White v Hawkesbury City Council - [2003] FMCA 420

FEDERAL MAGISTRATES COURT OF AUSTRALIA

WHITE & ANOR v HAWKESBURY CITY COUNCIL

[2003] FMCA 420

BANKRUPTCY – Application to set aside bankruptcy notice and for an extension of time for compliance with the bankruptcy notice – order made ex parte under s.41(6A) on the basis of a solicitor’s affidavit – false statements in the affidavit – whether the order extending time should be rescinded.

COSTS – Consideration of indemnity costs.

PRACTICE AND PROCEDURE – Duty of candour imposed on an applicant proceeding ex parte – standard of honesty and competence expected of a legal practitioner.

Bankruptcy Act 1966 (Cth), ss.30, 37, 41,
Federal Magistrates Court Rules 2001 (Cth)

Lindholdt v Merritt Madden Publishing Pty Limited [2002] FCA 260
Re Baker; ex parte TLE Electrical Pty Limited (1988) 79 ALR 445
Wasilenia v Deputy Commissioner of Taxation [2003] FMCA 8

First Applicant:

Second Applicant:

DAVID RAYMOND WHITE

SUZANNE MAY WHITE

Respondent:

HAWKESBURY CITY COUNCIL

File No:

SZ1820 of 2003

Delivered on:

16 September 2003

Delivered at:

Sydney

Hearing date:

16 September 2003

Judgment of:

Driver FM

REPRESENTATION

Counsel for the Applicant:

Mr R DeBuse

Solicitors for the Applicant:

Reimer Winter Williamson

Counsel for the Respondent:

Mr F Kunc

Solicitors for the Respondent:

A R Walmsley & Co

ORDERS

THE COURT DIRECTS THAT:

The application for costs against the solicitors for the applicants is adjourned for directions at 9.30am on 27 October 2003.

THE COURT ORDERS THAT:

The application filed on 5 September 2003 is dismissed.
The order made on 5 September 2003 to extend time to comply with the bankruptcy notice is rescinded pursuant to s.37(1) of the Bankruptcy Act 1966 (Cth).
The applicant is to pay the respondent’s costs and disbursements of and incidental to the application on an indemnity basis.

FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SZ1820 of 2003

DAVID RAYMOND WHITE

First Applicant

SUZANNE MAY WHITE

Second Applicant

And

HAWKESBURY CITY COUNCIL

Respondent

REASONS FOR JUDGMENT

(revised from transcript)

