Allison v Murphy

The nature of the proceedings to review the registrar's decision 10 In Bechara v Bates [2021] FCAFC 34, the Court considered the state of the authorities concerning the nature of an application to review a sequestration order in bankruptcy made by a registrar and concluded at [27] that the following matters were clear: (a) The application for review leads to a hearing de novo of the creditor's petition. (b) The hearing (or rehearing) of the creditor's petition is not prosecuted by the debtor (applicant for review) but by the creditor in the proceeding in which the registrar's order was made. (c) The application for review is a demand that the claim for relief (the sequestration order) be heard by a judge. (d) The onus is upon the creditor to prosecute its petition. The only onus of the debtor/bankrupt against whose estate a sequestration order has been made is to prove either solvency or any other sufficient cause under s 52(2) of the Bankruptcy Act 1966 (Cth). (e) An appreciation of the above considerations makes it evident that summary or default judgment terminating an application for review is highly likely to be misconceived and founded upon a misconception that the applicant for review has an onus to prosecute an application or to show error in the approach of the registrar. 11 Therefore, on such a review application, the judge is not concerned with considering the correctness of the decision made by the registrar or redressing any perceived error in that decision. Rather, the Court hears the case again unaffected by what has gone before and the applicant on the review is the petitioning creditor even if it is the debtor who brings the review application: Robson at [2], [38], [40], [61]-[64], [299]. 12 Accordingly, it was for Mr Murphy to prove the fact that the debt or debts on which he relied were still owing as at the date of the hearing: s 52(1)(c) of the Bankruptcy Act. Only if there was evidence upon which the Court may be satisfied as to the proof of that matter could the Court make a sequestration order on review. Further, the debt must be above the statutory minimum of $10,000 required to support a petition for a sequestration order. 13 In addition, it may be noted that s 52(2) provides: If the Court is not satisfied with the proof of any of those matters [that is, the matters stated in s 52(1)], 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. 14 Therefore, if the debtor seeks to answer the petition by claiming solvency it is for the debtor to satisfy the Court that he or she is able to pay his or her debts.

The proceedings before the Circuit Court judge 15 No transcript or other account of the proceedings before the Circuit Court judge has been provided. It appears that at the hearing an order was made by the Circuit Court judge allowing an affidavit of debt to be filed and served by 4.00 pm that day. Otherwise, after hearing argument, judgment was reserved and the matter was adjourned. 16 An affidavit was filed by Mr Murphy concerning the debt. It referred to the payment made to his bank account. It said that at no time had those payments been accepted. It then said: The debtor was an adjudged bankrupt at the time of the transfers and (as I am advised) was incapable of making any effective payment. I am also concerned that, were I to accept the transfers, it is highly likely (as I am advised) that, if otherwise valid, they would be set aside as voidable dispositions. I was listening by telephone to the hearing of this matter before His Honour Judge Jarrett on the morning of 27 August 2021, when the debtor's solicitor (Mr Frankcom) conceded that this may be the case. For the above reasons, I regard myself as holding the proceeds of those transfers on trust for [the trustee in bankruptcy]. 17 The affidavit then said: Consequently, as at the time of filing this affidavit, the debtor: (a) has not made lawful tender of any payment on account of the underlying debt; and (b) still owes the underlying debt. 18 On 24 September 2021, orders were made confirming the registrar's order and dismissing the review application with costs. In written reasons for those orders, the Circuit Court judge found (insofar as is relevant for present purposes): (1) It was uncontroversial that the payments made by the debtor's solicitor to the petitioning creditor were made by way of electronic bank transfer to the petitioning creditor's bank account (at [16]). (2) At the time of making the sequestration order, the funds in the solicitor's trust account were funds that Mr Allison had borrowed from his relatives and were his funds (at [18]). (3) Upon the making of the sequestration order Mr Allison's property vested in his trustee (at [18]). (4) As the funds in the trust account were the funds of Mr Allison they vested in the trustee (at [19]). (5) Evidence that suggested that Mr Allison was not the beneficial owner of the funds and that the relatives had advanced the funds to him for the purpose of paying his creditors was not very probative (at [19]). 19 Relying upon the above steps in reasoning, the Circuit Court judge concluded as follows (at [20]-[21]): So for the reasons I have given I find that the money that was in the solicitor's trust account on 2 June, 2021 was money to which the debtor was entitled. Upon the making of the sequestration order, the funds vested in his trustee in bankruptcy and upon that happening the debtor lost the capacity to deal with them or to direct where they might be paid. To the extent that the solicitors held them on trust for the debtor they also held them on trust through the debtor for the debtor's trustee in bankruptcy. Payment of them to the petitioning creditor in those circumstances could not pass to the petitioning creditor any better title to the money than the payee had. And so the petitioning creditor - leaving aside a whole range of other reasons - received those monies as trustee for the debtor's trustee in bankruptcy. The petitioning creditor is liable, in my view, to pay those funds to the trustee in bankruptcy.

