Australian Securities and Investments Commission v Endresz [2014] FCA 786 | Case summary

Judgment (31 paragraphs)

[1]

ia Ltd [2004] SASC 293 Clapham v Commonwealth Bank of Australia [2013] FCAFC 84 Commonwealth of Australia v Davis Samuel Pty Ltd [2008] ACTSC 59 Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 2) [2008] ACTSC 60 Commonwealth v Davis Samuel Pty Ltd & Ors (No 3) (2008) 164 ACTR 14 Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 4) (2008) 221 FLR 151 Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 5) (2008) ACSR 336 Commonwealth of Australia v Davis Samuel Pty Ltd and Ors (No 6) [2009] ACTSC 12 Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 7) (2013) 282 FLR 1 Corney v Brien (1951) 84 CLR 343 Endresz v Australian Securities and Investments Commission [2013] FCCA 1167 Endresz v Australian Securities and Investments Commission [2013] FCCA 1168 Endresz v Australian Securities and Investments Commission [2013] FCCA 1169 Foong v Owners of Strata Plan No 54026 [2014] FCA 338 Forge v Australian Securities and Investments Commission [2013] FCCA 1170 International Alpaca Management Limited v Ensor [1999] FCA 72 Milostnik v Jabbour [2008] FMCA 1540 National Australia Bank Ltd v Pollak (2001) 186 ALR 44 Re Stubberfield; Ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169 Rozenbee v Kronhill (1956) 95 CLR 407, 414 Sarina v Council of the Shire of Wollondilly (1980) 32 ALR 596 Sutherland v Jatkar [2014] FCA 532 Williams v Spautz (1992) 174 CLR 509 Xu v Wan Ze Property Development (Aust) Pty Ltd (in liquidation) [2014] FCA 461 Yarranova Pty Ltd v Shaw (No 2) [2014] FCA 616

[2]

REASONS FOR JUDGMENT 1 The Australian Securities & Investment Commission ("ASIC") seeks sequestration orders in four separate proceedings against, respectively, Dawn May Endresz, Jozsef Endresz, Allan Paul Endresz and William Arthur Forge. The four proceedings were heard at the same time for convenience because of the substantial overlap in the evidence, issues and submissions arising in each. Mr Allan Endresz appeared for himself in the proceeding for a sequestration order against him and sought leave, which was granted, to appear for his mother, Mrs Dawn Endresz, and his father, Mr Jozsef Endresz. Mr Forge appeared on his own behalf but substantially adopted the submissions and evidence which had been filed or relied upon by Mr Allan Endresz in the other proceedings. 2 Mr Allan Endresz and Mr Forge were entitled to appear on their own behalf in the proceedings in which they were parties. Mrs Dawn Endresz and Mr Jozsef Endresz, however, were not entitled to be represented by their son. Rule 4.01(1) of the Federal Court Rules 2011 (Cth) provides: A person may be represented in the Court by a lawyer or may be unrepresented. The effect of this rule prevented Mrs Dawn Endresz and Mr Jozsef Endresz from being represented in the proceedings against them by their son. However, r 1.34 permits the Court to dispense with the operation of r 4.01(1) and, consequently, to give leave to Mr Allan Endresz to appear on behalf of his mother and his father in their respective proceedings: see Foong v Owners of Strata Plan No 54026 [2014] FCA 338. Leave should not be granted lightly for a party to be represented by someone who is not a lawyer. The entitlement of a party to appear in person or to be represented by a lawyer expresses important public policies of access to justice and of ensuring the proper administration of justice. Those policies are not necessarily advanced, and may indeed at times be impaired, by permitting parties to be represented by those who are not legally qualified, who do not have the experience or skills to conduct proceedings in court, who are not subject to professional standards, supervision or control by regulatory authorities, and who do not have the lawyer's personal duties to the court and to the administration of justice. 3 In Foong Perram J considered the principles to be applied when a party seeks leave to be represented by a person who is not a lawyer and said at [3]: The question is, what are the circumstances in which that discretion ought to be exercised in favour of a person or persons in the position that the appellant and his mother presently find themselves. Dealing with a slightly different statutory regime, the New South Wales Court of Appeal considered the circumstances in which a non-lawyer should be permitted to appear before a court in Damjanovic v Maley (2002) 55 NSWLR 149. The principal judgment was given by Stein JA, following an exhaustive examination of the authorities in this area. His Honour stated at paragraphs 69-86 the relevant considerations of which account should be taken. These were: (a) the complexity of the case; (b) genuine difficulties of the unrepresented party; (c) the unavailability of disciplinary measures and a duty to the court by lay advocates; (d) protection of the client and the opponent; (e) the position of lay advocates in inferior courts and tribunals (not here relevant); and (f) the interests of justice. In this case leave was given for Mr Allan Endresz to appear on behalf of his parents in their proceedings. He had previously been permitted to do so in other proceedings which were raised by the respondents in these applications: Commonwealth of Australia v Davis Samuel Pty Ltd [2008] ACTSC 59 at [3]; Australian Securities and Investment Commission v Forge [2002] NSWSC 760. The principal matters raised by each of the four respondents in these proceedings were complex and involved matters within Mr Allan Endresz's personal knowledge. He is not legally trained but had experience and skills in business matters and in the presentation of materials and legal argument. In each proceeding his parents, who I assume to be elderly, had provided a written authority for their son to appear on their behalf and in each of their cases the issues they sought to agitate were fundamentally the same as those he raised in the proceeding against him in which he had a right to appear on his own behalf. It was clear that Mr Allan Endresz was able to represent his parents effectively and would do so in circumstances in which he would, in any event, represent himself and, in addition, where another unrepresented litigant (Mr Forge) would essentially rely upon what Mr Allan Endresz would submit in his proceeding as applicable also to that of Mr Forge. The parties had also filed one set of written submissions of some length and complexity which were intended to apply to each of the four proceedings without distinction and which had been prepared by Mr Allan Endresz. In such circumstances, there would be benefit to the parties and to the court for Mr Allan Endresz to represent his parents in the respective proceedings against them and, therefore, leave was granted for him to appear on behalf of his parents in their proceedings. 