REASONS FOR JUDGMENT
1 In this proceeding, which was commenced in the Federal Magistrates Court of Australia on 29 September 2011 and transferred to this court on 22 December 2011, the applicant, Commonwealth Bank of Australia, seeks a sequestration order under s 52 of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act") against the estate of the respondent, Paul Pattison. Jurisdiction to make the order arises under s 43 of the Bankruptcy Act, the relevant act of bankruptcy having been the respondent's failure to comply with a bankruptcy notice based upon a judgment of the Supreme Court of Victoria in the sum of $1,534,411.06 obtained on 1 August 2011 by Bank of Western Australia Ltd ("BankWest").
2 When the proceeding was commenced in the Federal Magistrates Court, BankWest was the petitioner. On 1 October 2012, pursuant to s 22(3) of the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth), the applicant was substituted for BankWest as a party to this proceeding, and, on 12 November 2012, I ordered, pursuant to r 9.09(2) of the Federal Court Rules 2011 (Cth), that BankWest be removed as petitioner and that the applicant be joined in its place.
3 The making of a sequestration order is resisted by the respondent upon the ground for which s 52(2)(b) of the Bankruptcy Act provides, namely, that, aside from his inability to pay his debts, there is "sufficient cause" why such an order should not be made.
4 The respondent is a chartered accountant. For substantially all of his professional career, he has specialised in insolvent administrations. He has secured appointments as registered liquidator, registered trustee in bankruptcy and official liquidator. He worked for, or as a principal in, certain accountancy firms until 1997, when he commenced practising on his own account by way of Pattison Consulting Pty Ltd ("PC"), a company of which he was the sole director and secretary. It traded as "Pattisons".
5 PC operated from several offices, the main one of which was at 461 Bourke Street, Melbourne. For those premises, PC was the sub-lessee of Pattisons Australia Pty Ltd ("PA"), a company of which the respondent was the sole director and secretary, which in turn leased the premises from an unrelated party, 461 Bourke Street Pty Ltd ("461 Bourke").
6 From about March 2006, PC encountered cash flow difficulties, in relation to which BankWest provided financial accommodation. On 30 November 2006, PC executed a fixed and floating charge over all its rights, property and undertaking in favour of BankWest. On the same date, the respondent executed a guarantee of PC's obligations in favour of BankWest.
7 On 28 November 2008, the indebtedness of PC to BankWest was "provisioned" for the amount of $1,512,000 in the books of BankWest. What this meant, and the significance of it, are matters to which I shall turn. On any view, however, BankWest was not optimistic about its prospects of recovering what it was owed by PC.
8 PC was again encountering cash flow difficulties in 2010, and had, it seems, been in default of its obligations to remit regular PAYG instalments to the Australian Taxation Office ("the ATO"). In April 2010, the ATO issued a director's penalty notice to the respondent pursuant to s 222AOE of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") and served a statutory demand upon PC itself. After some correspondence between the respondent and the ATO, it seems that one of the "options" that was acceptable to the latter was the winding up of the company that was in default (presumably by reason of the provisions of s 222AOB(1)(d) of the 1936 Act), and that this would include a members' voluntary winding up pursuant to Pt 5.5 of the Corporations Act 2001 (Cth) ("the Corporations Act"). The respondent determined to follow that course in order to avoid the consequences of the director's penalty notice.
9 On 21 April 2010, the respondent executed a declaration of solvency in relation to PC pursuant to s 494 of the Corporations Act. It showed total estimated realisable assets of $4,618,688, of which $4,100,000 was work in progress, and total liabilities of $4,371,366, of which $1,832,071 was said to be "secured by floating charge(s)". On the following day, 22 April 2010, PC was placed into a members' voluntary liquidation. On the following day again, 23 April 2010, the insolvency administration business formerly carried on by PC commenced to be carried on, with the same staff, by Pattisons Business Recovery & Insolvency Specialists Pty Ltd ("PBRIS"), a company of which the respondent was the sole director and secretary. By arrangement with the liquidators of PC, PBRIS purchased from PC the plant and equipment necessary to carry on that business, PC's website and the name "Pattison Consulting". The business was at first carried on at the same premises as those previously used by PC, but, on 28 April 2010, 461 Bourke determined its lease with PA, and PBRIS's business was thereafter carried on in leased premises at Box Hill.
