Sidhom v Euphoric Pty Ltd

[2006] FMCA 827

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SIDHOM v EUPHORIC PTY LTD [2006] FMCA 827

BANKRUPTCY – Application to extend time for compliance with bankruptcy notice – where appeal from decision on which bankruptcy notice based – where no application for stay – relevant principles.

Bankruptcy Act 1966, s.41(6A)

Agrillo v Codisposto unreported Federal Court, Sackville J, 16 December 1994
Ahearn v Deputy Commissioner of Taxation (1987) 76 ALR 137
Bryett v Deputy Commissioner of Taxation (1997) 37 ATR 141
Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264
Euphoric Pty Ltd v Ryledar [2006] NSWSC 2
Re Baker; Ex parte Baker v Staples (unreported, Federal Court, 4 September 1995)
Re Geard; Ex parte Reid (unreported, Federal Court, 11 February 1994)
Re Smith (unreported Federal Court, Whitlam J, 4 May 1995)
Re Taylor; Ex parte Deputy Commissioner of Taxation (Cth) (1983) 74 FLR 377
Shepherd v Chiquita Brands (South Pacific) Ltd [2001] FCA 1394
Shepherd v Chiquita Brands (South Pacific) Ltd [2003] FCA 841
Warner v Frost [1999] FCA 830
Wenkart v Abignano (unreported, Federal Court, 28 August 1998)

Applicant: AZIR MAGAR SIDHOM

Respondent: EUPHORIC PTY LIMITED

File Number: SYG1254 of 2006

Judgment of: Barnes FM

Hearing date: 23 May 2006

Delivered at: Sydney

Delivered on: 9 June 2006

REPRESENTATION

Counsel for the Applicant: Mr Marshall

Solicitors for the Applicant: Philip Goldman & Co

Counsel for the Respondent: Mr Ashurst

Solicitors for the Respondent: Cowley Hearne Lawyers

ORDERS

1. The application is dismissed.

2. The applicant pay the costs of the respondent as agreed and in the absence of agreement taxed in accordance with the Federal Court Rules.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG1254 of 2006

AZIR MAGAR SIDHOM

Applicant

And

EUPHORIC PTY LIMITED

Respondent

REASONS FOR JUDGMENT

1. On 2 May 2006 the applicant, Azir Magar Sidhom, filed an application seeking an order that bankruptcy notice number NN1351/06 be set aside.  Interim orders were sought extending the time for compliance with the bankruptcy notice.  In oral submissions it was clarified that it was sought that the time for compliance with the bankruptcy notice be extended until after the hearing and determination of an appeal pending in the Supreme Court of New South Wales from the decision on which the bankruptcy notice was based.  In the alternative it was contended that the time for compliance should be extended for a limited period in order to assess the progress of the appeal and when it was likely to be heard. 

2. Finally it was suggested that if the Court was not minded to grant an extension of time pending the determination of the appeal or for a limited period then it should consider adopting the approach taken by Allsop J in Shepherd v Chiquita Brands (South Pacific) Ltd [2001] FCA 1394. In that case his Honour considered a motion for an extension of time to comply with a bankruptcy notice pending resolution of an appeal to the Full Court of the Federal Court from the decision of a Federal Magistrate declining to set aside a bankruptcy notice. His Honour dismissed the notice of motion on condition that (subject to the appeal being prosecuted expeditiously) the respondent undertake to consent to the adjournment of any final hearing of the creditor’s petition until the resolution of any appeal from the decision of the Federal Magistrate. The creditor in that case agreed to provide the undertakings sought by the Federal Court. However, as discussed below, in this case counsel for the creditor indicated that the creditor would not undertake to consent to any adjournment of a creditor’s petition.

3. The respondent in these proceedings, Euphoric Pty Ltd, commenced proceedings number 50070 of 2001 in the Supreme Court of New South Wales against Ryledar Pty Ltd as first defendant and the applicant as second defendant claiming moneys pursuant to a supply agreement between the parties entered on 18 May 1998.  According to an affidavit of the applicant sworn on 2 May 2006, on 17 February 2006 judgment was entered in the Supreme Court of New South Wales against Ryledar Pty Ltd and the applicant in these proceedings for $9,033,567.17 plus interest of $4,244,064.17.  

