia since 18 March 1997, there has been what might be regarded as a fairly significant change in circumstances.  On 18 March 1997 the debtors were embarked on a course of prosecuting the debtors’ Supreme Court action with the initial step being an appeal from the decision of the Acting Principal Registrar to strike out their statement of claim.  As I have mentioned, the current situation is that not only does that statement of claim remain struck out but the whole of the action has been dismissed.  The debtors are now in a situation where they have failed before the Master in an application to have the Default Judgment set aside, but they have persuaded one judge of a two-judge Full Court of the Supreme Court of Western Australia that the Default Judgment should be set aside.  They are awaiting the rehearing of that appeal by a Full Court, comprising at least three judges, next month.

On 13 May 1997 the District Registrar of this Court made an order, by consent, in effect extending the life of the petition until 21 May 1998. It cannot be extended beyond that date - see s 52(5) of the Bankruptcy Act.  The petition is thus within two days of its expiry date.

In those circumstances, the petitioning creditor exercised its right to apply to relist the petition for hearing.  The hearing resumed for a full day last week.  The judgment creditor presses for a sequestration order.  On the other hand, the debtors say that no such order should be made, but that the petition should either be dismissed or allowed to lapse. 

THE PETITIONING CREDITOR’S CONTENTIONS

The petitioning creditor submitted that if the petition lapses or is dismissed and if the debtors’ appeal to the Full Court of the Supreme Court of Western Australia fails, then it will have to issue a fresh bankruptcy notice. If that is not complied with, it will have to issue a fresh creditor’s petition. It says that the direct prejudice to it through having to take that course would be that its costs in relation to the notice and the petition will be wasted. The petitioning creditor has filed an affidavit deposing to the fact that, apart from solicitors’ costs and disbursements to date, it has paid $9,190 in respect of counsel’s fees for preparation and appearances on the petition. The second item of direct prejudice advanced by the petitioning creditor is that it will lose the benefits conferred by various sections in Division 3 of Part VI of the Bankruptcy Act.  When the matter was before me (briefly) the week before last, counsel for the petitioning creditor referred me to sections 120 and 122 in the terms in which they were expressed before being amended in December 1996.  However, in my opinion it is quite clear (as counsel later conceded) that the relevant provisions are those sections as amended by the Bankruptcy Legislation Amendment Act 1996 (Cth). I refer to Items 208 and 209 of the Schedule to that Act when read with Items 457 and 458 of that Schedule together with s 5(1) (the definition of “the date of the bankruptcy”) and Government Gazette GN49 of 11 December 1996 p 3677 which provided that that Schedule commenced on 16 December 1996. The potential significance of the application of those sections in this matter, if the petition is granted, appears to be as follows:

.the relevant period for the purposes of s 120 in relation to any under-valued transactions will be from 9 April 1991 to the date of any sequestration order made in this matter.  That is because the relevant act of bankruptcy within six months preceding presentation of the petition (the petition was presented on 22 May 1996) occurred on 9 April 1996 when the judgment debtors failed to comply with the bankruptcy notice.  If the petition is granted, the bankruptcies will be deemed to have commenced on 9 April 1996 (see s 115 of the Act); and

.the relevant date for the purposes of s 122 for avoidance of preferences would be 22 December 1995, being six months prior to the presentation of the petition.