4 Each of the four applications for sequestration orders were brought by ASIC under s 43 of the Bankruptcy Act 1966 (Cth). That section empowers the court to make a sequestration order where a debtor has committed an act of bankruptcy and the other matters set out in the section have been established. In each case the relevant act of bankruptcy relied upon by ASIC was the failure by the relevant respondents to comply with bankruptcy notices which had been served. 5 Section 52(1) empowers the Court to make a sequestration order against the estate of a debtor if the Court is satisfied at the hearing of a creditor's petition of the matters, about which the Court must require proof, stated in the petition, of service of the petition, and of the fact that the debt or debts on which the petitioning creditor relies is or are still owing. ASIC met the requirements of s 52(1) of the Bankruptcy Act 1966 (Cth) and the additional requirements imposed by Part 4 of the Federal Court (Bankruptcy) Rules 2005 in each of the four proceedings. ASIC was, accordingly, prima facie entitled to a sequestration order against each of the respondents: Caine v Whyte (1933) 48 CLR 639, 645-6; Rozenbee v Kronhill (1956) 95 CLR 407, 414; Clapham v Commonwealth Bank of Australia [2013] FCAFC 84 at [54]. Each of the respondents, however, contended that a sequestration order should not be made. 6 Section 52(2) empowers the Court to dismiss a petition if it is not satisfied with the proof of any of the matters of which it is required to be satisfied, or if the Court is satisfied by the debtors that (a) the debtor is able to pay his or her debts or (b) that for other sufficient cause a sequestration order ought not to be made. In these proceedings the debtors sought to raise seven grounds in opposition to the orders. Each respondent filed a notice pursuant to r 2.06 of the Federal Court (Bankruptcy) Rules 2005 stating an intention to oppose the making of a sequestration order on the following grounds: 1. Pursuant to s.52(1)(c) of the Bankruptcy Act 1966 (Cth) ("the Act"), the Court should not be satisfied that the judgment debt, upon which the bankruptcy notice (BN 9545) and creditor's petition (No. VID 108 of 2014) ("Petition") were foundered [sic], is not still owing; 2. That in all material times, the respondent is solvent and has been able to pay his debts within the meaning of s.5(2) and s.52(2)(a) of the Act respectively; 3. Within the meaning of s.52(2)(b) of the Act, the respondent has a counter claim, set-off or cross demand exceeding the amount of the judgment debt arising from the respondent's appeal, to be filed within 28 days after Refsahuge J delivers final orders in Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 7) [2013] ACTSC 146 ("ACT Proceedings"), being a counter claim, set-off, or cross demand not set up in the proceeding in which the applicant's judgment was obtained, and that with all the circumstances of the case provides sufficient cause for the Court to refuse a sequestration order, dismiss the Petition, or alternatively, reason to adjourn or stay the Petition subject to review; 4. The ACT Proceedings are referred to in the affidavit filed in support of this notice; 5. Within the meaning of s.52(2)(b) of the Act, the bankruptcy notice is invalid as execution on the judgment in favour of the applicant was deemed to have been stayed at the time of issue of the bankruptcy notice within the meaning of s.40(1)(g) and s.41(3)(b), such that the applicant was not in a position to issue immediate execution in circumstances where the respondent has been restrained from disposing, encumbering or dissipating any of his assets since Crispin J. issued orders on 26 February 1999 in the ACT Proceedings ("Restraining Orders"). It follows that the bankruptcy notice must be set aside and the Petition dismissed; 6. The Restraining Orders remain in place today; and 7. Within the meaning of s.52(2)(b) of the Act, the Petition is an abuse of process in that it was not only foredoomed to fail, but was used by the applicant as a means of obtaining some collateral advantage or other benefit in the full knowledge that the respondent was restrained from accessing his assets pursuant to the Restraining Orders. The Petition must be dismissed. The seven grounds were relied upon by the respondents in various ways. All of the grounds were relied upon in support of the dismissal of the petitions. Grounds 5 and 6 were also relied upon for orders that the bankruptcy notices be set aside, and grounds 3, 4 and 7 were relied upon for an adjournment or a stay of the sequestration orders or petition. The evidence relied upon by the respondents was predominantly an affidavit (and exhibits) by Mr Allan Endresz sworn 23 April 2014 in the proceeding in which he was the respondent. His mother filed an affidavit sworn 23 April 2014 in her proceeding adopting the contents of her son's affidavit in so far as it related to her. His father filed an affidavit sworn on 23 April 2014 adopting his son's affidavit in so far as it related to him. Mr Forge also filed an affidavit sworn 23 April 2014 in the proceeding in which he was the respondent adopting the contents of the affidavit of Mr Allan Endresz in so far as it related to Mr Forge. Mr Forge also made unsworn statements from the bar table during the hearing which added to his evidence and was accepted as evidence without challenge or cross-examination. 7 The underlying facts upon which the grounds of opposition are based span many years, are complicated, and have been the subject of a number of judicial decisions. It may, therefore, be best to confine a recitation of the facts relevant to these reasons to those facts which bear upon the disposition of those grounds. A wider statement of the factual background would serve little purpose and may be found in other published reasons for decision of other courts: see Commonwealth of Australia v Davis Samuel Pty Ltd & Ors [2008] ACTSC 59; Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 2) [2008] ACTSC 60; Commonwealth v Davis Samuel Pty Ltd & Ors (No 3) (2008) 164 ACTR 14; Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 4) (2008) 221 FLR 151; Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 5) (2008) ACSR 336; Commonwealth of Australia v Davis Samuel Pty Ltd and Ors (No 6) [2009] ACTSC 12; Commonwealth of Australia v Davis Samuel Pty Ltd & Ors (No 7) (2013) 282 FLR 1; Endresz v Australian Securities and Investments Commission [2013] FCCA 1167; Endresz v Australian Securities and Investments Commission [2013] FCCA 1168; Endresz v Australian Securities and Investments Commission [2013] FCCA 1169; Forge v Australian Securities and Investments Commission [2013] FCCA 1170. 