Swart v Carr - [2008] FMCA 795

FEDERAL MAGISTRATES COURT OF AUSTRALIA

SWART v CARR

[2008] FMCA 795

BANKRUPTCY – Adjournment of petition – pending special leave applications – whether arguable grounds – other considerations – uncertainty as to solvency of debtor – a short adjournment allowed.

Bankruptcy Act 1966 (Cth)

Carr trading as Foreshaws Neill v Swart; Lawcover Pty Ltd v Swart [2007] NSWCA 135
Carr v Swart [2008] HCASL 355
Malcolm Douglass Carr trading as Foreshaws Neill v Swart & Ors [2008] NSWCA Unreported 14 April, 2008
Swart v Carr [2006] NSWSC 1302
Westpac v Carver (2002) 126 FCR 113

Applicant:

DANIEL FREDERICK VICTOR SWART

Respondent:

MALCOLM DOUGLAS CARR

File Number:

SYG 250 of 2008

Judgment of:

Smith FM

Hearing date:

5 June 2008

Delivered at:

Sydney

Delivered on:

5 June 2008

REPRESENTATION

Counsel for the Applicant:

In Person

Counsel for the Respondent:

In Person

ORDERS

The hearing of the petition is adjourned to 20 August 2008 at 10.15.
Costs reserved.
Any further adjournment application by the respondent must be supported by an affidavit filed and served no later than 4 pm on 15 August 2008, which sets out or attaches a full statement of his financial affairs, including identifying all outstanding present and contingent creditors for amounts exceeding $5,000 and the extent of his current trading.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 250 of 2008

DANIEL FREDERICK VICTOR SWART

Applicant

And

MALCOM DOUGLAS CARR

Respondent

REASONS FOR JUDGMENT

(revised from transcript)