4. A bankruptcy notice dated 31 March 2006 was served upon the applicant on 12 April 2006 based on the judgment of the Supreme Court in the sum of $13,277,631.36.  The time for compliance with the bankruptcy notice was extended by orders of a Registrar of this Court on 2 May 2006 and again on 16 May 2006. 

5. The applicant and Ryledar Pty Ltd filed and served a notice of appeal without appointment from the decision of Palmer J to the New South Wales Court of Appeal (in proceedings number 40067 of 2006) before the expiration of the time fixed for compliance with the Bankruptcy Notice.  On 17 May 2006 a notice of appeal with appointment was filed setting out grounds relied on.  It is not disputed that the matter is listed for call-over on 6 July 2006 and that the appeal is unlikely to be heard before August of this year.  It is also common ground that no application for a stay of Palmer J’s judgment in Euphoric Pty Ltd v Ryledar Pty Ltd [2006] NSWSC 2 has been filed or attempted.

6. In these circumstances the applicant now seeks an extension of the time for compliance with the bankruptcy notice under s.41(6A) of the Bankruptcy Act 1966 (Cth) (the Act). It is not disputed that the prerequisites in s.41(6A) are fulfilled (see Re Geard; Ex parte Reid (unreported, Federal Court, 11 February 1994)) and that the Court has power to exercise its discretion to extend the time for compliance with the bankruptcy notice.  The only issue in dispute in these proceedings is how that discretion should be exercised. 

7. Counsel for the applicant relied on a number of authorities in support of the proposition that the time for compliance with the bankruptcy notice should be extended, primarily on the basis that there was in existence a genuine and arguable appeal from the decision on which the bankruptcy notice was based.  Counsel for the creditor, who referred to the same cases in support of the proposition that the application should be dismissed, conceded for the purposes of this application that the appeal from the decision of Palmer J was arguable, but contended that this was not sufficient to warrant the extension of time sought. 

8. While both parties considered that the decision of Hely J in Warner v Frost [1999] FCA 830 was of primary relevance, it is convenient to consider the cases relied on chronologically.

9. In Re Geard; Ex parte Reid (unreported, Federal Court, 11 February 1994), in considering an application for an extension of time to comply with a bankruptcy notice, Sheppard J expressed the view that it was “most undesirable that a judge of [the Federal] Court should in effect undertake some provisional review of the judgment of another court especially when that judgment is under appeal to the Court of Appeal which has jurisdiction to hear appeals in the normal course”. 

10. His Honour stated that he preferred to approach the question of how the discretion under s.41(6A) of the Act should be exercised in a different way. Sheppard J observed that the debtor had not made any application for a stay of proceedings pending the outcome of the appeal (in relation to a final judgment) from the decision on which the bankruptcy notice was based. In those circumstances his Honour suggested:

    It would seem to me to require quite special circumstances before a court exercising jurisdiction in bankruptcy would, in effect, do what has not been done in the court in which the judgment has been obtained by extending the time for compliance with the bankruptcy notice when no application to stay the judgment has been made. 

11. Sheppard J drew a distinction between an application to extend the time for compliance with a bankruptcy notice (which, if refused, would not affect the status of the debtor but would in all probability mean that he would commit an act of bankruptcy) and the hearing of a bankruptcy petition.  His Honour suggested that the availability of an earlier act of bankruptcy may be quite important to the petitioning creditor, the general body of creditors and the trustee in bankruptcy if the appeal was ultimately dismissed and bankruptcy proceedings continued. 

12. However in Re Baker; Ex parte Baker v Staples (unreported, Federal Court, 4 September 1995) Kiefel J did not refer to Re Geard but observed that the discretion of the Court under s.41(6A) of the Bankruptcy Act was “at large”.  Her Honour described the approach taken to applications for adjournment of a creditor’s petition where an appeal was outstanding, where it had been held that it was “generally desirable to permit the conclusion of investigation into liability before a sequestration order is made”, and referred with approval to what had been said by the Full Court of the Federal Court in Ahearn v Deputy Commissioner of Taxation (1987) 76 ALR 137 at 148 in relation to the principle that in general a court should not proceed to sequestrate the estate of a debtor where an arguable appeal was pending against the judgment relied on as the foundation of the bankruptcy proceedings.

