Barber v Bone Thorpe International Pty Ltd [2001] FMCA 4

5. The applicant debtor is to pay the respondent creditor's costs of this application and the application heard by this Court on 21 December 2000.

6. A copy of these orders is to be provided to the official receiver in Brisbane within two days of entry.

1. This is an application under s.104 of the Federal Magistrates Act 1999 and in particular subsection 2 of that section. That subsection provides that a party to proceedings in which a Registrar has exercised any of the powers of the Federal Magistrates Court, under subsection 102(2) or under a delegation under subsection 103(1), may a) within the time prescribed by the rules of court; or b) within any further time allowed in accordance with the rules of court, apply to the Federal Magistrates Court for a review of that exercise of power. No rules have been made to date under the Federal Magistrates Act. In the circumstances, the Federal Court Rules apply unless otherwise ordered.

2. Order 77 rule 8 of the Federal Court Rules provides for an application for review of a Registrar's decision to be made within 21 days of the date of the decision. On 21 December 2000 I ordered that Ms Barber have liberty to file an application for review up to 19 January 2001. The application was filed within that time. The applicant in these proceedings, Thi Tuyet Nga Barber, seeks an order that the sequestration order made against her by Registrar Baldwin of this Court on 17 November 2000 be set aside. The respondent to the present application is Bone Thorpe International Pty Ltd, the successful petitioning creditor. The applicant has previously unsuccessfully applied in this Court for a stay of proceedings under the bankruptcy. Costs of that application have been reserved pending the outcome of this application.

3. It is apparent from the material filed in support of that earlier unsuccessful application and from the affidavit of Ms Barber made on 9 January 2001 in support of the present application that Ms Barber considers that the sequestration order should not have been made for several reasons. First, Ms Barber deposes that she is solvent. Secondly, Ms Barber deposes that she was not served with a statement of claim on which the default judgment supporting the bankruptcy notice which ultimately led to the creditor's petition was instituted. Thirdly, Ms Barber denies that she is indebted to the respondent. In other words, she disputes the claim leading to the judgment supporting the bankruptcy notice. Fourthly, Ms Barber has asserted that she has a claim against the respondent of equal or greater value than the judgment debt against her. Lastly, Ms Barber disputes that an order for substituted service of the creditor's petition should have been made prior to the hearing of that petition.

4. I am not persuaded by the last argument concerning the order for substituted service made by the Registrar on 20 October 2000. Although the applicant is a person who regularly travels overseas, it appears from the evidence that she was in all likelihood in Australia at the time substituted service was effected and, in my view, the Registrar properly concluded that it was likely that the creditor's petition would come to the attention of Ms Barber by way of substituted service in the post to her home address. I note that in court today Mr de Robillard has told me that in fact it did not come to her attention due to some problems in the provision of mail in the place in which she lives. In any event, the debtor is now aware of the creditor's petition and is in court in the person of her legal representative for a rehearing of that petition. I would not be prepared to dismiss the petition by reason only of the order for substituted service previously made.

5. Turning to other matters raised by the applicant, a claim of solvency is a matter relevant to proceedings on a creditor's petition under s.52 of the Bankruptcy Act 1966. Section 52(2) provides relevantly that a court hearing a creditor's petition may dismiss the petition if satisfied that the debtor is able to pay his or her debts. In the present case there is evidence that Ms Barber has equity in her residential property in Pyrmont substantially in excess of the debt supporting the creditor's petition.

6. There is no evidence of any other unsecured creditors who may wish to prove in the bankruptcy. The Commonwealth Bank holds a mortgage over the residential property and there may indeed be other mortgagees, but presumably the bank has no interest in whether Ms Barber is successful in her present application provided that she continues to meet her obligations under the mortgage held by the bank. However, the fact that a debtor has an excess of assets over liabilities is not the same thing as a debtor being in a position to pay all of the debts that he or she owes within a reasonable time. In order to resist a creditor's petition a debtor needs to be able to demonstrate a capacity to pay his or her debts within a reasonable time. Re Sarena; ex parte Wollondilly Shire Council [1980] FCA 66; (1980) 43 FLR 163.

7. It would be sufficient for the debtor to establish that he or she has the means to borrow on available assets to pay debts within a reasonable time. Mr de Robillard has told me this morning that his instructions are that Ms Barber has the means to pay the debt currently in dispute and that her accountant has told him last week that he is in possession of sufficient funds for that purpose.

