Sfar v Totev
[2007] FMCA 245
•19 March 2007
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| SFAR & ANOR v TOTEV | [2007] FMCA 245 |
| BANKRUPTCY – Review of sequestration order made by a registrar – remitted by Federal Court for partial rehearing – whether “other sufficient cause” why a sequestration order should not have been made – claim by the debtor against the creditors – uncertain prospects of that claim. |
| Bankruptcy Act 1966 (Cth), ss.40, 41, 52, 54, 56, 60, 153B |
| Cain v Whyte (1933) 48 CLR 639 Commonwealth Bank v McDonald [1999] FCA 984 Dowling v Colonial Mutual Life Assurance Society (1915) 20 CLR 509 Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346 Glew v Harrowell (2003) 198 ALR 331 Griffiths v Boral Resources (Qld) Pty Limited [2006] FCAFC 149 Gomez v State Bank of NSW Ltd [2002] FCAFC 101 Guss v Johnstone (2000) 171 ALR 598 International Alpaca Management Pty Ltd v Evsar [1999] FCA 72 Ling v Commonwealth (1996) 68 FCR 180 Ling v Enrobook Pty Ltd (1997) 74 FCR 19 Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303 Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135 Re Capsanis; Capsanis v The Owners – Strata Plan 11727 [2000] FCA 1262 Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19 Re Gould; Gould v Day [1999] FCA 1650 Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14 Re Player (1962) 19 ABC 277 Re Rivett; Ex parte Edward Fay Ltd (1932) 5 ABC 182 Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314 Re Yeatman; Ex parte Yeatman (1880) 16 Ch D 283 Rozenbes v Kronhill (1956) 95 CLR 407 Sfar & Anor v Totev [2005] FMCA 948 St George Bank v Helfenbaum [1999] FCA 1337 Totev v Sfar [2006] FCA 470 Totev v Sfar [2006] FCA 586 Vogwell v Vogwell (1939) 11 ABC 83 |
| First Applicant: | MICHAEL SFAR |
| Second Applicant: | ENAYET SFAR |
| Respondent: | VASIL TOTEV |
| File Number: | SYG3647 of 2004 |
| Judgment of: | Driver FM |
| Hearing date: | 2 March 2007 |
| Delivered at: | Sydney |
| Delivered on: | 19 March 2007 |
REPRESENTATION
| Counsel for the Applicant: | Ms L Goodchild |
| Solicitors for the Applicant: | Employment Lawyers |
The Respondent appeared in person
ORDERS
The review application is dismissed with costs.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG3647 of 2004
| MICHAEL SFAR |
First Applicant
ENAYET SFAR
Second Applicant
And
| VASIL TOTEV |
Respondent
REASONS FOR JUDGMENT
Introduction and background
This matter comes before me for a second time in consequence of the judgment of the Federal Court in Totev v Sfar [2006] FCA 470. In that case Allsop J found that I had erred in two respects in dealing with an application to review a decision of Registrar Hedge to make a sequestration order over the estate of Mr Totev[1]. In his judgment on appeal, Allsop J found that I had erred in directing my consideration of proceedings Mr Totev has been agitating in the District Court of New South Wales against Mr and Mrs Sfar to the question of whether those proceedings amounted to a counter-claim, set off or cross-demand of equal or greater value than the judgment debt obtained by Mr and Mrs Sfar against Mr Totev[2] His Honour found that I should have directed my consideration to the question of whether the District Court proceedings constituted “other sufficient cause” for the purposes of s.52(2)(b) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”). His Honour also found that, probably in consequence of that misdirection, I incorrectly found that the District Court proceedings did not have any prospects of success.
[1] See my earlier judgment in Sfar & Anor v Totev [2005] FMCA 948.
[2] See s.40(1)(g) of the Bankruptcy Act 1966 (Cth).
In the supplementary judgment Totev v Sfar [2006] FCA 586 at [4], Allsop J made clear that the only issue requiring redetermination was the issue in relation to s.52(2)(b). His Honour did not seek to place an express limitation on the power of this Court on the remitter but made clear that the only basis of review legitimately remaining open after the appeal is the operation of s.52(2).