This bankruptcy petition comes at the end of lengthy litigation between the parties. They have appeared today self represented, but in the past both of them have been represented by Senior Counsel.
In Swart v Carr [2006] NSWSC 1302, Palmer J published his reasons on 1 December 2006, giving judgment in favour of Mr Swart against Mr Carr in the sum of $1,145,460.30, after a hearing which had occupied many days. His Honour found that Mr Carr was in breach of an agreement with Mr Swart, in which he undertook the management of an investment fund which included an amount of $500,000 transferred to him by Mr Swart. He was in breach, because he transferred the money to a solicitor in the United Kingdom, and then agreed to its disbursement by the solicitor out of his trust account, without first obtaining certain guarantees which Palmer J found were required under the terms of the agreement. The whole fund disappeared in a ‘wire fraud’ perpetrated in the course of its transmission. The transactions had occurred in 1998. The judgment debt compensated Mr Swart’s loss, with added interest.
Mr Carr practised as a solicitor in New South Wales. In separate proceedings which were also decided by Palmer J in his judgment, Mr Swart sought to clarify whether Mr Carr was entitled to indemnity from LawCover for his liability up to the cap of $1.5 million under his compulsory legal practitioner’s policy. Palmer J held that Mr Carr would be entitled to an indemnity, and made a declaration to that effect.
However, Mr Carr and LawCover both appealed to the Court of Appeal. In a judgment delivered on 27 November 2007, the Court of Appeal dismissed Mr Carr's appeal, thereby confirming the judgment obtained by Mr Swart. However, it allowed LawCover's appeal and set aside the declaration of Mr Carr’s entitlement to an indemnity.
In the course of the proceeding in the Court of Appeal, Basten JA made interlocutory orders (see Carr trading as Foreshaws Neill v Swart; Lawcover Pty Ltd v Swart [2007] NSWCA 135). These required LawCover to pay into an interest-bearing deposit the amount of the judgment debt against Mr Carr together with some accrued interest, as a condition upon an order that “enforcement of the judgment is stayed pending the determination of the appeals by Law Cover and Mr Carr in matters number 440844 and 40818 of 2006 respectively”.
He also ordered:
(2) The stay of enforcement of the judgment shall include but not be limited to prohibiting Mr Swart from petitioning for a sequestration order against the estate of Mr Carr on the basis of any non-compliance with the bankruptcy notice served by Mr Swart dated 29 March 2007.
The bankruptcy notice identified in this order was subsequently set aside, and therefore the second order made by Basten JA would not seem to have any continuing effects. The current petition relies upon non-compliance with a different bankruptcy notice.
However, there are other issues facing the petition, arising from the stay orders made by Basten JA. Although the appeals which are referred to in the stay order have, in one sense, been finalised by the order of the Court of Appeal made on 27 November 2007, there remains the possibility that the orders might be varied and the appeals might be re-opened in the course of appeals to the High Court. This possibility arises by reason of two special leave applications which have been lodged in the High Court. Mr Carr applied on 19 December 2007 for special leave against the Court of Appeal’s judgment which upheld of Palmer Js order against him. On 4 February 2008, in the other matter, Mr Swart filed an application for special leave to appeal against the setting aside of Palmer J’s declaration in relation to the LawCover policy.
On the evidence before me, both of these applications have proceeded according to the High Court Rules. The parties are legally represented in both applications, and have lodged draft notices of appeal and summaries of argument which are in the papers before me.
Mr Swart's enquiries of the High Court Registry have indicated that the applications might not be heard before early August, when there is a list in which the applications may or may not appear for oral submissions. If oral submissions are to be allowed, it remains possible that the High Court will not reach the applications in August, but on the evidence before me it is possible that it might.
The present petition relies in an unqualified way on the whole of the judgment debt against Mr Carr with accrued interest. One of Mr Carr’s objections to the petition, is that Mr Swart must make an election under s.44(3) of the Bankruptcy Act whether to amend his petition, so as to exclude reliance upon the amount which he expects to receive from the account established under Basten JA’s order, in the event that he is given special leave and wins his appeal against LawCover. This contention raises whether Mr Swart is a "secured creditor" by reason of the existence of that account and the terms upon which it was established. That argument might disappear if both special leave applications were dismissed, and might take a different shape if either or both applications succeed.
Necessarily, if Mr Carr succeeds in getting special leave and wins in his appeal against Mr Swart, the debt relied upon in the petition would not exist, whether or not it was secured in whole or in part by the funds in the account, and the petition would have to be dismissed.
The petition was filed on 5 February 2008, and after one adjournment it reached me for directions on 15 April 2008. I set the petition down for hearing today. At that time, I noted that the parties were awaiting the revised reasons given by Mason P on 14 April 2008, when refusing Mr Carr a stay on the judgments of the Court of Appeal and of Palmer J, pending the hearing of his special leave application (see Malcolm Douglass Carr trading as Foreshaws Neill v Swart & Ors [2008] NSWCA Unreported 14 April 2008
Voluminous material has been now been filed by both parties. Mr Carr has raised many other issues in opposition to the petition, as well as whether Mr Swart is a secured creditor. These include whether the Court should go behind the Supreme Court judgments, so as to consider some additional defences which Mr Carr claims were not addressed by Palmer J. He also has an argument concerning the validity of the bankruptcy notice. He also presents the pendency of his special leave application as grounds for the Court to either adjourn or, in its discretion, refuse a sequestration order.
At the start of today's hearing I heard the parties on whether the Court should adjourn the petition to a date in August to await the possibility that the High Court will have determined the special leave applications by then. For the reasons which follow, I have decided that it should be adjourned.