10 On 29 September 2010, on the application of 461 Bourke, the Supreme Court of Victoria ordered that PA be wound up in insolvency.
11 On 15 October 2010, PC changed its name to ACN 079638501 Pty Ltd. In these reasons, I shall continue to refer to this company as PC.
12 On 1 November 2010, it was apparent both to the respondent and to the liquidators of PC that PC would not be able to pay or to provide for the payment of its debts in full within the period stated in the respondent's declaration of solvency. Therefore the liquidators appointed an administrator of PC under s 436B of the Corporations Act, as provided for in s 496(1)(b) of that Act. On the same day, BankWest, acting pursuant to its powers under the charge of 30 November 2006, appointed receivers and managers to PC. On 7 December 2010, at a meeting of creditors, PC was placed into a creditors' voluntary winding up, and the administrators appointed on 1 November 2010 ceased to act as such.
13 On 7 February 2011, the Australian Securities and Investments Commission ("ASIC") commenced proceedings in the Supreme Court of Victoria against the respondent and PBRIS, in which it sought an inquiry under s 536 of the Corporations Act into the capacity of the respondent to continue adequately and properly to perform his duties as liquidator. The commencement of this proceeding led to the suspension, on 8 February 2011, of the respondent's membership of the Insolvency Practitioners Association and, on 18 February 2011, of the respondent's membership of CPA Australia Ltd. Both of those suspensions were pending the taking of internal disciplinary proceedings by the bodies concerned.
14 On 28 February 2011, in the proceeding commenced by ASIC, the respondent consented to orders by which, amongst other things, replacement liquidators and administrators were appointed to all of the companies of which the respondent was then liquidator or administrator, such orders being made on the respondent's undertaking -
To cease carrying out, consenting to or otherwise accepting appointment as a liqidator, provisional liquidator, voluntary administrator, administrator of a deed of company arrangement or controller until such time as he has produced evidence in a form acceptable to ASIC or to the court demonstrating his practice [sic] and financial capacity to adequately and properly carry out his duties as a liquidator.
The respondent also undertook to deliver up all the relevant files to the new liquidators/administrators (and not to claim any lien) and to co-operate with them in assuming the conduct of the administrations concerned.
15 As a result of an intimation given to the respondent by representatives of ASIC on 28 February 2011, and of subsequent discussions, it was clear to the respondent that ASIC was determined to conduct an inquiry into PBRIS. This caused the respondent to place PBRIS into a creditors' voluntary winding up, this being done on 7 March 2011. On the following day, the respondent commenced to operate his business as a sole practitioner. In that capacity, he was not subject to supervision by ASIC. He continued so to practise from 8 March 2011, and thereafter, as a sole practitioner. This remained the situation until 8 July 2011, when this court, on the application of the respondent himself, accepted his resignation from the office of trustee of each of the relevant bankrupt estates, and did so upon his making undertakings along similar lines to those accepted by the Supreme Court on 28 February 2011.
16 The position in summary, then, is that, until 22 April 2010, the respondent conducted an unlimited insolvency practice through PC. Commencing on 23 April 2010, he did so through PBRIS until 28 February 2011. From then for a period of about a week, he was conducting a bankruptcy only practice through PBRIS, after which he conducted such a practice as sole practitioner until 8 July 2011. Since then, he has worked, when work was available, as a consultant to other insolvency practitioners.
17 I shall now return to the narrative of the respondent's relationship with the receivers of PC and with BankWest.
18 By letter dated 22 December 2010 to the respondent, solicitors for the receivers of PC referred to the work in progress of $4.1m listed as an asset of PC in the respondent's declaration of solvency executed on 21 April 2010, asserted an entitlement, on behalf of PC, to that asset, and demanded the immediate payment of what was believed to have been recovered in that behalf since the members' voluntary liquidation of 22 April 2010, namely, $909,821.29. On the same day, 22 December 2010, those solicitors corresponded with PBRIS, asserting substantially the same entitlement and making the same demand.
19 This correspondence did not, it seems, lead to a satisfactory outcome for the receivers, and on 15 February 2011 they commenced proceedings, in the name of PC, against the respondent in which they asserted an entitlement to the work in progress. Those proceedings went to trial, with the respondent claiming that the work in progress was his own asset, substantially for the reason that the appointments of him in insolvency administrations were personal ones, and that he was the only person who could sue for and recover the remuneration that was represented by the work in progress that had, on 21 April 2010, been shown as an asset of PC. In a judgment of 1 October 2012, Ferguson J of the Supreme Court of Victoria decided this point in favour of the receivers. On 15 October 2012, the respondent appealed against that judgment. At the time of the hearing in the present case, that appeal stood in the list of the Victorian Court of Appeal.