Appeal proceedings in this Court 20 Mr Allison seeks to bring an appeal against the decision of the Circuit Court judge. He provided instructions to his solicitors to do so within time and steps were taken by the solicitor but they were misconceived in a number of respects with the consequence that the appeal was commenced some 17 days late. Therefore, an extension of time to bring the appeal is sought. 21 There are four grounds of appeal to be relied upon if the extension of time is granted. They are: 1. His Honour erred in law in finding the Appellant had not paid the Creditor the sum of $47,784.00; 2. His Honour erred in law in finding the sum of $47,784.00 [w]as not the property of the Appellant and/or was the property of the Trustee in Bankruptcy; 3. His Honour erred in law in granting leave to the Respondent to file affidavits of search and debt on 27 August 2021; 4. His Honour erred in law in finding the Respondents Affidavit of Debt complied with the Bankruptcy Rules. 22 For the following reasons there should be an extension of time, but the appeal should be dismissed with costs.

Extension of time 23 The principles to be applied in considering an application for an extension of time in which to appeal are well established. They were summarised recently in Porter as former trustee of the estates of Ghasemi and Kakhsaz v Ghasemi [2021] FCAFC 144 at [40]. In the present case, the delay in commencement has been explained. It was entirely due to errors by Mr Allison's solicitor, including the attempted filing of a form of appeal notice for the Federal Circuit and Family Court of Australia for family law matters. There is no evident prejudice to Mr Murphy. On an impressionistic assessment, the appeal grounds appear to have merit. There are, at least, real questions as to whether the payment made before the hearing by the primary judge reduced the indebtedness to Mr Murphy and whether the procedure followed in relation to the affidavit of debt was fair and resulted in compliance with s 52(1)(c) of the Bankruptcy Act. 24 At the hearing of the appeal, Senior Counsel for Mr Murphy sought to cross-examine Mr Allison's solicitor as to aspects of the matters relied upon by way of explanation for the delay. The topics that were proposed to be covered were outlined. They concerned whether there was a period of unexplained delay in obtaining instructions and certain respects in which the adequacy of the explanation provided by the solicitor might be questioned. It appears it was also sought to question the basis upon which the hearing of the appeal had been expedited. We did not allow cross-examination. We did so because it had not been demonstrated that any real forensic purpose would be served by allowing the proposed cross-examination. The principal explanation for the delay was the conduct of the solicitor and there would be no substantive effect upon that argument if there was more detailed examination of those circumstances where the length of delay was minor and the subject matter of the appeal affected the status of the appellant. 25 It was also submitted that the Court should have regard to the fact that the application for security for costs of the appeal had been refused despite a finding that Mr Allison was unlikely to be able to meet any such order. This was said to lead to the result that Mr Murphy was in the position that even if he was to succeed on the appeal he would lose. We do not accept that this additional matter is a reason, taken with the matters we have described, for refusing an extension of time. The question of security has been addressed in reasons given on the interlocutory application in the appeal: Allison v Murphy [2021] FCA 1551. If Mr Murphy was to succeed in opposing the appeal he would support the sequestration order. Therefore, it is not the case that there is no matter at issue in the proposed appeal from his perspective. 26 For those reasons, there should be an extension of time in which to appeal.