13. Kiefel J stated in Re Baker:

    Subs (6A), subs (6B) and subs (6C) of s.41 in providing for an extension of time where a judgment or order is under investigation, recognised the serious consequences which follow if a bankruptcy notice is not complied with.  At least where the proceeding taken is genuine and arguable, the course the subsection allows is that a person ought not to be called upon to answer a notice and have his/her solvency tested without the order upon which it is based being first tested.  It would hardly be of comfort to the judgment debtors or a just outcome to have the judgment set aside and then be faced with all that flows from having committed an act of bankruptcy and failing to comply with it.  The subsections must be taken to recognise those problems.  It is, I think, not to the point to suggest, as the judgment creditor did here, that they ought to be required to make payment if the creditor secures repayment to them in the event their appeal succeeds.

14. Her Honour found that the only factor to consider in the case before her was the existence of a bona fide and arguable appeal that had been instituted and prosecuted with diligence.  On this basis it was ordered that the time for compliance with the bankruptcy notice should be extended until the determination of the appeal. 

15. Counsel for the applicant described Re Baker as the “high point” for a debtor in the authorities in issue.  It was contended that, similarly, as there was conceded to be an arguable appeal in this instance, in all the circumstances the extension of time sought should be granted. 

16. However, as contended for the respondent, subsequent authorities do not support the view that the existence of an arguable appeal is of itself sufficient to warrant the exercise of the discretion under s.41(6A) of the Act. In particular, in Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264 Lehane J had before him the competing views of Kiefel J in Re Baker and of Sheppard J in Re Geard.  Lehane J referred to that part of the judgment in Re Baker in which Keifel J adopted the principles concerned with an adjournment of a creditor’s petition in the context of an application for an extension of time to comply with a bankruptcy notice, but continued (at 269) “Evidently her Honour was not referred to Re Geard … in which Sheppard J took a somewhat different view, or later decisions in which Geard was followed.” 

17. Lehane J quoted extensively from the decision in Geard.  His Honour observed (at 270) that because of the difference of approach in Re Baker and Re Geard he must consider for himself the approach to be adopted and continued:

    In my view the considerations to which Sheppard J refers indicate that the principles to be applied where the question is whether a petition should be adjourned or dismissed are not necessarily those which should guide the exercise of a discretion to set aside, or extend time for compliance with, a bankruptcy notice.  The commission of an act of bankruptcy is, undoubtedly, a serious matter; it is, however, a very different order of gravity from the change of status brought about by the making of a sequestration order; and there is also to be taken into account the interest of both the judgment creditor and other creditors of the judgment debtor in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs earlier rather than later.

18. His Honour thought therefore that “considerable weight” should be given to the circumstance that in the case before him, as in Geard, no stay had been granted (or apparently sought) of the judgment on which the bankruptcy notice was based.  However he indicated that it did not follow that other matters were not to be taken into account as the discretion was “at large”.  (See Re Taylor; Ex parte Deputy Commissioner of Taxation (Cth) (1983) 74 FLR 377 at 379). Indeed Lehane J suggested that the merits of the appeal (if particularly “slight” or “unusually strong”) may be relevant in particular cases despite the Court’s reluctance in most cases to enter into the merits of an appeal.

19. His Honour addressed arguments in relation to the merits of the application for special leave to appeal in the case before him, but concluded (at 272) that it was “not an exceptional case in which (following the reasoning of Sheppard J in Geard) the Court should extend the time for compliance with the bankruptcy notice on the ground of the existence of an appeal (or an application for leave to appeal) when no stay had been obtained or sought”. 

20. Both parties relied on the decision of Hely J in Warner v Frost [1999] FCA 830. In that case the respondents had obtained judgment against the applicant in the District Court of New South Wales in a personal injuries claim and served a bankruptcy notice on the applicant for the judgment debt. In the meantime the applicant had filed an appeal. He subsequently applied to the Supreme Court Court of Appeal for a stay of the District Court judgment. Fitzgerald JA determined that application adversely to the applicant. According to Hely J in Warner v Frost at [17] “at least inferentially” a reason for the refusal of a stay was the inability of the applicant to provide sufficient security.

