Zhang Shijing Laywers v Huang
[2022] FedCFamC2G 451
FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA
(DIVISION 2)
Zhang Shijing Laywers v Huang [2022] FedCFamC2G 451
File number(s): SYG 2117 of 2021 Judgment of: JUDGE STREET Date of judgment: 16 May 2022 Catchwords: BANKRUPTCY – failure to pay a judgment debt – whether Court satisfied the first respondent is able to pay his debts – whether there is other sufficient cause pursuant to s 52(2)(b) of the Bankruptcy Act 1966 (Cth) – where there were proceedings before the Supreme Court of New South Wales – Court not satisfied other sufficient cause not to make sequestration order – sequestration order made Legislation: Bankruptcy Act 1966 (Cth) ss 27, 43, 52(1), 52(2), 52(2)(a), 52(2)(b)
Uniform Civil Procedure Rules 2005 (NSW)
Cases cited: Barnes v Addy (1874) LR 9 Ch App 244
Browne v Dunn (1893) 6 R 67 (HL)
Division: Division 2 Family Law Number of paragraphs: 31 Date of hearing: 16 May 2022 Place: Sydney Counsel for the Applicant: Mr A Spencer Solicitor for the Applicant: Zhang Shijing Lawyers Counsel for the Respondents: Mr H Fielder Solicitor for the Respondents: Fusion Legal ORDERS
SYG 2117 of 2021 FEDERAL CIRCUIT AND FAMILY COURT OF AUSTRALIA (DIVISION 2)
BETWEEN: SHIJING ZHANG AND CHUNSHENG JIANG TRADING AS ZHANG SHIJING LAWYERS
Applicant
AND: KAI YIN HUANG
First Respondent
XUAN JING HUANG
Second Respondent
ORDER MADE BY:
JUDGE STREET
DATE OF ORDER:
16 MAY 2022
THE COURT ORDERS THAT:
1.The Court refuses leave for the filing of the interim application by the respondents.
2.Cross examination is limited to half an hour without further leave.
3.The Creditors Petition as against the second respondent is dismissed.
4.A sequestration order is made against the estate of Kai Yin Huang.
5.The petitioning creditor’s costs are to be paid out of the bankrupt estate with the priority to which they are entitled, in an amount as taxed or agreed.
Note: The form of the order is subject to the entry in the Court’s records.
Note: This copy of the Court’s Reasons for judgment may be subject to review to remedy minor typographical or grammatical errors (r 10.14(b) Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth)), or to record a variation to the order pursuant to r 10.13 Federal Circuit and Family Court of Australia (Family Law) Rules 2021 (Cth).
Section 121 of the Family Law Act 1975 (Cth) makes it an offence, except in very limited circumstances, to publish proceedings that identify persons, associated persons, or witnesses involved in family law proceedings.
IT IS NOTED that publication of this judgment by this Court under a pseudonym has been approved pursuant to s 121(9)(g) of the Family Law Act 1975 (Cth).
EX TEMPORE REASONS FOR JUDGMENT
JUDGE STREET:
INTRODUCTION
These proceedings arise within the Court’s jurisdiction pursuant to s 27 of the Bankruptcy Act 1966 (Cth) (“the Act”) in which the petitioning creditor is seeking a sequestration order against the first respondent.
The proceedings were commenced on 15 November 2021. The act of bankruptcy occurred on 9 November 2021. The bankruptcy notice was based on a judgment debt in the total amount of $167,126.79 as a result of a judgment obtained in the District Court of New South Wales on 26 February 2020 in the sum of $152,205.29. The judgment was against both the first respondent and his wife.
BEFORE THE COURT
In the course of the hearing proceedings today, it was identified that the act of bankruptcy by the second respondent occurred after the filling of the petition as against the second respondent. Accordingly, it was conceded that was fatal to the petition as against the second respondent.
The proceedings have continued as against the first respondent in these proceedings. The Court has had the benefit of lengthy written submissions by both the applicant and the first respondent. There has been tendered an agreed bundle that identifies that there was an act of bankruptcy in respect of the first respondent that was within the jurisdiction under s 43 of the Act.
In essence, the first respondent submits that no sequestration order should be made, first, because it is alleged that the first respondent is able to pay his debts and, secondly, there is other sufficient cause not to make a sequestration order.
SUBMISSIONS
The applicant’s supplementary submissions, filed on 19 April 2022, are as follows:
1.In their amended Notice of Opposition, the Respondents raise solvency for the first time. The material that has been filed in support falls well short of establishing that either respondent is solvent. Nor does the material disclose how the respondents propose to fund the Supreme Court Proceedings they have recently commenced.