The evidence and submissions
I heard oral submissions and received evidence for the purposes of the review on 2 March 2007. I received the affidavit of Vasil Totev filed on 31 October 2006, together with two volumes of exhibits to that affidavit[3]. I also received from Mr Totev as an exhibit the appeal book he had prepared for the purposes of the appeal hearing in the Federal Court[4]. Mr and Mrs Sfar rely upon the evidence before the Court for the purposes of the creditor’s petition and the review application when the matter was last before me. They also tendered the affidavit of Michael Sfar made on 7 February 2006 in the Federal Court proceedings[5] and the proof of debt given by Mr and Mrs Sfar to the trustee in bankruptcy of Mr Totev’s estate[6].
[3] including an additional exhibit (DC14A) which had been inadvertently omitted by Mr Totev
[4] exhibit A1
[5] exhibit R1
[6] exhibit R2
Mr Totev submits that his claim in the District Court demonstrates a clear case of misleading and deceptive representations having been made by the Sfars, causing him loss or damage and, further, that the Sfars have committed a fraud. Mr Totev submits that, although there are several affidavit he still needs to prepare for the purposes of the District Court proceedings, he could be ready in four to six weeks and would anticipate obtaining a hearing date six to eight weeks after having demonstrated readiness to the District Court. His primary submission is that the sequestration order should be set aside and he should be given the opportunity to pursue his litigation against Mr and Mrs Sfar in the District Court. When I put to him that it appeared to me that, if I set aside the sequestration order, I would have to dismiss the petition as it had become stale by effluxion of time[7], Mr Totev also sought the dismissal of the creditor’s petition.
[7] see s.52(5) of the Bankruptcy Act
I invited submissions from Mr Totev on the question of whether, because of the lengthy period of time since the sequestration order was made, I should consider the possibility of annulment pursuant to s.153B of the Bankruptcy Act. Mr Totev told me that he had given his statement of affairs to his trustee but that he had received no report from the trustee. He does not know what costs may have been incurred by the trustee and does not have any proposal for payment of the trustee’s remuneration, apart from proposing to seek loan funds to pay what trustee’s remuneration might properly be payable by him. He agreed with the proposition from me that, in the absence of loan funds, any payment by Mr Totev to his trustee would depend upon a successful outcome in the District Court proceedings.
Ms Goodchild, for Mr and Mrs Sfar, submitted that the proceedings in the District Court are now in the Court’s dormant list in consequence of the operation of s.60(3) of the Bankruptcy Act. Accordingly, the proposed further amended ordinary statement of claim now relied upon by Mr Totev[8] is unfiled. Ms Goodchild submits that Mr Totev’s prospects of success are poor or, at best, speculative or equivocal. She notes that critical factual issues are in dispute in the District Court proceedings and that, because of a lack of documentary evidence of the dealings between Mr Totev and Mr and Mrs Sfar, much would depend upon the credibility of witnesses. She submits that the claim by Mr Totev for $500,000 as damages for loss of profits is highly speculative and that, in the absence of that claim, Mr Totev, even if he is successful, would not be able to pay the debts he discloses in his statement of affairs. Ms Goodchild notes that even at this stage, Mr Totev has more work to do in order to be ready for a trial of his matter in the District Court and that there is no assurance of an early hearing date. She submits that the proceedings in the District Court are complex and will take some time to resolve, if they are reactivated.
[8] exhibit DC1 to his affidavit
Ms Goodchild did not wish to make any submission in relation to the question of annulment under s.153B, other than to stress that Mr and Mrs Sfar contend that the sequestration order was properly made and, hence, the question of the secondary discretion, pursuant to s.153B, does not arise for consideration.
In his submissions in reply, Mr Totev took issue with matters of detail raised by Ms Goodchild. He also reasserted the merits of his case in the District Court.
