Seidel v Lane - [2010] FMCA 196

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SEIDEL v LANE

[2010] FMCA 196

BANKRUPTCY – Application for annulment.

PRACTICE & PROCEDURE – Leave sought to issue additional subpoenas.

Bankruptcy Act 1966, ss.60(1)(b), 153B
Federal Magistrates Act 1999 (Cth), s.15
Trade Practices Act 1974 (Cth)
Federal Magistrates Court Rules 2001 (Cth), rr.15A.05, 15.13, 15.23

Clyne v Deputy Commissioner of Taxation [1984] HCA 44
Clyne v Deputy Commissioner of Taxation & Ors (1984) 55 ALR 143
BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611
McIlwain v Ramsey Food Packaging Pty Ltd [2005] FCA 1233
Re John Wayne Cornish, ex parte: Stephen Joseph English Bankruptcy [1984] FCA 348
Tamawood Ltd v Habitare Developments Pty Ltd [2009] FCA 364

Applicant:

MONIKA SEIDEL

Respondent:

MORGAN LANE, TRUSTEE

File Number:

SYG 3075 of 2009

Judgment of:

Lloyd-Jones FM

Hearing date:

23 February 2010

Delivered at:

Sydney

Delivered on:

24 March 2010

REPRESENTATION

Counsel for the Applicant:

Mr L Adams (solicitor)

Solicitors for the Applicant:

Leigh Adams Lawyers

Counsel for the Respondent:

Mr Leather (solicitor)

Solicitors for the Respondent:

Barringer Leather Lawyers

ORDERS

The Application, under r.15A.05 of the Federal Magistrates Court Rules 2001 (Cth) to issue further subpoenas, is dismissed.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 3075 of 2009

MONIKA SEIDEL

Applicant

And

MORGAN LANE

Respondent

REASONS FOR JUDGMENT

Introduction

I have before me an application seeking leave to issue further subpoenas beyond the five that can be issued without leave pursuant to r.15A.05 of the Federal Magistrates Court Rules 2001 (Cth). Previously five subpoenas to produce documents to the Court have been issued to:
a)Australian & New Zealand Banking Group Ltd (ACN 005 357 522);
b)Permanent Custodians Ltd (ACN 001 426 384);
c)Australian & New Zealand Banking Group Ltd (ACN 005 357 522);
d)American Express Australia Ltd (ACN 108 952 085); and
e)AMP Bank Ltd (ACN 081 596 009).

The proceedings

I rely on the judgment of His Honour Geraghty DCJ of the District Court of New South Wales, Civil jurisdiction, in proceedings 5320/08 delivered on 4 December 2008 and oral submissions of Mr Adams for background information in respect of the proceedings in this Court. Part of that judgment is reproduced in summary form, to briefly describe the relationship between the parties and the nature of the issue being pursued.
The Applicant in these proceedings, Monika Seidel, seeks repayment of $326,122.70 of monies owed by Future Holdings Pty Ltd and guaranteed by the bankrupt, Tina Poh-Chooi Fung. The investment was made by Ms Seidel in Future Holdings Pty Ltd and is invested in an overseas company in Hong Kong which was personally guaranteed by Tina Poh-Chooi Fung. At the time these investments were made Tina Poh-Chooi Fung was a financial advisor operating a business “On Line Super”. On 10 November 2008 Ms Tina Fung had been removed from the ASIC list and banned as a financial advisor.
In or around June 2008 Tina Fung and her husband Stephen Oliver were divorced. A property settlement involving consent orders in the Family Court provided for the sale of their matrimonial home in Bellevue Hill with the sale proceeds being divided equally between the parties subject to adjustment between the parties for monies drawn down from their mortgage to achieve equilibrium. Mr Oliver was entitled to withdraw $247,000 and Ms Fung $348,000. Both were required to create a fund of $200,000 for the payment of educational expenses relating to the three children of the marriage. That fund was to be in the name of Mr Oliver to manage and administer subject to Ms Fung’s rights to receive accounts for the fund.
In October 2008 a joint account with the ANZ Banking Group received the proceeds of the sale in the matrimonial home amounting to $1,000,093 approximately. By 28 October 2008 the account contained a reduced balance of $395,592.96. This represented a withdrawal of approximately $700,000. During this period in about August 2008 Ms Fung was aware that Monika Seidel was seeking repayment of her investment. The original enquiry about the repayment of funds to Monika Seidel occurred on 13 June 2008 and the due date for repayment of the loan was 17 June 20008. The initial denial of the repayment was 22 August 2008 and since early October 2008 more than $700,000 had been withdrawn. In November 2008 by a District Court Statement of Claim, Monika Seidel sought inter alia the recovery of a debt of $310,000 from the bankrupt. Ms Seidel approached the Court seeking a freezing order. On 11 November 2008 an ex parte order freezing Tina Fung and Stephen Oliver was made restraining them and the bank on operating the joint account until further order.
Mr Adams (solicitor representing Ms Seidel) informed the District Court at a mention of the District Court proceedings that he had been instructed to apply for an order under s.153B of the Bankruptcy Act 1966 (Cth) (“the Act”) seeking an annulment of the bankruptcy. As a result of the bankruptcy, the District Court proceedings were stayed and stood over to 1 March 2010 for mention.

