Victorian Securities Corporation Limited v Gadallah
[2010] FMCA 113
•10 February 2010
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| VICTORIAN SECURITIES CORPORATION LIMITED v GADALLAH | [2010] FMCA 113 |
| BANKRUPTCY – Creditor’s petition – interim control of debtor’s property – debtor’s petition presented before hearing of creditor’s petition – effect on creditor’s petition and on interim trustee – petitioner’s costs and remuneration and costs of interim trustee – power to order payment from estate in bankruptcy – award of indemnity costs arising from unreasonable delay in filing debtor’s petition. |
| Bankruptcy Act 1966 (Cth), ss.32, 50, 50(1)(b), 51, 55(4A), 57A, 109(1)(a), 109(1)(b) Bankruptcy Regulations 1996 (Cth), reg.4.07(2) |
| Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 Colgate‑Palmolive Co v Cussons Pty Limited (1993) 46 FCR 225 Equuscorp Pty Ltd v Chang [2000] FCA 486 Genovese v BGC Construction Pty Ltd (No.2) [2007] FMCA 601 Re Hankey; Ex parte Kratzmann (1986) 11 FCR 512 Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 Re Penning; Ex parte State Bank of South Australia (1989) 23 FCR 588 World Best Holdings Ltd v Sarker [2006] FMCA 1876 |
| Applicant: | VICTORIAN SECURITIES CORPORATION LIMITED ACN 004 496 208 |
| Respondent: | BOUSHRA KADDIS GADALLAH |
| File Number: | SYG 2693 of 2009 |
| Judgment of: | Smith FM |
| Hearing date: | 10 February 2010 |
| Delivered at: | Sydney |
| Delivered on: | 10 February 2010 |
REPRESENTATION
| Counsel for the Applicant: | Mr D McLure |
| Solicitors for the Applicant: | Baker & McKenzie |
| Counsel for the Respondent: | No appearance by or on behalf of the Respondent |
| Solicitors for Nicholas Banna, in his own right as a supporting creditor and as executor of the estate of the late Lody Banna, First Supporting Creditor: | Finn Roache Lawyers |
| Solicitors for Workers Compensation Nominal Insurer ABN 83 564 379 108, Second Supporting Creditor: | TurksLegal |
| Solicitors for Maha Hanna, Third Supporting Creditor: | Finn Roache Lawyers |
ORDERS
Note that the respondent became a bankrupt on 5 February 2010 by force of ss.55(4A) and 57A of the Bankruptcy Act 1966 (Cth).
The creditor’s petition is dismissed.
Orders 7, 8, 9, 10, 11, and 12 made on 18 November 2009, as varied by orders 1, 2, and 3 made on 18 December 2009, are discharged with effect from the date of this order.
The applicant’s costs in the proceedings, including its reserved costs and costs in relation to the interim application made on 18 November 2009, are to be taxed and paid from the estate in bankruptcy of the respondent in the priority fixed by s.109(1)(a) of the Bankruptcy Act 1966 (Cth). Those costs are to be taxed on an indemnity basis in relation to costs incurred subsequent to 10 January 2010.
Pursuant to s.50(1)(b) direct that the remuneration, costs, charges and expenses of the trustee appointed under order 7 made on 18 November 2009 properly and reasonably incurred shall be paid from the estate in bankruptcy of the respondent in the priority fixed by s.109(1)(b) of the Bankruptcy Act 1966 (Cth).
Pursuant to Regulation 4.07(2) of the Bankruptcy Regulations 1996 (Cth), direct the trustee appointed under order 7 made on 18 November 2009 to refund to the applicant the amount deposited pursuant to order 15 made on 18 November 2009, after deducting the amount of his fees and expenses which is not recovered pursuant to order 5 above.
The parties, the trustee appointed under order 7 made on 18 November 2009, and the respondent’s trustee in bankruptcy, have liberty to apply for further orders or directions in relation to the above orders.
The applicant must serve a copy of this order on the respondent, the Official Receiver in Sydney and the two trustees within 2 days.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG 2693 of 2009
| VICTORIAN SECURITIES CORPORATION LIMITED ACN 004 496 208 |
Applicant
And
| BOUSHRA KADDIS GADALLAH |
Respondent
REASONS FOR JUDGMENT
(revised from transcript)
This judgment explains the history of this matter, and my reasons for making a number of orders in the absence of an appearance by or on behalf of the debtor, Mr Gadallah.