Reasoning
Allsop J dealt with the principles in relation to s.52(2)(b) in the appeal judgment at [37]-[44]. I adopt that statement of principles for the purposes of this judgment:
On proof of the matters in s 52(1) of the Act, the Court will generally proceed to make an order for sequestration. It is for the debtor to persuade the Court that the public interest in the dealing with the insolvent debtor and the rights of individual creditors are outweighed by other considerations: Cain v Whyte (1933) 48 CLR 639 at 645-6 and 648. In Cain v Whyte, the judgment of Henchman J sitting as the judge in bankruptcy for the District of Southern Queensland was approved by Rich, Starke, Dixon, Evatt and McTiernan JJ. At 645-46 Henchman J was recorded as saying the following:
...Mr. Philp, however, argues that the Court has a discretion even though the proofs that I have alluded to have been made. He suggests that in the present case "other sufficient cause" exists, within the meaning of sec. 56 (3) (b), which throws upon me an obligation to dismiss, or gives me a discretion to dismiss, the petition. I agree that the sections do leave a certain amount of discretion in the Bankruptcy Judge (see secs. 54, 56 (2) and 56 (3)), and I do not agree with the argument put forward by Mr. Graham that the words "other sufficient cause" should be limited to the one case where the Court is satisfied that the petition is put forward solely for some collateral illegitimate end, and not for the purpose of securing the equal distribution of the available assets amongst the creditors. To my mind, the High Court of Australia did not intend to put a limit on the meaning of the words "other sufficient cause" in Dowling v. Colonial Mutual Life Assurance Society (1915) 20 CLR 509, and I do not propose to be the first to say that such wide words as "other sufficient cause" are necessarily limited to meaning a cause in the nature of fraud or abuse of the provisions of the bankruptcy law. I can well conceive that "other sufficient cause" might arise in connection with any particular case. To my mind, it is the duty of the Bankruptcy Judge to examine in each case, if the question is raised, whether there is other sufficient cause than the fact that the debtor is able to pay his debts in full, for refusing to make an order.
I rule then that I am fully entitled to examine the contention put forward by Mr. Philp on behalf of the debtor that there is, in the present case, other sufficient cause sufficient to justify the dismissal of this petition. I approach that question with the full appreciation that, prima facie, on proof of the matters mentioned in sec. 56 (2), the Court will proceed to make an order for sequestration, and that it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order. ...
See also Rozenbes v Kronhill (1956) 95 CLR 407 at 414 per Dixon CJ, Webb J and Fullagar J; and Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509 at 520-521.
In Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314 at 317, Burchett J said the following after referring to the above passage from Cain v Whyte:
This exposition of the law emphasises the width of the discretion conferred by the 1966 Act upon the Court. At the same time it points to a fundamental limitation imposed by the nature of the jurisdiction in bankruptcy, which requires the Court to keep in mind, not only the interests of the individual parties before it in the particular case, but also the public interest, which may be adversely affected by the propping up of insolvency. However, in the present case that factor does not provide the bar to an exercise of discretion in the debtor's favour that it would provide in many cases, since the debtor has a paucity of creditors, other than the petitioning creditor, who would be likely to have any reason for concern. Of course, that merely removes a bar; it does not provide a positive ground constituting "other sufficient cause" why a sequestration order ought not to be made.
It is for the debtor to show "other sufficient cause". A claim sounding in money by the debtor against the petitioning creditor may amount to such other sufficient cause. The matter was examined by the Full Court in Ling v Enrobook Pty Ltd (1997) 74 FCR 19. At 25-26, after referring to Cain v Whyte, the Full Court referred to the relevant authorities (in particular Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116 per Gibbs J, sitting in bankruptcy) and stated the principles. Despite the length of the passage it is appropriate to set it out.
A review of the authorities discloses that in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor's debt will amount to "other sufficient cause" not to make a sequestration order (Re Yeatman; Ex parte Yeatman (1880) 16 Ch D 283; Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303; Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14; Ling v Commonwealth). The circumstance that the legitimate claim of the debtor is one against the judgment creditor is likely to be a significant circumstance for the purposes of s 52(2)(b).
Lehane J's reasons for judgment show that his Honour understood the principles established by the relevant authorities. His Honour rightly said:
"As a general proposition (and those authorities say nothing to the contrary) there is no apparent reason why a petitioning creditor should not be entitled to have a sequestration order made, if the requirements of s 52 are otherwise satisfied, simply because the debtor may have a counterclaim or cross-demand against some other creditor."
The primary submission pressed on behalf of the appellant was that:
"the public interest in allowing Mr Ling to prosecute his action against the Commonwealth ... is ... a public interest which overrides the ... present respondent's interest and prima facie entitlement to a sequestration order."
