Barton v Malcolm Johns Legal Pty Ltd

Legal principles 8 Although Mr Barton's interlocutory application refers to Federal Court Rules 2011 (Cth) ("Rules"), r 41.03 (concerning applications for a stay of a judgment or order), the possible sources of the Court's jurisdiction to grant the stay which Mr Barton seeks are: a. s 52(3) of the Bankruptcy Act 1966 (Cth); b. r 36.08(2) of the Rules. 9 Section 52(3) provides: The Court may, if it thinks fit, upon such terms and conditions as it thinks proper, stay all proceedings under a sequestration order for a period not exceeding 21 days. 10 Rule 36.08(2) provides that an appellant may apply to the Court for an order to stay the execution of the proceeding until the appeal is heard and determined. 11 The principles to be applied on an application of this kind were set out in Nolten Groeneveld Australia Pty Ltd [2011] FCA 1494 at [24]: Rule 36.08 of the Rules confers a broad discretion to order a stay notwithstanding that an appeal shall not operate as a stay of execution or of proceedings under the judgment appealed from. In Powerflex Services Pty Ltd v Data Access Corporation (1996) 67 FCR 65, a Full Court of this Court held that the appropriate test for a stay under the equivalent of Rule 36.08 of the current Rules was that set down in Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685, namely, whether the applicant for a stay showed a reason or an appropriate case to warrant the exercise of discretion in his favour. More specifically, with respect to an application for a stay of a sequestration order, the question is whether there is an arguable point on the proposed appeal and whether the balance of convenience favours the granting of a stay: see Freeman at [3]-[4]; Coleman at 303; Beames v Rigby [2002] FCA 806 at [2]; Kellow v Dudzinski [2003] FCA 238 ("Dudzinski") at [8]; and Shirreff v Beck Legal Pty Ltd [2010] FCA 1407 at [67], [2010] FCA 1407; (2010) 119 ALD 284 at 293-294 [67]. The test for a stay under s 52(3) of the Act is not materially different. 12 This statement of the relevant principles was adopted in Commonwealth Bank of Australia v Pattison [2012] FCA 1511 and Lahood v Bank of Western Australia [2013] FCA 137. 13 The fact of a bona fide and timely appeal does not of itself justify the grant of a stay: Starborne Holdings Pty Ltd v Radferry Pty Ltd [1998] FCA 548; Kellow v Dudzinski [2003] FCA 238 at [7]. The applicant must demonstrate an appropriate case to warrant a favourable exercise of the Court's broad discretion: Powerflex Services Pty Ltd v Data Access Corporation (1996) 67 FCR 65.

Evidence 14 Mr Barton relied on two affidavits in support of his application, being affidavits sworn on 2 and 26 September 2014, and a bundle of documents handed up at the interlocutory hearing. The evidence discloses the following: a. An alleged failure by the respondent to pay an amount of $50,000 to the estate of Welsh from an amount of approximately $52,000 held in trust by the respondent for Mr Barton. The suggestion appears to be that, in the absence of the payment to the estate of Welsh, this money was available in trust and should have been used to pay the counsel's fees that form the judgment debt. b. In February 2014, Mr Barton filed an affidavit in the Roberts Fund proceedings, said to attach an amended second cross claim against the respondent and Malcolm Johns, seeking relief including an amount of $1.5 million. Mr Barton says that he relied on that affidavit at the hearing before the primary judge. c. The trustee has lodged a caveat over real property owned by Mr Barton. Mr Barton completed a statement of affairs, which is annexed to Mr Barton's 26 September 2014 affidavit. d. In his 2 September 2014 affidavit, Mr Barton said that the trustee in bankruptcy had not permitted Mr Barton to sell horses "that form the basis for my income". 15 Mr Barton's 2 September 2014 affidavit also refers to various professional disciplinary matters concerning the respondent and Malcolm Johns. In particular, in late 2013 Mr Barton made a complaint about Mr Johns to the Office of the Legal Services Commissioner. On 25 July 2014, Mr Barton wrote to the Law Society of New South Wales seeking suspension of the respondent's practising certificate. On 29 August 2014, Mr Barton discovered that the respondent had had its practising certificate suspended. Mr Johns was suspended from practising as a solicitor on 29 May 2014. The suspension was not disclosed at the FCC hearing on 30 May 2014. 16 Mr Barton adduced no evidence as to his solvency. However, he proffered an undertaking not to dispose of any of the stock, furniture and other property disclosed in the statement of affairs until the outcome of the appeal is known. 17 The respondent did not tender any evidence. It did not identify any particular prejudice flowing from the grant of a stay. Nor was there any evidence from the trustee in bankruptcy, although I was informed from the Bar table when the matter was last in court that the trustee did not consent to a stay of the sequestration order.