The petitioning creditor adduced some affidavit evidence concerning the disposal of certain of the debtors’ assets.  In his affidavit sworn on 4 May 1998 Mr Gordon Braid, the petitioning creditor’s Lending Manager Rural, deposed to the disposal in 1994 by the debtors of some 5,300 sheep.  Answering affidavits were sworn by Mr Robert Edward Rollond and a Mr William Ronald Lloyd.  Those two latter affidavits tendered an explanation for that transaction.  On a prima facie basis, that explanation appears to be a satisfactory one.  In short, in 1994 the judgment debtors had to leave their farms.  The sheep had to be looked after.  The sheep were the subject of security by way of a bill of sale to a stock and station agent.  Mr Lloyd, as part of a larger transaction, purchased the sheep in return for taking over the debt to the stock and station agent.  When he was unable to secure rights to lease the farms (which was his main purpose) he sold the sheep to Mr Rollond’s son, Mr Matthew Rollond, for an amount equal to the debt owing to the stock and station agent.  Financial records produced by the stock and station agent under subpoena, confirmed those arrangements.  Mr Braid also exhibited to his affidavit coloured photographs of certain plant and equipment said to have been located on the debtors’ farms in January 1995.  Mr Rollond, in his affidavit, deposed to the effect that any farm equipment so photographed belonged not to the judgment debtors but to a company called Chartwell Nominees Pty Ltd (“Chartwell”).  The plant and equipment would appear, in any event, to have only nominal value.  The ownership and disposition of other items of moveable property shown in the photographs are also, on a prima facie basis at least, in my view, satisfactorily explained. 

Mr Rollond deposes to the transfer on 14 June 1996, of the judgment debtors’ two shares in Chartwell to their son.  There was no admissible evidence tendered about the worth of those shares as at 14 June 1996.  If the debtors’ estates are later sequestrated and it transpires that the transaction was an undervalued one, there remains plenty of time for it to be declared void.  I refer below to the significance, if any, of delay to possible recovery proceedings against Mr Matthew Rollond.

There was a more troublesome disposition disclosed in Mr Rollond’s latest affidavit.  Paragraph 18 of that affidavit reads as follows:

“18. I have also been advised by my solicitors that gifts of money occurring within 5 years of commencement of bankruptcy are void under Section 120(1) of the Bankruptcy Act. During the year ended 30 June 1995 I gifted $32,000.00 to my son Matthew to help him out. I will need to check with my accountant but I believe the gift was not made until June 1995. I have informed Matthew that if I become bankrupt before June 2000 he is likely to be required to pay back the gift to my trustee in bankruptcy.”

Mr A N Siopis, counsel for the petitioning creditor, submitted that it was not for his client to prove that there were any other transactions which might be set aside but which might not be so vulnerable if the petition were dismissed and his client had to rely on a subsequent petition.  All that the petitioning creditor could do was to point to these transactions which should be investigated.  The implication was that there may be other such transactions.  I acknowledge the substance of that submission as a general rule.  However, the evidence in this matter shows that the petitioning creditor was the debtors’ banker for at least the last 10 years of their farming activities.  I think it is reasonable to infer, as I do, that (now that the $32,000 gift has been disclosed), any potentially relevant asset disposals have been uncovered.

In terms of the “loss” of the relation-back period under s 115 to 9 April 1996, the evidence does not suggest that it is likely that substantial assets which would otherwise have fallen into the estate will not do so if the judgment debtors are later made bankrupt.  A reference to Exhibit RER2 to Mr Rollond’s affidavit of 9 August 1996 (being a statement of the judgment debtors’ assets and liabilities as at 7 July 1995) indicates that they had no substantial assets.  Their total assets amounted to $6383.68, a lot of which were such that they would not have been available to creditors in any event.  [I return below to the question of the $32,000 gift to Mr Matthew Rollond.]  An even gloomier picture emerges from the exhibits to Mrs Rollond’s affidavit sworn 4 April 1997 deposing to the debtors’ assets and liabilities and income and expenditure as at 30 June 1996 and 31 March 1997 respectively.  I do not think that there is sufficient evidence of substantial prejudice to the judgment creditor, or any other creditors, under this heading.  In terms of s 120 and the gift of $32,000 the situation is as follows.  If a sequestration order is made now, the commencement of the bankruptcy would be 9 April 1996.  In those circumstances, it would be absolutely certain that Mr Matthew Rollond could not rely on the provisions of s 120(3).  Theoretically, he might be able to do so if this petition is dismissed but later a sequestration order is made against the estates of the judgment debtors.  However, in practical terms, my assessment is that there is virtually no chance of Mr Matthew Rollond establishing that at the time when the gift was made (assuming that to be June 1995) his father was solvent.  Accordingly, the prospects are that if the judgment debtors are made bankrupt in the course of the next two years or so (it is not possible to fix the date more precisely because it depends upon the commencement of the bankruptcy and that in turn may involve relation-back), the trustee in bankruptcy will be able to obtain relief in relation to that gift.  I have not overlooked the possible prejudice of delay in pursuing Mr Matthew Rollond in that regard.  However, there has already been some three years delay.  If the judgment debtors are unsuccessful in their appeal to have the Default Judgment set aside, it is unlikely that matters will be dragged out much further.  Nevertheless, I weighed quite heavily the circumstances of this gift when it came to exercise my discretion.  The timing of the gift is significant.  It was made after the farms had been sold and shortly after the petitioning creditor served a notice of demand (on 16 May 1995) for payment of an amount very close to the total of the Judgment Debt.  I weighed the fact of that payment, and the circumstance that it was not disclosed until virtually on the eve of the re-adjourned hearing, very much against the debtors.