Legal Principles
2.“[O]nce an act of bankruptcy has been committed a creditor is prima facie entitled to a Sequestration Order” Cain v Whyte (1933) 48 CLR 639; Ling v Enrobook Pty Ltd (1997) 74 FCR 19; In Body Corporate SP 31235U v Miao [2014] FCCA 2457.
3.A debtor may resist a petition by demonstrating that he or she is solvent. The test of insolvency is now well settled. The authoritative statement on solvency is that of Barwick CJ in Sandell v Porter (1966) 115 CLR 666 at 670. The test is not limited to a debtor’s immediately available cash resources, but may:
“… extend to moneys which he can procure by realization by sale or by mortgage or pledge of his assets within a relatively short time — relative to the nature and amount of the debts and to the circumstances, including the nature of the business, of the debtor.“
4.The onus is with the debtor. Clyne v DCT (1985) 5 FCR 1 at 5 (per Fisher, Morling and Wilcox JJ); Liang v LV Property Investments Pty Ltd [2015] FCA 1057 at [52] also Bank of Queensland Ltd v Pascoe [2014] FCCA 1394, at [11].
5.In Miller v Ghosh (No 5) [2018] FCCA 3760 Judge Manousaridis adopted what was said in Deputy Commissioner of Taxation v Caporale (2013) 92 ATR 66; [2013] FMCA 5 by Driver FM:
“The inquiry emphasises that it involves a consideration of the ability to command cash resources through his or her own assets. The Court must also look at the level of the debtor’s recurrent expenses and earnings in addition to whether there are cash resources from assets.
6.A respondent debtor bears the onus of proving to the Court that their assets are sufficient to pay their liabilities as and when they become due and payable. It is not sufficient to simply show an excess of assets over liabilities. The respondent debtor must also establish that their assets are available to be realised and that they are capable of ready realisation.The Owners - Strata Plan No 20347 v Saha [2021] FCA 961 Miller v Ghosh (No 5) [2018] FCCA 3760.
7.To discharge the onus proving solvency “the Court should ordinarily be presented with the “fullest and best” evidence of the financial position of the respondent” Commonwealth Bank of Australia v Begonia (1993) 11 ACLC 1075 at 1081; Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] , approved in Expile Pty Ltd v Jabb’s Excavations Pty Ltd [2003] NSWCA 163; [2003] 45 ACSR 711 at [16] per Santow J, Meagher and Handley JJA agreeing, in an analogous context).
8.Speaking in the context of corporate insolvency, Weinberg J in Ace Contractors & Staff Pty Ltd v Westgarth Development Pty Ltd [1999] FCA 728 at [44] , said that:
“unaudited accounts and unverified claims of ownership or valuation are not ordinarily probative of solvency. Nor are bald assertions of solvency arising from a general review of the accounts, even if made by qualified accountants who have detailed knowledge of how those accounts were prepared”.
See also for example C & O Voukidis Pty Ltd v Break Fast Investments Pty Ltd [2014] FCA 1000
9.Even if “other sufficient cause” has been shown, that merely enlivens the court’s discretion to refuse to make a sequestration order. The power in s 52(2) is permissive, not mandatory. Even if a debtor can bring himself or herself within s 52(2)(b), that does not entitle him or her to have a sequestration order refused: Endresz v ASIC (No 2) 228 FCR 334 at [37] per Edmonds, Gordon and Beach JJ; Russell v Polites Investments Pty Ltd [2012] FCA 11 at [24] ; Liang v LV Property Investments Pty Ltd [2015] FCA 1057 at [53] .
Application of Principles to Facts
10.The evidence which the Respondents have filed falls well short of what is required.
11.There is no evidence sworn by the second Respondent at all. The Respondents claim to own several properties of indeterminate worth which are tenanted. Approximations of monthly obligations to two banks are disclosed with no indication of the size of the loans or their terms. Weekly rentals are disclosed but one tenant appears to be in default.
12.There is no proper evidence of what the Respondents recurrent expenses are other than the imprecise statements as to their monthly obligations in relation to their bank debt. Those obligations alone consume the vast bulk of the disclosed income. Missing from the evidence entirely are the following expenses that necessarily are incurred by reason of the ownership of multiple properties:
a.Council rates;
b.Water rates;
c.Land tax;
d.Insurance;
e.Repairs;
13.From the monthly obligations that are said to be owed to the banks, it may be inferred that the principal debts are significant and that the Respondents owe the usual obligations of a mortgagor to maintain the properties in good order and ensure that rates, taxes and insurance are paid up to date.