21. It was contended for the applicant that in Warner v Frost Hely J accepted that the applicant had an arguable appeal. It is the case that his Honour proceeded on that basis (consistent with what had been said by Fitzgerald JA in refusing a stay). However Hely J referred to a number of judgments of the Federal Court in which the principles governing whether an extension of time should be granted were discussed. His Honour noted at [5] that in Re Baker Kiefel J concluded that the subsistence of an arguable outstanding appeal against the judgment on which the bankruptcy notice was based was “of itself” sufficient ground on which to extend time for compliance with the bankruptcy notice, but stated at [6] “That view has not prevailed in the general line of judgments in this court”, referring to the decisions in Bryett v Deputy Commissioner of Taxation (1997) 37 ATR 141, Wenkart v Abignano (unreported, Federal Court, 28 August 1998) and Byron v Southern Star Group Pty Ltd. 

22. His Honour suggested that it was possible to “synthesise” from these authorities three different views.  The first was said to be the view of Keifel J that the subsistence of an arguable outstanding appeal was sufficient basis on which to extend time for compliance with the bankruptcy notice.  The second was the view of Sheppard J in Re Geard (referred to in Bryett and Byron) that “quite special circumstances are required before the Court will extend the time for compliance with a bankruptcy notice when an application has not been made to the court in which judgment was given for a stay of proceedings” (Warner v Frost at [6]). The third view was said to be the view of Lehane J in Byron’s case that “whilst weight should be given to the absence of an application for a stay it is not necessarily conclusive”.  Hely J expressed a preference for the view of Lehane J in Byron which he stated that he proposed to follow. 

23. His Honour then had regard (at [7]) to the matters relied upon in support of a stay in the case before him, being the existence of an arguable appeal, that an application for a stay had been made but, “at least inferentially” refused because the applicant was unable to put up sufficient security; the impact of a change in status consequential upon the refusal of the stay; the absence of a showing of any prejudice to the respondent should an extension be granted; and finally that the appeal in question was likely to be heard and decided in a period of eight months or less. 

24. Hely J found at [8] that the factors before him were “insufficient to outweigh the proposition that the Court in which this judgment was obtained has declined to stay its execution and something more than an arguable appeal needs to be shown before the Bankruptcy Court would grant an extension of time for compliance with the bankruptcy notice, which would produce a similar effect to the granting of a stay”.  As “really nothing more” had been shown than the arguable appeal and that the consequence of refusing an extension of time would be the commission of an act of bankruptcy, and having regard to the “different order of gravity” between this consequence and the change of status brought about by a sequestration order (see Byron at 270), and the fact that the applicant had other creditors and could not meet the bankruptcy notice, Hely J found that it would be in the interests of creditors generally that if a sequestration order was to be made the relevant act of bankruptcy should occur earlier rather than later.

25. Counsel for the applicant pointed out that in this case there was an arguable appeal and that applying the principles in Warner v Frost to this case it was also relevant to have regard to the fact not only that the evidence before the Court was that the appeal would not be heard before August (although it was too early to determine precisely when it would be heard) but also that, importantly, there was no evidence from the respondent as to any prejudice should an extension of time be granted.  It was submitted that it should be borne in mind that as Madgwick J stated in Shepherd v Chiquita Brands (South Pacific) Ltd [2003] FCA 841 at [12]: “The power to extend the time was the subject of a broad discretion which may be exercised in many different situations.  The discretion should not be fettered by any particular rules:  See Warner v Frost [1999] FCA 830, a decision of Hely J.  The prejudice that creditors might suffer by reason of a postponement of the commencement of bankruptcy is often cited as a significant factor weighing against the grant of an extension of time for compliance with the bankruptcy notice”.  In this case there is no evidence of such a factor, although it may be said to be in the interests of creditors generally if a sequestration order is made that the relevant act of bankruptcy should occur earlier rather than later (see Warner v Frost). 

