ROLF v ARNOLD

[2015] FCCA 1803

FEDERAL CIRCUIT COURT OF AUSTRALIA

ROLF & ANOR v ARNOLD [2015] FCCA 1803

Catchwords:
BANKRUPTCY – Application for an adjournment pending completion of other proceedings – other sufficient cause not to make sequestration order.

Legislation:  

Bankruptcy Act 1966, ss.52, 52(2)(b)

Stratton & Bowles (No. 2) [2015] FCA 43

First Applicant: HARALD ROLF

Second Applicant: MONICA ROLF

Respondent: DIRK ARNOLD

File Number: BRG 135 of 2015

Judgment of: Judge Jarrett

Hearing date: 5 March 2015

Date of Last Submission: 5 March 2015

Delivered at: Brisbane

Delivered on: 6 March 2015

REPRESENTATION

Counsel for the First and Second Applicants: Mr Forde

Solicitors for the First and Second Applicants: Bridge Brideaux

Counsel for the Respondent: Mr Kelso

Solicitors for the Respondent: Jim Feehely Project Law

ORDERS

1. The application be adjourned to 2 November 2015 at 9.30 a.m. for directions in the Federal Circuit Court of Australia sitting at Brisbane.

2. Costs of today be in the cause.

3. Liberty to re-list the petition with four (4) days’ written notice.

FEDERAL CIRCUIT COURT OF AUSTRALIA

AT BRISBANE

BRG 135 of 2015

HARALD ROLF

First Applicant

MONICA ROLF

Second Applicant

And

DIRK ARNOLD

Respondent

REASONS FOR JUDGMENT

As Corrected

ex tempore

1. This is an application for the making of a sequestration order.  The respondent was served with a bankruptcy notice on 20 January, 2015.  The date for compliance with the notice was 10 February, 2015.  There was no compliance with notice. 

2. There is no dispute that an act of bankruptcy has been committed. There is evidence before me which satisfies all of the formal requirements of s.52 of the Bankruptcy Act 1966.  The petition has been verified in the way that it is required to be, and I am satisfied by the affidavit material that the debt, the subject of the creditors’ petition and the bankruptcy notice, is presently owed. 

3. In those circumstances, the petitioning creditors in this case have a prima facie right to the making of a sequestration order. However, the respondent says that there is other sufficient cause not to make a sequestration order in this case. Section 52(2)(b) of the Bankruptcy Act provides to the Court a discretion to not make a sequestration order if, in the circumstances of the case before it, it thinks there is some other sufficient cause not to do so. Here, the respondent says two things, I think, so as to engage that discretion.

4. The first is that he attempted to make a payment to the creditor in satisfaction of the bankruptcy notice, but that through the creditor’s own actions he was not permitted to do so.  Secondly, that the debt upon which the bankruptcy notice and the subsequent creditors’ petition are based is an interlocutory costs order which was obtained in proceedings which are presently in the throws of being finalised in the Magistrates Court of Queensland. 

5. As to the first matter, I am not satisfied that the arrangements to which the respondent points demonstrates that the creditors in this case prevented him from paying the debt.  What he alleges is that whilst he was under cross-examination in the proceedings which are presently on foot between the creditors and the respondent in the Magistrates Court, he determined to pay the debt.  However, because he was under cross-examination he was unable to speak with his solicitors.  I say nothing about the veracity of that advice but, whatever be the correct legal or ethical position, the respondent says that he did not think that he could speak with his lawyers and therefore did not. 

6. He sent an email to the solicitors for the creditors.  That email was sent on 10 February at about half past 7 in the evening.  The email was, I accept, an offer – although not, perhaps, in express terms – to make payment of the costs by directly depositing to the solicitors’ trust account, or the solicitors’ bank account some of the money.  There was a proposal to pay half now and half later.

7. As it turns out, the solicitors for the creditors received the email and replied to the solicitors for the respondent.  They did so on the same evening, and pointed out that the debt needed to be paid in full by midnight that day.  There can be no complaint that the applicants’ or the creditors’ solicitors responded to the respondent’s solicitors in the circumstances.  Midnight on 10 February came and went, and the payment was not made.  Subsequently, a few days later, a payment was tendered on behalf of the respondent by another person of the amount claimed in the bankruptcy notice.  The tender was not accepted by the petitioning creditors.  In those circumstances, the respondent says that there is sufficient cause not to make a sequestration order. 