14.Other than what is said in relation to the properties, there is no evidence of what amounts the Respondents themselves require to feed and clothe themselves and what other domestic expenses the Respondents may have in respect of themselves and any dependents. There is no evidence as to how the Respondents might fund the litigation they have commenced going forward. Indeed the evidence is that it has already stalled. The Respondents have failed to respond to correspondence, failed to provide particulars and failed to take steps to have the proceedings that they have so recently commenced moved to the appropriate list. The court might well infer that the principal purpose of launching the Supreme Court Proceedings was to stymie the Applicant’s efforts in these proceedings.
15.There is evidence of a substantial tax debt but no evidence of what arrangements might be in place in relation to that debt. Otherwise, there is no evidence as to the Respondents’ tax affairs. It may be assumed that the receipt of income rental would ordinarily involve some income tax obligations but the Respondents have not exposed any of that detail to the court.
16.The evidence such as there is of the ownership and value of the properties is completely unsatisfactory. Essentially it is the same type of evidence that the court found was unpersuasive in The Owners - Strata Plan No 20347 v Saha [2021] FCA 961 (at [45]).
17.The evidence discloses that without the loan contemplated by the Letter of Offer from MaxRye Pty Ltd the Respondents are unable to pay the creditor’s debt. There is no evidence of what the proposed lender was told in any application. For example, there is no evidence that the lender knows about the judgment debt against the Respondents or the failure to comply with a Bankruptcy Notice, or of the tax arrears that are disclosed in the evidence. Clause 11.1 would allow the lender to walk away in the face of any non-disclosure. Seemingly the lender was told that the funds were to be used for a commercial purpose (Clause 11(m)).
18.The Letter of Offer contains the following relevant provisions:
a.It has not been accepted
b.It may be withdrawn at any time (chapeau page 1);
c.It is conditional upon (see clause 5.2):
i.The provision of financial information satisfactory to the lender (5(xi))
ii.appropriate insurance being taken out over the security property noting the interest of the lender (Clause 5(viii) and the maintenance of that insurance;
iii.any arrears of land tax, rates or other statutory charges being paid either beforehand or from the loan proceeds;
19.There is no evidence that these preconditions have or can be satisfied, nor is there any evidence as to how the Respondents will fund their obligations going forward.
20.In any event drawing down on the Loan merely replaces one debt with another. Drawing down on the loan to pay the Applicant will increase the Respondents’ liabilities by the costs and expenses of the transaction and convert an unsecured debt into a secured one, to the disadvantage of other creditors. The court would not approve such an arrangement with the paucity of information available to it.
21.The Respondents ask the Court to exercise a discretion in their favour but have not provided the Court with the frank exposition of their position which is required. The Court could have no confidence that they are solvent. It is not in the interests of the community that insolvent litigants should be permitted to progress litigation at the expense of others.
The respondent’s consolidated submissions, filed on 20 April 2022, are as follows:
1.These are the respondents’ consolidated submissions in relation to the creditor’s petition filed on 15 November 2021.
2.By amended notice of objection filed on 29 March 2022, the respondents oppose the sequestration order and seek for the application to be dismissed pursuant to s 52(2) of the Bankruptcy Act 1966 (Cth) on grounds that:
a.they are able to pay their debts, including the alleged debt the subject of the application; or
b.for other sufficient cause, a sequestration order ought not be made, including:
i.the respondents have an offsetting claim against the applicants for an amount greater than the amount of the alleged debt (which has been filed recently in the Supreme Court of New South Wales and concerns allegations that the applicants were professionally negligent in the provision of their legal services to the respondents);
ii.as a result of the alleged negligence of the applicants, the respondents say that they have been unable to recover a substantial judgment sum and a costs order made in their favour and have incurred even further costs in attempting enforcement of such orders to no avail; and
iii.the applicants are otherwise not entitled to the debt the subject of the application by reason of (i) and (ii) above unless and until the negligence proceedings have been heard and determined.
3.The respondents deny that the applicants are entitled to be paid the debt at all. The debt claimed by the applicants relates to fees for legal services provided which the respondents allege were provided negligently and caused them loss and damage. The respondents have put the debt in issue in the proceedings currently on foot in the Supreme Court of New South Wales 2022/00030824.