Proceedings before this Court

On the application filed on 17 December 2009 Ms Seidel sought to set aside the Debtor’s Petition filed on 5 June 2009 under the provisions of s.153B of the Act. An annulment will be granted if the Applicant can show that the Debtor’s Petition was filed for a purpose foreign to that contemplated by the Act. It is the Applicant’s position and will be the Applicant’s argument when the matter is heard that it is open to the Court to infer that the purpose for which the Debtor’s Petition was filed was to defeat Ms Seidel’s claim against Ms Fung in the District Court proceedings. In effect to defeat Ms Seidel’s entitlement to monies now subject to the ex parte freezing order made on 11 November 2008 by McLoughlin DCJ and subsequently upheld by Geraghty DCJ on 4 December 2008 and Acting Judge Hungerford QC on 20 March 2009.
It is Ms Seidel’s position that if she can show that Ms Fung was in fact solvent as at 5 June 2009 then the inference Ms Seidel would be seeking the Court to make was that Ms Fung’s contention was to defeat Ms Seidel’s claim.
Mr Adams informed the Court that this matter had been before a Registrar on several occasions. Five subpoenas were issued and that subpoenaed material had to be examined and an application was made to the Registrar for leave to issue further subpoenas. That application was refused so a request was made to place that issue before this Court.

Evidence

Mr Adams relies on three affidavits sworn and filed in these proceedings and identified as:
a)Affidavit of Leigh Adams sworn 9 February 2010 (“first affidavit of Mr Adams”);
b)Affidavit of Leigh Adams sworn 15 February 2010 (“second affidavit of Mr Adams”); and
c)Affidavit of Leigh Adams sworn 23 February 2010 (“third affidavit of Mr Adams”).

