Australian Securities and Investments Commission v Forge

Federal Court of Australia (Full Court)|2003-11-28|Before: Stone JJ

WHERE MADE: SYDNEY (HEARD IN CANBERRA VIA VIDEO LINK TO SYDNEY)

THE COURT ORDERS THAT:

the appeal be upheld;
the orders of the Federal Magistrates Court made on 11 March 2003 be set aside; 3. the proceeding, including the question of costs of the proceeding before the Federal Magistrates Court, be remitted to the Federal Magistrates Court for further consideration concerning the extension of time for compliance with bankruptcy notice BN 40/02; 4. the time for compliance with bankruptcy notice BN 40/02 be extended up to and including the time of such further consideration by the Federal Magistrates Court;
the respondent pay the appellant's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

WHERE MADE: SYDNEY (HEARD IN CANBERRA VIA VIDEO LINK TO SYDNEY)

THE COURT ORDERS THAT:

the appeal be upheld;
the orders of the Federal Magistrates Court made on 11 March 2003 be set aside; 3. the proceeding, including the question of costs of the proceeding before the Federal Magistrates Court, be remitted to the Federal Magistrates Court for further consideration concerning the extension of time for compliance with bankruptcy notice BN 41/02; 4. the time for compliance with bankruptcy notice BN 41/02 be extended up to and including the time of such further consideration by the Federal Magistrates Court;
the respondent pay the appellant's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

AUSTRALIAN CAPITAL TERRITORY DISTRICT REGISTRY A 14 OF 2003

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

WHERE MADE: SYDNEY (HEARD IN CANBERRA VIA VIDEO LINK TO SYDNEY)

THE COURT ORDERS THAT:

the appeal be upheld;
the orders of the Federal Magistrates Court made on 11 March 2003 be set aside; 3. the proceeding, including the question of costs of the proceeding before the Federal Magistrates Court, be remitted to the Federal Magistrates Court for further consideration concerning the extension of time for compliance with bankruptcy notice BN 42/02; 4. the time for compliance with bankruptcy notice BN 42/02 be extended up to and including the time of such further consideration by the Federal Magistrates Court;
the respondent pay the appellant's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

A 11 OF 2003 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

A 12 OF 2003 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

A 13 OF 2003 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

A 14 OF 2003 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

PLACE: SYDNEY (HEARD IN CANBERRA VIA VIDEO LINK TO SYDNEY)

BRANSON AND STONE jj: 1 We have had the advantage of reading in draft the reasons for judgment of Emmett J. We agree with his Honour that the appeals should be upheld and the orders of the learned Federal Magistrate set aside. Although we agree with his Honour's reasons, we consider it appropriate to add the following observations. 2 The principal issue to be determined on the appeals is the proper construction of s 40(1)(g) of the Bankruptcy Act 1966 (Cth) ('the Act'). 3 As Mason and Wilson JJ observed in Cooper Brookes (Wollongong) Proprietary Limited v Federal Commissioner of Taxation (1981) 147 CLR 297 at 320: 'The fundamental object of statutory construction in every case is to ascertain the legislative intention by reference to the language of the instrument viewed as a whole. But in performing that task the courts look to the operation of the statute according to its terms and to legitimate aids to construction.' 4 The Act as a whole reflects legislative recognition of the public interest, as well as private interests, in the management of personal insolvency. It seeks to achieve a balance between the public interest in creditors of an insolvent being paid rateably from the property of the insolvent and the public interest, as well as the private interest of the debtor, in the debtor not being reduced to a mendicant. It also reflects a balance between the public interest in limiting the capacity of insolvent persons to incur debts that they will not be able to satisfy and the public and private interest in eventually allowing insolvent persons to be free from the burden of past debts to start financially afresh. 5 In the scheme of the Act the commission of an act of bankruptcy is an event of critical significance. Section 40(1) of the Act is concerned to identify the circumstances in which a debtor commits an act of bankruptcy. The commission of an act of bankruptcy is a necessary precondition to the presentation of a creditor's petition (s 44(1)(c)) and to the making of a sequestration order against the estate of a debtor on a creditor's petition (s 43(1)(a)). 6 The commission of an act of bankruptcy has, however, additional significance by reason of the doctrine of relation back which is reflected in s 115 and s 116(1) of the Act. Generally speaking, a bankruptcy is taken to have commenced at the time of the commission of the earliest act of bankruptcy committed by the debtor within the period of six months immediately before the date on which the sequestration order is made (s 115(1)). Where a person becomes bankrupt on a creditor's petition, the earliest relevant act of bankruptcy may have been committed before the time when the debt on which the creditor's petition was founded was incurred (s 115(3)). Subject to certain exceptions in s 116 and s 123 to s 127, all property that belonged to the bankrupt at the commencement of the bankruptcy or that was acquired by the bankrupt thereafter and before his or her discharge is available to pay the bankrupt's creditors. 7 The effect of the doctrine of relation back has been described in the context of English law as follows: 'Until commission of the act of bankruptcy [the debtor] was, of course, the beneficial owner of whatever assets he possessed, but by the act of bankruptcy his title to be regarded as such beneficial owner is no longer absolute, but is contingent on no bankruptcy petition being presented within three months of the date of the act of bankruptcy which leads to a receiving order being made. If such receiving order be made the whole of the assets vest in his trustee as from the date of the act of bankruptcy. He is, therefore, in the position that should such a contingency occur he is from the date of the act of bankruptcy something less than a mere trustee of his assets for the creditors in his bankruptcy. Until this stage of suspense has been removed either by a receiving order or by lapse of time, he has no right to deal with those assets that were in his hands, and can give no title in them to any transferee with notice. Similarly, with regard to the debts and other choses in action which form part of his estate, he cannot collect them or give a valid discharge for them, and anyone making a payment to him with notice of the act of bankruptcy does so at his peril.'