8 The first ground relied upon in opposition to the applications for sequestration orders is that the judgment debt upon which the bankruptcy notice and creditor's petition were founded is not still owing. This ground was said to be addressed at paragraphs 20 and 111-114 (inclusive) of the written submissions by the respondents and in paragraphs 3 and 4 of their written submissions in reply. However, neither what is said in those paragraphs, nor what is said in the affidavits filed in any of the proceedings, establishes that the debts are not still owing. The evidence filed on behalf ASIC, in contrast, establishes that the debts are still owing and have not been paid or otherwise compromised. The bankruptcy notices on which the creditor's petitions were founded are based upon various cost orders made against each of the respondents in favour of ASIC and entered as judgments in the Local Court of New South Wales and the District Court of New South Wales. ASIC has filed separate affidavits in each of the proceedings establishing that the debt exists, has not been paid and has not otherwise been compromised. Mr Martin Lockett has filed affidavits in each proceeding dated 20 February 2014, 12 May 2014 and 27 June 2014. Ms Ginette Fellows has filed an affidavit in each proceeding on different dates but to substantially the same effect. Affidavits for ASIC were also filed in each proceeding by Mr Gregory McLeod and Ms Annmaree Dormer dated 15 July 2014. The affidavits deal expressly with each of the matters required to be addressed by s 52(1) and by rules 4.05 and 4.06 of the Federal Court (Bankruptcy) Rules 2005 (Cth). The materials establish the existence of the debt and that it remains owing. The respondents did not provide any evidence of payment or of any arrangement concerning payment or any basis upon which the judgments relied upon by ASIC had been set aside or were of no effect. Indeed it was clear from submissions by the respondents that their position was that they were unwilling to pay the debt at present rather than that it was not legally owing. There is, therefore, no substance to ground 1. 9 The second ground relied upon by the parties is that each of the respondents is solvent and able to pay his or her debts. This ground was said to be addressed in paragraphs 22-26 of the respondents' principal submissions and in paragraphs 5-8 of their submissions in reply. The basis of this ground is the availability of funds to which Mr Allan Endresz claimed to have access as the general partner in the Ezy Bonds (Pacific) Limited Partnership ("EzyLP"). The evidence of Mr Allan Endresz was that his occupation since 16 September 2004 has been that of general partner in EzyLP which was formed under the Partnership Act 1892 (NSW) and which is governed by the terms of a limited partnership agreement dated 16 September 2004. A copy of that agreement was annexed to his affidavit and received without challenge. None of the respondents have filed complete statements of their assets and liabilities but their evidence made their personal financial position sufficiently clear. Mr Allan Endresz has no personal assets other than those which are the subject of a restraining order initially made in 1999 by the Supreme Court of the ACT in favour of the Commonwealth. The only personal outstanding debts of Mr Allan Endresz are a home loan facility with the Commonwealth Bank totalling some $343,116.94 and the judgment debts relied upon by ASIC. The only asset of his parents is a property which is the subject of the restraining order in the proceedings in the ACT in favour of the Commonwealth. Mr Forge is nearly 78 years old and his assets are a home in Albury and an amount of $100,000 held in trust in the ACT which Mr Forge said was held beneficially for his wife. The state of the financial position of each of the respondents is not as well established as it might be but I am satisfied that their solvency depends upon their ability to discharge the debt to ASIC. I also accept the evidence on behalf of the respondents that the injunction made initially by Crispin J on 29 January 1999 in the ACT proceeding covers all of the property owned beneficially by each of the respondents but that the ability of Mr Allan Endresz to secure payment by EzyLP of the debt due to ASIC would not leave any of the respondents insolvent. 10 The position of each of the respondents concerning solvency, therefore, is that they claim to be solvent because EzyLP can pay the debt to ASIC, but that they are not willing to do so at present. The reason for their unwillingness to have the debt paid at this stage is best understood by reference to the long standing dispute between the respondents and the Commonwealth (which will be considered later), but for present purposes the critical question is whether the respondents have sufficiently established solvency by their claim that EzyLP can pay, but has not arranged to pay, the debt due to ASIC. 11 In Australian & New Zealand Banking Group Limited v Foyster [2000] FCA 400 Hely J observed at [37] that a respondent was "perfectly entitled to adopt the role of a recalcitrant debtor, and to decline to pay a judgment debt if he wishes. But [that] he will only be immune from the operation of the bankruptcy laws if he can establish solvency". In Foyster his Honour had before him evidence of the assets and liabilities of the respondent who was claiming to be solvent but who was unwilling to pay the debt due. In considering the evidence his Honour said: 16 The Bank has made out the elements which prima facie entitle it to the making of a sequestration order. However, s 52(2) of the Act provides that if the Court is satisfied that the debtor is able to pay his debts, or that for other sufficient cause a sequestration order ought not to be made, then the Court may dismiss the petition. 17 The onus of proving sufficiency of assets lies on the respondent. It is not sufficient for the respondent simply to establish that he has assets which exceed his liabilities in value. It must also be established that the assets are available to be realised and that they are capable of ready realisation. If a debtor is able to pay his or her debts, but is recalcitrant, the creditors may resort to other remedies, such as execution against property and garnishee proceedings, but not to sequestration. Bankruptcy is not a proceeding designed for the recovery of debts: see Re Sarina; Ex Parte Wollondilly Shire Council (1980) 32 ALR 596, 599. 18 Although a sequestration order will not be made against the estate of a debtor who is recalcitrant but plainly solvent, the Bank submitted, on the basis of Trojan v Corporation of Hindmarsh (1987) 16 FCR 37, 46-48, that the discretion under s 52(2)(a) should not be exercised unless the debtor demonstrates that the petitioning creditor will be satisfied from the ordinary remedies such as execution and guarantee. Trojan decides that even if a debtor establishes solvency, the Court retains a discretion whether or not to dismiss the petition. The Full Court said, at p 48 : " … the principle laid down in the Sarina case would not necessarily be satisfied by a sterile demonstration of an ability to achieve a payment which was not in reality at all likely to be compelled. Section 52(2)(a) envisages a situation which will probably bear fruit in payment. It is not easy to see any other reason why the legislature saw fit to make a demonstration of ability to pay only a discretionary ground of dismissal of a petition, and not an absolute bar to its success." 