Applicant’s submissions

Mr Adams indicates that his third affidavit contains information regarding credit card debts that are identified. Some of those financial institutions had credit card debts owed by the bankrupt that were identified in the original subpoenas which have now been inspected. Examination of four of those credit card statements indicated that whilst there is a sum due as at 5 June 2009, it is not payable until a future date. Taking that information into account, the amount that was actually due by 5 June by the bankrupt is reduced by $77,122.34. With this adjustment, the amount due and payable by the bankrupt at 5 June 2009 is estimated as $171,947.80.
Mr Adams concedes that there are several calculations that could be made but a calculation of the amount available to the bankrupt from the ANZ account considering the Family Court Orders the balance remaining is $114,018.90.
Mr Adams acknowledges that the transcripts attached to his first affidavit in respect of the applications for freezing orders indicates that there was some uncertainty about how much was available to the bankrupt as at 5 June 2009 or any other date for that matter. However for the purposes of the application before this Court, the calculation contained in paragraphs [4], [5] and [6] of the third affidavit indicates that the amount due to unsecured creditor at 5 June 2009 was reduced from $249,070.14 to $171,947.80 and there could be more if other material was taken into account. Mr Adams states that having access to the original subpoenas has enabled Ms Seidel to be in a position to seek leave to issue further subpoenas. These further subpoenas are entities with which Ms Fung traded and owed money. The reformulated ground that the Applicant seeks the indulgence of the Court is:
The subpoenas will seek production of any documents evidencing any assets of the bankrupt as at 5 June and the amount due by the bankrupt as at 5 June 2009.
Mr Adams submits that the material previously produced on subpoena has indicated that the amount due on 5 June can be reduced to the vicinity of $77,000. If the subpoenas are issued to these other entities there may well be other evidence which indicates that the amount due can be further reduced. If it can be proved that the amount available in the debtor’s frozen account is in excess of the amount owed to unsecured creditors then it is open to the Court to find that the Debtor’s Petition should not have been presented because the debtor was solvent. Further, the filing of the Petition was to defeat the claim that Ms Seidel had.