(Ponsford, Baker & Co v Union of London and Smith's Bank Ltd [1906] 2 Ch 444 at 452-453 per Fletcher Moulton LJ).

8 Section 40(1) identifies many circumstances in which a debtor will commit an act of bankruptcy. Section 40(1)(g), which refers to failure to comply with a bankruptcy notice served on the debtor by a creditor, identifies only one such circumstance. The act of bankruptcy for which s 40(1)(g) provides is the only act of bankruptcy that is directly precipitated by conduct of a specific creditor under the Act. The act of bankruptcy for which s 40(1)(d) provides is also precipitated by conduct of a specific creditor but not conduct under the Act. Section 40(1)(d) provides that a debtor commits an act of bankruptcy if execution has been issued against him or her under process of a court and as a consequence any of his or her property has been sold or held by the sheriff for 21 days or the execution has been unsatisfied. None of the other acts of bankruptcy for which s 40(1) provides is dependent on the conduct of a specific creditor. Each of them is dependent on conduct of the debtor himself or herself which is strongly suggestive of insolvency (eg the making of a conveyance or assignment of property for the benefit of creditors generally, conduct intended to defeat or delay creditors, presenting a debtor's petition, suspending the payment of debts etc). 9 For the reasons identified in [6] above, an act of bankruptcy is more than a mere trigger for the presentation of a creditor's petition. The earliest act of bankruptcy within the period of six months immediately before the date on which a sequestration order is made will ordinarily be critical in the identification of the property of the debtor that will be available to pay creditors rateably. By relating the bankruptcy back in this way to an act which prima facie demonstrates insolvency, unfair advantage to the better informed or more resolute of the debtor's creditors is minimised. 10 Against the above brief consideration of the significance of acts of bankruptcy in the structure of the Act as a whole, it is appropriate to have regard to the actual language of s 40(1)(g). Section 40(1)(g) provides as follows: 'A debtor commits an act of bankruptcy in each of the following cases: … (g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not: (i) where the notice was served in Australia - within the time specified in the notice; or (ii) where the notice was served elsewhere - within the time fixed for the purpose by the order giving leave to effect the service; comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained'. 11 The critical issue for present purposes is whether 'a creditor who has obtained against the debtor a final judgment or final order' within the meaning of s 40(1)(g) is restricted to a creditor who has obtained against the debtor a final judgment or a final order in respect of a debt that would be provable in the debtor's bankruptcy were a sequestration order made against the debtor's estate. 12 We note incidentally that this is, in our view, a quite different question to, and may attract a different answer from, the question whether a creditor who wishes to present a petition against a debtor may rely on debts that are not provable in bankruptcy for the purpose of satisfying the requirement of s 44(1) of the Act. We received only limited help from counsel with respect to the structure and operation of the Act. For this reason, in our view, it is desirable that we restrict our consideration of these issues as much as is possible. We note, however, that s 44(2), which deems a secured creditor for the purposes of s 44(1)(a) to be a creditor only to the extent, if any, by which the amount of the creditor's debt exceeds the value of his or her security, might suggest an intention that only a creditor whose provable debts satisfy the requirements of s 44(1)(a) should be entitled to present a creditor's petition. We would prefer to express no opinion on whether a creditor, to whom the debtor does not owe a debt provable in bankruptcy of $2000, or debts provable in bankruptcy that aggregate to $2000, may present a petition against that debtor. 13 As we read the reasons for judgment of the learned Federal Magistrate, he concluded that 'a creditor who has obtained against the debtor a final judgment or final order' within the meaning of s 40(1)(g) is not restricted to a creditor who has obtained against the debtor a final judgment or a final order in respect of a debt that would be provable in the debtor's bankruptcy were a sequestration order to be made against the debtor's estate. However, the Federal Magistrate, after observing that the Parliament had decided that penal orders should not be provable in bankruptcy, observed: 'There is little logic in allowing such a debt to be the trigger for the very state of affairs which it is legislatively prohibited from enjoying.'