This is an application made by the respondent creditor, the Hawkesbury City Council, to set aside an order made by a registrar of this Court on 10 September 2003. The Council's application seeks that the order be rescinded ab initio with the effect that the time for compliance with a bankruptcy notice issued at the instigation of the Council to the applicants, David Raymond White and Suzanne May White, which are the subject of the substantive proceedings, expired on 10 September 2003. The Council also seeks an order that the application by Mr and Mrs White to set aside the bankruptcy notice be dismissed and that costs be paid on an indemnity basis.
The relevant background is that bankruptcy notice NN2044 of 2003 was issued at the instigation of the Hawkesbury City Council on the basis of a default judgment given in the Supreme Court of New South Wales on 20 June 2003. It is not disputed that that notice was served upon the debtors, the present applicants. It is material that the time for compliance with that bankruptcy notice expired on 10 September 2003 if time for compliance were not to be extended.
On 5 September 2003, Mr and Mrs White applied pursuant to ss.30, 41(6A) and 41(7) of the Bankruptcy Act 1966 (Cth) (“the Bankruptcy Act”) to set the bankruptcy notice aside and for an extension of time. With that application, also filed on 5 September 2003, is an affidavit by Mr and Mrs White's solicitor Mr Anil Ivan Herat in support of the application. The application to set aside the bankruptcy notice and the supporting affidavit assert that the applicants have a counter-claim, set‑off or cross demand, that could not have been set up in the original action, which is of equal or greater value than the amount claimed in the bankruptcy notice, and also that proceedings to set aside the default judgment supporting the bankruptcy notice had been instituted.
Both statements in the application and the solicitor’s affidavit were wrong. In fact, proceedings to set aside the default judgment were not instituted until yesterday, 15 September 2003. Secondly, it is now accepted on behalf of the applicants that there can be no claim under s.41(7) of the Bankruptcy Act in that the only material counter-claim, set-off or cross demand was one that was in fact set up in the original action in the Supreme Court and it therefore does not satisfy the requirements of s.41(7).
Section 37(1) of the Bankruptcy Act provides that:
Subject to subsection (2) the Court may rescind, vary or discharge an order made by it under this Act or may suspend the operation of such an order.
Subsection (2) is not presently relevant.
The order in question in these proceedings is the order made by Registrar Grant on 5 September 2003, the day on which the application and supporting affidavit were filed, to extend time for compliance with the bankruptcy notice pursuant to s.41(6A) of the Bankruptcy Act until today, Tuesday, 16 September 2003.
I am asked to rescind that order ab initio pursuant to s.37(1) of the Bankruptcy Act because the order was obtained on the basis of false information, namely that proceedings to set aside the original judgment had been instituted at the time the application was made and that the applicants had a counter-claim, set-off or cross demand that could not have been set up in the original action.
The consequence of setting aside the extension of time order ab initio or, more particularly, rescinding the order in the language of s.37, is that time for compliance with the bankruptcy notice would have expired on 10 September 2003 and an act of bankruptcy would have been committed. It is arguable that, even at this stage, I could extend time for compliance with the bankruptcy notice even if no previous order had been made, on the basis of the application filed on 5 September 2003. However, if I were minded to do so I would not rescind or set aside the order that has been made as from the date that it was made.
The Council proceeds on the affidavit of Adrian Richard Walmsley filed in court on 16 September 2003 and exhibits filed on the same day. In addition, the Council relies upon a note of conversations between Mr Walmsley and his counsel Mr Kunc, and also between Mr Walmsley and Mr Herat, the solicitor for the Whites (exhibit R1). There was some contest whether the file note of the latter conversation, which is exhibit R1, is a complete record of that conversation. I find that the file note presents the salient parts of that conversation.
The substance of the conversation was that Mr Walmsley enquired of Mr Herat on 10 September 2003 whether he had at that stage filed a proceeding to set aside the default judgment. Mr Herat stated that he had not. Mr Herat conceded as much in his affidavit filed on 15 September 2003, which is relied upon by Mr and Mrs White. Both Mr Walmsley and Mr Herat were cross-examined on their affidavits.
In addition to the power conferred by s.37, the Federal Magistrates Court Rules 2001 (Cth) (“the Federal Magistrates Court Rules”) relevantly provide in rule 16.05 that an order of the court may be set aside after it has been entered if the order is made in the absence of a party or the order is obtained by fraud. In this case, there is no doubt that the order was made in the absence of a party. The order was made ex parte on 5 September 2003. There is also no dispute that, at the time that order was made, there was no application to set aside the default judgment. Neither, as it now appears, was there any substance to the application under s.41(7).
Mr Herat was pressed in cross-examination by Mr Kunc about his reasons for stating, in the application filed on behalf of his clients and in the supporting affidavit prepared by him in support of the application, that Mr and Mrs White had applied to set aside the judgment of the Supreme Court and that his clients had a counter-claim exceeding the amount due under the bankruptcy notice. Mr Herat explained that in relation to the second matter he was instructed by his clients that they did have a counter-claim exceeding the amount due under the bankruptcy notice, although he added that from his perusal of the relevant court documents, he was aware of the counter-claim set up in the proceedings in the Supreme Court.