4.The respondents rely on affidavits sworn by Kai Yin Huang (the first respondent) on 2 February 2022 and 2 March 2022 and an affidavit affirmed by Hao Jie Seow on 1 April 2022.
Background
5.In October 2015, a group of family members (the “Petkovski Family”) commenced proceedings in the Supreme Court of NSW against the respondents.
6.At around the same time, the respondents retained the applicants as their solicitors in those proceedings.
7.On the advice of the applicants, the respondents filed a cross-claim in the proceedings against the Petkovski Family on the basis of, among other things, a claim for damages for misleading conduct and unconscionable conduct and declaratory relief on the basis of constructive trust; Huang #1 at [6].
8.The cross-claim which the applicants advised the respondents to file only claimed primary relief against one of the Petkovski Family members, Luben Petkovski, and otherwise pleaded a very narrow case against the other Petkovski Family members.
9.The respondents relied on the applicants as their solicitors in relation to the adequacy of the cross-claim; Huang #2 [5]-[6].
10.The Court found that Luben Petkovski had engaged in unconscionable conduct, misleading and deceptive conduct and economic duress and that other family members (Diana, Lence and George Petkovski) were knowingly concerned in the unconscionable conduct and that the respondents’ damages would be assessed in a further hearing; Huang #1 at [12] and Annexure B.
11.In the damages hearing, the Court expressly identified its concern about the cross-claim not being properly pleaded to seek relief against the persons that were found to be knowledgably involved in the contravention. As part of that hearing, the Petkovski parties (other than Luben) moved on a motion to set aside the orders concerning their knowing involvement (which the Court said “were the foundation of the compensation sought through this claim”); Huang #1 Annexure C (e.g. para 8, 14, 19, 41, 49-50 of judgment).
12.The Court’s analysis of the adequacy of the pleaded cross-claim (and the way the case was run for the respondents) commenced at paragraph 22 of that judgment; Huang #1 Annexure C. The Court concluded at paragraph 35 that the cross-claim failed to claim relief against the Petkovski parties (other than Luben) despite such parties being knowingly involved in the unconscionable conduct.
13.The judge also concluded at paragraph 51 that due to the failure to plead relief against the Petkovski parties (other than Luben) in the cross-claim, the respondents were not entitled to relief from anyone other than Luben.
14.By judgment delivered on 14 November 2019, the Court ordered Luben Petkovski to pay the respondents in excess of $600,000 in damages; Huang #1 at [15].
15.On 15 October 2020, Luben Petkovski filed for bankruptcy. The respondents have been unable to recover any of the damages awarded to them in the Petkovski proceedings. They have incurred $57,462.83 in costs to date in attempting to recover the judgment sum, to no avail; Seow affidavit [27].
16.The respondents allege that, had the cross-claim been properly pleaded, they would have been awarded that same relief against Diana, Lence and George Petkovski (as persons involved in the contravention) and which is likely to have been recoverable against them since, unlike Luben, those other family members hold assets in their names; Huang #1 at [22].
17.The respondents received legal advice in December 2021 in relation to the adequacy of the applicants’ legal advice in preparing the cross-claim. The respondents filed a Statement of Claim against the applicants for professional negligence in the Supreme Court of NSW on 2 February 2022; Huang #1 Annexure E.
18.In those proceedings, the respondents claim $613,548 in damages and a stay of the orders the subject of the debt in this petition; Huang #2 [9].
19.If the respondents are made bankrupt, they will not be able to continue with those proceedings and, if so, the serious question about the applicants’ negligence will not be resolved; Huang #2 [10]-[11].
20.Mr Huang has expressed his aggrievance about the negligent legal services provided by the applicants which has not only caused them to ‘lose out’ on recovering the judgment award to date against the Petkovskis but has also caused him to refuse to pay for the legal fees which essentially caused that loss (such fees being the debt in this petition); Huang #1 at [24]-[25].
The Debt claimed in the petition
21.The Debt claimed in the petition is an amount of $152,205.29 for orders made on 26 February 2020 by the District Court on 26 February 2020 (over 2 years ago). Paragraph 1 of the creditor’s petition and paragraph 2 of the affidavit in support dated 15 November 2021 incorrectly refer to these orders being made by the “Local Court”.
22.Those orders were made following a costs assessment process (carried out by a costs assessor) for legal fees that the applicants had charged to the respondents in the Petkovski proceedings. The Court did not otherwise make any determination on the merits as to whether the applicants were entitled to be paid those legal fees, rather, the Court entered judgment following receipt of the costs assessment certificate from the costs assessor.