Merits of appeal 18 The notice of appeal contains eight grounds of appeal. The material before me did not enable me to form a clear view about the strength of the appeal. The case appears to depend primarily upon Mr Barton's ability to demonstrate that he has a counter-claim or set off against the respondent. 19 Counsel for the respondent conceded that the appeal was not hopeless. 20 The alleged failure by the respondent to pay an amount of $50,000 to the estate of Welsh is not mentioned in the judgment below. Rather, the primary judge recorded that Mr Barton did not know whether Counsel's fees had been paid or not. The state of the evidence before the primary judge on this point is not clear. 21 The primary judge also referred to an "extensive cross-claim" lodged by Mr Barton against his lenders and the respondent. His Honour said that Mr Barton had "literally flooded the Court" with documents in support of his claims, but that he was not satisfied that Mr Barton had a fair chance of success or a prima facie case. The judgment does not contain any analysis of the material before the FCC except to say that it "paints a somewhat sorry history of what turned out to be unsuccessful litigation, during which Mr Barton accumulated a very substantial liability for legal fees." The absence of analysis of the material may well be explained in due course by the manner in which Mr Barton ran his case before the primary judge. The manner in which the case was run may also explain the primary judge's observation that the mere production of a cross-claim alleging facts which, if true, might give rise to such a claim, will be insufficient to satisfy the Court. However, that observation is incongruous in the face of the earlier comment that Mr Barton had flooded the Court with documentary evidence. On the face of the reasons, there is an issue as to whether the primary judge might have made an error in addressing this aspect of Mr Barton's case. 22 I am satisfied that the appeal is bona fide and that its prospects are not hopeless. In particular, there appears to be an issue as to whether the primary judge may have erred in failing to find that Mr Barton had demonstrated sufficient evidence of a counter-claim against the respondent in an amount exceeding the judgment debt.

Balance of convenience 23 The appeal is listed for hearing in four weeks. 24 At the hearing of the application, Mr Barton expressed particular concern about the sale of his breeding stock, particularly at an undervalue. The breeding stock comprises nine Australian stock horses, a stallion "Nanima Neptune", two colts "Nanima Champ" and "Nanima Lucky" and eight fillies. 25 According to Mr Barton, if the livestock were sold and his appeal is successful then he would have no source of funds to use to conduct the Roberts Fund proceeding. I accept that this would be a significant detriment to Mr Barton. 26 There is some evidence that the trustee in bankruptcy has taken steps to sell the livestock that forms part of the bankrupt estate, although there is no evidence that the trustee intends to do so before the determination of the appeal or that she intends to make sales at an inappropriate price. Mr Barton also mentioned a concern that the trustee might sign a "noise" agreement with ERM Power to the detriment of the value of his real property. There is no evidence before the Court about the trustee's intentions in this regard. 27 There is no evidence of any particular prejudice to either the petitioning creditor or the trustee that might be suffered by the grant of a stay.

Conclusion 28 I am satisfied that this is an appropriate case for relief in the nature of a limited stay of the sequestration order to preserve Mr Barton's breeding stock and prevent the detriment to Mr Barton that I have identified above. The order will only operate until the hearing of the appeal, when I will hear any application for an extension of the stay. The orders will also permit the sale of breeding stock with the mutual agreement of Mr Barton and the trustee. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gleeson.