He explained that he did not understand the significance of the application form which invites applicants to identify whether they have an application to set aside a bankruptcy notice on the basis that there is a counter-claim, set-off or cross demand that could not have been set up in the original action. He also stated that he did not fully appreciate at the time the significance of the application form and the form of affidavit which invite an applicant to state whether a proceeding has been instituted to set aside a judgment supporting the bankruptcy notice.
On a generous view, it may be said that Mr Herat was acting swiftly to protect the interests of his clients and, in order to get his foot in the court door, made two incorrect statements. The most obviously wrong was the statement of fact that the applicants had applied to set aside the default judgment. Mr Herat knew that that was not correct at the time he made the statement. On a less charitable view, Mr Herat was knowingly making at least one false statement in the application and supporting affidavit.
As was discussed during argument, the action of Mr Herat was either stupid or was dishonest. Mr DeBuse, for the applicants, submitted to me that I should take the view the action of Mr Herat was merely stupid. I am prepared to accept that Mr Herat did not set out with the intention of lying to the Court. If he did have that intention, as Mr DeBuse submitted, the lie would have been very quickly found out.
Rule 30.02 of the Federal Magistrates Court Rules in fact requires that an application to set aside a judgment supporting a bankruptcy notice be annexed to the application to set aside the bankruptcy notice. That was not attached. If anything was to be done in substance with the application by Mr and Mrs White, the truth regarding their application to set aside the default judgment would have been revealed in due course. Accordingly, there would have been no point in Mr Herat deliberately lying to the Court. Nevertheless, he was very foolish and he did make a false statement. He did know at the time he filed the documents that his statement that an application had been filed to set aside the default judgment was incorrect.
In his affidavit Mr Herat deposes that he spoke to an officer in the registry and explained that he had not had time to get all the documents that he would need to file in the Supreme Court. I do not place any particular significance on that asserted conversation. The obligation on officers of the Court is to make full and frank disclosure to the Court at the time of making an application on an ex parte basis. That disclosure should be apparent on the face of the documents relied upon, not left to an undocumented conversation with a registry officer.
The Court expects a high standard of its officers. Indulgence is given to self-represented litigants on occasion and on occasion probably too much indulgence. However, the Court expects rather more of legal practitioners. Unfortunately, that expectation was not met on this occasion.
In Lindholdt v Merritt Madden Publishing Pty Limited [2002] FCA 260, referred to in Wasilenia v Deputy Commissioner of Taxation [2003] FMCA 8, the Federal Court held that it is an abuse of process on an ex parte application for a legal practitioner not to discharge his or her obligation of full and frank disclosure. As the Federal Court said on that occasion at [45]:
“ A party who applies ex parte for an order in the exercise of a judicial or quasi judicial power is required to meet a high standard of candour and responsibility in bringing to the attention of the decision maker all facts material to the determination of the application.
This obligation extends to facts which the absent party at present would presumably rely upon in defence of the application. The existence of such a duty of candour is not limited to applications to the Court for injunctive or other equitable relief. An order obtained in breach of an ex parte applicant's duty of candour will almost invariably be set aside even if on a fresh application following full disclosure the applicant would be entitled to an order in similar terms.”
Mr DeBuse submitted to me that in this case Mr and Mrs White would be entitled to an order in similar terms in that the application to set aside the bankruptcy notice was, in substance, founded upon the proposition that the debt claimed in the bankruptcy notice is not due. That is said to be the basis on which application is now made to set aside the default judgment.
That may in theory be arguable but nothing is said about that ground for setting aside the bankruptcy notice in the application or in Mr Herat's supporting affidavit. That argument was only raised orally this afternoon.
In my view, s.41(6A) of the Bankruptcy Act provides for the possibility of an extension of time for compliance with a bankruptcy notice in limited circumstances. In any circumstance the power to extend time is in the discretion of the Court. One circumstance where the discretion may be exercised is where proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued had been instituted by the debtor before the time fixed for compliance with the bankruptcy notice has expired. Clearly, on the facts, that had not occurred prior to the filing of this application on 5 September 2003.
Another circumstance that may support an extension of time is where an application has been made to the court to set aside the bankruptcy notice. Where an application has been filed to set aside a judgment supporting a bankruptcy notice one would also expect there to be an application to set aside the bankruptcy notice. However, s.41(6A)(b) has more work to do than that. There are other circumstances in which application may properly be made to set aside a bankruptcy notice. For example, the notice may be defective.
