Totev v Sfar

Case [2006] FCA 470

FEDERAL COURT OF AUSTRALIA

Totev v Sfar [2006] FCA 470

BANKRUPTCY – counter claim against petitioning creditors – other claims – whether sequestration order should have been made – whether bankruptcy proceeding was an abuse of process – held that the exercise of power under s 52 of the Bankruptcy Act miscarried.

Bankruptcy Act 1966 (Cth) s 40, 41 and 52

Amos v Lillyman Whitlam J 1 July 1998 unreported

Brunninghausen v Glavanics [1998] FCA 230

Cain v Whyte (1933) 48 CLR 639

Chen v Bannerman [2001] FCA 160

Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509

Ebert v Union Trustee Co of Australia Ltd (1960) 104 CLR 346

Glew v Harrowell (2003) 198 ALR 331

International Alpaca Management Pty Ltd v Evsar [1999] FCA 72

Ling v Commonwealth (1996) 68 FCR

Ling v Enrobook Pty Ltd (1997) 74 FCR 19

Opie v Opie (1951) 84 CLR 362

Qun Xiong (Kenny) Yu v Todaytech Distribution Pty Ltd [2006] FCA 131

Re Black; Ex parte Jeffery (1932) 4 ABC 157

Re Brink; Ex parte Commercial Banking Co of Sydney Ltd (1980) 44 FLR 135

Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No 2) (1994) 51 FCR 14

Re Ling, Ex parte Ling v Commonwealth (1995) 58 FCR 129

ReSchmidt, Ex parte Anglewood Pty Ltd (1968) 13 FLR 111

Re Svir; Ex parte Commissioner of Taxation (1998) 83 FCR 314

Rozenbes v Kronhill (1956) 95 CLR 407 at 414

St George Bank v Helfenbaum [1999] FCA 1337

Vogwell v Vogwell (1939) 11 ABC 83

Williams v Spautz (1992) 174 CLR 509

Wren v Mahoney (1971-72) 126 CLR 212

Halsbury (3rd Ed Vol 2)

VASIL TOTEV v MICHAEL SFAR & ANOR
NSD 1246 OF 2005

ALLSOP J
5 MAY 2006
SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

1246 OF 2005

BETWEEN:

VASIL TOTEV
APPELLANT

AND:

MICHAEL SFAR
FIRST RESPONDENT

ENAYET SFAR
SECOND RESPONDENT

JUDGE:

ALLSOP J

DATE OF ORDER:

5 MAY 2006

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:

1.The appeal be allowed with costs.

2.The orders of the Federal Magistrates Court made on 5 July 2005 be set aside.

3.Within seven days the parties file and serve such written submissions as they see fit as to why the matter should not be remitted to the Federal Magistrates Court for rehearing and the terms of such remitter and as to any necessary further orders.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.


IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

1246 OF 2005

BETWEEN:

VASIL TOTEV
APPELLANT

AND:

MICHAEL SFAR
FIRST RESPONDENT

ENAYET SFAR
SECOND RESPONDENT

JUDGE:

ALLSOP J

DATE:

5 MAY 2006

PLACE:

SYDNEY

REASONS FOR JUDGMENT

  1. This is an appeal from orders made by the Federal Magistrates Court on 5 July 2005 dismissing an application for review of a sequestration order made by a Registrar against Mr Totev on 10 May 2005. The Chief…

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AGLC
Totev v Sfar [2006] FCA 470
Case
[2006] FCA 470
Decision Date

CaseChat Overview and Summary

In the case of Totev v Sfar, the primary issue before the court was whether Mr Totev's District Court claim against the Sfars was relevant in the context of his opposition to a creditors' petition for his sequestration. The case involved Mr Totev, who was subject to a creditors' petition based on an unpaid judgment debt, and the Sfars, the petitioning creditors. The Federal Magistrates Court had previously ruled that Mr Totev's District Court claim was irrelevant to the creditors' petition. Mr Totev appealed this decision to the Federal Court.

The legal issues that the court needed to decide included whether Mr Totev's District Court claim against the Sfars was a valid consideration in the decision to make or refuse a sequestration order, and whether the Federal Magistrate's interpretation of section 52 of the Bankruptcy Act 1966 (Cth) was correct. The court also needed to consider whether there was any error in the Federal Magistrate's approach in refusing to go behind the judgment debt and in not allowing Mr Totev to prove his solvency.