Respondent’s submissions

Mr Leather submits that there are a number of problems with this application. Section 153B of the Act provides two limbs upon which a bankruptcy can be annulled.
Annulment by Court
(1) If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a Debtor’s Petition, that the Petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.
(2) In the case of a Debtor’s Petition, the order may be made whether or not the bankrupt was insolvent when the Petition was presented.
Mr Leather submits that Mr Adams is espousing a third position which is that the bankruptcy ought to be annulled because the presentation of the Petition was an abuse of process and not that the Petition ought not to have been presented or that it ought not to have been accepted. The Debtor’s Petition was in the proper form, accompanied by a Statement of Affairs which clearly evidences hopeless insolvency on the part of the debtor.
The position in the Statement of Affairs is that the debtor had $448.00 and some $1,060,000 in debt. Subsequent to the presentation of the Petition, a Proof of Debt of $397,000 has been presented to the Trustee in respect of unsecured debts. The argument advanced by Mr Adams is that this figure is capable of being whittled down to a point where the Court could infer that in fact the debtor was solvent as at the date of presentation of the Petition and on that basis it is an abuse of process for the debtor to have presented the Petition.
Mr Leather submits that one of the principled difficulties with this application is that the presentation of a Debtor’s Petition was an abuse of process because it was presented for a purpose foreign to bankruptcy law. It is submitted that issuing further subpoenas is not for a proper purpose but rather is trying to adduce evidence to whittle down the position in a Statement of Affairs and a Debtor’s Petition. The Petition on its face ought to have been presented. It is in the proper form and ought to have been accepted. Mr Leather contends that because of established precedent, Mr Adams is left with no option but to proceed on the basis of abuse of process. The issue was addressed in BWK Elders (Australia) Pty Ltd v White [2004] FCA 1611 per Finkelstein J at [7] His Honour stated:
[7] … It is an abuse of process for a debtor to present a Petition for the purpose of placing his estate beyond the reach of a person who will imminently become a creditor. The purpose of bankruptcy laws is to secure an equitable distribution of a bankrupt’s assets among all creditors…
Mr Leather confirmed that Ms Seidel commenced proceedings in December 2008 by freezing a joint account of which the debtor was signatory. At that time the account held approximately $400,000 as a residual amount. In the previous month the account held approximately $1.09 million being the proceeds of sale of the matrimonial home after the marriage ended in March 2008. Family Court Orders have been made for the deposition of the estate being the assets of the marriage. The Family Court Orders were made allowing for the sale of the home, distribution in the sale of proceeds between husband and wife and there was an explicit order that approximately $400,000 be placed in Trust for the benefit of the education of the children. An amount of approximately $700,000 being the proceeds of the sale was distributed between the husband and wife but the parties did not get to the point of transferring approximately $400,000 for the benefit of the education of the children.
An amount of approximately $700,000, being part of the proceeds of the sale was distributed between the husband and wife but the parties did not get to the point of transferring approximately $400,000 in to a new account in the name of the husband in Trust for the children before it was frozen by the application by Ms Seidel. The basis of that application was that the funds were available to the wife who is the debtor.
The only reason that monies did not become Trust monies in accordance with the Family Court Orders is that Ms Seidel intervened and the husband has attempted to have the freezing orders lifted. He has been unsuccessful principally because his evidence was insufficient to establish exactly what proportion of the funds should be properly treated as his and what proportion hers and whether or not they should be treated as Trust monies. The District Court indicated at the date of the issue of the freezing order that these funds clearly were not Trust monies.
Mr Leather submits that a problem with this application is the suggestion that even where there are monies in that account and if that figure were available and it could be shown that on the issue of further subpoenas it could be established that the position of the debtor as at the date of the presentation of the Petition could meet the debts then the bankruptcy would be annulled and the funds frozen could be made available to Ms Seidel to proceed to her application. This is a flawed proposition.
In BWK Elders v White (supra) the Applicant was seeking to set aside the bankruptcy on the basis that the four Respondent debtors had made themselves bankrupt to avoid the Applicant claiming assets available to them. In that case the Respondent debtors had no other debts other than the debts owed to BWK Elders which they had incurred for the purposes of defending the proceedings. The abuse in that case was that by tipping themselves into bankruptcy effectively ensured that the bankrupt estates would go to their wives in toto so that no money would be available to their only significant creditor BWK Elders.
In that case proceedings were brought under the provisions of the Trade Practices Act 1974 (Cth) for un-liquidated damages. The Applicant did not have a provable debt. In the matter before this Court the District Court proceedings have been stayed pursuant to s.60(1)(b) of the Act on the basis that this is a provable debt and the Applicant has presented a Proof of Debt to the Trustee. The Debtor has demonstrated in her Statement of Affairs that she has significant debts both secured and unsecured and has also demonstrated that she has no assets. The position in respect of the frozen funds is immaterial because the Debtor has a provable debt and she is in the position to prove the bankruptcy. What Ms Seidel seeks to do by annulling the bankruptcy is to make those monies available to her and her alone to the exclusion of other creditors of the estate.
Mr Leather submits that in neither the first, second or third affidavit of Mr Adams is there a denial that there are other creditors of the estate. Ms Seidel freely admits that there is $171,000 owing even after they have tried to deduct various amounts for various reasons. There is no suggestion that any monies other than $448.00 disclosed in the Statement of Affairs or the monies that are frozen by the District Court are available to the bankrupt.
Mr Leather submits that Mr Adams seeks leave to issue subpoenas to try to adduce evidence to create a case to justify annulling the bankruptcy. This is a clear abuse of process as it is not a proper purpose for the issue of subpoenas and should be rejected. The application for annulment is seeking to place Ms Seidel’s position over that of other creditors and in circumstances in which it is not denied that there are other creditors. The position of the bankrupt as at 5 June 2009 was that she had a sum of money, which had been frozen by the proceedings of Ms Seidel, which in Ms Fung’s view was money that should properly have been held on Trust for the benefit of her children’s education.
Mr Leather submits that the Debtor’s Petition is in the proper form and was accompanied by a Statement of Affairs clearly disclosing insolvency. It does not fall within the two limbs set out in s.153B and on the basis of the decision in BWK Elders v White (supra) it cannot fall within the purpose foreign to the purposes of the Act which is the necessary test for an abuse of process in order for it to fall within the exemption. This is also considered in Clyne v Deputy Commissioner of Taxation [1984] HCA 44 at [11] where the Court held in:
…It is a purpose foreign to the bankruptcy laws, and an abuse of process, for a debtor to present a Petition for the purpose of making it impossible for a creditor to obtain a sequestration order on a pending Petition and with the further purpose of shortening the period of relation back, possibly placing beyond the reach of the Trustee property which would otherwise vest in him.