Application to adduce further evidence 27 Mr Allison made application to adduce further evidence in the appeal being a letter from Mr Murphy to the solicitor acting for Mr Allison dated 10 June 2021 (being about a week after the registrar made the sequestration order and well before the hearing before the primary judge). The letter referred to statements that had been made by the solicitor to the registrar to the effect that the amount of $47,384 had been paid into the solicitor's trust account for the purpose of paying Mr Murphy. It made demand for the funds to be remitted to Mr Murphy. 28 We refused the application to admit the further evidence. Our reasons for doing so are as follows. 29 First, it was plain that the letter was available to be presented in evidence by Mr Allison before the primary judge but that was not done. Assuming it had significance, there was no explanation as to why it had not been relied upon before the primary judge. Indeed, given the limited material and the narrow scope of the issues before the primary judge it is very difficult to see how any such significance might have been overlooked. 30 Second, if the letter was received it could open up issues as to the circumstances in which it had been sent. Those were matters that should not be dealt with for the first time on appeal. 31 Third, the letter did not contain any admission against interest. It referred to the monies being held in a trust account to be paid to Mr Murphy and claimed that the solicitor had not stated that any conditions applied to the trust. Therefore, the letter simply relied upon statements that had been made to the registrar as a basis for the demand. 32 Fourth, the contentions advanced on behalf of Mr Allison in the appeal were based upon the actual payment of the monies to Mr Murphy and claims as to the status of those monies before they were paid. The fact that Mr Murphy had made the demand in the letter was not relevant to the determination of those matters. The fact of the demand could not affect the status of the monies in the trust account which was determined by dealings between Mr Allison, his solicitor and his relatives. Further, there was no suggestion that the payment made to Mr Murphy had been made because of the demand.

Grounds 1 and 2 33 The first two appeal grounds can be dealt with together. They depend upon the proposition that proof of payment to Mr Murphy of $47,784 would lead to the conclusion that the creditor's petition should have been dismissed by the primary judge. 34 In order to deal with the grounds, it is first necessary to consider the significance for them of the nature of the review proceedings that were before the Circuit Court judge. On the one hand, the sequestration order made by the registrar was valid and effectual and operated to commence the bankruptcy of Mr Allison. Therefore, by the time of the hearing before the Circuit Court judge, Mr Allison was a bankrupt. He was also a bankrupt at the time that the payment was made from the solicitor's trust account to Mr Murphy's bank account. 35 On the other hand, the order made by the registrar was always subject to review by a judge as an incident of the exercise of delegated judicial power. As was stated in Bechara v Bates at [2]: In such cases, however, it is important to recognise that the review … is not concerned with correcting error and in that respect is to be differentiated from the statutory rights of appeal that have gradually become an established part of the judicial system. Nor is it a review de novo as a further stage in a tiered process. Rather, the review is an attribute of a recognised mechanism by which the exercise of judicial power may be delegated to an officer of the Court who is not a judge, such as a registrar. The right to seek review attaches to the delegation and is an attribute of the nature of the delegated authority. 36 The nature of the review that is conducted if a party seeks review of the exercise of delegated judicial power was described in Robson at [65] (Colvin J, Allsop CJ, Markovic, Derrington and Anastassiou JJ agreeing) in the following terms: As was observed in Bechara v Bates an order made by a registrar in the exercise of delegated judicial power takes effect without reservation when pronounced. It does so as an exercise of judicial power and (save for the prospect of review) operates with the same effect as if it had been made by a judge making the decision of the Court. Its past validity is not undone if a judge, on review, decides on the review that the order should not be made on the application. Rather, a review in which the judge reaches a different decision to the delegate results in the operation of the earlier, valid and operative, exercise of delegated judicial power coming to an end. At least from the point in time of the decision on review, the delegation which authorised the exercise of judicial power comes to an end. The act of the delegate is replaced by an exercise of judicial power by the judge. For that reason, even where, on review, the Court determines that the same order should be made as was made by the delegate it is usual for the Court on review to affirm the orders made by the delegate. 