20 In the meantime, BankWest had commenced proceedings in the Supreme Court against the respondent upon his guarantee of 30 November 2006, based upon PC's default. By consent, on 1 August 2011, that court ordered the respondent to pay BankWest the sum of $1,534,411.06, together with interest from 17 March 2011. That payment was not made, and on 6 September 2011 BankWest served a bankruptcy notice, relying upon the judgment of 1 August 2011, upon the respondent. The notice allowed the respondent 21 days in which to meet BankWest's demand and, when he had not done so by 27 September 2011, he committed an act of bankruptcy. It is that act which forms the basis of the present proceeding.
21 The applicant's petition is in the following terms:
1. The Respondent Debtor owes the Applicant Creditor the amount of $1,534,411.06. The amount of $1,534,411.06 is calculated by reference to the amount of judgment entered on 1 August 2011 in the Supreme Court of Victoria at Melbourne, Proceeding No. S CI 2010 05523 (which is the amount stated as owing in the bankruptcy notice).
2. The Applicant Creditor does not hold security over the property of the Respondent Debtor.
3. At the time when the act of bankruptcy was committed, the Respondent Debtor was personally present in Australia.
4. The following act of bankruptcy was committed by the Respondent Debtor within 6 months before presentation of this petition:
The Respondent Debtor failed to comply on or before 27 September 2011 with the requirements of a bankruptcy notice served on him on 6 September 2011 or to satisfy the Court that he had a counter-claim, set-off or cross demand equal to or more than the sum claimed in the bankruptcy notice, being a counter-claim, set-off or cross demand that he could not have set up in the action in which the judgment referred to in the bankruptcy notice was obtained.
A senior manager of Bankwest verified, by affidavit, the matters stated in paras 1-3 of the petition. He also swore that the respondent had failed, within 21 days after service of the bankruptcy notice on him, to pay his debt to Bankwest "or [to] make an arrangement to [Bankwest's] satisfaction for payment of the debt". It is also established that the petition was served on the respondent and that the judgment debt on which the applicant relies is still owing. Subject only to the respondent's case under s 52(2)(b), the applicant is entitled to the order which it seeks.
22 The respondent has two grounds of opposition to the making of a sequestration order. Both are related to the order of Ferguson J and to the pending appeal in the Court of Appeal. Under the first ground, it is said that the making of a sequestration order "would bar the respondent from proceeding with his appeal", and that, if the respondent wins the appeal over ownership of the work in progress, "there should be sufficient funds available to pay the debt in full", while, if he loses the appeal, there would be nothing available for creditors and the making of a sequestration order would be "futile". The respondent says that, in the circumstances, the petition should be dismissed or adjourned until after the hearing and determination of the appeal.
23 In response to the suggestion that, if a sequestration order were to be made, the respondent's trustee in bankruptcy would be in a position to assess the prospects of the appeal and, if those prospects were considered to be good, to pursue the appeal and recover the work in progress for the benefit of all creditors, it was submitted on behalf of the respondent that the trustee would not act in that way without funding, and that the applicant, being the largest creditor, would have no reason to assist with funding because, in prosecuting the appeal, the trustee would be seeking to establish that the work in progress was not the subject of the applicant's charge. That is to say, the prosecution of the appeal would be contrary to the applicant's own interests as chargee.
24 The respondent's second ground is that the present proceeding is an abuse of process in the sense that it was commenced for the improper purpose of seeking to prevent the respondent from prosecuting his appeal.
25 The applicant's petition is based on the respondent's failure to comply with a bankruptcy notice, which in turn was based upon the consent judgment of 1 August 2011. It is important to note that the respondent's grounds referred to above involve no challenge to that judgment. I was reminded by counsel for the respondent of the line of cases that state that a bankruptcy court may, in appropriate circumstances, go behind the judgment on which a bankruptcy notice is based: Corney v Brien (1951) 84 CLR 343 at 347-348. But the respondent's grounds do not allege that the respondent was not conventionally liable upon the guarantee which he executed on 30 November 2006. Indeed, the respondent's position, adopted both before Ferguson J and here, is that the work in progress is not an asset of PC. If he is right in that respect, PC's ability to satisfy its liability to the applicant will be compromised, to an extent at least, and the respondent's liability under the guarantee will be correspondingly confirmed.