It was contended that the primary judge erred in principle in supposing that the relevant public interest factor can be confined to cases where the petitioning creditor is the defendant in the debtor's action.
In Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116 Gibbs J said:
"The second main contention of the debtor is that he is entitled to damages for the wrongful removal of his own property ... The question immediately arises whether I should proceed to determine the existence and extent of the debtor's alleged claim. The position is different from that which arose in relation to his claim that the trucks were sold at an undervalue. In that regard any sum which the mortgagee was entitled to have brought to its credit as the amount which was realised, or ought to have been realised, on the scale [sic] of the mortgaged property must also be allowed to the credit of the debtor as surety, thus pro tanto reducing the amount of his indebtedness. It was therefore necessary to determine in this Court the questions that arose in relation to that aspect of the matter. Where, however, the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor the position seems to me to be different. As a general rule this Court is not an appropriate forum to decide such a claim and is limited to forming a view as to whether it appears that there is sufficient validity in the debtor's claims to justify a dismissal or adjournment of the petition ... Considerable evidence directed to this issue has been given before me and it seems to me that I ought to consider this evidence for the purpose of deciding only whether it is probable that the debtor has against the petitioning creditor a claim which is likely to succeed. If I am satisfied that the debtor has a claim against the petitioning creditor equal to or exceeding the amount of the judgment debt, I should not make a sequestration order. If, however, it appears that the debtor has a claim which is less than the amount of the petitioning creditor's judgment debt, the proper course would seem to be to require the debtor, if he desires to avoid a sequestration order, to pay the difference between the amount of the judgment debt and the amount which it seems probable to me that he will recover in the proceedings against the petitioning creditor. In many cases it would be more convenient, assuming that the debtor showed that he had a real claim to litigate, to adjourn the proceedings to enable his claim to be tried in the ordinary courts, but that course was not taken in the present case, partly because the existence of any valid claim was vigorously denied by the petitioning creditor and partly because the proceedings in the Supreme Court have been somewhat dilatory."
The above approach was adopted in this Court by Olney J in Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) and applied by the Full Court of this Court in Ling v Commonwealth (1996).
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 which, in broad terms, is reflected also in s 40(1)(g) of the Act; that is, that a sequestration order ought only to be made on the basis of an indebtedness which is not counterbalanced by a claim by the debtor against the petitioning creditor. Such authorities provide no comfort to a debtor who asserts a claim, not against his or her creditor, but against a third party.
The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts may well provide a basis for a finding that there is a "sufficient cause" for a sequestration order not to be made (see, for example, Maddestra v Penfolds Wines Pty Ltd). 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 Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14, Olney J after referring to Re Schmidt, cited by the Full Court in Ling v Enrobook, said at 22:
In the passage from Re Schmidt which is quoted above, Gibbs J suggested that in many cases it would be more convenient to adjourn the proceedings to enable the debtor's claim to be tried in the ordinary courts, but such a course would be justified only on the assumption that the debtor showed that he had real claim to litigate. It seems to me that Gibbs J has distinguished between a claim of the debtor against the petitioning creditor that is likely to succeed (which would justify the Court refusing to make a sequestration order) and the existence of a "real claim" which presumably the Court has been unable to classify as one that is likely to succeed, but nevertheless is thought to have sufficient integrity to warrant the debtor being given an opportunity to have it litigated. In such a case Gibbs J thought that it would be appropriate to adjourn the petition pending resolution of the litigation.
Katz J in International Alpaca Management Pty Ltd v Evsar [1999] FCA 72 stated the matter as follows at [54]:
I begin my discussion of that approach with the proposition 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 ": Ling v Enrobook Pty Ltd (1997) 74 FCR 19 (Davies, Wilcox and Branson JJ). When, therefore, an insolvent debtor, in order to demonstrate "sufficient cause ", relies upon the existence of a monetary claim against the petitioning creditor which the debtor alleges means (leaving out of account the debtor´s possible bankruptcy) that the debtor´s state of insolvency is likely to be of only short duration, an assessment of that claim must be made in order to determine whether it is likely to terminate shortly the debtor´s state of insolvency. That assessment will involve a consideration of the strength of that claim on liability, the strength of that claim on quantum and the stage, if any, which the prosecution of that claim has reached. If, after consideration of those matters, an assessment is made that (leaving out of account the debtor´s possible bankruptcy) the existence of that monetary claim against the petitioning creditor means that the debtor´s state of insolvency is likely to be of only short duration, then the existence of that claim may amount to "sufficient cause " why a sequestration order ought not to be made.