I now turn to the question of the petitioning creditor’s costs which are, as I have mentioned above, well in excess of $10,000.  In the normal course, if a sequestration order were made, there would be an order that the petitioning creditor’s costs be taxed and paid out of the estates of the bankrupts in accordance with the Bankruptcy Act.  This would mean that the petitioning creditor would have priority in respect of those costs.  I doubt whether they would be taxed at much more than $10,000.  If the petition were dismissed, an order could be made to the effect that the debtors pay the petitioning creditor’s costs in the event that they lose the appeal to the Full Court of the Supreme Court of Western Australia and that judgment is not set aside by the High Court of Australia.  If the petition were dismissed and the debtors were successful in having the Default Judgment set aside then there should be liberty to apply on the question of costs.  I appreciate that even the former order will mean that the petitioning creditor would not recover those costs in full but would have to prove in the debtors’ estates in the event of their eventual bankruptcy.  However, I take into account that those costs are quite small in comparison with the total debt and also that the debtors’ assets would probably be insufficient to ensure full payment of the taxed costs in any event. 

There were several other discretionary matters relied upon by the petitioning creditor for its submission that a sequestration order should be made against the estates of the debtors.  First, it was submitted that the evidence called into question the manner in which the debtors conducted their financial affairs.  I was referred to certain correspondence between RAFCOR and the debtors in relation to what was described as the complexity of their business affairs.  On behalf of the petitioning creditor it was contended that the reason why the RAFCOR application failed was the failure of the debtors satisfactorily to answer questions about their financial dealings.  In my view, to the extent that this is a relevant consideration (which for present purposes I so assume), very little weight should be attached to this matter.  The apparent complexity seems to arise out of the fact that the farms were owned by the debtors whereas the farming business and its plant and equipment were (so it would appear) owned by Chartwell.  If it becomes necessary to unravel those affairs, in my view that would not be very difficult.  The arrangement of their affairs can scarcely be regarded as in any way sinister or questionable.

A more substantial submission, in my view, was that the debtors are quite clearly insolvent.  They have assets of negligible value and liabilities (in round terms) in excess of $730,000.  Apart from the petitioning creditor (which is owed in excess of $350,000) there are three other relevant creditors which I should first consider for present purposes.  They are as follows:

.          Commonwealth Development Bank ($215,000)

.          RAFCOR ($145,000)

.          Broadlands Ltd ($15,000)

[the figures are approximate].