The principal application is a creditor’s petition filed on 5 November 2009, in which Victorian Securities Corporation Limited (“Victorian Securities”) relies on a judgment debt entered by consent against Mr Gadallah on 24 September 2009 in the sum of $4,142,227 plus interest. The debt owing at the time of the filing of the creditor’s petition was at least that sum. The petition relied upon Mr Gadallah’s failure to comply with a bankruptcy notice based on that judgment, which was served on Mr Gadallah on 8 October 2009 and required him to pay the debt or apply to the Court before 29 October 2009. Mr Gadallah has not challenged his liability under the judgment, nor the fact that he committed an act of bankruptcy as alleged.
Before the first court date on the petition, Victorian Securities applied to me ex parte on 18 November 2009 for an interim order under s.50 of the Bankruptcy Act 1966 (Cth). Its interim application sought the appointment of a registered trustee, Mr Pascoe, to take control of Mr Gadallah’s property, and other orders requiring disclosure by Mr Gadallah to Mr Pascoe of his property and affairs, and restraining his use of his property. I made detailed orders, based upon my satisfaction that an appropriate case had been made out for the exercise of s.50 powers. The jurisdiction to make orders had been clearly established, and the evidence showed grounds for real concerns, both that Mr Gadallah was insolvent and that he might dispose of assets which would otherwise have been available to his creditors, unless he were restrained pending the hearing of the petition. My full reasons for making those orders appear in the transcript of proceedings on that day, and I also gave an ex tempore judgment which I shall revise and publish only if requested.
My orders on 18 November 2009 required urgent service of the interim application on Mr Gadallah, and gave him liberty to apply on short notice to have the interim orders discharged or varied. I listed the interim application for directions on the same date that the creditor’s petition was returnable before the Registrar, being 11 December 2009.
Mr Gadallah did not apply urgently to discharge or vary the interim orders, but made contact with Mr Pascoe, and gave him some evidence concerning his financial affairs. This included a statement of assets and liabilities, which showed that he was clearly insolvent. The statement listed, with his estimates of their value, a number of interests in various real estate and companies, as well as addressing his interest in an accountancy practice.
An appearance on behalf of Mr Gadallah was filed in court before the Registrar on 11 December 2009 by a firm of solicitors. They also filed an interim application, seeking the discharge of the ex parte injunctions, but not the discharge of the order appointing Mr Pascoe as interim trustee. They foreshadowed to the Registrar that a notice of opposition to the petition would be filed, and this was filed on 16 December 2009, supported by affidavits by Mr Gadallah.
The notice of opposition contained the following four contentions:
1.I am not insolvent and I can pay my debts as and when they fall due.
2.It would be unjust to make the sequestration order because the Applicant holds security in the form of real property located at Cedar Party Road Taree in the State of New South Wales, the value of which, subject to council approvals, is in excess of the amount of the debt owed.
3.The [sic: I] hold other and additional property, the combined value of which is in excess of the amount of the debt owed.
4.The Applicant has failed to realise on its security and has materially misstated in the Creditors Petition the value of the land provided as security.
In his affidavit sworn on 15 December 2009, Mr Gadallah presented a schedule of his assets and liabilities. Contrasting with the schedule given to Mr Pascoe, it asserted substantially different estimates of the value of various property interests, and purported to arrive at a surplus of assets over liabilities. However, his evidence did not tender any evidence of a properly qualified valuer in relation to his property interests.
On 11 December 2009, Registrar Hannigan adjourned both the petition and Mr Gadallah’s application to vary the s.50 interim orders, listing them before me on 18 December 2009.
At the listing on 18 December 2009, Mr Gadallah was still represented by his solicitor, and the parties agreed that a sensible course in relation to the outstanding petition and the interim applications would be to list them for concurrent hearing today, on the basis that the outcome of the petition might well determine the outcome of the interim applications. I also varied the ex parte order by consent, so as to allow Mr Gadallah to have reasonable access to his property with the consent of Mr Pascoe during the interim period. I directed Mr Gadallah to file all additional evidence before 29 January 2010, and directed Victorian Securities to file any material in reply before 5 February 2010. I directed outlines of submissions to be exchanged.