26. It was also said to be relevant that there was no evidence that the applicant had any other creditors whose interests had to be taken into account (although it must be stated that the creditor, who opposes the extension of time, is not necessarily as well placed as the applicant to identify other creditors).  There is no evidence before the Court from the applicant as to the existence of any other creditors. 

27. It was also said to be relevant that, unlike in Warner v Frost there had been no application for a stay of the proceedings in issue.  It was, however, acknowledged for the applicant that given the amount of the judgment debt one could understand why this might be so and that there was no evidence before the Court of the applicant’s financial standing and ability to provide security.  Counsel for the applicant conceded that it could “probably” be implied that the applicant in this case, as in Warner v Frost, was not in a position to meet the bankruptcy notice. 

1. It was suggested that there would be a change in the status of the debtor if the application was not granted as the debtor would have committed an act of bankruptcy. 

2. Finally, it was contended for the applicant that the facts in Byron could be distinguished, as in that case there had already been an unsuccessful appeal to the Court of Appeal (although it was conceded that the approach taken in Byron more favoured the Geard approach than the Re Baker approach).  In these circumstances it was contended that the Court should extend the time for compliance with the bankruptcy notice. 

3. Counsel for the applicant also noted that while Hely J had refused to grant an extension of time for compliance with the bankruptcy notice in Warner v Frost, observing that it seemed to be in the interests of creditors generally “that if ultimately a sequestration order is to be made, the relevant act of bankruptcy should occur earlier rather than later” (at [9]), his Honour had also stated that it did not automatically follow that if a creditor’s petition was presented based on the act of bankruptcy in issue that a sequestration order would be made if the appeal to the Court of Appeal was still pending.  It would be open to the Court to adjourn the hearing of the petition pending resolution of the appeal.  The Court was referred to the approach of Allsop J in Shepherd v Chiquita Brands (South Pacific) Ltd.  It was suggested that a similar undertaking could be sought in this case. 

4. However, this suggestion can be disposed of shortly.  The respondent’s concession that the applicant has an arguable appeal is limited to the present proceedings.  Indeed, counsel for the respondent indicated that this would be contested were the applicant to seek an adjournment of the hearing of any creditor’s petition presented by the respondent.  In these circumstances the approach adopted by Allsop J in Shepherd v Chiquita Brands which was dependent on an undertaking from the respondent to consent to an adjournment of any final hearing of a petition is not available.  Thus it is necessary to determine whether, in the absence of any such undertaking by the respondent, the Court should grant any further extension of the time to comply with the bankruptcy notice.  It was contended for the applicant that in addition to other factors the Court should consider the appropriateness of not extending the time for compliance when counsel for the respondent had indicated that no undertaking would be given to agree to an adjournment of any hearing of the creditor’s petition pending disposition of the appeal and moreover would argue at that time that the appeal was not arguable.

5. Counsel for the respondent contended that the cases established that unless exceptional circumstances are shown, an extension of time to comply with the bankruptcy notice will not be granted and that exceptional circumstances are not provided merely by the fact that an appeal has been lodged and that the appeal is arguable.  It was suggested that the cases indicate that the courts take quite a different approach to an application for an adjournment of the hearing of a creditor’s petition to the view taken in relation to an application to extend the time for compliance with a bankruptcy notice.  It was accepted that where the issue was adjournment of a creditor’s petition it has been held that an arguable appeal may be sufficient ground for an adjournment, but pointed out that the present application was for an extension of time to comply with the bankruptcy notice in which context an arguable appeal was not usually sufficient.  It was contended that this difference of approach reflected the fact that while the consequences of failure to comply with the bankruptcy notice was very serious, it paled into insignificance when compared to the making of a sequestration order.