Consideration

The power to issue a subpoena is a general one conferred on this Court by s.15 of the Federal Magistrates Act 1999 (Cth). In addition, rr.15.13, 15.23 of the Federal Magistrates Court Rules 2001 (Cth) regulate the issuing of subpoenas. No leave of the Court is required for up to five subpoenas issued at the instigation of a party in proceedings before this Court. This has occurred and the five subpoenas issued are identified in paragraph [1] (above). The application now before the Court seeks leave to file an additional eight subpoenas.
Although the rules governing the issuing of subpoenas vary slightly from the Federal Court, the principles governing when leave ought to be granted to issue a subpoena are set out in McIlwain v Ramsey Food Packaging Pty Ltd [2005] FCA 1233. The principle referred to in McIlwain is quoted also in Tamawood Ltd v Habitare Developments Pty Ltd [2009] FCA 364 per Collier J at [12] where her Honour stated:
Principles governing the grant of leave by the Court to issue subpoenas were considered in detail by Greenwood J in McIlwain v Ramsey Food Packaging Pty Ltd [2005] FCA 1233. In that case his Honour observed, so far as is relevant in these proceedings, that:
·    a request for a subpoena cannot be used to disguise an application for discovery of documents, or as an alternative to an application for further and better discovery;
·    the documents for production must be identified with reasonable particularity;
·    the category of documents must not be so wide as to be oppressive;
·    the material sought must have an adjectival relevance, that is, an apparent relevance to the issues in the principal proceedings. The adjectival relevance looks towards the possibility whether the material sought could reasonably be expected to throw light on some of the issues in the principal proceedings (cf Trade Practices Commission v Arnotts Limited (1989) 88 ALR 90);
·    more specifically, the documents must be relevant to an issue raised on the pleadings and be used to elicit documents to support the Applicant’s existing case. It cannot be used for the purposes of “fishing” or for the purpose of determining a preliminary question as to whether a party has a supportable case;
·    there must be a legitimate forensic purpose for the production of documents;
·    a wide-ranging subpoena seeking documents of doubtful relevance at great inconvenience to, or that risk compromising the commercial privacy of, a third party, may not readily attract the grant of leave;
·    the issue of the subpoena must not, in all the circumstances, be oppressive in terms of its impact on the recipient.