8. The creditors submit that what the evidence reveals is nothing more than a cynical attempt by the respondent to put himself into a position whereby it might be suggested that he has not committed an act of bankruptcy, or to provide himself with some sort of excuse or explanation as to why he did not comply with the bankruptcy notice.  It is difficult not to accept that submission because the facts certainly point in that direction.  As the submissions for the creditors point out, there was no need to seek advice about the banking details for the creditors’ solicitors because the respondent, and those that advise him, already had them.

9. There was evidence of the banking details given in the Magistrates Court proceedings, and a letter of demand from the applicants’ solicitors of 6 January, 2015 also contained the banking details.  As the written submissions for the creditor point out, the payment was subsequently made into the applicants’ account without them having provided any additional information to the respondent.  That an email would be sent to solicitors, professional people conducting a business, at 7.30 in the evening speaks for itself.  As I said, I am not satisfied that those circumstances amount to sufficient reason not to make a sequestration order.

10. The second matter turns on the fact that there is litigation on foot between these parties.  It is at an advanced stage.  In the proceedings, the creditors claim the sum of $50,000 from the respondent by way of repayment of a loan.  There is no dispute, as I understand the material that the respondent borrowed that sum from the creditors, but there is a dispute about whether it has been repaid.  There was evidence given in the proceedings before the state Magistrates Court that there had been repayment of the loan and that had been recorded on a document, although the creditors had subsequently recanted.

11. The proceedings have had a number of days hearing.  The evidence has closed.  As I apprehend the evidence before me, one party has made their submissions.  The other party is yet to make their submissions.  And then, another day has been allocated soon for oral submissions.  As counsel for the petitioning creditors points out, it is probably the case that the Magistrate will reserve her judgment, and it may be some little while before it is delivered given the busy nature of that court.  Somewhat pessimistically, he then suggested there may well be appeals and the like thereafter, and so one can not be confident that those proceedings will be finalised any time soon.

12. The nature of the debt in this case, being an interlocutory costs order, of itself does not mean that a sequestration order ought not be made.  There is no order staying execution of the order for costs.  There has been no application by the respondent, as I understand the material, to stay the execution of that order for costs.  And there was no application to this Court, or the Federal Court, to extend the time within which to comply with the bankruptcy notice so as to enable the present proceedings in the State Magistrates Court to be finalised.  Nonetheless, it seems to me that the respondent has a cross-claim against the petitioning creditors.

13. The phrase cross-claim or cross-demand is a phrase of wide import in the Bankruptcy Act. It is apt, in my view, to cover the circumstances here that if the proceedings in the State Magistrates Court resolve by judgment in favour of the respondent, it is just as likely as not that there will be an order for costs in his favour. Indeed, the evidence – or at least the argument contained in the evidence – that the respondent has filed suggests that he will ask for an order for costs. There has been correspondence between the solicitors for the parties, suggesting that there should be some set off of the costs order that has been obtained by the petitioning creditor against the respondents, against what, optimistically perhaps, are said to be costs orders that the respondent will obtain against the petitioning creditors.

14. In any event, it seems to me that there is a cross-claim or a cross-demand for the purposes of the Bankruptcy Act. I also accept the assertions from the respondent, both in his affidavit material and that of his solicitors, that if there is an order for costs in his favour at the conclusion of the Magistrates Court trial the quantum of it might well exceed the quantum of the costs that he has been ordered to pay the petitioning creditors. The trial has gone for a number of days. No doubt, the costs will be large – perhaps so large as to derive the parties of any benefit from the litigation at all, but that is another matter.

15. The existence of a cross-claim or a cross-demand is relevant to a bankruptcy application in two respects.  First, a debtor might set up a cross-claim or a cross-demand in answer to a bankruptcy notice.  That was not done here, but that it was not done here does not mean that it cannot then be used or relied upon to satisfy the Court that there is not other sufficient cause to refuse the making of a sequestration order.  The way in which the existence of a cross-claim or a cross-demand might affect the Court’s discretion to make a sequestration order has recently been discussed in Stratton & Bowles (No. 2) [2015] FCA 43, a decision of the Full Court of the Federal Court of Australia. The Court was constituted by Beach J, who was sitting as the Full Court on appeal from a decision of a Federal Circuit Court judge.