37 Further, as has been noted, the judge on review starts again and makes a decision unaffected by what has gone before. New evidence and submissions may be received. Importantly, the judge makes a decision at the time of the hearing before the judge and as matters stand at that time. 38 Therefore, despite the operative effect of the order made by the registrar, the decision to be made by the judge required a determination to be made as to whether there should be a sequestration order. In order to make that determination, it was necessary for the judge to put to one side the fact that there had been a sequestration order. If that were not so, then there would be no debt upon which the creditor could press for sequestration. As was made clear in Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 589 at 594 (Gibbs CJ, Murphy, Brennan and Dawson JJ), where a creditor's petition is founded upon a debt incurred before the date of an existing sequestration order it is not possible in those circumstances for the court to make a second sequestration order. The reason why that is so is because the remedies of the creditor have been taken away by the existing sequestration order and the creditor has instead a right to prove against the estate. So, the primary judge in the present case was required to approach the question whether there should be a sequestration order on the basis that the registrar's order had not been made. Such an approach was inherent in the nature of the review, which was a qualification to the valid exercise of delegated judicial power. Further, there was a 'constitutional imperative' for such a review to be available in order for there to be a valid delegation of judicial power: Harrington v Lowe (1996) 190 CLR 311 at 321. 39 If, for the purposes of the review, the debt upon which the petition was based has not been converted into a right to prove in the bankrupt estate then can it also be claimed that, for the purposes of the review, payment tendered by the debtor to the creditor in the intervening period between the registrar's order and the review by the judge discharges that debt? 40 In Clyne's case it was said at 594-595 that: 'The effect of the bankruptcy … is that the debtor is no longer obliged to pay his creditors; indeed he is disabled from doing so'. So, whilst there is a sequestration order, the debtor cannot make payment from what had been the debtor's own funds. By reason of the sequestration order, those funds are administered by the trustee. Therefore, it is simply not possible for a debtor whose estate has been made the subject of a sequestration order to apply those funds to reduce the debt owed to the creditor. As it is not possible for the debtor to disregard the valid sequestration order and make the payment, it is not possible for the judge on hearing the petition to treat the debtor as having made the payment during the operation of the sequestration order. If the funds in the solicitor's trust account were unconditionally the funds of Mr Allison at the time of the sequestration order then the solicitor could not pay the funds to Mr Murphy. It was a matter for the trustee in bankruptcy to decide what to do with those funds. 41 However, the primary judge when hearing the review application was deciding whether there should be a sequestration order (not whether the order made by the registrar should be overturned). In order to undertake a hearing of that question and to fulfil the characteristics of the constitutionally required de novo hearing, the judge had to approach the matter on the basis that any position that could have been adopted if the sequestration order had not been made could be advanced by the debtor. In the present case that meant it was open for Mr Allison to oppose the creditor's petition at the hearing of the review of the making of the sequestration order on the basis that the funds in the trust account should be treated as funds that were sought to be tendered unconditionally to Mr Murphy. The distinction is between the steps Mr Allison could take in his dealings in fact once the sequestration order was made by the registrar in the exercise of delegated judicial authority (which required compliance with that order) and his reliance for the purposes of the review hearing upon the circumstances as they would have existed (which assumed that the sequestration order had not been made). 42 In the present case that means that payments made by Mr Allison from property that formed part of his bankrupt estate must be disregarded. However, the availability to Mr Allison of those funds to pay Mr Murphy (which would have continued to be the case if a sequestration order had not been made) was a matter that the judge was required to take into account on the review. If that were not so then Mr Allison would be required to conduct the review as if the sequestration order under challenge was in existence and there would be no real review de novo. 43 By the time that the matter came before the primary judge, there was no question of any condition attaching to the tender of the monies in the trust account. It was plain that Mr Allison maintained that but for the sequestration order he had access to funds that he wanted to use to pay Mr Murphy unconditionally in reduction of the debt. It mattered not whether those funds were his or those of his relatives or were impressed with a trust for the purpose of making such a payment. On all available alternatives, the funds were available to be so tendered (if the sequestration order made by the registrar was put to one side). The fact that they had been purportedly paid to Mr Murphy in the meantime did not alter that position unless the sequestration order continued in effect, being a matter that could not be assumed to be the case given the nature of the review application. 