14 It would appear that the Federal Magistrate regarded an act of bankruptcy under s 40(1)(g) as a mere trigger for the presentation of a creditor's petition. For the reasons set out above all acts of bankruptcy have a wider significance than their capacity to found a creditor's petition. 15 Nothing in the language of s 40(1)(g) indicates a legislative intention that the general description 'a creditor who has obtained against the debtor a final judgment or final order' should be subject to any limitation. Nor, in our view, does the context provided by s 40, or the Act as a whole, suggest that any limitation on the generality of the expression is intended to be found by implication. The conduct encompassed by s 40(1)(g), even where undertaken in respect of a final judgment or final order in respect of a debt not provable in bankruptcy, is an act which prima facie demonstrates insolvency. All persons are under an obligation to comply with final judgments or final orders. Failure to do so, especially after having been placed on notice that compliance is required by the party in whose favour the final judgment or final order was made, may be assumed to indicate an inability to do so; that is, to indicate insolvency. The public interests with which the Act is concerned are thus engaged. 16 For the above reasons we agree with Emmett J that the Federal Magistrate erred in setting aside the bankruptcy notice on the basis, in effect, that its issue served no logical purpose within the legislative scheme of the Act. I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices Branson and Stone.

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

A 11 OF 2003 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

A 12 OF 2003 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

A 13 OF 2003 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

A 14 OF 2003 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION

PLACE: SYDNEY (HEARD IN CANBERRA VIA VIDEO LINK TO SYDNEY)

REASONS FOR JUDGMENT EMMETT J: 17 These four appeals concern bankruptcy notices issued under the Bankruptcy Act 1966 (Cth) ('the Act') at the behest of the appellant, Australian Securities and Investments Commission ('the Commission'). The notices are addressed to the respondents, William Arthur Forge, Jozsef Endresz, Allan Paul Endresz and Dawn Endresz. On 11 March 2003, Raphael FM ('the Magistrate') made orders setting aside each of the bankruptcy notices: see Forge v ASIC [2003] FMCA 58. The Commission now appeals to the Federal Court of Australia pursuant to s 24(1)(d) of the Federal Court of Australia Act 1976 (Cth). The Chief Justice has determined that the appeals be heard by a Full Court constituted by three judges. 18 The bankruptcy notices are based on orders made by the Supreme Court of the New South Wales under s 1317EA(3)(b) of the Corporations Law of New South Wales ('the Law'). Section 1317EA of the Law applies if the Court is satisfied that a person has contravened a civil penalty provision, as that term is defined in the Law. Section 1317EA(2) then provides that the Court may declare that the person has contravened such a provision. Section 1317EA(3) provides that the Court may also make an order against such a person that the person pay to the Commonwealth a pecuniary penalty of an amount specified in the order. 19 On 28 August 2002, pursuant to s 1317EA(3)(b) of the Law, Foster AJ made orders for pecuniary penalties against the respondents as follows:

William Arthur Forge $245,000;
Jozsef Endresz $245,000;
Dawn May Endresz $245,000;
Allan Paul Endresz $200,000. 20 On 13 September 2002, bankruptcy notices were issued at the instigation of the Commission addressed to each of the respondents requiring payment of the amounts of those respective penalties. On 4 October 2002, each of the respondents filed an application to the Federal Magistrates Court for orders under ss 30, 41(6A) and 41(7) of the Act that the bankruptcy notice addressed to that respondent be set aside and that an order that the time for compliance with the bankruptcy notice be extended. Thereafter, the time for compliance has been extended up to 11 March 2003. On that day, the Magistrate ordered that each of the bankruptcy notices be set aside. 21 The basis for his Honour's orders was that, by the operation of s 82(3AA) of the Act, the amounts payable under the orders made under s 1317EA would not be provable in the bankruptcies of the respondents. His Honour concluded that the Act would permit the 'issuance' of a bankruptcy notice against a debtor based on a non provable debt and would permit an act of bankruptcy, based upon the failure to comply with such a bankruptcy notice, to ground a creditor's petition. However, his Honour considered that, since the Act provides that penalty orders such as an order made under s 1317EA of the Law are not provable in bankruptcy, there was little logic in allowing such a debt to be the trigger for the very state of affairs 'which it is legislatively prohibited from enjoying'.

THE RELEVANT SCHEME OF THE ACT 22 Section 43(1) of the Act provides that, where a debtor has committed an act of bankruptcy and one of the prerequisites set out in s 43(1)(b) is satisfied (and it is common ground that at least one would be satisfied in the present case), the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor. Section 40(1) sets out the cases in which a debtor commits an act of bankruptcy. One of those cases is referred to in s 40(1)(g), which relevantly provides that an act of bankruptcy is committed if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution which has not been stayed, has served on the debtor a bankruptcy notice under the Act and the debtor does not take the steps set out in that provision. 23 Section 41(1) provides that an Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor a final judgment or final order that is of the kind described in s 40(1)(g) and is for an amount of at least $2000. Section 40(3)(d) relevantly provides that, for the purposes of s 40(1)(g), a person who is for the time being entitled to enforce a final judgment or final order for the payment of money is to be deemed to be a creditor who has obtained a final judgment or final order. 24 Section 52(1) of the Act provides that, at the hearing of a creditor's petition, the Court must require proof of certain matters, including the fact that the debt or debts on which the petitioning creditor relies is or are still owing and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. Thus, the Court has a discretion whether to make the sequestration order, even where an act of bankruptcy has been committed. If the Court determines that the circumstances are such that the Court should go behind the judgment debt relied upon in a bankruptcy notice and, having done so, it is not satisfied that there has been shown to be real consideration for the debt, it will, in the exercise of that discretion, dismiss the petition, notwithstanding a proved act of bankruptcy: see Makhoul v Barnes (1995) 60 FCR 572 at 582. 25 Section 41(6A) of the Act provides that, where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice, an application has been made to set aside the bankruptcy notice, the Court to which the application is made may extend the time for compliance with the bankruptcy notice. Section 30(1) provides that the Court has full power to decide all questions in any case of bankruptcy coming within the cognizance of the Court and may make such orders as the Court considers necessary for the purposes of carrying out or giving effect to the Act. 26 While there is no express power conferred by the Act on a Court to set aside a bankruptcy notice, it is clear that there is power to do so. The power is derived from s 30 of the Act and from the principle that a power conferred by Parliament carries with it the power necessary for its performance or execution. Thus, the express power to extend time for compliance with the requirements of a bankruptcy notice, when an application to set it aside has been filed, carries with it the power to set aside the bankruptcy notice itself: Re Sterling; Ex parte Esanda Ltd (1980) 44 FLR 125. 27 However, the Act gives no general discretion to set aside bankruptcy notices that are valid in form and not an abuse of process. The Act permits the issue of a bankruptcy notice and, if the notice is valid, prescribes the consequences to the bankrupt of non-compliance. The grounds upon which a bankruptcy notice may be set aside must relate to the form or content of the notice, service of the notice or the existence of the debt upon which the judgment, and, in turn, the notice, is founded. Reference to the existence of a debt includes the existence of a counter claim, set off or cross demand equal to or exceeding the amount of the debt: Re Briggs; Ex parte Briggs v Deputy Commissioner of Taxation (WA) (1986) 12 FCR 310 at 312; Re Athans; Ex parte Athans (1991) 29 FCR 302 at 310. Since jurisdiction to set aside a defective bankruptcy notice is not a general discretionary jurisdiction, it differs from the jurisdiction to make a sequestration order under s 52(1), which is expressly discretionary.