19 Under s 52(2)(a) the respondent must satisfy the Court that he is "able to pay his … debts", including liabilities: s 5(1). In my view, the subsection refers to a state of affairs which requires account to be taken of debts which will fall due in the reasonably immediate future pursuant to existing obligations: Bank of Australasia v Hall (1907) 4 CLR 1514, 1527-1528 as well as debts which are presently due and payable. However, whether that is so or not, for the reasons explained by Katz J in International Alpaca Management Pty Ltd account needs to be taken, if not in assessing solvency, then in the exercise of the discretion whether or not to dismiss the petition, of liabilities which will become payable in the reasonably immediate future. In that case his Honour concluded that the respondent was not solvent and made a sequestration order against him. It is clear from the statement of principle in [17] above that what a recalcitrant debtor needs to establish to avoid the operation of the Bankruptcy Act is, in effect, that a creditor is able to enforce the judgment by such other processes as may be available to the creditor other than sequestration. The claim by the respondents in this case that EzyLP has funds available to discharge the debt, even if established, would not establish the solvency of any of the respondents in the sense contemplated in [17] in the passage quoted above. The ability of the respondents to rely upon a third party to discharge their debt when that third party is not itself obliged to make the payment does not reveal a process available to ASIC to resort to other remedies to secure payment of the debt other than sequestration against the respondents themselves. The solvency to be established is the personal solvency of the relevant respondent facing a sequestration order. That is not ordinarily established by a respondent showing that the debt could be discharged by means under the control of the respondent but which is legally beyond the reach of a creditor. Indeed, it was clear that a factor leading to the establishment and the activities of EzyLP was to create assets available to one or more of the respondents that would not be directly available to their creditors for past debts. It is their solvency which must be established if they wish to rely upon their solvency to prevent an order for sequestration. 12 The cases relied upon by the respondents do not require a contrary conclusion. In Milostnik v Jabbour [2008] FMCA 1540 Lloyd-Jones FM was satisfied that the respondent in that case, Mrs Jabbour, was solvent because she was able to have access to family funds which, on the evidence, the family was willing to pool for the payment of her debts. At [43] his Honour said: In relation to the Court's discretion pursuant to s 52(2)(a) of the Act, I am satisfied that the material before me sufficiently establishes that Mrs Jabbour is solvent and a sequestration order against her should not be made. It needs to be remembered that proceedings of this kind are not debt recovery proceedings and involve the issue of redressing personal insolvency. I am satisfied on the material before me that this debtor has established, in discharging the onus upon her, that she is able to access funds available to her. Although the funds are not limited to cash resources, I am satisfied that she has an ability to access funds by mortgage and pool the family's resources to meet her debt. I am not satisfied that the requirements of s 52 of the Act have been met and, in my view, a sequestration order against Mrs Jabbour should not be made. In that case, therefore, a sequestration order was not made in circumstances where the respondent established an ability to access funds from others. Critical to the conclusion, however, was his Honour's acceptance that Mrs Jabbour and the family, were willing to pay the debt. In Sarina v Council of the Shire of Wollondilly (1980) 32 ALR 596 and Re Stubberfield; Ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169 sequestration orders were not made because solvency of the respondent was established. 13 In this case, however, the evidence for the solvency of the respondents, at its highest, is that Mr Allan Endresz could, but will not (at least not unless required to), pay the debt through funds available in EzyLP. Mr Allan Endresz claimed in submissions, and to some extent from unsworn evidence from the bar table, that his ability to deal with the funds of EzyLP established the solvency of the respondents. Clause 6.1 of the EzyLP partnership deed gave him, as the general partner, the sole and exclusive control, management and operation of the partnership. In that capacity he was given wide powers by clause 6.3: 6.3 Powers of the General Partner Without limiting the generality of clauses 6.1 and 16.2, the General Partner has the power and authority to act on behalf of the Partnership and to bind the Partnership in relation to all its activities including without limitation in relation to: (a) any agreement for the purposes of the Partnership; (b) the engagement or termination of any consultant or employee of the Partnership; (c) selling or otherwise disposing of any property; both real and personal on such terms as the General Partner thinks to be appropriate; (d) paying all costs and expenses of the Partnership; (e) opening and operating any partnership bank account in accordance with the terms of the document; (f) borrowing funds (with or without the granting of any security) for the purpose of the Partnership; (g) granting any guarantee of security for any financial accommodation provided to, or obligations of, any third party (whether or not related to the General Partner); (h) investing in any form of investment, any surplus funds of the Partnership whether or not such funds are held in the bank accounts of the Partnership; and (i) all dealings with any property of the Partnership; and (j) all and any actions incidental to the furtherance of the purposes of the Partnership. These powers, Mr Allan Endresz maintained, gave him the legal ability to pay the judgment debts of the respondents if he chose to do so. He also claimed in submissions, and to some extent from unsworn evidence from the bar table, that the assets available to EzyLP included a substantial portfolio of shares available to him as the general partner to access immediately to pay the judgment debts if that was necessary to do so within a reasonable time. Mr Allan Endresz went on to say that a reasonable time, given the nature of the portfolio, was three days. On at least two occasions during the hearing Mr Allan Endresz indicated that "if need be" money could be put into trust pending the final resolution by the appeals process in the ACT proceedings. 