16. In paragraph 38 of that judgment, his Honour says this:

    38. The existence of a cross claim (in the present case, the appellant’s defamation proceedings against the respondent in the New South Wales Supreme Court) may be a “sufficient cause” if the claim, if successful, well exceeds the judgment debt.

    39.    An important distinction is to be made between a cross-claim which is likely to succeed and a cross-claim which is a bona fide and reasonably arguable claim, but where it is not established by the judgment debtor that it is likely to succeed. In the former case, where it is established that the claim is likely to succeed, such a claim may warrant the refusal of a sequestration order.

17. His Honour then cites some authority:

    In the latter case, only a basis for adjourning the creditor’s petition may be established, but the refusal of a sequestration order may not be justified.

18. Again some authority, and then:

    There is a theoretical question. If you have the latter case, do you establish a “sufficient cause” at all? Some authorities suggest that you do not and that only cases in the former category fit within s 52(2)(b)… In my view, these authorities support what was said in Rigg v Baker that cases in the former category support a refusal of a sequestration order, whereas cases in the latter category support only an adjournment of the petition. In such a case, a “sufficient cause” has not been shown. The discretion to adjourn does not then arise under s 52(2), but rather arises more generally as to when the petition should be decided. In any event, there is little doubt that one way or the other the discretion to adjourn arises in the latter case...the present case falls in the latter category at most. Finally, it should be said that a judgment debtor does not establish a bona fide and reasonably arguable claim by merely producing a statement of claim in a separate proceeding or by pointing to such litigation. There must be sufficient evidence or other material to show that it satisfies both criteria to justify an adjournment; to demonstrate that it is reasonably arguable or of substance may require prima facie verification of the key factual elements as well as demonstrating legal tenability.

19. Here, as I have already indicated, I consider that there is a cross-claim or cross-demand to set off a possible costs order at the conclusion of the state Magistrates Court’s proceedings against the interlocutory costs order.  There is nothing remarkable about that because as the facts in Stratton & Bowles themselves demonstrate the subject of the cross-claim or cross-demand might be an application yet to be determined which will yield to the debtor a presently indeterminate sum.  An action for damages for defamation is the example in Stratton & Bowles.

20. Here there is evidence before me that the respondent has a bona fide and reasonably arguable claim in the state Magistrates Court.  I come to that conclusion for these reasons.  First, there has been a trial and there continues to be a trial of the proceedings.  It is, as I understand the evidence, an action for debt.  If there was no defence to it, then no doubt there would have been a summary judgment.  That there has been a trial extending over a number of days tends to suggest that there is an issue to be tried.  Second, there is evidence before me of the evidence that was given in the state Magistrates Court.  If there was evidence that the petitioning creditors had acknowledged repayment of the debt, then one might describe the prospects of success in the proceedings as reasonably good.  There was no request in the proceedings here to cross-examination the deponents and so I take what they say in their affidavits at face value.

21. Whist I am not satisfied that the respondent’s defence in the state Magistrates Court is likely to succeed, I am satisfied that it is a claim which is bona fide and is reasonably arguable according to the evidence that I have.  The case thus falls within the second of the two categories identified by Beach J in Stratton & Bowles.  It is a case where it is probably not appropriate to refuse the making of a sequestration order, but rather to adjourn the petition until such time as there has been a resolution of the cross-claim.

22. I have not heard the parties on whether it ought to be dismissed or whether there ought to be an adjournment until the resolution of the cross-claim and I propose to do that now.

RECORDED :  NOT TRANSCRIBED

ORDERS DELIVERED

1. I do not think I should make an order for costs now at all.  The issue of the set-off and cross-claim was raised in correspondence and if it turns out that there is a cross-demand that is operative, it may be that having regard to that correspondence it is appropriate that the petitioning creditors pay the respondent’s costs, but that remains to be seen.  The costs of today will be in the cause.

I certify that the preceding twenty-three (23) paragraphs are a true copy of the reasons for judgment of Judge Jarrett delivered on 6 March 2015.

Associate: 

Date:  9 July 2015

CORRECTIONS

1. Changed hearing date from “6 March 2015” to “5 March 2015” on the cover sheet.

2. Changed Counsel for the Respondent from “Ms McAuliffe-Lake” to “Mr Kelso” under the Representation heading of the cover sheet.