Re Seghabi; ex parte GIO General Ltd
[1994] FCA 470
•24 JUNE 1994
RE: TANNOUS SEGHABI AND SAIDE SEGHABI
EX PARTE: GIO GENERAL LIMITED
No. NP298 of 1994
FED No. 470/94
Number of pages - 9
Bankruptcy
COURT
IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF NEW SOUTH WALES
GENERAL DIVISION
BEAZLEY J
CATCHWORDS
Bankruptcy - non compliance with bankruptcy notice - creditors' petition - whether fact that petitioning creditor different from judgment creditor affects validity of Bankrutpcy Notice - whether "error" in the Certificate of the judgment on which bankruptcy notice based, when "error" not duplicated in bankruptcy notice, affected validity of bankruptcy notice - whether effect of grant of legal aid on liability of debtors for order casts in favour of judgment creditor - appropriate for court to go behind the judgment based in part on an amount for which debtors are not liable - whether application should be dismissed on the basis that the debtors are solvent - Legal Aid Commission Act 1979 (NSW): s47; Bankruptcy Act 1966 (Cth): s52.
Legal Aid Commission Act (1979) (NSW)
Bankruptcy Act 1966 (Cth)
Government Insurance Office (Privatisation) Act 1991
Wren v Mahony (1972) 126 CLR 212
Emerson and Anor v Wreckair Pty Ltd (1992) 33 FCR 581
Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71
Re Sarina; ex parte Wollondilly Shire Council (1980) 43 FLR 163
Wollondilly Shire Council v Sarina (1980) 48 FLR 372
Trojan v Corporation of Hindmarsh (1987) 16 FCR 37
HEARING
SYDNEY, 24 May 1994
#DATE 24:6:1994
Solicitors for the Debtors: Mr Prichard
Solicitors for the Creditor: Mr Lee
ORDER
THE COURT ORDERS THAT: The petition be dismissed.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
BEAZLEY J GIO General Limited (the petitioning creditor) seeks a sequestration order against the estates of Tannous Seghabi and Saide Seghabi (the debtors), alleging that the debtors are indebted to them in an amount of $8,239.15, together with interest. The debt is alleged to arise from a judgment awarded against the debtors on 22 November 1993. The debtors oppose the making of the sequestration order.
Background
2. In 1986, the debtors commenced proceedings No. 25797 of 1986 in the District Court of NSW against the Government Insurance Office of New South Wales (the GIO) for recovery under a contract of fire insurance in respect of fire at a property at 47 Portland Street, Enfield. The proceedings were heard over a period of 3 days in July 1987, judgment being entered for the Government Insurance Office on 31 July 1987. The debtors were ordered to pay the Government Insurance Office's costs to be taxed. Costs were taxed on 31 May 1991 and allowed in the sum of $8,239.15. A Certificate of Taxation in that amount was issued. On 22 November 1993, a Certificate of Judgment, (the certificate of judgment) bearing file number "25797/86", but recording the name of the judgment debtor as "NSW Insurance Ministerial Corporation", was issued.
The debtors had been granted legal aid for the purposes of the proceedings as from 11 March 1987. The solicitor for the petitioning creditor did not become aware of the grant of legal aid until February 1994. In a statement from the bar table, accepted by counsel for the debtors, he stated that he had searched the Government Insurance Office's file in the District Court proceedings and could find no material to indicate that the Government Insurance Office had been advised or otherwise knew of the grant of legal aid. Under the statutory scheme governing the Legal Aid Commission's liability for the payment of costs, the prescribed amount payable by the Legal Aid Commission changes from time to time. The maximum amount currently payable by it in respect of the costs order made against the debtors is $7,500. The Legal Aid Commission has requested advice from the debtors' solicitors as to the date that the order for costs was made so that it can determine the exact amount of costs payable pursuant to s47 of the Legal Aid Commission Act (1979) (NSW).
On 21 December 1993, a bankruptcy notice based on the amount of the judgment for costs was issued. The debtors did not pay to the petitioning creditor the sum referred to in the bankruptcy notice. On 3 February 1994, the judgment creditor presented a petition to the court alleging that the debtors were indebted to the petitioning creditor in the sum of $8,239.15 together with interest in the sum of $2,435.68, making a total of $10,674.83 "...being the amount due under a final judgment recovered in the District Court...on 31 July 1987, the consideration for such debt being for taxed costs of the Creditor in proceedings commenced by Plaint No. 25797 of 1986." On 24 May 1994, the debtors filed a Notice of Intention of Debtor to Appear at Hearing of Petition.