14 It may be that the claims made by Mr Allan Endresz are correct but the onus upon the respondents is to establish the facts which establish solvency. An ability to exercise the powers of EzyLP to pay the respondents' debt falls well short of a willingness or commitment to do so (cf Milostnik). A statement that money could be put in trust for the payment of the respondents' debt to ASIC pending the final resolution of appeals in the ACT proceedings falls well short of money being in trust for the purpose of paying ASIC's debt if the ACT proceedings are decided against the respondents. The terms of the EzyLP partnership agreement, and the evidence available, is consistent with, and indeed supports a view that, the assets in EzyLP will not be made available to pay the respondents' debt to ASIC. Furthermore, the actual evidence of EzyLP's assets is not adequately established beyond general statements by Mr Allan Endresz which were not supported by any documentary, or other, material establishing EzyLP's net financial position. Accordingly, the respondents have not established their solvency. 15 The third and fourth grounds of opposition may be dealt with together as they were by the parties in their written and oral submissions. These grounds were dealt with in paragraphs 27-110 of the respondents' principal written submissions and in paragraphs 9-13 of their written submissions in reply. These grounds of opposition concern the proceedings between the respondents and the Commonwealth in the Supreme Court of the ACT to which brief reference has already been made. The Commonwealth commenced proceedings in the Supreme Court of the ACT on 29 January 1999 against 29 defendants including the four respondents in the present proceedings. On that day Crispin J granted injunctions to the Commonwealth against the defendants in those proceedings subject to the Commonwealth giving the usual undertaking as to damages. The hearing on liability commenced before Refshauge J on 10 June 2008 and concluded on 3 October 2008 when judgment was reserved. The decision in those proceedings was finally handed down in August 2013: Commonwealth of Australia v Davis Samuel Pty Ltd & Others (No 7) (2013) 282 FLR 1. Final orders in that proceeding, however, appear not yet to have been made and, therefore, no appeal appears yet able to have been lodged. Further submissions had been made before his Honour on 6 December 2013 and the respondents were informed that final orders will be given at the end of July. Mr Endresz gave evidence in his affidavit, and in effect during the course of his oral submissions, that an appeal will be lodged within 28 days of the parties receiving final orders. 16 The respondents filed substantial evidence and made substantial submissions on these grounds of their opposition on the basis of a counterclaim, set-off or cross-demand they sought to set up against ASIC, but its force depended upon establishing that any claim against the Commonwealth in, or arising from, the ACT proceedings was something which could be relied upon against ASIC on the basis that ASIC is the Commonwealth or, relevantly, is its privy. The judgment debts relied upon by ASIC against the respondents, however, were not based upon the ACT proceedings, to which ASIC was not a party, but were based upon cost orders from other proceedings in the Supreme Court of New South Wales in which ASIC sought civil penalties, declarations and orders pursuant to Part 9.4B of the Corporations Law of New South Wales 1997 for alleged contraventions in 1998 of the related party and director duty provisions of that law. The claims in the ACT proceedings were different and were commenced by the Commonwealth rather than ASIC. 17 The respondents, however, contended that ASIC and the Commonwealth were, relevantly, the same party or, at least, privies. In ASIC v Edensor Nominees Pty Ltd (2001) 204 CLR 559 it was held by the High Court that ASIC was the Commonwealth for the purposes of s 39B(1A)(a) of the Judiciary Act 1903 (Cth). At [39]-[40] Gleeson CJ, Gaudron and Gummow JJ said: 39 The first question which arises concerns the status of ASIC. It is established by ss 7 and 8 of the ASIC Act as a body corporate. That circumstance does not, of itself, deny the proposition that ASIC falls within the scope of the expression "the Commonwealth" in s 75(iii) of the Constitution. In an appropriate context, those words are of sufficient width to include a corporation which is an agency or instrumentality of the Commonwealth. The ASIC Act provides (s 9) that its members are appointed by the Governor-General on the nomination of the Minister administering the ASIC Act. Provision is made in s 12 of the ASIC Act for the giving by the Minister of written directions to ASIC respecting the exercise of its functions and powers. Those functions and powers are spelled out in ss 11 and 12A and pertain to the executive functions of government. Section 120 of the ASIC Act provides that the staff of ASIC are appointed as employees under the Public Service Act 1922 (Cth). The Parliament appropriates money for the purposes of ASIC (s 133) and its activities are inquired into by the Parliamentary Joint Committee on Corporations and Securities appointed pursuant to s 241 of the ASIC Act. ASIC is subjected to audit by the Auditor-General under s 8 of the Commonwealth Authorities and Companies Act 1997 (Cth). 40 This is a clear case of a corporation established by a law of the Commonwealth which answers the description of "the Commonwealth" in s 75(iii) of the Constitution. Section 39B(1A)(a) of the Judiciary Act is a law supported by s 77(i) of the Constitution; it defines the jurisdiction of the Federal Court with respect to a limited class of the matters mentioned in s 75(iii). The limitation is expressed in two ways. First, by identifying matters where the Commonwealth sues but not those where it is sued, and, secondly, by the nature of the relief sought. [Footnotes omitted.] McHugh J said at [102]: In my opinion, the Federal Court did have power to make the orders. ASIC is "the Commonwealth" for the purposes of s 75(iii) of the Constitution and various provisions of the Judiciary Act 1903 (Cth) including s 39B(1A)(a) of that Act. Because the Commonwealth was a party to the proceedings, the Federal Court was exercising federal jurisdiction when ASIC sought declaratory and injunctive relief against the respondents. That being so, s 79 of the Judiciary Act - which applies to proceedings in federal jurisdiction - operated to "pick up" and apply the Law in the proceedings brought by ASIC. Accordingly, the Federal Court in the exercise of its federal jurisdiction (and without any issue of accrued or associated jurisdiction arising) had power to make orders under ss 737 and 739 of the Law. [Footnotes omitted.] Later his Honour said at [126]-[128]: 126 The ASIC Act provides for the establishment, nature, functions and powers of ASIC and for the control and supervision of ASIC by the Minister and by other executive authorities of the Commonwealth. Section 8 of that Act established ASIC as a body corporate but without corporators. One of the objects of the Act was to provide for ASIC to administer such laws of the States and Territories "as confer functions and powers under those laws