No additional evidence was filed by Mr Gadallah. It appears that his solicitors gave him notice on 29 January 2010 of their intention to withdraw as his lawyer. Their notice of withdrawal was subsequently filed in the Court on 9 February 2010.
Last week, on 5 February 2010, Mr Gadallah presented a debtor’s petition which was accepted by the Official Receiver on the same day. It was given bankruptcy number NSW727-10-3, and Mr Samuel Piscopo was appointed trustee of his bankrupt estate. Victorian Securities were given no notice of his intention to do this, and only became aware of it in recent days.
The effect of ss.55(4A) and 57A of the Bankruptcy Act is that the acceptance of the debtor’s petition made Mr Gadallah bankrupt, and vested his property in Mr Piscopo with effect from 5 February 2010. The consequence is that the Court no longer has power to make a sequestration order on the petition of a creditor relying upon a debt arising before that bankruptcy, notwithstanding that the creditor’s petition was lodged before the debtor’s petition and was listed for hearing when the debtor’s petition was presented (see Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 594).
There is also authority suggesting the purposes of a s.50 order are completed upon the final disposition of the creditor’s petition which supported its making, either by the dismissal of the petition or by the making of a sequestration order (see Re Penning; Ex parte State Bank of South Australia (1989) 23 FCR 588 at 597). The same reasoning would suggest that Mr Pascoe’s appointment should terminate by reason of the appointment of Mr Piscopo as trustee in bankruptcy, following Mr Gadallah’s presentation of a debtor’s petition.
Victorian Securities accepts today that its petition should be dismissed, and that Mr Pascoe’s control of Mr Gadallah’s property as interim trustee should come to an end. It is arguable that either the terms of Mr Pascoe’s appointment under order 7 of my s.50 order, or the implicit limitations on his appointment, would have the effect in law of terminating Mr Pascoe’s duties. However, I consider that for abundant caution it is appropriate to discharge the relevant parts of the interim orders, including the injunctions directed at Mr Gadallah, with effect from today.
Mr Gadallah has not appeared today, either in person or by a new legal representative. Although three supporting creditors have filed appearances and are present in Court, they have not sought to be heard in relation to any issue. There is no appearance by either Mr Pascoe or Mr Piscopo, and they have made no submissions in relation to any concerns that they might have about the disposition of Mr Gadallah’s estate in bankruptcy, or about the costs and expenses arising from Mr Pascoe’s interim control of that estate.
Victorian Securities submits that, notwithstanding the dismissal of the petition, I should order that costs should be awarded in its favour in relation to both the interim applications and the petition. It submits that these should be taxed on an indemnity basis and paid from his bankrupt estate.
Victorian Securities also seeks orders which would make Mr Gadallah’s bankrupt estate primarily liable in relation to Mr Pascoe’s remuneration, costs and expenses arising from his period as interim trustee. It initially suggested that I could achieve this outcome by including in the costs awarded to it an indemnity in relation to the deposit of $11,000, which I ordered on 18 November 2009 to be paid to Mr Pascoe “to meet his fees and expenses”. However, I have doubts whether that fund can properly be regarded as costs which can be the subject of a costs order under s.32 of the Bankruptcy Act. Rather, in my opinion, Mr Pascoe’s costs are appropriately addressed by the Court pursuant to its powers in s.50, whether expressly through s.50(1)(b) which gives it a power to “make any other orders in relation to the property” of the debtor, or by implication of the role of a trustee appointed under s.50 as an officer of the Court performing a function analogous to a Court‑appointed receiver. In this respect, I note the opinion of Von Doussa J in Re Penning (supra) at 597:
Furthermore, as a necessary incident of the exercise of the jurisdiction under s 50, which existed between the presentation of the creditor’s petition and its dismissal, after the dismissal the Court can give all necessary directions as to the distribution of property of the debtors in the control of the person who had been appointed under s 50, and can settle the proper remuneration of that person for work done prior to the dismissal of the creditor’s petition.
I propose, therefore, to give directions which would make Mr Pascoe’s remuneration, costs and expenses recoverable from Mr Gadallah’s bankrupt estate, giving them the priority conferred by s.109(1)(b) of the Bankruptcy Act. That provision gives second priority to the remuneration and costs of a controlling trustee arising prior to the making of a personal insolvency agreement, and I consider that Mr Pascoe should be regarded as having performed an analogous role by reason of my s.50 order.