The petition came on for hearing before me on 24 May 1994. Counsel for the debtor formulated the grounds upon which the debtors relied in opposition to the creditor's petition as follows:
1. the effect of s47 of the Legal Aid Commission Act 1979 (NSW) is that the debtors are not liable for the debt upon which the Bankruptcy Notice was based;
2. the Bankruptcy Notice, which was issued at the request of GIO General Limited, was based upon a Certificate of Judgment in which the defendant was described as the NSW Insurance Ministerial Corporation, an entity of which the debtors had no knowledge, although the file number on the certificate was the file number in the proceedings which had been brought by the debtors against the GIO; and
3. the debtors are solvent.
The solicitor for the petitioning creditor submitted that whatever be the position in relation to the grounds relied upon by the debtors, their non-compliance with the bankruptcy notice constituted an act of bankruptcy so that the petitioning creditor is thereby entitled to a sequestration order. I will deal with each of the grounds of opposition in turn.
Effect of section 47 of the Legal Aid Commission Act (NSW)
7. Counsel for the debtors submitted that pursuant to s47 of the Legal Aid Commission Act, the debtors are not liable for the amount claimed in the bankruptcy notice. Section 47 relevantly provides:
"(1) Where a court or tribunal makes an order as to costs against a legally assisted person:
(a) except as provided by subsections (2), (3), (3A), (4) and (4A), the Commission shall pay the whole of those costs; and
(b) except as provided by subsection (3), (3A), (4) and
(4A), the legally assisted person shall not be liable for the payment of the whole or any part of those costs.
(2) The Commission shall not pay an amount in excess of $5,000 (or such other amount as the Commission may from time to time determine):
(a) except as provided by paragraph (b), in respect of any one proceeding; or
(b) in respect of each party in any one proceeding, being a party who has, in the opinion of the Commission, a separate interest in the proceeding.
(3) The Commission shall not be liable to pay any costs incurred by or on behalf of a person in respect of a period during which that person was not a legally assisted person (even though those costs were ordered to be paid at a time when that person was a legally assisted person) and that person shall be liable for the payment of those costs."
The amount referred to in subs(2) is, as stated earlier, now $7,500. the effect of s47(3) is that the debtors remain liable for the Government Insurance Office's costs up until the date of grant of legal aid on 11 March 1987, but were not so liable thereafter. The statutory exemption from liability for costs conferred by s47 is not dependant upon notice of the grant of legal aid being given to the opposing party. Nor must the opposing party have knowledge of the grant of aid for the purposes of s47.
Section 44 of the Bankruptcy Act 1966 provides that before a creditor's petition may be presented against a debtor, there must be a debt or debts owing to the petitioning creditor in an amount of $1,500; that the debt is a liquidated sum due at law, payable immediately or at some future certain time, and further, that the act of bankruptcy upon which the petition is founded was committed within six months before the presentation of the petition. An act of bankruptcy is committed by a debtor failing to comply with a bankruptcy notice or a failure to satisfy the Court that the debtor has a counter-claim, set off or cross-demand equal to or exceeding the amount of judgment debt, which could not have been set up in the action or proceeding in which the judgment or order was obtained: s40(1). Where a debtor has committed an act of bankruptcy and at the time of the commission of the act of bankruptcy was personally present or ordinarily resident in Australia, the court, on a petition presented by a creditor, may make a sequestration order against the estate of the debtor: s43. Section 52 then provides:
"52(1) At the hearing of a creditor's petition, the Court shall require proof of:
(a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);
...
(c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. 52(2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:
(a) that he is able to pay his debts; or
(b) that for other sufficient cause a sequestration order ought not to be made;
it may dismiss the petition."
The statutory scheme makes the commission of an act of bankruptcy a pre-requisite to the issue of a creditor's petition, and consequently to the making of a sequestration order. Where the act of bankruptcy relied upon is a failure to comply with a bankruptcy notice, the bankruptcy notice must be valid in order to found a sequestration order. A bankruptcy notice is not valid if it fails to comply with a requirement made essential by the Bankruptcy Act or if it may mislead the debtor as to what is necessary to comply with the notice: James v Commissioner of Taxation (Cth) (1955) 93 CLR 631 at 644; Pillai v Comptroller of Income Tax (1970) AC 1124 at 1135; Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 80. Nor is a bankruptcy notice valid if it demands payment of monies of which a judgment creditor cannot enforce payment, by execution or otherwise: Re Manion; Ex parte Deputy Commissioner of Taxation (1979) 37 FLR 78 per Lockhart J at 83; Re Follows; Ex parte Follows (1895) 2 QB 521 at 525 per Vaughan Williams J; cf Re O'Keefe; Ex parte Australian Factors Ltd (1963) 19 ABC 101 at 103-104.
