Rose v Howell - [2001] FMCA 112

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ROSE v HOWELL [2001] FMCA 112

BANKRUPTCY – no binding agreement between parties preventing sequestration order where letter referring to stay of proceedings does not specifically refer to bankruptcy application, no steps taken to enforce agreement and no specific authority from firm acting in the bankruptcy proceedings – discretion under s 52(2)(a) not exercised where no evidence that debtor can speedily realise his assets – where an absence of particularisation relating to cross claim – inference drawn that useful information would have been produced – where no current stay of execution of original judgment – no sufficient cause under s 52(2)(b) found.

Bankruptcy Act 1966 (Cth) ss 52(1), 52(2)

Re Sarina: Ex parte Wollondilly Shire Council (1980) 32 ALR 596 mentioned

Australia and New Zealand Banking Group Limited v Lloyd Foyster [2000] FCA 400 applied

Ling v Enrobook Pty Limited (1997) 74 FCR 19 applied

Applicant:

JOHN EMMANUEL ROSE IN SUBSTITUTION OF FINE REAL ESTATE NETWORK PTY LIMITED

Respondent:

PAUL ROCH HOWELL

File No:

SZ110 of 2001

Delivered on:

19 November 2001

Delivered at:

Sydney

Hearing Date:

14 November 2001

Judgment of:

Raphael FM

REPRESENTATION

Counsel for the Applicant:

Mr C Stomo

Solicitors for the Applicant:

White & Downey

Solicitors for the Respondent:

Mr Bruce Dennis of Dennis & Company

ORDERS

Application dismissed.
There be a Sequestration Order against the estate of the Respondent Paul Roch Howell.
The Applicant’s costs including any reserved costs be taxed, if not agreed, pursuant to the Federal Court Rules and paid out of the bankrupt’s estate.

Note: Date of Bankruptcy is 26 October 1999.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

SZ 110 of 2001

JOHN EMMANUEL ROSE
IN SUBSTITUTION OF FINE REAL ESTATE
NETWORK PTY LIMITED

Applicant

And

PAUL ROCH HOWELL

Respondent

REASONS FOR JUDGMENT

This is the long delayed hearing of a bankruptcy petition against PAUL ROCH HOWELL which was transferred into this court pursuant to an Order of Sackville J on 15 March 2001. It is appropriate to give a short history of these proceedings .
The respondent debtor Paul Roch Howell is a real estate developer/investor who for some time was in a form of partnership with Fine Real Estate Network Pty Limited. That partnership was not a happy one. Eventually there were proceedings between the partners in the Supreme Court of New South Wales. In those proceedings JOHN EMMANUEL ROSE, the creditor, acted for Mr Howell. The proceedings resulted in a judgment being given against Mr Howell that was confirmed by the Court of Appeal in a judgment dated 16 December 1998. That judgment was sought to be enforced by the issue of a bankruptcy notice. An application was made to the Federal Court to set aside that notice and was dismissed on 26 October 1999 by her Honour Matthews J.
On 2 December 1999 a creditor’s petition was issued in the Federal Court which alleged the following act of bankruptcy:
“The respondent debtor, in an application to set aside the bankruptcy notice, served on him on 21 September 1999, failed to satisfy the court that he had a counter claim, set off or cross demand equal to or exceeding the sum specified in paragraph 3 of the bankruptcy notice, such bankruptcy notice being issued on the grounds that the applicant creditor had obtained a judgment against the respondent debtor and it was further declared by the court that the act of bankruptcy was committed on 26 October 1999.”
Whilst that application was being made and dealt with Mr Rose was proceeding in his own way in the District Court of New South Wales against the debtor in respect of the costs which had been incurred in the proceedings against Fine Real Estate. On 6 November 1998 there was a hearing of Mr Rose’s application for summary judgment which was successful. On 24 November 1998 judgment was entered for Mr Rose but stayed pending further order. Mr Howell then filed an application for a costs assessment in the Supreme Court of New South Wales. On 5 February 1999 the stay of execution was dissolved but the debtor was given leave to file a cross claim which he did on 17 February 1999. On 26 March 1999 the first application for assessment of costs was terminated.
On 30 July 1999 the judgment which Mr Rose had obtained was set aside on terms which related to the prosecution of the cross claim. On 8 October 1999 judgment was again entered this time for $360,897.00 plus costs of $1,093.00. On 19 October 1999 a second application for a costs assessment was filed. On 6 March 2000 there were further consent orders setting aside the judgment conditionally and on 4 April a third application for a costs assessment was filed. On 12 May 2000 a judgment was re-entered but subject to a stay until 21 June of that year. On 26 June 2000 the bankruptcy proceedings brought by Fine were adjourned until 26 October 2000 by Matthews J. On 13 October Master Harrison in the Supreme Court of New South Wales declined to allow the third application for a costs assessment to proceed out of time.
On 26 October 2000 orders were made in the Federal Court substituting John Emmanuel Rose as the petitioning creditor in place of Fine Real Estate Network Pty Limited and others. The period at the expiration of which the petition will lapse was ordered to be a period of twenty-four months from the presentation of the petition on 2 December 1999 pursuant to s.52(5) of the Bankruptcy Act. Other consequential orders were made.
The proceedings in the District Court, being the hearing of Mr Howell’s claim against Mr Rose for breach of contract and negligence of his handling of the litigation with Fine Real Estate Network, proceeded through its interlocutory stages. Mr Rose was represented by Law Cover as agent for the insurance underwriter HIH. The case was set down for hearing in the District Court on