Neither Commonwealth Development Bank nor RAFCOR appear to have taken any interest in these proceedings.  Broadlands Ltd appeared by counsel at the hearing of the petition on 25 February 1997 and expressed an interest in being either joined as a petitioning creditor or substituted for the petitioning creditor.  There is evidence that the debtors have reached a compromise with Broadlands Ltd.  I appreciate the possibility that Commonwealth Development Bank and RAFCOR might well be leaving the running to the petitioning creditor.  However, given the size of their debts, had they been interested in pursuing the debtors into bankruptcy they might reasonably have been expected to have registered some interest in the proceedings.  But it is not necessary for me to draw any conclusion in that regard.  I shall treat their interests as being co-extensive with those of the petitioning creditor.  If the debtors were trading or carrying on a business, or otherwise obtaining substantial credit I think that such factors would weigh very heavily in favour of granting the petition at this stage - see Re Maddestra; Ex parte Penfold Wines Pty Ltd (Lee J, unreported, Federal Court of Australia, 3 February 1993 at 6-7).  However, the evidence is to the opposite effect.  Mr Rollond is employed as an aircraft pilot and Mrs Rollond is employed as a nursing sister.  I do not think that a refusal, at this stage, to sequestrate their estates poses any risk to the commercial community. 

The petitioning creditor relied quite heavily on a series of submissions to the effect that the viability of the case sought to be advanced by the debtors in the Supreme Court of Western Australia against the petitioning creditor was open to serious doubt. Those doubts were particularised in a further outline of written submissions handed up at the hearing on 13 May 1998 and developed orally by Mr Siopis. It is not necessary to refer to those particulars. It seems to me that my task is to weigh up the prospects of the Full Court of the Supreme Court of Western Australia setting aside the Default Judgment and granting the debtors leave to defend. I acknowledge that in making that assessment I must, to some extent, weigh the apparent merits and demerits of the case which the debtors seek to bring against the petitioning creditor in the Supreme Court. Mr Siopis submitted that, even putting aside the question of the credibility of the debtors’ evidence, it was not possible to say that they had a real likelihood of success in that litigation. I acknowledge the weight of the submissions made by Mr Siopis, but I do not think that the debtors’ case is as bad as he contended. When I delivered judgment on 18 March 1997 I explained that I had come to the conclusion that the debtors’ claims had sufficient validity to fall within s 52(2)(b) at that stage. I also expressed the view that the circumstances did not warrant dismissal of the petition. That was because it appeared likely that the Supreme Court would in the near future resolve the question of the viability of the case which the debtors then wished to bring against the petitioning creditor. There appeared to be plenty of time in which to decide the petition, in the light of what transpired in that Court. I still hold the view that the debtors’ claims have sufficient validity to fall within s 52(2)(b) of the Bankruptcy Act.  In view of the appeal to the Full Court, I do not think that it is appropriate for me to expand on that view. 

The petitioning creditor tendered a letter dated 12 May 1998 from a Mr Louis Nilant. Mr Nilant is a chartered accountant who, so it is proposed, would be appointed as trustee of the debtors’ estates, were they made bankrupt. The purpose of this letter was to assist in relation to submissions advanced by the petitioning creditor to the effect that, at least to some extent, the debtors would be able to prosecute the appeal to the Full Court of the Supreme Court of Western Australia, even if their estates were sequestrated. I was asked to find that at least some of the debtors’ proposed claims were in respect of personal wrongs within the meaning of s 60(4) of the Bankruptcy Act and thus could be continued by the debtors without reference to their trustee.  Mr Siopis conceded that there was no authority directly in point, but referred me to various authorities which were said to be analogous.  It is not necessary for me to decide that point because I consider that, in practical terms, it is not sensible to seek to subdivide the subject matter of the appeal to the Full Court in the manner suggested.  In fact, if it were to be so subdivided, then I consider that very factor might weigh heavily against the exercise by the Full Court of the discretion to allow the appeal.  Mr Nilant, in his letter, refers to the prospect of assigning the cause of action to the debtors.  I place very little weight on that prospect because (as might well be expected) the terms of the letter are very heavily conditioned in that regard.

THE DEBTORS’ CONTENTIONS

The debtors say that if the Supreme Court of Western Australia sets aside the Default Judgment and grants them leave to defend the action in which that judgment was obtained, then the petition will be without any basis.  They rely upon Wallwork J’s expressed opinion that if the debtors’ evidence is believed and their case were pleaded correctly they would have a defence with “a real prospect of success”.  They say further that they have acted with expedition, that they could not have anticipated the disagreement between the two Supreme Court judges who heard the appeal and that the present situation (the fact that the appeal cannot be reheard until after the expiry date of the petition) is not one for which they are responsible.  They say that they have done what they can by way of consent to expedite that rehearing. 