8. The Court has a discretion to make a sequestration order even though it is satisfied that the debtor is able to pay his or her debts, but the Court will not exercise that discretion in cases where the creditor has other means, legal or equitable, to enforce payment of its debt and the debtor has sufficient assets or other resources to pay the debts though unwilling to do so: Re Stubberfield; ex parte Paradise Grove Pty Ltd (1995) 134 ALR 169.

9. I have asked Mr Preston what he says on that issue and he has told me that there would be difficulties in enforcing the judgment by other means having regard to the need to obtain enforcement of a foreign judgment in New South Wales and doubts about the financial position of Ms Barber. Nevertheless, I have alluded both today and last week to the possibility of Ms Barber paying into court in the Magistrates Court of Queensland the disputed debt while attempting to have that default judgment set aside.

10. The applicant invites this Court to go behind the judgment supporting the creditor's petition on the basis that she was never served with any statement of claim in relation to the proceedings and because she says that the default judgment should not have been obtained because she does not owe the amount claimed. The applicant, Ms Barber, deposes that she was never served with a statement of claim in relation to the proceedings in the Magistrates Court of Queensland, leading to the default judgment. That is an issue relevant to the court's consideration of whether to go behind the judgment. The respondent has deposed that personal service was effected on Ms Barber at her home on 11 July 1999. There is evidence that Ms Barber was in Australia at that time.

11. There is authority that if a judgment has been obtained by default, without a real trial of the issues, the bankruptcy court will more readily look behind it to see if on investigation it does represent a real debt: Corney v Bryan [1951] HCA 31; (1951) 84 CLR 343. Whether the debtor has attempted to have the judgment set aside is relevant to the exercise of the Court's discretion to look behind the default judgment unless there is an explanation for not so attempting such as lack of funds to pay the legal costs involved.

12. There is evidence that Ms Barber was made aware of the default judgment and that she gave instructions to her solicitors to have the default judgment set aside. However, no action was taken to have the default judgment set aside. The respondent's solicitor, Martin Daniel, deposed on 9 February 2001 that that remained the position as at that date and Mr de Robillard has confirmed that that remains the position to date. The explanation proffered by Mr de Robillard is that various means of proceeding were considered by Ms Barber, including proceedings that were ultimately commenced to obtain a judgment against the creditor by way of set off or cross claim, and alternatively, application to the Federal Court to set aside the bankruptcy notice based on the default judgment.

13. Ms Barber now applies for orders that the Queensland Magistrates Court proceedings be transferred to this Court. Clearly I cannot make that order. In the first place, the proceedings in the Queensland Magistrates Court have been completed. There is nothing to transfer. Secondly, this Court has no jurisdiction in the matter that was before the Queensland Magistrates Court and this Court has no relevant power of transfer.

14. The assertion by the applicant that she has a counterclaim against the creditor of equal or greater value is a matter which could in theory justify the court in dismissing the creditor's petition. The existence of a set off, cross demand or counter claim will often be a sufficient cause in exercising the discretion of the court under Section 52(2)(b). There is evidence that Sennaway Pty Limited commenced proceedings in the District Court of Queensland in 1999 claiming $72,043.80 plus interest against the respondent to these proceedings. However, it appears from the available evidence that those proceedings in the District Court have not been pursued diligently and in any event it does not appear to me that there is any necessary likelihood that Ms Barber would benefit personally from a successful outcome of that claim. I am not persuaded that this Court should set aside the sequestration order made by the Registrar by reason of that outstanding claim. For the same reasons I am not prepared to adjourn proceedings of the creditor's petition to give time for those proceedings in the District Court to be pursued, even if I was prepared to otherwise set aside the decision of the Registrar to make the sequestration order.

15. When reviewing a decision of a Registrar to make a sequestration order a judge can take into account considerations relevant to the making of an annulment order pursuant to s.153B of the Bankruptcy Act: BBC Hardware Ltd v Boutros (unreported, FCA, 6 March 1998, Emmett J). Apart from the considerations already mentioned, the factors relevant to the exercise of the Court's discretion to annul a bankruptcy are first, whether the bankrupt was represented on the return date of the creditor's petition and whether the matters raised in the application could have been raised before the court at the hearing of the creditor's petition. In the present case the bankrupt was not represented and did not have the opportunity to raise the matters on the hearing of the creditor's petition.