23.The applicants sent a letter on 20 January 2021 (some 11 months after the orders were made) seeking payment of their fees; Huang #2 [14].
24.The respondents were not pleased with the applicants seeking to be paid in circumstances where the applicants essentially failed them as their solicitors in the Petkovski proceedings; Huang #2 [14].
25.On 3 March 2021, the respondents lodged a complaint to the Office of the Legal Services Commissioner in relation to the applicants; Huang #2 [15].
26.The OLSC complaint was closed at it related to allegations of professional negligence. However, the respondents were reluctant to commence legal proceedings against the applicants for their negligence in early 2021 and thereafter due to, among other things, the costs involved and the fact that the applicants had not previously pressed for payment of their fees; Huang #2 [17]-[20].
27.Since then, further time passed during which (1) the applicants did very little, if anything, to obtain payment of their fees the subject of the orders until issuing the bankruptcy notice in late 2021, and (2) the respondents maintained their reluctance to incur the cost of litigating against the applicants particularly in circumstances where the applicants were not chasing them for payment.
Legal principles and analysis
28.Section 52(2) of the Bankruptcy Act 1966 (Cth) provides:
(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.
Ability to pay their debts – s 52(2)(a)
29.Solvency requires an ability to pay debts as they fall due. This includes both cash on hand and money reasonably quickly realisable by asset realisation. Temporary lack of liquidity will not generally constitute insolvency: Sandell v Porter (1966) 115 CLR 666; (1966) 40 ALJR 71; CLR at 670.
30.What has to be proved is that assets are available to be realised and capable of ready realisation likely to result in payment of outstanding debts within a reasonable time: Re Sanders; Knudsen and Yates (t/a Hargreaves Practice) v Sanders [2003] FCA 1079.
31.The respondents have the ability to draw $250,000 in funds from a lending facility, which would be advanced to them within 14 days of acceptance of the loan offer. The purpose or use of those funds by the respondents is not restrained; Seow affidavit [28]-[29] and Annexure R.
32.Further, the respondents own a number of properties in New South Wales, including a property in Rockdale at 49 Watkin Street, which is not mortgaged; Huang #2 at [21]. It is roughly estimated to have a value of $1.62 million; Huang # 2 Annexure D.
33.Given the respondents can obtain $250,000 in cash within 14 days and also own a property at 49 Watkin Street which has significant value and is free of mortgage, the respondents invite the Court to find that they are plainly able to pay their debts, including the debt the subject of the application ($152,205.29).
“Sufficient cause” – s 52(2)(b)
34.For a matter to constitute sufficient cause, the matter must be one of significant weight to displace the interest of the community in avoiding insolvent trading: Ramsay Health Care Australia Pty Ltd v Compton (No.2) [2017] FCA 629 at [26]–[37].
35.The concept of “sufficient cause” confers a discretion which in its terms is unconfined, as are the factors to be taken into account by the Court: Baker v Perpetual Trustee Company Ltd [2012] FCA 553 at [35].
36.The existence of a counter-claim by a respondent may be a “sufficient cause” to dismiss the petition - the question will depend upon an assessment of the particular facts in each case, considered with the interests of the petitioning creditor; St George Bank v Helfenbaum [1999] FCA 1337 at [13]; Totev v Sfar [2008] FCAFC 35 at [78]-[87].
37.The respondents must show that there is a real claim that is likely to succeed to justify a dismissal or adjournment of the petition: Re Schmidt; Ex Parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116.
38.The respondents say that there is sufficient cause in favour of dismissing the application because:
a.they have a claim on foot against the applicants in the Supreme Court of NSW for an amount far greater than the alleged debt; and
b.that claim, in fact, also puts in issue whether the order the subject of the debt ought to be stayed (or alternatively, it may form part of the respondents’ damages claim).
39.As referred to above, the cross-claim prepared by the applicants, on behalf of the respondents, in the Petkovski proceedings was defective and it led to an express conclusion by the Court that relief which could have been sought against other Petkovski family members was not available due to the failure to plead it.
40.There can be no doubt that there is a serious question to be addressed in those Supreme Court proceedings.
41.The authorities are uncontroversial in this respect. A solicitor cannot blindly follow the advice of a barrister, rather, they must exercise their own expert professional mind to the substance of the advice received; see e.g. Keddie and Ors v Stacks/Goudkamp Pty Ltd [2012] NSWCA 254 at [131]-[132].