In St George Bank v Helfenbaum [1999] FCA 1337 at [13] Sundberg J summarised the authorities:
The existence of a cross-claim may be a `sufficient cause´ within s 52(2)(b) for declining to make a sequestration order: Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 25. It is for the debtor to establish the existence of `sufficient cause´: Cain v Whyte (1933) 48 CLR 639 at 645-646; Ling at 24. He must establish that he has a real claim against the creditor that is likely to succeed. If the Court is satisfied that there is such a claim, and that its quantum is likely to equal or exceed the creditor´s claim, it will not make a sequestration order. If the claim is likely to be less than the creditor´s claim, the Court will require the debtor, if he is to avoid a sequestration order, to pay the difference between the judgment debt and the amount he is likely to recover on his claim. See Re Player (1962) 19 ABC 277 at 282; Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116; Ling at 25-26; Commonwealth Bank v McDonald [1999] FCA 984. A debtor does not establish a real claim that is likely to succeed merely by producing a statement of claim in an action against the creditor: Re Rivett; Ex parte Edward Fay Ltd (1932) 5 ABC 182; Player at 282, or by pointing to the existence of current litigation against the creditor: cf Re Douglas Griggs Engineering Ltd [1963] 1 Ch 19 at 23. While the Court does not try the cross-claim in advance, the debtor must adduce sufficient evidence to show that it is a real claim which is likely to succeed: cf Vogwell v Vogwell (1939) 11 ABC 83 at 88; Player at 282.
It may be that the fourth sentence of the above passage in St George Bank Ltd v Helfenbaum is open to debate as to whether it states the matter slightly too unequivocally in the light of what was said in Ling v Enrobook. Nevertheless, what is clear is that the fact that there has been an act of bankruptcy does not make the claim by the debtor against the petitioning creditor irrelevant. It should be examined to assess whether it can be said that there is sufficient evidence to show that it is a real claim which is likely to succeed. Also relevant is the stage of the litigation, the length of time for its vindication and any other relevant matters. It goes without saying that solvency is a relevant consideration. In some circumstances, it may be difficult to assess the likelihood of success of the debtor’s claim. All the authorities show that central to the showing of "other sufficient cause" for the purposes of s 52(2)(b) is the question of the prospects of success. The case is not tried in the bankruptcy court, but the material is examined for the purpose alluded to by Gibbs J in Re Schmidt. As Olney J identified in Re James, if a likelihood of success can be demonstrated, that may justify a refusal of a sequestration order. Alternatively, the circumstances may reveal a claim of a character and nature in which likelihood of success cannot be predicted with accuracy but in the circumstances the petition should be dismissed or an adjournment of the petition should granted: see the approach of Sundberg J in Ling v Commonwealth (1996) 68 FCR 180 at 195-196, with which Wilcox J and Whitlam J agreed. If the claim is one in which credit of witnesses will be involved, and a debtor sets out the nature and detail of the case and all his or her evidence the debtor may only be able to persuade the bankruptcy court that, if relevant criteria are believed, he or she has good prospects of success. What should be proved, or what is sufficient to be proved, in any given case will depend upon the circumstances. The context in which the issue arises is also important. The discretion involved in s 52(2)(b) is a broad one, and, importantly, it is informed by public interest considerations concerned with the dealing with insolvents. It is to be distinguished from the task involved in deciding whether a claim exists that satisfied s 40(1)(g) of the Act. There, the task, prior to the commission of an act of bankruptcy, is the identification of a bona fide or genuine claim: Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346; Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135; Vogwell v Vogwell (1939) 11 ABC 83. Lindgren J summarised the position in relation to s 40(1)(g) in Glew v Harrowell (2003) 198 ALR 331 at [9]-[12] as follows:
There are authorities suggesting that Glew and Tresidder must satisfy me of the following interrelated and sometimes overlapping matters:
• that they have a "prima facie case", even if they do not adduce evidence which would be admissible on a final hearing making out that case (Ebert v The Union Trustee Co of Australia Ltd (1960) 104 CLR 346 ("Ebert") at 350; Re Brink; Ex parte Commercial Banking Company of Sydney Ltd (1980) 44 FLR 135 ("Brink") at 141; Gomez v State Bank of NSW Ltd [2002] FCAFC 101 at [17], [18]);
• that they have "a fair chance of success" or are "fairly entitled to litigate" the claim: Brink at 141; Re Gould; Gould v Day [1999] FCA 1650 at [27], [28]; Re Capsanis; Capsanis v The Owners – Strata Plan 11727 [2000] FCA 1262 at [11]); and
• that they are advancing a "genuine" or "bona fide" claim (Re Capsanis ... at [11]).