on" it (s 1(1)). Its members are appointed by the Governor-General "on the nomination of the Minister" (s 9(2)). It must have a Chairperson and may have a Deputy Chairperson appointed by the Governor-General (s 10). The Minister may give and ASIC is required to comply with "a written direction about policies it should pursue, or priorities it should follow, in performing or exercising any of its functions or powers under a national scheme law of this jurisdiction" (s 12(1)). ASIC is funded by amounts appropriated by Parliament (s 133). And the Minister may require ASIC to pay surplus money to the Commonwealth (s 135(5)). ASIC is audited by the federal Auditor-General. These and other provisions of the ASIC Act identify ASIC as a Commonwealth authority required by a law of the Commonwealth to perform certain executive functions of the Commonwealth under the control and direction of a Minister. Such an authority is "the Commonwealth" for the purposes of s 75(iii) of the Constitution and s 39(1A)(a) of the Judiciary Act. 127 Where the Commonwealth has incorporated a body with no corporators which: carries out public functions and exercises public powers; is controlled by persons appointed by a Minister of the Commonwealth government; is under the ultimate direction and control of a Minister of the Commonwealth government; is funded by the Commonwealth and can be required to pay its revenues, profits or surpluses to the Commonwealth; and is audited by the federal Auditor-General or is required to report to the Parliament of the Commonwealth, it will be "the Commonwealth" for the purposes of Ch III of the Constitution and ss 39, 39B, 56, 57 and 64 of the Judiciary Act, unless there is some extraordinary provision or provisions in its constating statute that indicates that it is independent of the Commonwealth. 128 When ASIC filed proceedings in the Federal Court seeking declarations and injunctions and also orders in accordance with ss 737 and 739 of the Law, the entire proceedings were immediately in federal jurisdiction. That was because ASIC was the Commonwealth and was claiming relief falling within s 39B(1A)(a) of the Judiciary Act, as I have pointed out. Section 64 of that Act declares that in any proceedings in which the Commonwealth is a party "the rights of parties shall as nearly as possible be the same" as in proceedings "between subject and subject". Those rights include the substantive rights to be given effect to in the proceedings. To determine those rights requires a court exercising federal jurisdiction to refer to ss 79 and 80 of the Judiciary Act because in a proceeding "between subject and subject these sections direct where [the] Court shall go for the substantive law". Here the substantive law included ss 615, 737 and 739 of the Law. Although ss 737 and 739 were couched in terms of remedies, they gave rise to substantive rights and liabilities. As Dixon J once pointed out, "[i]t is not unusual to find that statutes impose liabilities, create obligations or otherwise affect substantive rights, although they are expressed only to give jurisdiction or authority, whether of a judicial or administrative nature". Hayne and Callinan JJ agreed at [215] with the reasons given by Gleeson CJ, Gaudron and Gummow JJ. 18 The conclusion that ASIC is the Commonwealth for the purposes considered by the High Court in that case, however, does not carry with it the conclusion that ASIC is the Commonwealth for all purposes. It may be that ASIC is funded by money appropriated by the parliament and that the relevant minister may require ASIC to pay surplus funds to the Commonwealth and that it is audited by the Federal Auditor-General, but it does not follow that ASIC and the Commonwealth are the same party (or privies) for all purposes or, relevantly, that they are the same parties (or privies) for the purposes of the respondents' claims against the Commonwealth in the ACT proceedings in answer to ASIC's claim on the orders for costs in favour of ASIC in the New South Wales proceedings upon which ASIC relied in its petitions against the respondents for the sequestration orders. The Australian Securities and Investment Commission Act 2001 (Cth) establishes ASIC as a statutory corporation with an independent legal existence capable of suing and being sued in its own name: s 8. ASIC was not a party to the ACT proceedings and has no right or obligation in respect of, or arising from, the ACT proceedings. Its proceedings in the NSW courts was to vindicate public rights arising from contravention of public laws enacted by parliament. The Commonwealth, in contrast, was a party in the ACT proceedings to vindicate its interests to recover property. Any claim the respondents may have against the Commonwealth in the ACT proceedings is not a claim which they have against ASIC and, accordingly, is not a sufficient cause for a sequestration order not to be made: International Alpaca Management Limited v Ensor [1999] FCA 72, [55]. 19 An additional obstacle confronting the respondents in relation to these grounds is that the nature of the claim they have against the Commonwealth is not one existing as a right until a declaration is made by a court. The claims of the respondents against the Commonwealth depend upon orders, not yet made, flowing from a finding, not yet found, by a court for damages which the court may order by reason of an undertaking given by the Commonwealth to the ACT Court. Such a claim by the respondents does not yet exist as against ASIC (assuming it were the Commonwealth or its privy). In Ansett Australia Ltd v Travel Software Solutions Pty Ltd (2007) 65 ACSR 47 Hargrave J explained that for a debt to be contingent there needed to be an existing right albeit that it may be dependent upon the happening of an event. In that case his Honour said at [65]-[72] (omitting footnotes): 65 In order for there to be mutual dealings within the meaning of s 553C, it is not necessary for there to be, on the relevant date, an accrued debt due in respect of each dealing. For example, there will be mutual dealings on the relevant date where, on the one hand, the company owes a creditor an accrued debt and, on the other hand, the creditor is contingently liable to the company in respect of an existing transaction. 