26 The respondent's first point, rather, is that, because the work in progress is his asset, he is presumptively able to satisfy his obligation under the judgment of 1 August 2011 and should, as a matter of discretion, now be given the opportunity to do so. His case in this respect involves two main propositions: first, that the judgment of Ferguson J is likely to be reversed on appeal, and secondly, that the consequent recovery by him of the work in progress would be sufficient to satisfy the judgment debt. The applicant takes issue with him at each of these levels.
27 The position for which the respondent contended before Ferguson J was summarised by her Honour as follows ([2012] VSC 445 at [15]):
Mr Pattison contended that all of his appointments as liquidator, administrator or trustee in bankruptcy were personal appointments and that the entitlement to remuneration in respect of those appointments was also personal to him. He claimed that this entitlement extended not only to the work that he performed personally but also to work performed by others who were employed by the Company. Mr Pattison submitted that the fact that he facilitated payment to the Company of debts he says were payable to him cannot change the characterisation of his personal entitlement to be remunerated in respect of various administrations.
However, her Honour said that the submissions then made on behalf of the respondent -
… principally focus on the nature of the relationship between Mr Pattison and the companies or bankrupt estates in respect of which he was appointed. However, it seems to me that the real question is as to the relationship between Mr Pattison and the Company and the effect (if any) that that had on ownership of the work in progress. ([2012] VSC 445 at [15])
Her Honour said ([2012] VSC 445 at [16]) that the respondent's obligations arising from his appointment as liquidator, administrator or trustee in bankruptcy were not determinative of the ownership of the work in progress as between himself and PC.
28 Ferguson J then considered whether the respondent was an employee of PC, and held that he was, even in respect of the period after 1 January 2007 when he was no longer being paid a salary as such (during which latter time pay slips were still being made out in favour of the respondent, and the respondent was still being paid accordingly, but he asserted that each such payment was a loan rather than salary). Her Honour said ([2012] VSC 445 at [25]):
There are a number of other facts that lead to the conclusion that he was an employee. Mr Pattison established and oversaw the systems in operation in the Company, including the issue of payslips to him as an employee and the time recording system. The Company's books recorded him as an employee. In essence he performed tasks beyond those that would be performed if he were only a director. The work that he undertook as an administrator, liquidator and trustee in bankruptcy falls into the category of work beyond that of a director. That work was recorded as work of the Company. There was no separate work that Mr Pattison performed on the various administrations that was recorded separately or for which a separate charge was made by him. The full amount of the fees charged (including for Mr Pattison's time) was paid to the Company either through the endorsement of the cheques by Mr Pattison or by electronic transfer. Mr Pattison did not seek to deduct any amount or receive payment of any part of the fees before the payment was made to the Company. Rather, until at least January 2007, Mr Pattison was entitled to fortnightly wages of a fixed amount plus superannuation less tax. Those wages were not linked to the work that he performed on any particular administration. Even if Mr Pattison's evidence is accepted that after January 2007 he was paid amounts in lieu of wages, nevertheless in substance he remained working as an employee. He continued to record the work that he performed on the various administrations in the Company's records; he made no separate charge for that work and he received from the Company amounts for that work that replicated wages rather than payment of the hourly fees charged for his time working on the administrations.