It may be that the first and second formulations are intended to cover the same ground. In Brink Lockhart J treated (at 141) the reference to a "prima facie case" in Ebert as a reference to "a fair chance of success".
In Brink Lockhart J said (at 141) that the Court is not required to "undertake a preliminary trial of the counter-claim, set-off or cross demand". But, clearly, the application of the criteria above requires the Court to make some kind of preliminary assessment, though obviously not to determine the counter-claim, set-off or cross demand finally. And in Guss v Johnstone (2000) 171 ALR 598, Gleeson CJ, Gaudron, McHugh, Kirby and Callinan JJ stated (at 606):
"[40] The state of satisfaction referred to in s 40(1)(g), and s 41(7), involves weighing up considerations as to the legal and factual merit of the claim relied upon by the debtor, and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim."
Plainly, in order to "satisfy" the Court for the purposes of par 40(1)(g), the debtor is not required to prove, as on a final hearing, the asserted entitlement to recover from the creditor. Accordingly, evidence tendered on an application to set aside is to be tested for admissibility, not as if the proceeding were one in which the debtor’s claim was being finally determined, but by reference to the question whether the Court should be satisfied that the debtor has a claim deserving to be finally determined.
Perhaps little more can usefully be said than that a debtor must satisfy the Court that there is sufficient substance to the counter-claim, set-off or cross demand asserted to make it one which the debtor should, in justice, be permitted to have heard and determined in the usual way, rather than be forced to comply with the bankruptcy notice by payment or to commit an act of bankruptcy.
It follows that it is necessary to consider the prospects of success of Mr Totev in the District Court proceedings. If there is a likelihood of success in those proceedings it may be that the sequestration order made by the registrar should not have been made. On the other hand, if the likelihood of success is unpredictable but there is a sufficient justification to dismiss the petition or adjourn it then that course probably should have been taken by the registrar. However, there is now considerably more material bearing on the question of prospects of success than was available to the registrar. Further, because of the passage of time, the petition has now become stale and could not be revived[9]. It follows that an adjournment of the petition is no longer an option. As I advised the parties during argument, the Court is faced with an all or nothing outcome. If the sequestration order is set aside, the petition should be dismissed as stale.
[9] see Griffiths v Boral Resources (Qld) Pty Limited [2006] FCAFC 149 in particular at [29]-[33]
I accept that the view I expressed in my first judgment dismissing the review application, that the District Court proceedings had no prospect of success, was clearly wrong. In paragraphs [63] and [64] of the appeal judgment Allsop J expressed the opinion that the material available to him disclosed a:
…tolerably coherent case that representations were made to [Mr Totev] by or on behalf of the Sfars which were misleading, deceptive and fraudulent to the effect that loan funds of a certain character and amount would be available if he contributed certain funds; and, in reliance upon those representations, [Mr Totev] sold a development in Sydney out of which funds he paid the Sfars a fee, paid the Sfars money to fund the arrangement and funded a trip to Spain in connection with the proposed development for which the loan was sought. The loan funds did not eventuate and he lost the use of the funds [$16,500] which he paid the Sfars and lost the benefit of the profits (said to be $500,000) from the development he sold, all, he said, in reliance on their representations.