6. The cases do not go so far as establishing that unless “exceptional circumstances” are shown an extension of time to comply with a bankruptcy notice will not be granted. Rather the discretion conferred on the Court under s.41(6A) is “at large” (Byron at 270 and see Re Taylor; Ex parte Deputy Commissioner of Taxation (Cth) (1983) 74 FLR 377 at 379). Lehane J in Byron did not simply adopt the approach in Geard insofar as it was taken to suggest as a matter of principle that where there had been no application for a stay of the judgment it would require special circumstances before an extension of time for compliance with the bankruptcy notice should be granted.  While considerable weight ought to be given to the fact that no stay has been granted or sought in a particular case, any other relevant factors should also be taken into account as suggested in Byron.  The approach in Geard was applied in other decisions of the Federal Court: see Re Smith (unreported Federal Court, Whitlam J, 4 May 1995) and Agrillo v Codisposto (unreported Federal Court, Sackville J, 16 December 1994) and see Warner v Frost at [6]). The general approach taken in Geard and Byron was also preferred by Madgwick J in Bryett v Deputy Commissioner of Taxation.  In Wenkart v Abignano (unreported, Federal Court, 28 August 1998) Hill J outlined the approaches taken in Re Baker and Re Geard and in Byron and expressed a preference for the approach suggested by Lehane J to the other approaches “to the extent that they intended to suggest some general principle”.  I agree that as Hely J stated in Warner at [6] and Hill J recognised in Wenkart, “like all discretions the discretion to extend the time for compliance should be exercised having regard to all relevant factors”.

7. However I also agree with the respondent’s contention that the principles to be applied in determining whether there should be an adjournment of a hearing of a creditor’s petition are “not necessarily those which should guide the exercise of the discretion to … extend time for compliance with a bankruptcy notice”.  (See Lehane J in Byron at 270 adopting the view of Sheppard J in Geard in this respect).  As recognised in Geard, Byron and Warner v Frost (at [8]) this is because of the “different order of gravity” of the commission of an act of bankruptcy from the change in the debtor’s status following a sequestration order and recognises the interests of creditors that the relevant act of bankruptcy occur earlier rather than later. 

8. It is clear that the preponderance of authority cited is to the effect that in the absence of a stay the Court should be reluctant to extend time for compliance with a bankruptcy notice where all that is established is the existence of an arguable appeal which has been instituted in good faith and has been diligently prosecuted.  In other words, if a stay has not been sought an arguable appeal would not, of itself, and in the absence of other relevant factors, constitute the “quite special circumstances” referred to in Geard or the “exceptional case” described in Byron at 272.

9. Having regard to these principles and all the relevant factors in the present case, the applicant has not established that the circumstances are such that the Court should extend the time for compliance with the bankruptcy notice.  There has been no application for a stay.  There is no suggestion that the applicant would be in a position to provide such security as might be sought in connection with such an application.  While it is conceded that the applicant has an arguable appeal, it has not been submitted that I should take into account the merits of the appeal in the sense considered in Byron.  The respondent’s concession that the applicant has an arguable case on appeal is limited to the present proceedings.  There has been an indication that this would be contested were the creditor to present a creditor’s petition and the applicant seek an adjournment of the hearing.  However, as discussed, there is a clear distinction between the exercise of the discretion to extend the time for compliance with the bankruptcy notice and the question of whether to proceed with the hearing of a creditor’s petition.  This is not the hearing of a creditor’s petition.  The debtor’s status would remain unaffected by a refusal to extend the time for compliance except that an act of bankruptcy would be committed at an earlier time than would be the case if the application for an extension of time were granted. 

10. I recognise that it has not been established that there would be any prejudice to the respondent should an extension be granted.  The time for the hearing of the appeal has not been determined.  There is no evidence before the Court as to whether or not there are any other creditors of the applicant. 

11. I consider that considerable weight should be given to the fact that no stay has been sought or granted.  In all the circumstances the other factors are not such as to establish that this is a case in which the Court should exercise its discretion to extend the time for compliance with the bankruptcy notice until the appeal has been determined. 

12. Nor am I persuaded that an extension for a shorter period, such as until the time for hearing of the appeal is fixed, should be granted.  Such an order would merely be the first step towards achieving in instalments what the court is not prepared to do on the material before it.  An indication of a more definite time for the hearing of appeal would not be such as to persuade me that there should be an extension of time within which to comply with the bankruptcy notice.  I note that the application that the bankruptcy notice should be set aside has not been prosecuted.  The application should be dismissed with costs. 

I certify that the preceding thirty-nine (39) paragraphs are a true copy of the reasons for judgment of Barnes FM

Associate: 

Date:  9 June 2006.