44 Of course, it is possible that the relatives of Mr Allison had provided those funds for the sole purpose that they be applied to discharge (at least in part) the debt owed by Mr Allison to Mr Murphy the subject of the bankruptcy notice. If, in the events which have occurred, as a matter of law the solicitor has paid those funds to Mr Murphy in circumstances where that could not have been the purpose of the payment (by reason of the existence of the sequestration order made by the registrar) then that may have consequences for who can lay claim to the money if the present appeal is unsuccessful. However, before the primary judge, there could be no doubt that the funds that had been held in the trust account and had been paid to Mr Murphy were available and intended to be paid unconditionally to Mr Murphy if the sequestration order had not been made. 45 Therefore, the primary judge was in error in approaching the review on the basis that the sequestration order meant that the amount of $47,784.00 were not funds available to Mr Allison for the purposes of the hearing de novo as to whether there should be a sequestration order. The mode of reasoning by the primary judge gave effect to the registrar's order and for that reason was in error. 46 However, there is a fundamental difficulty for Mr Allison's case to the effect that the monies should be treated as being available to reduce the debt such that it could not be relied upon to support the creditor's petition of Mr Murphy. Once the act of bankruptcy had been committed by Mr Allison, there was no obligation on the part of Mr Murphy to accept the tender of payment of the debt the subject of the bankruptcy notice: see McIntosh v Shashoua (1931) 46 CLR 494 at 505, 508; Taylor v Deputy Commissioner of Taxation [1999] FCA 195 at [39]; and Psevdos v Commonwealth Bank of Australia (No 2) [2017] FCA 19 at [70]. He was entitled to reject the tender made at that time and proceed with his petition. On the evidence, it was clear that Mr Murphy would accept nothing less than full payment. Therefore, even accepting the claim by Mr Allison that there had been such a tender (or a desire to make such tender) by the time of the review, that was not a sufficient basis upon which to conclude that there was error by the primary judge in making the sequestration order. Put another way, if the primary judge had found that there had been payment of the amount of $47,384 to Mr Murphy then that would not have been a sufficient reason, in itself, for the creditor's petition to have been dismissed. By reason of the act of bankruptcy in failing to satisfy the bankruptcy notice, it was only if the payment had been accepted by Mr Murphy that the debt would have been reduced. On the evidence, it was not accepted. Therefore, the debt remained outstanding. 47 For that reason, although there has been shown to be error in the way in which the primary judge approached the issue concerning the significance of the evidence as to the payment that Mr Allison sought to make to Mr Murphy, in the result that error does not infect the ultimate conclusion of the primary judge. 48 For those reasons, grounds 1 and 2 have not been made out.

Ground 3 49 Next, Mr Allison claims that the primary judge erred in granting leave to Mr Murphy to file affidavits of search and debt. Although the ground also refers to an affidavit of search, the submissions focussed upon the affidavit of debt. 50 It was said that leave to file an affidavit of debt should not have been given after oral submissions before the primary judge commenced. It was submitted that a party such as Mr Allison faced a quandary if such an order could be made because it meant that the party did not know whether to rely upon the failure to comply or take the further step of filing evidence. However, there is no such quandary. The affidavit of debt is required to be filed just prior to the hearing. It is to update the Court at the time of the hearing. Therefore, a party seeking to oppose the making of a sequestration order will not know at the time of being required to file its affidavits and grounds of opposition whether there would be a failure to file such an affidavit. 51 Further, in the present case, there was no contest about the debt or the circumstances in which funds were available to pay Mr Murphy. Those matters had been addressed in the affidavits filed on behalf of Mr Allison. 52 It was said that it was not a satisfactory process to allow further affidavit material to be filed without the opportunity of the parties to comment or make submissions on that material. The submission to that effect raises an issue as to whether there was fairness in the process. However, it is well established that not every departure from the rules of natural justice at a trial will entitle the aggrieved party to a new trial: Stead v State Government Insurance Commission (1986) 161 CLR 141 at 145. There must be a realistic possibility of a different outcome. In the present case there is no suggestion that there was any possibility that a different course may have been taken if Mr Allison had been given an opportunity to respond to the affidavit of debt whether in relation to the filing of evidence or the making of submissions. Given the nature of the case advanced by Mr Allison before the primary judge, there was no issue that the debt had not been paid in full or that payments had been made from the trust account in the manner described in the affidavits relied upon by Mr Allison. The affidavit of Mr Murphy did not dispute those matters. 53 The Court has power to extend time for filing an affidavit. In the present case, for reasons we have given, no error has been demonstrated by the primary judge in exercising that power. The appeal ground should not be upheld.