The court found that the Federal Magistrate had erred in concluding that Mr Totev's District Court claim was irrelevant. According to the court, the claim was indeed a consideration to be taken into account in the decision to make or refuse a sequestration order under section 52 of the Act. The court further held that the Federal Magistrate had not adequately addressed section 52(2) of the Act, which provides for the dismissal of a petition if the debtor can show that they are able to pay their debts or that there is other sufficient cause for not making a sequestration order. The court found that the Federal Magistrate's reasoning was flawed and that the District Court claim should have been considered in the context of the creditors' petition.

The appeal was allowed, and the orders of the Federal Magistrates Court were set aside. The matter was to be remitted to the Federal Magistrates Court for rehearing, with the parties to file and serve written submissions on why the matter should not be remitted and the terms of such remitter and any necessary further orders within seven days.

Orders

Orders of the court

1. The appeal be allowed with costs.

2. The orders of the Federal Magistrates Court made on 5 July 2005 be set aside.

3. Within seven days the parties file and serve such written submissions as they see fit as to why the matter should not be remitted to the Federal Magistrates Court for rehearing and the terms of such remitter and as to any necessary further orders.

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

ALLSOP J
Before dealing with Mr Totev’s arguments it is to be noted that no attempt was made by Mr Totev to prove that he was solvent or that he had the means to pay the small judgment debt upon which the order was based.Going behind the judgment There was no error in the approach of the Federal Magistrate in this regard. The order for costs created a liability. It was an order not set aside. There was no evidence that the solicitors were acting pro bono or for no fee or that the material placed before the assessor did not involve legal costs. The order for costs of itself founded a judgment. Its enforcement was not conditional upon the petitioning creditors proving the relationship between them and their legal advisers. There was no error in refusing to go behind the judgment debt.The existence and strength of the District Court claim The respondents argued before me that, because there had been an act of bankruptcy and because the time and context to raise a counter-claim or set off or cross demand was in the application under s 41, the District Court claim was irrelevant. It is plain that this is what was argued below. It is not correct. The claim of Mr Totev against the Sfars was a consideration to be taken into account in the decision to make or to refuse to make a sequestration order under s 52 of the Act. Section 52 of the Act, relevantly, states:(1)At the hearing of a creditor’s petition, the Court shall require proof of: (a)the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b)service of the petition; and (c)the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. …(2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor: (a)that he or she is able to pay his or her debts; or (b)that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition. …[emphasis added] The Federal Magistrate did not deal with s 52(2). His reasons (at [8] and [9] set out above) explain why, in his view, the claim was not a counter-claim, set off or cross demand that Mr Totev could not have set up in the action or proceeding in which the judgment or order was obtained. This was an issue for the application under s 41 about the satisfaction of s 40(1)(g). The views expressed by the Federal Magistrate were ones that had been expressed by Raphael FM in the latter’s reasons for judgment on the application made by Mr Totev to set aside the bankruptcy notice. The Federal Magistrate then stated (without any reasons) that the same applied in the context of opposition to the creditors’ petition. It will be necessary, in due course, to say something about the conclusion of the Federal Magistrate concerning s 40(1)(g). Before that, it is necessary to show only that his Honour’s conclusion that Mr Totev’s District Court claim was irrelevant to his opposition to the creditors’ petition was incorrect.

Ratio Decidendi

Legal Principle Established

Established by: ALLSOP J

The claim of Mr Totev against the Sfars was a consideration to be taken into account in the decision to make or to refuse to make a sequestration order under s 52 of the Act. Section 52 of the Act, relevantly, states:(1)At the hearing of a creditor’s petition, the Court shall require proof of: (a)the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b)service of the petition; and (c)the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. …(2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor: (a)that he or she is able to pay his or her debts; or (b)that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition. …[emphasis added] The Federal Magistrate did not deal with s 52(2). His reasons (at [8] and [9] set out above) explain why, in his view, the claim was not a counter-claim, set off or cross demand that Mr Totev could not have set up in the action or proceeding in which the judgment or order was obtained. This was an issue for the application under s 41 about the satisfaction of s 40(1)(g). The views expressed by the Federal Magistrate were ones that had been expressed by Raphael FM in the latter’s reasons for judgment on the application made by Mr Totev to set aside the bankruptcy notice. The Federal Magistrate then stated (without any reasons) that the same applied in the context of opposition to the creditors’ petition. It will be necessary, in due course, to say something about the conclusion of the Federal Magistrate concerning s 40(1)(g). Before that, it is necessary to show only that his Honour’s conclusion that Mr Totev’s District Court claim was irrelevant to his opposition to the creditors’ petition was incorrect. 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. …