Although a court of bankruptcy may accept a judgment as proof that a debt is owing, it is not bound to do so. The principle was stated by Barwick CJ in Wren v Mahony (1972) 126 CLR 212 at 224 as follows:
"The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its consideration."
The usual case where the court will look behind a judgment to determine whether in truth there is a debt is where a judgment has been obtained by fraud. However, the court is not so confined, and I am of the opinion that where a liability has been abrogated by statute, it may be appropriate to look behind a judgment based on that purported liability. The bill of costs filed in the taxation of costs reveals that the greater portion of the costs incurred by the Government Insurance Office in the proceedings was incurred after the date of grant of legal aid. The bankruptcy notice claimed the total amount of the costs awarded on taxation. The effect of s47 of the Legal Aid Commission Act is that the debtors are not liable for any costs incurred by the Government Insurance Office after 11 March 1987. There is no evidence of the amount for which the debtors are liable, being those costs incurred before 11 March 1987 although there seemed to be no dispute between the parties that the amount owed, together with interest, exceeded $1500.00. The question arises therefore whether it is appropriate to go behind the judgment based in part on an amount for which the debtors are not liable.
In Emerson and Anor v Wreckair Pty Ltd (1992) 33 FCR 581, the Full Court of this court stated at 588:
"There is...no requirement for the issue of a bankruptcy notice that the creditor have a judgment for any minimum amount. Nor is there a requirement that a creditor who petitions for a sequestration order based upon an act of bankruptcy of the kind for which section 40(1)(g) of the Bankruptcy Act provides rely, wholly or at all, upon the debt upon which the bankruptcy notice was founded. It would, therefore, seem appropriate that upon an application to a court exercising jurisdiction in bankruptcy to set aside a bankruptcy notice, the court should not go behind a judgment where the grounds upon which the judgment is challenged are such that, if accepted, they would only support a finding that the amount of the debt be reduced and will not support a finding that there was in truth no debt at all."
The court further stated that it was inappropriate for the court, having concluded that it should not go behind the judgment, to then examine the correctness of the judgment and conclude that it was entered for too large a sum as the trial judge had done in that case.
This is not a case, therefore where it could be said that the bankruptcy notice involved an understatement or overstatement of the amount of the judgment debt, or where there had been some misstatement of the amount of interest. In such cases, the validity of the notice depends upon whether or not the notice is objectively capable of misleading the debtor: Kleinwort Benson Australia Ltd v Crowl (1988) 165 CLR 71 at 80. It follows that notwithstanding that the debtors are not liable for a portion of the costs which the judgment creditor was awarded in the District Court proceedings, the court in this case is precluded from going behind the judgment and therefore the bankruptcy notice is not invalid on this basis.
Identity of Petitioning Creditor
16. Judgment was entered in the District Court in favour of the GIO, not the petitioning creditor. The GIO was a statutory corporation constituted pursuant to the Government Insurance Act 1927. In 1991 the Government Insurance Office (Privatisation) Act 1991 (the Privatisation Act) came into force. That Act provided for the conversion of the Government Insurance Office into a public company, limited by shares with the name GIO Australia Holdings Ltd. Pursuant to s11 of the Privatisation Act, the name "Government Insurance Office of NSW" was changed to GIO Australia Holdings Ltd. Section 20(1) of the Privatisation Act provides:
"The Minister may, by order in writing, direct that any part or parts of GIO's business undertaking be transferred to a GIO subsidiary or GIO subsidiaries specified in the order."