Ground 4 54 The final complaint is to the effect that the affidavit filed by Mr Murphy did not meet the requirements of the Federal Circuit Court (Bankruptcy) Rules 2016 (Cth). The Rules provide that before the hearing of a creditor's petition an applicant creditor must file an affidavit of a person who knows the relevant facts that 'states that each debt on which the applicant creditor relies is still owing': r 4.06(4). 55 In the present case the statement made in the affidavit was to the effect that Mr Allison had not tendered payment on account of the 'underlying debt' and 'still owes the underlying debt'. It was submitted that these statements did not meet the requirements of the relevant rule. It was suggested that a person in the position of Mr Allison did not know what debt was being referred to and did not know what amount to pay or deal with on the application. 56 It is sufficiently clear that the terminology 'underlying debt' refers to the debt underlying the petition, namely the debt described in the bankruptcy notice with which Mr Allison did not comply. There was no suggestion that there was any other debt relied upon by Mr Murphy. The affidavits filed for Mr Allison deal with that debt as the only one in issue on the creditor's petition. The affidavit of debt is made by Mr Murphy himself and states that the debt is still owing. 57 It may be accepted that due formality must be observed in bankruptcy proceedings. However, there is no form of words which must be incanted in the affidavit of debt. In the circumstances we have described, the affidavit satisfied the requirements of the Rules. The appeal ground should not be upheld.

Solvency 58 In the course of the appeal, the parties were invited to address the question whether the primary judge ought to have dealt with the application on the basis that the affidavit of Mr Allison in dealing with the trustee's report to creditors raised a question of solvency. As we have noted, under s 52(2) of the Bankruptcy Act, if the Court was satisfied by the debtor on the hearing of the creditor's petition that the debtor is able to pay his or her debts then the Court may dismiss the petition. 59 As to that aspect, for Mr Allison it was submitted that whilst it was maintained that Mr Allison was 'essentially solvent', that matter was not raised as an issue before the registrar or the primary judge because the whole case proceeded on the basis of the intention of Mr Allison to repay the debt. It was acknowledged that Mr Allison was a man of little assets. It was said that he had the ability through family support to pay his debts as and when they fell due, but that submission was put in the context of a statement acknowledging that his ability to do so was not in issue before the primary judge. Mr Allison's solicitor accepted that it was the debtor's responsibility to prove solvency and said that the matter never really proceeded on that basis. He referred to the matters addressed in the affidavit material as addressing errors in the trustee's report to creditors. 60 We take these submissions to accept that the issue of solvency was not advanced before the primary judge and it was not sought to demonstrate at the hearing that Mr Allison could pay his debts as they fell due. 61 It was said that the payment of the amount of $47,784.00 was evidence of solvency. However, that submission cannot be accepted in circumstances where the evidence was that the amount had come from relatives. 62 It may be noted that none of the appeal grounds nor the submissions advanced in reliance upon them relied upon a claim of solvency. Therefore, given the concession that the point was not taken before the primary judge and the terms in which the grounds are expressed the point does not arise on appeal and the evidence did not disclose the circumstances in which that advance had been made. 63 It may also be noted that Senior Counsel for Mr Murphy did make submissions on the point. In addition to a submission that there was no ground of appeal raising the issue of solvency and leave would be required to raise any such point, reference was made to the state of the evidence before the primary judge which posed considerable difficulty for such a submission. There was force in those submissions. 64 Therefore, we are not persuaded that there is any basis upon which consideration of the application of s 52(2) arises.

Conclusion 65 For those reasons, the appeal should be dismissed with costs to follow the event. We note that an order for costs was sought by Mr Murphy on the unsuccessful application by Mr Allison to adduce fresh evidence. In our view there will be adequate provision for those costs if we make an order for costs of and incidental to the appeal in favour of Mr Murphy. I certify that the preceding sixty-five (65) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justices Besanko, Colvin and Downes.