42.In relation to the drafting of the cross-claim, Mr Zhang says “I relied on the expertise of [Counsel] when I signed, and caused to be filed, the Amended Cross-Claim”; Zhang #1 [19].
43.Further, Mr Zhang suggests that he simply signed the cross-claim after having been provided it from Counsel on short notice. Mr Zhang gives no evidence about whether he turned his professional mind to the substance of the cross-claim, in fact, his evidence indicates that he did not; Zhang #2 [9].
44.Based on Mr Zhang’s own evidence and the findings of the Court that the cross-claim was not properly pleaded, the respondents respectfully submit that they have a strong prima facie case against the applicants for professional negligence which is likely to succeed.
45.Separately but similarly, the respondents say that the negligence of the applicants has caused them to incur further costs in attempting to recover judgment against Luben Petkovski to no avail. The debt in this application is the legal fees for services which the respondents say were not only provided negligently but have caused them to suffer significant financial loss. In the Supreme Court proceedings the respondents claim that the costs order the subject of the debt ought to be stayed pending the resolution of those proceedings. The relation between the legal fees the subject of the debt and the matters the subject of the Supreme Court proceedings are so interrelated to the extent that there is sufficient cause to dismiss the application or at least adjourn the application until the Court makes a finding about such matters in the Supreme Court proceedings.
Conclusion
46.For the reasons above, the respondents respectfully submit that the Court should exercise its discretion to dismiss the petition and permit the parties to resolve their issues in the dispute currently before the Supreme Court of NSW.
ABILITY OF FIRST RESPONDENT TO PAY HIS DEBTS
The applicant’s submissions adequately identify the authorities in respect of ability to pay debts. No proper identification has been provided in respect of the liabilities of the first respondent to the Australian Taxation Office (“ATO”) or other creditors. No detailed evidence has been provided as to the cash-flow of the first respondent available to meet creditors. The existence of a property at Rockdale in respect of which the first respondent has half interest does not establish solvency. Nor does the general assertion of owning other properties without title details identifying encumbrances and values. The approximation of monthly obligations do not properly identify the liabilities or loans and bare weekly rental details do not identify net cashflow entitlement of the first respondent. There is no proper evidence of recurrent expenses or proper disclosure as to tax substantial debts and arrangements of the first respondent. The ownership of interests in property including Rockdale do not satisfy the Court that the first respondent can pay his debts.
The other basis for submitting solvency of the first respondent was the update of a financing document that identified an alleged ability to draw down a sum of some $250,000.00. The letter of offer was updated after an earlier letter of offer had expired. The most recent letter of offer was one in the amount of $250,000.00, dated 12 May 2022, which identified the proposed security mortgagee as being MaxRye Pty Ltd in respect of the property 49 Watkin Street, Rockdale NSW.
The financing document is one in respect of which there is a proposed mortgagee acting on behalf of a family trust. The property is in the name of the respondents and the first respondent has a half interest in that property. That half interest is unencumbered. However, there is no proper evidence about the substantial liabilities to the ATO or other creditors that has been put on by the first respondent. Nor has proper evidence been put on to show available cash flows to meet creditors. The first respondent debtor has not satisfied the Court that the first respondent is able to pay his debts as they fall due. The failure to pay the bankruptcy notice is evidence of insolvency. The existence of the terms of a proposed secured loan to both respondents and ability to enter into and draw down that same does not satisfy the Court that the first respondent is able to pay his debts. The financing document has not been exercised by acceptance, no mortgage has been secured and there has been no payment into Court or offer of payment that has been advanced by the first respondent and no proper detail of all creditors.
Mr Fielder, of Counsel, on behalf of the first respondent contended that the unencumbered property at Rockdale, having a value of $1.2 million, meant that there were sufficient assets that must be available if that property was the subject of realisation, to mean that the first respondent could meet his debts as they all fall due as well as rely upon the overall terms of loan. The unproved assumption in this proposition is that the only creditors of the first respondent are the petitioning creditors. The first respondent has not properly identified all creditors or properly identified net cash outgoings. As the first respondent has not properly identified all liabilities that the first respondent has to third parties creditors, including the ATO, the debtor has not satisfied the Court that the first respondent is solvent.
The summary terms of loan are not ones in respect of which the steps have been taken to enter into the mortgage and encumber the property and draw down on the loan. Accordingly, no funds are presently available. Whilst the Court accepts that the amount of the terms of loan might come close to the judgment sum and costs in the present case, it is not one which demonstrates, because of the ability to draw down a loan, that the first respondent is solvent.