Ferguson J referred also to the respondent's declaration of solvency executed on 21 April 2010 and to the fiduciary obligations of a director and senior employee, in the following terms ([2012] VSC 445 at [26]):
In addition, Mr Pattison considered the work in progress recorded in the Company's records to belong to the Company and made this clear in the declaration of solvency that he gave in April 2010. I accept Mr Pattison's submission that the declaration of solvency that he made is not of itself determinative as to whether the work in progress is an asset of the Company. However, Mr Pattison is an experienced insolvency practitioner and took seriously his obligation to make a truthful declaration. His declaration is consistent with a finding that as an employee of the Company, he did not own the work in progress, rather it was an asset of the Company. It is also consistent with the fiduciary duty that a senior employee [here her Honour referred to Warman International Ltd v Dwyer (1995) 182 CLR 544 and to Weldon & Co v Harbinson [2000] NSWSC 272] and director would have to the Company not to profit from their position as an employee or director at the expense of the Company [here her Honour referred to Victoria University of Technology v Wilson (2004) 60 IPR 392]. The endorsement of cheques and electronic transfer of funds by him in respect of the work performed on the various administrations by the Company is also consistent with fulfilment of the fiduciary duties that an employee and director owe to account for property received on behalf of the company employer [referring again to Warman International]. Given that the whole amount claimed was charged for and paid to the Company, without the retention of any amount by Mr Pattison, and in view of Mr Pattison's treatment of the work in progress in the declaration of solvency, I have come to the view that although the remuneration was paid to Mr Pattison in his name, once he received payment he accounted to the Company for it because he received payment as a director or as an employee. Mr Pattison was merely a conduit for payment of the money to the Company.
That is to say, it may well have been that the right, as against a company under administration or in liquidation, or an insolvent estate, to remuneration was the respondent's, but, because of the relationship with PC that he had created, it was PC which was beneficially entitled to the fees received, and which owned the value of the work before it had been invoiced.
29 The following represents a summary of the conclusion which Ferguson J reached in relation to the work in progress ([2012] VSC 445 at [30]):
Mr Pattison chose to structure his business affairs such that the Company owned the work in progress. The Company had the right to charge for that work through him as an employee and to receive payment through him as an employee for it from the various insolvency administrations to which he was appointed.
30 In the present case, counsel for the respondent submitted that, in the first instance, it was the administrator, liquidator or trustee in bankruptcy who could "recoup" the fees of the administration. This was because every such appointment, consistent with the applicable legislation, was personal. What thereafter happened as between the respondent and PC was a "private arrangement", and had no consequences for the locus of the right to be paid by the estate or company under administration. It was said that the Court of Appeal would not be looking closely at the respondent and his conduct, but would be "more interested … in the strict legality of what occurred". Thus it was said to be "by no means a doubtful appeal".
31 The respondent's Notice of Appeal in the Supreme Court was tendered in the present case. In essence, it is said there that Ferguson J's error was one of characterisation: the payments made to the respondent by the companies or estates under administration and endorsed directly to PC ought to have been treated as payments by the respondent to PC for services rendered by it to him, rather than, as her Honour did, as the accounting of an employee to his principal for payments received in a fiduciary capacity, and to which the principal was beneficially entitled.
32 A dispute, as between a debtor and a third party, about the ownership of an asset would not normally be a very good reason to deny a creditor's petition. If the debtor was unable to pay his or her debts as and when they fell due, it would be for the trustee in bankruptcy to pursue the asset if that was considered to be in the interests of the creditors as a whole. The point is that, once the conditions for the making of a sequestration order are satisfied, the focus of the court should be primarily on the interests of the creditors, rather than upon those of the debtor. There may, of course, be cases where the only reason the debtor does not satisfy a bankruptcy notice is that he or she is unable, in the short term, to liquidate assets sufficient to meet the claim on which the notice is based. If it were clear that, by allowing some extra time, the creditors would be paid in full, the court might, under s 52(2)(b), at least adjourn the petition to permit that to occur. But none of this represents the facts of the present case.
33 Even before the judgment of Ferguson J on 1 October 2012, the position was that the respondent was unable to pay his debts as and when they fell due. There was, at that time, a dispute as to the extent of the respondent's assets. In a bankrupt estate, that circumstance would not be unusual. It would not normally stand between a petitioner and the making of a sequestration order. Now, however, that dispute has been resolved adversely to the respondent's asset position. Sitting as a court in bankruptcy, I am bound by that resolution. Put another way, the respondent cannot be heard to submit that the work in progress must now be treated as his asset: he is bound by a judicial determination that the work in progress belongs to PC.
34 Doubtless recognising the reality of that position, the respondent did not invite me to make a finding contrary to the declaration of Ferguson J. Rather, he submitted that the appeal had very respectable prospects, but the point at issue would become moot if a sequestration order were made. That was because the trustee in bankruptcy, absent funding by the applicant, would not prosecute the appeal. Thus the respondent's point was that a sequestration order would frustrate his attempts to recover the work in progress and that its value would be recovered wholly by the applicant, as chargee of PC, rather than being available to the respondent to satisfy his own creditors.