The first issue that I address is whether the presentation of the Debtors Petition by Ms Fung was an abuse of process. This issue was addressed in Clyne v Deputy Commissioner of Taxation and Others (1984) 55 ALR 143 per Gibbs CJ, Murphy, Brennan and Dawson JJ where their Honours considered the issue of an abuse of process in respect of a debtor presenting his own Petition. Their Honours stated
… In our opinion, a distinction must be drawn between the pursuit of 'an ulterior private purpose' - which may not necessarily amount to an abuse of process - and a purpose foreign to the nature of the process in question: see the discussion in Dowling v. Colonial Mutual Life Assurance Society Ltd. [1915] HCA 56; (1915) 20 C.L.R. 509 at 521-523. It is a purpose foreign to the bankruptcy laws, and an abuse of process, for a debtor to present a Petition for the purpose of making it impossible for a creditor to obtain a sequestration order on a pending Petition and with the further purpose of shortening the period of relation back, possibly placing beyond the reach of the Trustee property which would otherwise vest in him.
The question which arises in this present case, therefore, is whether it can properly be said that Ms Fung’s purpose in presenting her own Petition was to make it impossible for one of her creditors to obtain a sequestration order and whether she had the further purpose of shortening the period of relation back thereby possibly placing beyond the reach of the Trustee, property that would otherwise vest in him. There is no evidence placed before the Court that any creditor or a pending Petition claiming Ms Fung’s actions were taken to avoid the issue of a sequestration order. Nor is there any evidence placed before me that suggests that Ms Fung’s further purpose was to shorten the period of relation back. This evidence has not been produced.
The Statement of Affairs (which is acknowledged by the parties remains unsigned) indicates that Ms Fung had $448.00 with a debt of $1,060,000.00. Further, subsequent to the presentation of Ms Fung’s Petition, the Trustee has received proof of debts amounting to $397,000.00 which are unsecured. On that information it appears appropriate that Ms Fung has elected to present a debtors Petition.
In Re John Wayne Cornish, ex parte: Stephen Joseph English Bankruptcy (1984) 6 FCR 257 His Honour Morling J stated:
I have considered whether this is a case of a kind referred to in Re Dunn (1949) Ch640 Ex Parte Painter; Re Painter(1895)(1QB85) and Re Hancock (1904)(1KB585) In all those cases the Court declined to annul bankruptcies bought about by presentation of debtors of their own Petitions. In all those cases the Court decided to annul bankruptcies. As was said by the High Court in Klein’s case, they may be explained as cases in which the debtor used, and was entitled to use, the machinery of the Bankruptcy Act for their own purposes to shield themselves from further liability to committal or other harassments. But as the High Court pointed out, in none of those cases was the debtor seeking to avoid a liability of a kind that resulted from the operation of the Bankruptcy laws themselves.
However, in that case, the bankruptcy was annulled because the debtor filed his own Petition to shorten the period of relation back, thereby possibly placing beyond the reach of his Trustee property which would otherwise vest in him. No evidence has been submitted to suggest this was the motive of Ms Fung.
The evidence before me suggests that the balance held in the joint account of Mr Oliver and Ms Fung was intended to be placed in Trust for the children’s future education. I note that there is a small shortfall in those funds which would be presumably contributed by either one or both of the parents to establish the balance in the Family Court Orders. Again, nothing has been placed before the Court to indicate that there was any contrary intention than to comply with this order. The Commonwealth Bank account in the name of Mr Oliver as Trustee, had been opened in accordance with the Family Court Orders but the transfer had not occurred because the joint ANZ Account of Oliver and Fung had been frozen by the District Court proceedings brought by Ms Seidel.
It is inappropriate to issue further subpoenas if they are being used purely for a fishing expedition. All that can be achieved by the issue of further subpoenas is to adduce evidence that may or may not whittle down the position in the Statement of Affairs. This is not the proper forum for that exercise as it should be conducted by the Trustee. This Court cannot overturn a Debtors Petition if it does not fall within the two limbs of s.153B or in the absence of evidence of an abuse of process. In the circumstances where the action of a debtor is not designed to defeat her creditors, there is no basis for an application for annulment. Ms Fung does have a provable debt which has been presented in accordance with the approved form and accompanied by the debtor’s Statement of Affairs. Submissions have been made suggesting that the Statement of Affairs is unsigned, however there is no contrary evidence indicating that the Official Receiver has rejected the Petition. Contrary submissions suggest while the Statement of Affairs has been filed with the Trustee, it has not been accepted as it was not signed and that there had been subsequent discussions between the parties and the Trustee where the Trustee has expressed the view that he is not yet satisfied that there is a valid claim.
Finally, the subpoenas which are sought to be issued by the representatives of Ms Seidel are addressed to financial institutions and particularly the issuers of credit cards. The purpose of these subpoenas is to establish what assets were available to Ms Fung for the purpose of presentation of the Petition. The subpoenas are directed at seeking access to application forms that were lodged to create the account the purpose was to establish what assets were disclosed by the debtor as of the date of the application for credit from those various providers. Further, the subpoenas would seek evidence of the assets of Ms Fung as of 5 June 2009 together with the amounts due by her as at that date. However, no evidence has been led to indicate that significant or sufficient funds were in existence at that date to establish Ms Fung’s solvency and that the filing of the Debtors Petition was designed to defeat the interests of Ms Seidel or any other creditor. In the circumstances, I believe the application to issue further subpoenas should be denied.

I certify that the preceding thirty-six (36) paragraphs are a true copy of the reasons for judgment of Lloyd-Jones FM

Associate:

Date: 24 March 2010