The failure to properly identify the identity and quantum of the first respondent’s creditors in affidavit form, including proper identification of the amounts owing to the ATO and or others creditors and the first respondent’s available net cash flow, leaves the Court unsatisfied that this a case where the first respondent has made out that he is able to pay his debts within s 52(2)(a) of the Act. The Court is satisfied that there has been an act of bankruptcy by the first respondent and, subject to s 52(2)(b) of the Act, is satisfied that the requirements of s 43 of the Act have been established, as well as the requirements in relation to s 52(1) of the Act by the petitioning creditors as against the first respondent.
OTHER SUFFICIENT CAUSE
The applicant’s submissions usefully identified the relevant authorities in respect of whether there is other sufficient cause by reason of an offsetting claim.
The Court accepts Mr Fielder’s submission that it should not take a confined approach to the pleading articulated. However, the problem he faces is that it is not apparent that there is any cause of action, even if one ignores the obvious problems with the existing pleading. There is no satisfactory evidentiary identification of facts provided or known, or that should have been known at the time of the cross claim pleading to the draftsman in respect of an identifiable cause of action.
In relation to other sufficient cause, Mr Fielder identified that there have been proceedings commenced in the Supreme Court of New South Wales (“Supreme Court”), alleging negligence by the petitioning creditors, who are solicitors who acted for the first respondent and his wife in proceedings that have a protracted history in the Supreme Court. That history is sufficiently summarised in paragraphs 5 to 20 of the first respondent’s above submissions.
Mr Fielder sought to rely upon findings purportedly made by the Supreme Court Justice in those proceedings in relation to a case of alleged knowing assistance by family members of a Mr Petkovski. It was advanced that there is now a negligence case sought to be made, which Mr Fielder said was based on Mr Petkovski being a fiduciary or an agent for those family members.
The pleading makes no allegation as against the lawyers of the other family members being an agent or a fiduciary for the respondents in these proceedings. Mr Petkovski was clearly himself in a fiduciary relationship with the respondents. The heart of Mr Fielder’s case is that it appears that the learned Justice made findings in respect of Mr Petkovski’s other family members, based on knowing assistance within the second limb of Barnes v Addy (1874) LR 9 Ch App 244 (“Barnes v Addy”). The learned Justice made declarations in that regard, as a result of some proposed consent orders sent up to the Court in error.
The learned Justice, for some unapparent reason, thought that he had no jurisdiction to set aside the declarations. That is a proposition that this Court really cannot understand or accept in light of the slip rule provisions under the Uniform Civil Procedure Rules 2005 (NSW) and in light of acceptance by that Justice of the fact that the compensation amount must be set aside because there was no such joinder of issue between the parties. There was also no such case pleaded of knowing assistance, as a result of which neither the declarations should have been made as against the other family members nor the compensation order in favour of the respondents in these proceedings.
The learned Justice did identify that he was setting aside the compensation order and suggested that he had no jurisdictions to set aside the declarations. The erroneous understanding as to jurisdiction or power is irrelevant. There has been no res juducata on a pleaded cause of action against the lawyers. The declarations give rise to no estoppel as against the lawyers. No pleading against the lawyers alleges any form of estoppel. It is clear that the consent orders were entered as the result of an error and the findings made by the trial Judge went outside the case pleaded, in respect of which the other family members were neither on notice nor were they put in a position as a result of notice to decide whether to give evidence.
The trial Judge made an adverse Browne v Dunn (1893) 6 R 67 (HL) observation in the context of making findings which were adverse to those other family members, as well as referring to some evidence in respect of value flowing to those other family members in respect of particular transactions. It is not for this Court to have to decide whether or not the inference was erroneously drawn because it is not open on the pleaded case. It is sufficient to say that the inferences and the findings made against the other family members were ones that were not open to the trial Judge because the issue was not properly before him.
An issue not properly litigated is not something that provides a foundation, in itself, for the assertions that there was a case to be advanced and that should have been pleaded, of knowing assistance against the other family members, which appears to be the kernel of the submission being advanced by Mr Fielder. It is not the kernel of the case that is actually being put on in the pleading. Mr Fielder correctly identified that pleadings can be corrected. However, the pleading bears no relationship to the nature of the case sought to be articulated by Mr Fielder.