66 In Hiley v The Peoples Prudential Assurance Co Ltd Dixon J stated: It is enough that at the commencement of the winding up mutual dealings exist which involve rights and obligations whether absolute or contingent of such a nature that afterwards in the events that happen they mature or develop into pecuniary demands capable of set off. If the end contemplated by the transaction is a claim sounding in money so that, in the phrase employed in the cases, it is commensurable with the cross-demand, no more is required than that at the commencement of the winding up liabilities shall have been contracted by the company and the other party respectively from which cross money claims accrue during the course of the winding up… 67 In the same case, Rich J stated that, for there to be mutual dealings: Rights must be vested in the creditor and in the company which, without any new transaction, grow in the natural course of events into money claims capable of forming items in an account or capable of settlement by set-off. 68 To the same effect are the statements of a Full Bench of the High Court (Mason CJ, Brennan, Deane, Dawson, Toohey, Gaudron and McHugh JJ) in Gye v McIntyre: The requirement that the credits, the debts or the claims arising from other dealings be commensurable does not mean they must be vested, liquidated or enforceable at the decisive date, that is to say, at the time of the sequestration order or special resolution accepting the composition. Provided they exist as contingent at that date and are of a kind which will ultimately mature into pecuniary demands susceptible of set-off, the requirement of the section may be satisfied in relation to them. 69 The issue arises as to what is required in order for a right or liability to "exist as contingent" at the relevant date. The effect of the cases is that a contingent right or liability will only exist where there is an existing right or obligation out of which, on the happening of a contingency (an event which may or may not occur) there will arise a right to be paid, or an obligation to pay, a sum of money, which sum of money may be liquidated or sounding only in damages. 70 In Community Development Pty Ltd v Engwirda Construction Co the High Court considered whether a builder, who had a building contract with a company under which it was entitled to be paid for work when performed, was a "contingent or prospective creditor" of the company at the relevant date. It was held that the builder was a contingent creditor from the time the building contract was made. In this regard, Kitto J (Barwick CJ, Taylor, Windeyer and Owen JJ agreeing) stated: Not much assistance is to be gained, I think, from observations that are to be found in reported cases as to the import of the word "contingent", and I shall refer to one only. In Re William Hockley Ltd Pennycuick J suggested as a definition of "a contingent creditor" what is perhaps rather a definition of "a contingent or prospective creditor", saying that in his opinion it denoted "a person towards whom, under an existing obligation, the company may or will become subject to a present liability upon the happening of some future event or at some future date". The importance of these words for present purposes lies in their insistence that there must be an existing obligation and that out of that obligation a liability on the part of the company to pay a sum of money will arise in a future event, whether it be an event that must happen or only an event that may happen. A building contract creates, as soon as it is entered into, an obligation upon the building owner to pay the contract price, either as a whole upon a future event or, more usually, by progress and final payments each of which is to be made on a future event. The event or events may not happen, but if and when one of them does happen the building owner, by force of the contractual obligation, must pay the builder a sum of money. It is, I think, nothing to the point that the event may be complex, as where the payment is agreed to be made when the whole or some part of the work has been done to the satisfaction of an architect as expressed in a certificate or to the satisfaction of an arbitrator as expressed in an award: the building owner is bound from the time the contract is made to pay money to the builder upon a contingency; and that in my opinion makes the builder a contingent creditor of the owner. 71 In National Bank of Australasia Ltd v Mason Barwick CJ referred to the judgment of Kitto J in Engwirda and the reliance by Kitto J upon the definition of a contingent creditor in Re William Hockley Ltd, in the following terms: As was emphasized in that judgment, the importance of that definition is its insistence on the presence of an existing obligation out of which the ultimate liability will grow. 72 In Federal Commissioner of Taxation v Gosstray Tadgell J referred to Engwirda and continued: The notion that a contingent debt must be founded on an existing obligation is strengthened when it is realised that a monetary claim for it, if made the subject of a proof, is to be stated as on the date of the bankruptcy;… If when the proof is lodged the contingency has not happened, the amount of the claim must be estimated as accurately as possible:… see s 82(4) of the Bankruptcy Act 1966. If the value of the claim cannot be fairly estimated s 82(6) provides that the debt or liability should be deemed not to be provable. Of course, it is open to the court to assess the value of a claim at nil:… If, however, a claim were made not founded on an obligation of the bankrupt existing at the date of bankruptcy which could ripen into a debt upon a contingency, the proper conclusion, in my view, would be not that the provable claim should be assessed at nil but that there was no claim on the bankrupt estate at all. What the respondents must show, therefore, is that there is an existing right or liability which they have in answer to the debt relied upon for sequestration: see also Sutherland v Jatkar [2014] FCA 532, [13]. The respondents' claims in this case, however, depend upon the undertaking as to damages given by the Commonwealth in the ACT proceedings. Any claim by the respondents flowing from the undertaking as to damages does not yet exist as a cause of action. In Cirillo v Citicorp Australia Ltd [2004] SASC 293 Gray J said at [72]-[74] (omitting footnotes): 72 An undertaking as to damages is given to the court and not to an enjoined party. The termination of an injunction creates no right to damages in favour of an enjoined party. Enforcement and the extent of enforcement are discretionary matters for the court. It is for the court to decide whether an interlocutory injunction should have been granted. Only if it is decided that the interlocutory injunction should not have been granted does any question of an enquiry as to damages arise. 73 An undertaking as to damages does not found or create a cause of action. The right in issue, on which Mr Cirillo's standing depends, is the right to apply to the court to request an exercise of discretion to order an enquiry as to damages. There is no 'right' to an enquiry until the court's discretion is positively exercised in favour of ordering an enquiry. Even where it is determined that an injunction should not have been granted, the court retains a discretion not to enforce an undertaking. 