9 April 2001. HIH collapsed and the proceedings in the District Court were placed in abeyance. In an affidavit dated 13 November 2001 Mr Dennis, who is the debtor’s solicitor, exhibited four letters which dealt with the arrangements pursuant to which the hearing was vacated. The first was from his firm to Messrs Ebsworth & Ebsworth, who as the solicitors for Law Cover, were representing Mr Rose. It said:
“We confirm we agree to the vacation of the hearing date listed for 9, 10 and 11 April 2001 upon your client agreeing to a stay of proceedings until the conclusion of the trial of the cross claim.”
The second letter is from Messrs Ebsworth & Ebsworth to the associate to Judge Patten enclosing a copy of that letter. The third letter relates to an appearance before this court on 13 July 2001 and the fourth which is dated 11 October 2001 from Messrs White & Downey, the solicitors for the petitioning creditor, Rose, states inter alia:
“Please note at the further direction (sic) hearing at the Federal Magistrates Court, we propose to have the bankruptcy proceedings set down for hearing. It is apparent that Law Cover are now ready to proceed in the cross claim filed by your client against Mr Rose. Accordingly we do not propose to file a motion in the District Court to have the purported undertaking or agreement made between your office and Mrs Elissa Baxter of Ebsworth & Ebsworth Lawyers withdrawn.”
This correspondence is important because one of the objections made to my proceeding with the sequestration order was the existence of an alleged agreement between the parties that the petition would not be pursued until after the result of the District Court proceedings was known.
I find this correspondence somewhat confusing. Firstly, the letter from Dennis & Co to Ebsworth & Ebsworth refers to “stay of proceedings” and does not refer specifically to the bankruptcy application. I am aware from an affidavit sworn by Mr Vincent Darcy of Messrs White & Downey and dated 13 November 2001 that on 20 March 2001 that firm lodged a certified copy of a writ obtained in the District Court matter at the Land Titles Office against a property owned by Mr Howell at 2 Vickar Street Coogee. It is certainly possible that the reference to stay of proceedings could be to a stay of proceedings to enforce the judgment that had previously been obtained by Mr Rose. The issuance and prosecution of a bankruptcy petition is not the enforcement of a judgment (Re Sarina: Ex parte Wollondilly Shire Council (1980) 32 ALR 596, 599). In any event, given the letter from Messrs White & Downey of the 11 October 2001, I would have expected Mr Howell’s lawyers to take immediate steps to enforce the agreement if it had really been extended to the bankruptcy process. I would also have considerable doubt as to whether without further evidence I could be satisfied that Messrs Ebsworth & Ebsworth whose real client was the insurer, could have bound the creditor to such an arrangement without specific authority when the debtor’s solicitor well knew that the firm was not acting in the bankruptcy proceedings but only in respect of the District Court proceedings. I would not be prepared to find on the evidence before me that there was any binding agreement between the parties that prevents me from dealing with the petition now before me.
The second and third grounds of resistance to a sequestration order being made fall under s.52(2) which states as follows:
(2)If the court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:
(a) that he or she is able to pay his or her debts; or
(b) that for other sufficient cause a sequestration order ought not to be made;
it may dismiss the petition.”
The respondent debtor did not appear in court on 14 November 2001. This was the date to which the matter had been adjourned when it came before me for hearing on 8 November 2001. On that date the respondent, through his solicitor Mr Dennis, produced an affidavit of Dr Daniel Hameiri who opined that “the respondent was not fit to attend court or able to provide any instructions to his lawyers at this point in time”. Mr Dennis indicated from the bar table on