16. Secondly, the commercial morality of the bankrupt prior to the sequestration order being made is a relevant factor. The applicant has been engaged in commercial activities with the respondent, principally in Vietnam. The facts relating to those dealings are in part disputed and the circumstances leading to the judgment debt and the claim by Sennaway against the respondent are somewhat murky. Among other things, there were outstanding criminal proceedings against the principal of the respondent company, although Mr Daniel has deposed that the prosecution has been discontinued. It is apparent that Ms Barber has been unwise in the way in which she has not given proper attention to her affairs leading to the sequestration order. I am not able to say, however, that Ms Barber has behaved improperly or that she has shown commercial immorality.

17. The next relevant factor is the bankrupt's conduct during the course of the bankruptcy prior to the present application. It appears that the applicant's conduct during this short period since the making of the sequestration order has been proper. In particular she has delivered her statement of financial circumstances to the trustee, although Mr Preston has queried the completeness of that financial statement.

18. The next relevant factor is whether the bankrupt was at the relevant time insolvent. As noted above, there is some evidence that at the time of the sequestration order the applicant was not insolvent.

19. The final factor is whether the applicant has made any proposal for payment of fees and charges incurred by the trustee in the course of the administration. Ms Barber has asserted that she has sufficient money to pay her outstanding debts including the costs of the trustee and Mr de Robillard has submitted today that those costs would be paid.

20. In the light of the above, I draw the following conclusions. Although Ms Barber has an excess of assets over her liabilities, I am not satisfied on the basis of the evidence that she is solvent. She has offered to pay money into court but she has not yet been put to the test of that promise.

21. I am somewhat uneasy about the default judgment obtained by the creditor given the contest of evidence over service and the fact that Ms Barber was not represented either at the hearing before the Queensland Magistrates Court or the hearing of the creditor's petition in this Court. But Ms Barber has been the author of her own misfortune in that she has to date taken no steps to set aside the default judgment. Neither did she challenge the bankruptcy notice. It may be that Ms Barber could have successfully defended the claim against her in the Queensland Magistrates Court but I am not in a position to determine that in these proceedings.

22. Ms Barber's difficulties have no doubt been exacerbated by her regular overseas travel, apparently connected with her business activities in Vietnam. Ms Barber was overseas at the time the creditor's petition was heard. She also went overseas after arranging for this application to be heard and apparently without the permission either of her trustee or the court. I commented on that present absence at the directions hearing on 13 February 2001. I say nothing further about it now as it is not, in my view, a relevant factor bearing on my decision.

23. On balance, I have concluded that the sequestration order should be set aside but I will not at this stage dismiss the creditor's petition. I am prepared to adjourn that petition for a short time to give Ms Barber the opportunity, however late, to set aside the default judgment. If she wishes to maximise her chances she will be well advised to pay into the Queensland Magistrates Court the amount of the judgment.

24. As to costs, the creditor has acted in good faith and properly. It is the debtor's fault that these proceedings have been necessary. Accordingly, even though the application will be granted, the applicant should meet the respondent's costs. I therefore order that:

1. The sequestration made by Registrar Baldwin on 17 November 2000 against the estate of Thi Tuyet Nga Barber is set aside.

2. Further hearing of the creditor's petition in this matter is adjourned to 13 March 2001.

3. If no steps have been instituted by 13 March 2001 to have the default judgment in proceedings M4239 of 1999 in the Magistrates Court of Queensland set aside or if an attempt to have the judgment set aside has failed the creditor's petition will be reheard on that date.

4. The applicant debtor is to pay the costs incurred by the trustee in the administration of her estate to date.

5. The applicant debtor is to pay the respondent creditor's costs of this application and the application heard by this Court on 21 December 2000.

6. A copy of these orders is to be provided to the official receiver in Brisbane within two days of entry.

25. The effect of those orders, gentlemen, is that I am keeping control of the bankruptcy proceedings. Ms Barber is presently released from bankruptcy to give her the opportunity to seek to set aside the default judgment of the Queensland Magistrates Court and I will review the position on 13 March 2001.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

I certify that the preceding twenty-five (25 paragraphs are a true copy of the Reasons for Judgment of Driver FM.