In relation to Victorian Securities’ legal costs in the matter, it is well established that the Court has power to award costs to a petitioning creditor notwithstanding the dismissal of its petition, and also to order that they be paid from the bankrupt estate of the debtor arising from his own petition, with the same priority that those costs would have had if the bankruptcy arose from a sequestration order. This was the opinion of Burchett J in Re Hankey; Ex parte Kratzmann (1986) 11 FCR 512, which has been followed in other cases, including by Finkelstein J in Equuscorp Pty Ltd v Chang [2000] FCA 486.
As with a creditor’s petition which is dismissed when a debtor belatedly pays an uncontested debt, it may well be appropriate to award the creditor its costs in bankruptcy, notwithstanding the dismissal of the petition. I considered that situation in World Best Holdings Ltd v Sarker [2006] FMCA 1876, where I explained why this was consistent with s.51 of the Bankruptcy Act.
However, it does not follow that the petitioner’s costs should be awarded on an indemnity basis, merely because the making of a sequestration order has become unnecessary by reason of either the payment of the debt or the filing of a debtor’s petition. In that situation, I consider that normally costs should be awarded on the usual party‑party basis as taxed under the Bankruptcy Act, and be paid with the priority given by s.109(1)(a) of the Bankruptcy Act if the debtor is bankrupt on his own petition. Something special needs to be identified to justify a higher measure of those costs. In this respect, the Court’s discretion under s.32 of the Bankruptcy Act is as broad as the other powers of this Court and other Courts to award costs, and it is appropriate to apply established principles upon which costs on an indemnity basis might appropriately be awarded (compare Sheppard J in Colgate‑Palmolive Co v Cussons Pty Limited (1993) 46 FCR 225, and other authorities which were summarised by Lucev FM in Genovese v BGC Construction Pty Ltd (No.2) [2007] FMCA 601).
In the present case, I have not been satisfied that Victorian Securities’ costs should be awarded on an indemnity basis in relation to the commencement of the proceedings, nor in relation to its interim application made on an ex parte basis. Although I was satisfied that a sufficient basis for an ex parte s.50 order had been made out, I would not conclude now that Mr Gadallah might not have had basis for contesting the continuance of that order, at least on a reasonably arguable basis. It would be inappropriate for me to explore in detail all the issues that might have arisen, merely for the purposes of deciding a costs application, nor to arrive at conclusions as to the likely outcome of Mr Gadallah’s grounds of objection to the petition (compare McHugh J in Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 624‑625).
The present case is not one where a debtor has protracted proceedings in the bankruptcy court by pursuing spurious adjournment applications or clearly unmeritorious contentions, which have unreasonably increased the creditor’s costs. Although the documents filed on behalf of Mr Gadallah in December held obvious difficulties, particularly in relation to his assertions as to his financial position, I am not persuaded that it was unreasonable for Mr Gadallah and his legal and accounting advisers at that time to be considering his position in relation to Victorian Securities’ petition and its s.50 application.
However, it does appear to me that it was unreasonable of Mr Gadallah to delay until the week before the contested hearing set down for today, before openly conceding that his estate should be administered in bankruptcy. I consider that the filing of his debtor’s position so near to the hearing indicated a consciousness that his opposition to the petition was manifestly hopeless. The date when he arrived at this conclusion is unclear, but in my opinion it was unreasonable for him to have either delayed reaching this conclusion beyond early January 2010, or to have delayed announcing his conclusion until so near to the hearing date. The result has been the unreasonable incurring of additional costs to Victorian Securities in relation to its preparation for a fully contested hearing on both the interim applications and the petition. I consider that its costs immediately leading up to today’s listing should be awarded to Victorian Securities on an indemnity basis. I am unable to assess the nature and extent of those additional costs, and they might not be easily distilled from its general costs in the matter. To avoid niceties for a taxing officer, I consider that it is appropriate to award costs on an indemnity basis in relation to all its costs incurred subsequent to 10 January 2010.
For the above reasons, I have made the orders set out at the start of this judgment, which will be made and entered immediately. They confer rights on the two trustees and on Mr Gadallah and Victorian Securities, to apply for further orders or directions if any difficulty arises in relation to the administration of Mr Gadallah’s bankrupt estate arising from Mr Pascoe’s earlier involvement, or otherwise from the orders I am making today.
I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of Smith FM
Associate: Lilian Khaw
Date: 25 February 2010
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