THE ISSUES ON APPEAL 28 The respondents contend, in effect, that the scheme of the Act, including s 82(3AA) as it does, is such that: · a bankruptcy notice issued at the behest of a creditor in respect of an order made under s 1317EA is invalid, or · the Court has a discretion to set aside such a bankruptcy notice because the creditor at whose behest it is issued could not prove for the amount of the relevant judgment debt in any ensuing bankruptcy. Neither contention can be sustained. 29 Bankruptcy legislation is not for the determination of disputes arising between citizens or between citizen and state. It is legislation designed for the benefit of the community as a whole. Thus, in considering whether or not to exercise powers under the Act, the Court must have regard not only to the rights of the parties to the proceedings, but to the community as a whole. Such considerations must be taken into account in exercising the discretion whether to make or refuse to make a sequestration order under s 52. 30 That policy underlines the scheme of bankruptcy legislation in so far as sequestration of the estate of a debtor depends upon a petition by a creditor. A prerequisite for a creditor's petition is that there has been an act of bankruptcy committed by the debtor. Examination of the cases where a an act of bankruptcy will be committed, as set out in s 40(1), indicates that the scheme of the Act is to identify markers or criteria that point towards insolvency. That is to say, they identify markers or criteria pointing towards a state of affairs whereby a debtor is unable to pay his or her debts in the ordinary course as the debts fall due for payment. Each of the cases described in s 40(1) suggests such an inability on the part of a debtor. Putting aside for the moment the case referred to in s 40(1)(g), none of the other cases requires an act by a creditor whose debt can be proved in any ensuing bankruptcy based on the commission of the relevant act of bankruptcy. 31 Indeed, there are cases that make it clear that such a creditor could be involved in an act of bankruptcy. For example, the case referred to in s 40(1)(d) is where execution has been issued against the debtor and any of the property of the debtor has, in consequence, either been sold or held for 21 days, or execution has been issued and has been returned unsatisfied. Both cases could involve execution at the behest of a creditor whose debt is not provable. The case referred to in s 40(1)(h) is where the debtor gives notice to any of the debtor's creditors that the debtor has suspended or is about to suspend payment of debts. Thus, notice of suspension of payment of debts could also be given to a creditor whose debt is not provable. 32 It is clear that the Commission is a creditor for the purpose of s 40(1)(g). There is no reason, in the scheme of the Act, to suggest that s 40(1)(g) is limited to the case where a bankruptcy notice is founded upon a judgment debt that could be proved in the bankruptcy. Further, the fact that such a debt is not paid after demand by the judgment creditor is just as much a marker or criterion of insolvency as where the bankruptcy notice is based upon a debt that is provable in the bankruptcy. 33 The question of whether the Court can or should set aside a bankruptcy notice raises quite different considerations from those that arise in relation to the question of whether the Court can or should make a sequestration order, assuming the prerequisites for s 52 have been satisfied, on a petition presented by a creditor whose debt could not be proved in the bankruptcy. The question of whether or not a sequestration order can or would be made in such a case is not relevant on an application to set aside a bankruptcy notice. These appeals are not concerned with that question and I express no opinion on it. These appeals are concerned only with the grounds upon which a bankruptcy notice can be set aside. The learned Magistrate erred in setting aside the bankruptcy notices just because the Commission could not prove in any bankruptcy in respect of the judgments on which the notices are based. 34 Nothing said above should be taken to bear one way or the other on the question of whether or not a sequestration order would be made on a petition presented by a creditor whose debt could not be proved in the bankruptcy. Whether, assuming an act of bankruptcy is committed by any of the respondents by failing to comply with the relevant bankruptcy notice, a sequestration order would be made is a matter for the exercise of discretion by the Court before whom that question arises.

CONCLUSION 35 The appeals should be upheld and the orders made on 11 March 2003 should be set aside. 36 The Magistrate observed that there were appeals on foot from the orders imposing penalties under s 1317EA. But for the fact that his Honour set the bankruptcy notices aside, his Honour would have extended the time for compliance with them until seven days after the determination of the appeals. 37 This Court has no information as to the current state of the appeal from the orders made by Foster AJ. In the circumstances, it is appropriate that the matters be remitted to the Federal Magistrates Court for further consideration concerning the extension of time for compliance with the bankruptcy notices. In the meantime, the time for compliance should be extended up to the time of such further consideration by the Magistrate. 38 The respondents should pay the Commission's costs of the appeals. The question of the costs of the proceeding before the Magistrate should be dealt with on remitter. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Solicitor for the Appellant: Australian Securities and Investments Commission

Solicitor for the Respondents: Ken Cush and Associates

Bankruptcy Act 1966(Cth)ss 30, 40, 41, 43, 44, 52, 115, 116, 123, 127

At a glance

Court

Decision date

Before

Source

Judgment (34 paragraphs)

Parties

Legislation Cited (2)

Cases Cited (6)

Cited By (11)