In this case no circumstance supporting the exercise of discretion under s.41(6A)(b) was identified in the application or in the supporting affidavit and has not been advanced to date in these proceedings on the application independently of the bare assertion relevant to the exercise of discretion pursuant to s.41(6A)(a). Because of Mr Herat’s lack of candour, the proceeding leading to the exercise of discretion under s.41(6A)(a) was an abuse of process.
In addition, while I accept that the Court could, in appropriate circumstances, exercise discretion to extend time notwithstanding an abuse of process, this is not an appropriate case for such action. Parties retaining solicitors are entitled to expect that the solicitors will act competently and in good faith on their behalf. Mr Herat in these proceedings did not act competently. He instituted proceedings on a factual basis which did not exist. He also instituted proceedings on a legal basis which did not exist, with reference to the requirements of s.41(7) of the Bankruptcy Act.
The setting aside of the extension of time order, or in the language of s.37, the rescission of that order from the time it was made, will have an adverse impact on Mr and Mrs White in that they will have committed an act of bankruptcy. However, it was their choice to retain Mr Herat and they must bear the consequences of the steps taken by him on their behalf. I also must bear in mind the interests of the creditor, the Hawkesbury City Council, and indeed any other creditors, who might be adversely affected by an extension of time for compliance with the bankruptcy notice that should not have been granted.
I heard submissions on the language of s.37(1) and the difference between a rescission, a variation and a discharge of an order. I was taken by Mr Kunc in particular to the decision of the Federal Court in Re Baker; ex parte TLE Electrical Pty Limited (1988) 79 ALR 445, in particular at page 447. I accept on that authority that where an order is rescinded under s.37 it is rescinded ab initio. Where, on the other hand, an order is discharged, it is discharged only from the date of the discharge.
I find that the application made on 5 September 2003 for an extension of time was an abuse of process because materially false statements were made in the application and supporting affidavit and Mr Herat did not discharge his obligation of full and frank disclosure in an ex parte proceeding.
Because the proceeding was an abuse of process, I am satisfied that the order made on that day should be rescinded ab initio. I am not persuaded that any other order should be made to extend time for compliance of the bankruptcy notice. The consequence is that an act of bankruptcy was committed on 10 September 2003 when the time for compliance with the bankruptcy notice expired.
The other questions are whether the application should be dismissed in its entirety and also the questions of costs. The applicants are now pursuing proceedings to set aside the judgment supporting the bankruptcy notice. It is possible that that proceeding may be successful. It is reasonably arguable in these circumstances that I should not dismiss the application to set aside the bankruptcy notice in its entirety given that if the applicants are successful in setting aside the default judgment the basis for the bankruptcy notice falls away. However, in consequence of the recision order that I will make an act of bankruptcy will have been committed. The main purpose of the debtor’s application will have been lost.
I also accept Mr Kunc's submission that there is a material difference in the quality of a bankruptcy notice and a creditor's petition. The latter, if successful, leads to a sequestration order with obviously serious consequences to a debtor. The former may have consequences for particular debtors in particular circumstances but it is a less serious matter. If the applicants are successful in setting aside the default judgment there will be no basis for further bankruptcy proceedings based upon the default judgment. I see no sufficient reason to leave the application to set aside the bankruptcy notice on foot.
I will therefore dismiss the application.
On the question of costs, Mr Kunc submits that I should award costs on an indemnity basis. I accept that submission. The application should not have been filed in the terms in which it was filed and the supporting affidavit should not have been presented in the form that it was presented. The respondent Council has been put to the trouble and expense of dealing an order for an extension of time for compliance with the bankruptcy notice in circumstances where the order should not have been made because it was made on a false factual basis. The Council has also been successful in disposing of the application to set aside the bankruptcy notice itself.
Given the circumstances in which the application was presented and an extension of time granted, it is, in my view, both necessary and appropriate that the court make a costs order on an indemnity basis to express its disapproval. I will therefore order that the application filed on 5 September 2003 be dismissed, that the order made on 5 September 2003 to extend time for compliance with the bankruptcy notice be rescinded pursuant to s.37(1) of the Bankruptcy Act and that the applicants pay the respondent's costs of and incidental to the application on an indemnity basis. I will adjourn the application for costs orders against the solicitors for the applicants for directions only at 9.30am on 27 October 2003.

I certify that the preceding thirty-five (35) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate:

Date: 3 October 2003