By Ministerial Order dated 30 June 1992 GIO Australia Holdings Ltd transferred:
"Item 4: PART OR PARTS OF BUSINESS UNDERTAKING That part or parts of the business undertaking of the Transferor comprising motor vehicle insurance, householders insurance, compulsory third party and business insurance, corporate insurance, financial risk services and mortgage insurance, workers compensation managed funds and reinsurance, other than those parts of the Transferor's business undertaking which are excluded undertakings or which are transferred by the Transferor to another transferee ineither case by the operation of an Order made under the Act or which comprise assets of the Transferor retained in order that the net market value of the assets, rights and liabilities transferred by the Transferor to the Transferee (which is the consideration representing the fair value of the part or parts of the business undertaking transferred) shall be the Amount specified in Item 6." (the first transfer)
Pursuant to s21 of the Act, any such transferee could itself transfer part or parts of a business undertaking which had been transferred to it. This in fact happened 1/2 hour after the first transfer. The business transferred was the same business which GIO Insurance Ltd had acquired pursuant to the s20 transfer. Counsel for the debtors submitted that the Act restricted the transfer of part or parts of the business undertaking of GIO Australia Holdings Ltd to subsidiaries of that company and that there was no evidence that GIO Insurance Ltd or GIO General Ltd were subsidiaries. This submission is correct to the extent that there is no direct evidence to this effect. However, the copy of the Ministerial Order was admitted into evidence without objection. It seems to me that I am entitled, in the absence of any evidence to the contrary, to infer that the Ministerial Order was made in compliance with the statutory scheme provided for by the Privatisation Act. Accordingly, I am satisfied that the petitioning creditor is the successor in title to the Government Insurance Office.
That leaves the question whether the fact that the Certificate of Judgment was in the name of "NSW Insurance Ministerial Corporation" in any way affects the validity of the bankruptcy notice or otherwise provides a reason why a sequestration order should not be made. There is no evidence as to whether there is any such entity as the NSW Insurance Ministerial Corporation. Nor is there any evidence as to how that name came to be on the certificate of judgment. It was not suggested by counsel for the debtors that the bankruptcy notice was issued in respect of a wrong amount and he rightly drew attention to the fact that the certificate of judgment bore the correct proceedings number. The debtors did not see the certificate of judgment and the bankruptcy notice was correctly intituled. There is no suggestion that the debtors were or could have been misled in any way by the incorrect name on the certificate of judgment. In these circumstances, I do not consider that the "error" on the certificate of judgment affects the validity of the bankruptcy notice.
Solvency
19. Finally the debtors say that they are solvent. The evidence reveals that they have assets of $126,000 and debts of $35,000. Their income is $1,020 per fortnight derived solely from social security. They have a large family of nine children, so that they would appear to have no ability to pay the debt out of their income. It is reasonable to assume that the Legal Aid Commission will satisfy its obligations under the Legal Aid Commission Act, to the extent of the statutory limit, which on the evidence before me is likely to be $7,500.00. The debtors have offered to pay the balance of the judgment debt, and tendered a bank cheque to the petitioning creditor shortly prior to the commencement of the hearing of the petition. It was submitted that they were entitled therefore to have the petition dismissed. In Re Sarina; ex parte Wollondilly Shire Council (1980) 43 FLR 163, the court dismissed a petition where it was satisfied that the debtor was able to pay his debts, notwithstanding that he refused to pay the petitioning creditor's debt. As Deane J said at 165-166:
"It does not appear to me that it is possible to divine any policy underlying the provisions of the Act to the effect that a creditor should be entitled to make a recalcitrant debtor bankrupt even though the debtor satisfies the Court that he is plainly solvent and able to pay his debts. It seems to me that it may well be that the legislative intent was to leave a creditor, in those circumstances, to the ordinary remedies by way of execution and garnishee.
In the result, I find that the debtor has, for the purposes of s 52(2)(a), satisfied me that he "is able to pay his debts". The petitioning creditor has not suggested that, in the event of such a finding, I should do other than dismiss the petition."
On appeal, the full Court of the Federal Court ((1980) 48 FLR 372 at 376-7), stated:
"The question now arises whether, as the appellant is able to pay his debts, the court is bound to refuse to make a sequestration order or has a discretion to refuse to do so. This involves the construction of the word "may" in s 52(2) in the context "may dismiss the petition". The question is whether "may" is mandatory or facultative...
The power conferred upon the court by s 52(2) is permissive not mandatory, although it seems that the occasions on which the discretion not to dismiss the petition might be exercised would not be frequent..."
In Trojan v Corporation of Hindmarsh (1987) 16 FCR 37 the Full Court of this court stated (at 48) that s52(2) envisaged "a situation which will probably bear fruit in payment".
In this case I am satisfied that the debtors are solvent. They have sufficient assets to pay, not only the amount for which they are strictly liable to the petitioning creditor, having regard to the provisions of s47 of the Legal Aid Commission Act, but also the judgment debt in its entirety. It is not a situation therefore, as was the case in Trojan, where it can be said that to require the petitioning creditor to take normal enforcement proceedings, would, more likely than not, be futile. Accordingly, I am of the opinion that the petition should be dismissed. I will hear the parties as to costs.
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