His Honour noted that the case advanced by Mr Totev was “to a degree incomplete” and that there were some problems in the legal drafting but was satisfied that they revealed a “real case”. His Honour noted that there was no material upon which one could gauge the loss of profits claim but said that:
Taken as a whole one can see a coherent case. Plainly, many of the allegations were contested. One can anticipate significant factual issues and credit issues. Even if Mr Totev swore expressly to the truth of all of the statements of fact in exhibits V7 to V20, it would be impossible for a bankruptcy court to conclude how good the case was.
I agree with His Honour’s observations. While Mr Totev has now advanced a significant body of written material bearing on the quality of his claim in the District Court, it remains essentially assertions which, to a significant degree, must be tested in evidence. Mr Totev considers that a trial would take three to four days. This is not a simple case. The proceedings in the District Court were commenced on 13 December 2001 and had been running for approximately three and a half years when the costs order was made by the District Court which led to the bankruptcy notice and, ultimately, to the sequestration order. The costs order was made because Mr Totev was unready to proceed, despite having been put on notice by earlier orders of the District Court that he would need to be ready to proceed. Mr Totev was, at times, unrepresented but was at other times assisted and represented by legal practitioners. The fact that after several years he was unable to get the case ready for trial indicates to me that the case was (and remains) far from simple.
There was a divergence of opinion amongst practitioners assisting Mr Totev as to the prospects of success of the proceedings. On 23 April 2003 his counsel, Michael Scheib, withdrew from the matter due to a lack of assistance from his instructing solicitors and described the case as a “difficult commercial cause”. Counsel was concerned about the absence of satisfactory evidence that Mr Totev would have been able to borrow money to carry out his property development prior to being encouraged to borrow offshore moneys with the assurances said to have been given by Mr Sfar. He was also concerned about the lack of evidentiary support for the loss of profit claim. Counsel considered that the claim of fraud should not have been made at all without a clear basis for it. From my perusal of the material available now, nothing much has changed in those respects. It is true that on 22 September 2005, Allan Palmer of David Payne & Co, Solicitors expressed an extremely positive view about the prospects of success in the District Court. However, it does not appear to me that Mr Palmer dealt with the concerns expressed by counsel in 2003 and it needs to be borne in mind that that letter was prepared at a time when Mr Totev was resisting the sequestration order made against him, by reliance upon the District Court proceedings. While both the view of
Mr Scheib, and that of Mr Palmer, are probably colourable by reference to the circumstances in which those views were expressed, I consider the view of Mr Scheib to be more objective and more persuasive.A further assessment of the prospects of success of the District Court litigation was made by the trustee[10] in considering whether to make an election to prosecute or discontinue the District Court action. The trustee decided, on the advice of Mr David Courtenay of Shaw MacDonald Solicitors, not to pursue the litigation. The solicitors advised that the prospects of success were “not particularly good”. The advice to the trustee was that the case is complex and difficult with little documentary evidentiary support and that the proceedings were not in a fit state to be run to a hearing. The advice also was that the $500,000 claimed as damages was excessive.
[10] see annexure “A” to exhibit R1
On the now available material, my own view is that Mr Totev has a reasonably arguable claim that he was induced to pay $16,500 to Mr and Mrs Sfar on the strength of representations which were misleading or deceptive. That amount was more than twice the amount supporting the creditor’s petition but substantially less than the debts identified by the trustee in his notice to creditors under Bankruptcy Regulation 4.14 on 1 July 2005. The trustee found an estimated deficiency of assets over liabilities of $72,466. The prospects of success of Mr Totev on liability are uncertain, given the state of the evidence, and his prospects of recovering anything more than $16,500, even if he were to be successful on liability, are in my view entirely speculative. Allsop J found that Mr Totev was insolvent[11]. The prospects of him obtaining sufficient funds to pay his debts from the District Court proceedings, even if he were to be successful on liability, is, at best, uncertain.
[11] Totev v Sfar at [71]
I conclude that the District Court proceedings are not a sufficient cause to prevent a sequestration order being made and hence, I find, that the sequestration order made by Registrar Hedge was properly made.
It is unnecessary to consider the question of annulment under s.153B of the Bankruptcy Act.
I will order that the application for review be dismissed with costs.
I certify that the preceding nineteen (19) paragraphs are a true copy of the reasons for judgment of Driver FM
Associate:
Date: 19 March 2007
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