Mr Fielder properly acknowledged that he was not the source of the drafting of the pleading. The new pleading that has been filed in the Supreme Court is one that identifies concepts that do not reflect any focus on the limbs of Barnes v Addy, or the identifying of a case of the kind that were the subject of findings by the Supreme Court Justice against the other family members outside the pleading. Rather, the new pleading seeks to advance some sort of case about a common law concept of a joint and several liability which remains unarticulated and unidentified.
The pleading filed in the Supreme Court is not one that the Court accepts identifies a real cause of action or a cause of action that has any likelihood of success. The issues raised by Mr Fielder, in terms of a contention that the other family members were a fiduciary, suffers from the problem that, firstly, it is not the case that has been pleaded and, secondly, there are not facts that have been identified as to why the other family members would have been fiduciaries at the time of the drafting of the pleading so as to support any case of alleged negligence. That would be an essential plank for the case sought to be advanced against the lawyers contending an offsetting claim. That essential evidentiary plank is missing.
It is not apparent to this Court why it is suggested that the other family members were, at the time of the pleading, fiduciaries for the respondents in these proceedings. There is no apparent evidentiary basis to find that they were. Mr Petkovski, however, was in a very different position because he was acting as an agent. It was suggested that the other family members being family members, was a basis in itself to support the contention. There is nothing to suggest that the other family members, assumed or adopted a role of agency or were aware of facts as recipients of property so as to give rise to any fiduciary duty. Nor is it the case that by merely being a family member one becomes a fiduciary, because of another family member holds a fiduciary position. No real or reasonable case arises from Mr Fielder’s contentions that the other family members might be identified as fiduciaries. It is a case not found in the new pleading and is not identified as the subject of known facts at the time of pleading the subject of alleged negligence.
The submission by Mr Fielder was that there might be found to be an agency by Mr Petkovski on behalf of the other family members. The concept of that agency is not pleaded. The concept of that agency has no identified basis upon which there could be said to be facts known to the solicitors and draftsmen of the pleading that gave rise to an arguable case in negligence. It is not necessary for this Court to delve into the obvious problems of counsel and solicitors’ immunity and whether or not there is a case within or outside that immunity, beyond the arguments that have been articulated. That is because the Court is not satisfied that there is disclosed any real or arguable case against relevantly the petitions creditors. The Court is not satisfied that the new proceedings have any real likelihood of success.
The Court is not satisfied that there is an evidentiary basis to support Mr Petkovski performing a role of agency on behalf of the other family members, so as to give rise to any common law cause of action. The Court is not satisfied there is a real or arguable case against the petitions creditors by the new proceedings. The Court is not satisfied that there is a real or arguable case of known facts to support a cause of action either under the first or second limb of Barnes v Addy and therefore no real or arguable case of negligence as against the petitioning creditors.
CONCLUSION
The petitioning creditors have made out the statutory criteria enlivening the Court’s jurisdiction to make a sequestration order. The first respondent has not satisfied the Court that he is able to pay his debts within s 52(2)(a) of the Act.
The findings by the learned Justice in the Supreme Court in respect of the other family members, that was not pleaded, do not carry with them the consequence that there was a real cause of action. As this Court has said, the failure to set aside the declarations for want of jurisdiction is misconceived, but it does not give rise to the existence before this Court of there being a real cause of action. The declarations do not give rise to a factual basis to find that there was such a real cause of action in existence. The reasons of the learned Justice in setting aside the compensation order made clear both the compensation order error and the misconception of no jurisdiction to set aside the declarations. The declarations do not provide an evidentiary basis upon which this Court is satisfied, in respect to the petitioning creditors who are not bound by those declarations, that there was any real cause of action and is not satisfied that there is a real cause of action against the other family members upon facts known by the lawyers at the time of drafting the cross claim.
The failure to set aside the declarations and the existence of the declarations do not advance the first respondent’s case in respect of other sufficient cause. The Court is not satisfied that the first respondent has a genuine or real offsetting claim in amount that is equal to or exceeds the judgment debt. The Court is not satisfied that other sufficient cause has been made out as to why a sequestration order ought not to be made. Nor is the Court satisfied that the respondent’s submissions in combination make out other sufficient cause. The Court is not satisfied of other sufficient cause whereby a sequestration order should not be made within s 52(2)(b) of the Act.
In the circumstances, the Court is satisfied that this is an appropriate case in which the petitioning creditor is entitled to a sequestration order. Accordingly, the Court makes Orders 1 to 5.
32 I certify that the preceding thirty one (31) paragraphs are a true copy of the settled transcript of the published oral reasons for judgment of Judge Street delivered in open Court on 16 May 2022.
Associate:
Dated: 7 July 2022
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