74 The inquiry itself will not be held unless and until the Court exercises its discretion in favour of an applicant. Until such time, an applicant can only be said to have a mere hope, a spes, of being awarded compensation, or a mere right to apply. The right to damages does not come into existence until after an enquiry. A chose in action is an existing right, whether vested or contingent. A mere hope or spes is not a chose in action. Any hope the respondents may have of securing an order from the court pursuant to the undertaking as to damages has not arisen and is not able to be raised as against the existing claim by ASIC from the orders by the court; nor, furthermore, is there any evidence to substantiate the quantum of any amount that may be awarded in the future if ultimately the respondents are successful. 20 It is, therefore, unnecessary to consider whether the respondents have established that they are "likely to succeed" in appealing from the final orders of Refshauge J in the ACT proceedings even if it were open to the court to go behind the orders made by his Honour in that proceeding. The court has long held that it may go behind a judgment upon which a creditor's petition is based: see Corney v Brien (1951) 84 CLR 343; Xu v Wan Ze Property Development (Aust) Pty Ltd (in liquidation) [2014] FCA 461; Yarranova Pty Ltd v Shaw (No 2) [2014] FCA 616. In this case, however, the judgment which the respondents seek to go behind is not that upon which the petitions for sequestration orders were based but, rather, an award in favour of the Commonwealth in different proceedings. The orders for costs upon which the petitions are based have not otherwise been shown to be wrongly obtained nor shown to be the subject of any process to have them set aside. Furthermore, if it be relevant, the material relied upon in support of the contention that the respondents are likely to succeed in their appeal against the Commonwealth is not compelling. And, even if successful, an award against the Commonwealth in the ACT proceeding would not extinguish the debt to ASIC. 21 The fifth and sixth grounds relied upon by the respondents in opposition to the sequestration order depends upon the terms of the restraining orders initially made by Crispin J in 1999. These grounds were dealt with in paragraphs 111-114 of the respondents' principal written submissions and in paragraphs 14-16 of their written submissions in reply. The restraining orders made by Crispin J were subsequently amended and for the purposes of this proceeding may be taken as applying now to all of the respondents and as restraining them from dealing with all of their property. The evidence of the respondents was that the terms of the orders covered all of their property and not just some. ASIC accepted that the evidence was to that effect albeit that it may not have been proved as clearly as it ought to have been. The existence of the restraining orders, however, are not an impediment to the making of a sequestration order: National Australia Bank Ltd v Pollak (2001) 186 ALR 44. The respondents contended, however, that ASIC's applications for sequestration orders in the context of the existence of the restraining orders was an abuse of process. To that extent grounds 5 and 6 overlapped with ground 7 and are, therefore, best considered together. 22 The claim of abuse of process depended in part upon the fact that the applications for sequestration orders could secure nothing for the creditor because the whole of the estates of the respondents were the subject of the restraints which had initially been made by Crispin J in the ACT proceedings. That, indeed, appears to have been established (albeit less clearly than might have been desirable) by the evidence. The existence of a restraining order does not, however, preclude the making of a sequestration order: a restraining order prevents a debtor from dealing with property whilst the sequestration order vests control of property in a trustee: National Australia Bank Ltd v Pollak (2001) 186 ALR 44 at [50]-[51]. The respondents' claimed, however, that the applications for sequestration were an abuse and not just that they would not secure anything not already subject to the restraining orders in favour of the Commonwealth. A claim of abuse of process imposes a heavy onus of proof on the person alleging the abuse: Williams v Spautz (1992) 174 CLR 509, 529. The abuse alleged by the respondents was said to be capable of inference. It was said that a collateral purpose of hindering the respondents in pursuing their appeal rights was to be inferred from the fact that ASIC would get nothing from pursuing sequestration given that all of the assets of the respondents were already subject to the restraining orders. 23 The evidence, however, does not establish any abuse or intention to obtain a collateral advantage by ASIC in support of the Commonwealth. It was not until the hearing of the applications that the evidence established (if somewhat unsatisfactorily) that there were no other assets of the respondents which were not the subject of the restraint. The respondents had not attempted before the hearing of the applications for sequestration to establish the facts which they asserted at the hearing. They could have, but had not, provided detailed statements of their assets and liabilities in their evidence prior to the hearing of the applications for sequestration orders. They may, perhaps, have thought it sufficient to rely upon general statements which were intended to assert what may have seemed obvious to them, namely, that they had no assets other than those covered by the restraints. They have not, however, established that ASIC was seeking the sequestration orders for any collateral purpose. The way in which the proceedings before me were conducted did not support the submission that ASIC sought in their applications to do anything other than to pursue the process of sequestration for the purpose for which it was designed. A consequence of bankruptcy may be that the fate of any appeal in the ACT proceedings will be determined by the trustee in bankruptcy, but that potential consequence is not shown to have been ASIC's purpose on the evidence beyond assertion and inference. Nor is the possibility of the trustee in bankruptcy determining the fate of appeals in the ACT proceedings an inevitability or necessarily inappropriate: the evidence makes it conceivable that the ASIC debt will be paid through EzyLP, and the fact that the trustee in bankruptcy may need to decide whether to pursue appeals in the ACT proceedings arises by operation of law and will, if it occurs, be an independent decision over which ASIC will have no control. 24 Accordingly, there will be in each proceeding a sequestration order made against the estate of the respondent in the proceeding. The applicant's costs, including reserved costs, in each proceeding, are to be taxed and paid from the respective estates in accordance with the Bankruptcy Act. The date of bankruptcy is 23 August 2013. I certify that the preceding twenty-four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Pagone.

Australian Securities and Investments Commission v Endresz

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Judgment (31 paragraphs)

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Legislation Cited (8)

Cases Cited (27)

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