In my view there is obvious merit in those submissions.  The petitioning creditor argued that it would be fairer to make a sequestration order now and, if the Default Judgment is set aside by the Full Court, the bankruptcies can later be annulled.  There is also some attraction in that submission.  However, as Mr P F Fletcher, counsel for the debtors, submitted, the practical realities in terms of the likelihood of the trustee in bankruptcy pursuing the Full Court appeal are such that the making of a sequestration order usually puts an end to such proceedings.  This was recognised by a Full Court of this Court in Adamopoulos v Olympic Airways SA (1990) 95 ALR 525 at 531.

I acknowledge that there is a difference between the nature of the appeal in this matter and the nature of the appeals in cases such as Adamopoulos and Ahern v Federal Commissioner of Taxation (1987) 76 ALR 137. In the present matter, the appeal is against a refusal to set aside the Default Judgment. In Adamopoulos the appeal was after a hearing.  In Ahern there were tax appeals pending.  However, I propose to take an approach which is analogous to the approach taken by the respective Full Courts in Adamopoulos and Ahern.  In Ahern (at 148) the Court laid down what was described in Adamopoulos (at 531) as “the governing principle” in the following terms:

“It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds: Re Rhodes; Ex parte Heyworth (1884) 14 QBD 49; Bayne v Baillieu (1907) 5 CLR 64 and Re Verma; Ex parte DCT (1985) 4 FCR 181.”

In my view, the debtors’ appeal is based on genuine and arguable grounds.  Wallwork J would have upheld it.  Accordingly, while I have taken into account the matters raised by the petitioning creditor, I consider that the somewhat unusual circumstances of the present matter constitute sufficient cause for a sequestration order not to be made.  I do not consider that it is satisfactory simply to let the petition lapse by the effluxion of the remaining two days of its currency.  There are what I consider to be useful orders to be made.  Accordingly, I propose to dismiss the petition.

The debtors raised two other matters which, strictly speaking, it is not necessary for me to consider, but I shall do so very briefly. 

First, it was said that there would be prejudice to the debtors if a sequestration order were made, in that they would lose some $400,000 of tax deductions in the form of carry-forward losses. They relied upon the provisions of s 79E(8) of the Income Tax Assessment Act 1936 (Cth). I think that the answer to that submission is that if the bankruptcy were later annulled, the deductions would be restored. Section 79E(8A) provides the particular circumstances (not relevant in the present matter) in which such annulment of bankruptcy is to be disregarded. Then it was said that a sequestration order would have a prejudicial impact upon the debtors’ financial standing and in particular their credit rating. Unfortunately, it is apparent that the debtors (at present) have hardly any financial standing. In terms of having a credit rating, my assessment is that the unsatisfied judgment would mean that their credit rating would be minimal. However, it is not necessary to decide these issues or comment any further.

CONCLUSION

For the above reasons there will be an order dismissing the petition.  There will also be an order that if the eventual outcome of the appeal to the Full Court of the Supreme Court of Western Australia is unsuccessful so far as the debtors are concerned, then they are to pay the petitioning creditor’s costs of the petition to be taxed.  There will be liberty to apply in relation to the matter of costs if the debtors are successful in that appeal.

I certify that this and the preceding thirteen (13) pages are a true copy of the Reasons for Judgment of Justice Carr

Associate:

Dated:            19 May 1998

Counsel for the petitioner creditor:	(at the resumed hearings on 5 and 13 May 1998) Mr A N Siopis
Solicitor for the petitioner creditor :	Mr Garth Berg
Counsel for the debtors:	Mr P F Fletcher
Solicitors for the debtors:	Messrs Solomon Brothers
Date of Hearing:	5, 13 May 1998
Date of Judgment:	19 May 1998