If, as general probabilities would suggest, both applications are likely to be dismissed, then the issues will be simplified considerably. However, this prospect itself should not cause me to adjourn the petition. I need to take into account broad matters of discretion including public interest.
The existence of a special leave application as a ground for adjourning a petition was considered by Beaumont J in Westpac v Carver (2002) 126 FCR 113. His Honour referred to the principle that a petition will normally be adjourned if an appeal is pending, if the appeal appears to be “based on genuine and arguable grounds”. He held that this principle does not apply where there is only an outstanding application for special leave to appeal to the High Court. This is because a special leave application is not an appeal, and that the considerations which the High Court addresses raise many additional issues as well as the merits of the proposed appeal. Beaumont J suggested that the Court should consider whether “there are arguable grounds for concluding that special leave to appeal would be granted” (see [18] of his judgment). He also helpfully set out the general understanding of the considerations applied by the High Court in special leave applications.
In the present case, Mason P has already considered the merits of Mr Carr's special leave application, including by considering the additional arguments that Mr Carr wishes to raise in the High Court, and also wishes to present to this Court. Mason P did not regard them as having much strength, taking into account the path of reasoning followed in the Court of Appeal judgments. However, Mason P needed to address only whether there was “a substantial prospect that special leave to appeal will be granted”, so as to justify a stay on enforcement. The test formulated by Beaumont J for adjourning a bankruptcy petition appears less demanding, and broader considerations apply to the Bankruptcy Court. Indeed, Mason P referred to the fact that different considerations could arise in bankruptcy proceedings, notwithstanding his refusal of a stay.
Without entering into a detailed discussion of Mr Carr’s grounds for seeking special leave as set out in the documents he has filed in the High Court, it is my impression that that he has poor or remote prospects of getting special leave, if his application were considered alone. However, it is likely to be considered by the High Court in context where Mr Swart has himself brought an application in the related LawCover matter.
Mr Swart’s application has been well drafted, and raises issues which might appear to the High Court to have general importance concerning the construction of the LawCover policy in circumstances where a solicitor conducting entrepreneurial activities may also be practising as a solicitor in relation to the transaction. In my opinion the papers filed by Mr Swart show that he has a genuine and arguable case for getting special leave. He might even be regarded as having a reasonable prospects of success in getting special leave, noting that in this context reasonable prospects may be a possibility significantly less than a probability, because of all the intangible considerations which are addressed by the High Court.
It is possible that if Mr Swart gets special leave, the High Court might allow Mr Carr's appeal to be brought concurrently, although I would regard that possibility as not being a probability. As I have indicated above, success by Mr Swart in getting special leave against LawCover would have significant implications in relation to the ‘secured creditor’ issues which I would have to address, even if Mr Carr's application were refused.
It appears to me that if I proceeded today to hear full argument on all the issues and then reserve my judgment, as I think I would have to, the probability of Mr Carr's petition being determined, if not by me then on a possible appeal from my judgment, before the High Court determines a special leave application, are not high. The general picture of the litigation between the parties in relation to bankruptcy issues, in my opinion, would be made simpler if the petition were adjourned at least until August, to see if it will be clarified in the High Court before then.
Mr Carr of course has important personal considerations in seeking an adjournment based on his hope that he will be able to get Mr Swart's judgment overturned, and also due to the effects of bankruptcy on his professional status. These are weighty considerations, suggesting the Bankruptcy Court should move cautiously in the present situation.
On the other hand, Mr Carr points to the long history of his pursuit of Mr Carr before achieving a judgment that has now been supported by the opinions of four Justices without dissent, and which relates to a breach of contract occurring ten years ago. He also points to evidence suggesting that Mr Carr is unable to meet the judgment from his personal property. He points out that there are other creditors, one of whom has appeared as a supporting creditor, and that Mr Carr has never presented to the Bankruptcy Court evidence of his financial position so as to allow the Court properly to assess the public interests in relation to preventing insolvent persons from trading.
This last concern is a matter which is of significant weight in the present case, on the evidence before me. Mr Carr's current financial position is entirely obscure on the current evidence, and Mr Swart has been able to put sufficient evidence before the Court to raise a significant public interest supporting an expeditious hearing of the bankruptcy petition.
On balance of all the relevant considerations, I have decided that a short adjournment of some months in the hope that the High Court position will clarify the situation is justified, but that a longer adjournment would not be justified in the absence of clear and unequivocal evidence from Mr Carr as to his financial position indicating that he has no present or future creditors who would be substantially prejudiced by any further adjournment of the petition.
I shall therefore grant an adjournment, and make directions requiring evidence in support of any further adjournment application. It should be clear to Mr Carr, that at present I would not be disposed to grant any further adjournment, in the absence of evidence providing satisfaction as to the public interests, even if the proceedings in the High Court remain undetermined.
The costs in relation to the adjournment will be reserved.
POSTSCRIPT. I note that the High Court refused both applications for special leave on 12 June 2008, without listing them for oral submissions (see Carr v Swart [2008] HCASL 355).

I certify that the preceding twenty-nine (29) paragraphs are a true copy of the reasons for judgment of Smith FM

Associate: Michael Abood

Date: 20 June 2008