14 November that he had seen the debtor and taken instructions from him including sufficient instructions to enable him to file an affidavit dated 13 November 2001 concerning his assets and liabilities but that otherwise his client was still sick. I declined to grant a further adjournment on the basis that the bankruptcy petition would expire on 2 December 2001 and there was no evidence from a qualified medical practitioner concerning the respondent’s ability to attend.
I will deal first with the debtor’s submission that he falls within s.52(2)(a) of the Bankruptcy Act.
In the commentary on this sub-section in McDonald Henry & Meek the learned authors say:
“To make a finding under s.52(2)(a), the court should be satisfied “either that no debts of [the debtors] will become payable in the reasonably immediate future or that, if they will, [the debtor] will be able to pay them”: International Alpaca Management Limited v Ensaw [1999] FCA 72.”
The affidavit of the debtor states as follows:
“2 My current assets and liability situation is as set out herein in the statement marked assets and liabilities of Paul Roch Howell, Howell Developments Pty Limited and Howell Homes Limited.”
There is then set out a list of assets and liabilities in respect of the two companies and the individual. In respect of Howell Developments Pty Limited a valuation is placed on three properties, two of which are owned in half shares (although the other owner is not named). There is reference to a costs order (although the payor is not named) and to loans (although the debtors are not named). The liabilities are alleged to consist of mortgages but the mortgagees are not named. There is no reference to the position of any other outgoings in respect of the properties. There is no independent valuation of any of the properties. There is no statement of income or any indication of how the mortgages are being serviced.
The same situation exists in the case of Howell Homes Limited. In respect of Mr Howell himself there are three assets mentioned, a claim against “Weston”, shares in private companies and a cross claim against the creditor Mr Rose. The only liability mentioned is the claim made by Mr Rose. Once again there is no indication of any current income or expenditure, no evidence that Mr Howell owns shares or in what companies he owns them and no details of how long it might take for him to realise any of his alleged assets.
In Australia and New Zealand Banking Group Limited v Lloyd Foyster [2000] FCA 400 Hely J considered in some detail the assets and liabilities of a debtor who was arguing that s.52(2)(a) should apply to him. His Honour applied International Alpaca Management but made it clear that the onus of proving a sufficiency of assets to pay debts lay with the respondent. He stated:
“It must also be established that the assets are available to be realised and that they are capable of ready realisation. “
In this case we have the barest of affidavits from the respondent and no appearance by him. He appears to have no physical assets or cash in his own name save his interest in companies which, if they are the companies mentioned in the affidavit, appear to own assets in conjunction with other unnamed persons. There must be a very real doubt as to the debtor’s ability to speedily realise any of these assets and it is interesting that in the correspondence found in the various affidavits on the file there is some suggestion of security being put up by the respondent but that has not materialised. I am not satisfied from the evidence that has been produced to me that I should exercise my discretion under s.52(2)(a) in this case.
Finally, the respondent argues that he has a counter claim which would be considered sufficient cause under s.52(2)(b). The existence of a cross claim can be a sufficient cause, see Ling v Enrobook Pty Limited (1997) 74 FCR 19. However, in that case the Full Court at

26 said:
“The above authorities do not, in our view, support the appellant’s contention that the courts recognise a public interest in allowing a debtor to prosecute litigation commenced by the debtor. The public interest recognised by such authorities is that … a sequestration order ought only to be made on the basis of an indebtedness which is not counter balanced by a claim by the debtor against the petitioning creditor… But the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally. They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of only short duration.”
In Ling the Full Bench recognised that the primary Judge had taken into account the fact that the claim which the debtor raised was unlikely to be heard before the expiry of the bankruptcy petition and the fact that the existence of the sequestration order did not prevent the matter in dispute being argued subject to the provisions of s.60(2) and (3) and 177(1) of the Bankruptcy Act. I also note these matters.
It is the respondent’s argument that his cross claim goes to the very heart of the judgment against him. The judgment is in respect of legal costs for Mr Rose’s representation of Mr Howell in proceedings against Fine Real Estate Network. Mr Howell claims that the conduct of those proceedings was flawed in a number of respects but in particular in relation to the failure to produce evidence. I have read the judgment of the Court of Appeal in the case where that court upheld the decision of the primary Judge not to admit evidence which had not been tendered before the referee. These matters are dealt with in pages 15 to 18 of the Reasons for Judgment which are supportive of a strongly critical approach taken to Mr Howell by both the referee and the trial Judge. I did not have before me either the judgment of the referee or of the Judge at first instance. Although I do have the cross claim, this is a document without much particularisation. In the absence of more information it is very difficult for me to make any finding as to the likelihood of success of the respondent in those District Court proceedings. I can say, however, that I am entitled to draw an inference if there was anything that was particularly helpful it would have been produced. I am further assisted in coming to the decision which I reach below by the fact that there is no current stay of execution in respect of the original judgment even though the effect of the cross claim is a direct attack upon it. A stay was originally granted but, for some reason which has not been presented to me, it lapsed in June 2000 and was not renewed. Surely, the most appropriate application that could have been made in this matter was one for a further stay pending the hearing of the cross claim. The District Court would have had before it all particulars relating to the judgment and to the cross claim. That Court would have been in a far better position to decide the merits of a matter coming before it than a Judge in bankruptcy who has not had the benefit of any of the papers.
I can find nothing in the submissions which have been made to me or the evidence produced to support those submissions which would lead me to exercise my discretion in favour of the respondent under s.52(2)(b) of the Bankruptcy Act.
I have read the affidavit of John Emmanuel Rose sworn 13 November 2001 and noting that Mr Rose is a substituted creditor I am satisfied that the debtor committed the act of bankruptcy alleged in the petition. I am satisfied with the proof of the other matters required by s.52(1) of the Bankruptcy Act. I make a Sequestration Order against the estate of the respondent Paul Roch Howell. I order that the petitioning creditor’s costs including all reserved costs be paid out of the estate of the bankrupt. I note that the date of the act of bankruptcy is 26 October 1999.

I certify that the preceding twenty-four (24) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: 19 November 2001