35 The position taken by the respondent is, in my view, problematic in a number of respects. First, to the extent that I should regard myself as being invited to hold that the respondent has good prospects of success in his appeal in the Supreme Court, that invitation was the subject of little elaboration in the arguments advanced on his behalf. At the centre of those arguments were the statutory entitlements (so it was put) of the respondent to his remuneration as a trustee, liquidator or administrator. It was said that those entitlements could never provide a cause of action for PC to sue third parties for the recovery of the work in progress. Whether or not these propositions on behalf of the respondent were well-founded, they do not, in my opinion, come squarely to grips with the basis upon which Ferguson J decided the case before her. Her Honour was well aware of an administrator's right to remuneration from the estate being administered, but considered that, because of the way that the respondent had structured his practice, as between himself and PC the work in progress belonged to the latter. I was favoured with no detailed argument as to why that conclusion was in error.
36 Perhaps counsel for the respondent were justified in so proceeding. Perhaps they took the view that it would not be for the court on the present application to re-decide, in effect, what had been decided by her Honour. But neither did the respondent place before the court a copy of the advice which he apparently received from counsel as to his prospects on the appeal. He justified that course on the ground that the advice was the subject of legal professional privilege. That position did, in my view, involve a confusion. It was not as though the applicant was seeking to have access to the advice against the opposition of the respondent: then, privilege would have been available to stand in the applicant's way. Rather, the question was whether the respondent had been advised that his prospects on the appeal were good. Because of the way he conducted his opposition to the petition, that was a relevant question. He has chosen not to lead evidence on that question. His reasons for so proceeding were a matter for himself: if he desired not to expose the advice to those whose interests were adverse to his own, he was under no obligation to do so. But the fact that the advice was privileged does not mean that the respondent can, in effect, have the advantage of an assumption that the advice which he received was favourable while at the same time declining to lead evidence of it. I am bound to proceed by reference to the circumstances as they exist, namely, that there is no evidence that the respondent has been advised that his prospects on the appeal are good.
37 Secondly, the position which the respondent invites the court to endorse in consequence of his presumptive success in the Court of Appeal is one in which he alone would be responsible for recovery of the value of the work in progress and for the payment of his creditors. How he did so would be a matter for him. So far as I can see, and absent further proceedings of the kind presently before the court, he would be under no obligation to ensure that the creditors were paid at any particular time or in equal proportions. In my view, a creditor whose bankruptcy notice has not been satisfied should not be expected to regard a situation of this kind as the equivalent of the administration of the respondent's estate by a trustee with the conventional obligations of his or her office. Neither should the other creditors.
38 Thirdly, and relatedly, there is the matter of the respondent's assets, other than the controversial work in progress. In an affidavit read to the court, the respondent gave what he described as his "best estimate" of his financial position. The only assets with values which he could quantify were motor vehicles and caravans, in which he had equity valued at $15,000, and household items, which he valued at $25,000. He said that the value of the work in progress for the period after 7 March 2011 (when the respondent was practising as a sole practitioner) was "unknown". However, it became clear from the submissions of counsel that what the respondent meant by this was that it was unknown how much of that work in progress would be recovered. That the respondent was unable, from his own records, to place a value on the work which he did is a proposition which I could not accept, particularly coming from a chartered accountant with a very strong background in insolvent administrations.
39 As it happened, the respondent was not unable to value that work in progress. Moving from the respondent's affidavit to answers which he gave while under cross-examination, he said that the amount of work in progress which he had generated between March and July 2011, was "not significant" and, when pressed further on that, he responded:
… it may have been around 300,000, two to three hundred thousand, possibly … [i]n WIP created, collections would have been probably about 100,000.
My concern about this evidence is the imprecision of it. In the view I take, creditors of the respondent who are waiting for their debts to be settled would be well justified in desiring the appointment of a trustee to bring a more systematic and disciplined approach to the determination of the respondent's asset position.
40 Finally in this area, there is the question whether the value of the work in progress is such that, if no sequestration order were to be made and the respondent were to win his appeal in the Supreme Court, both the applicant and the other creditors (whoever they may be and of whatever order may be their claims) would be paid. Counsel for the applicant read the affidavit of one of the receivers of PC, Ross Blakeley, in which he estimated the value of actual recoverables in the receivership, including both debtors and work in progress, as being in the range of $70,832.18 - $1,449,736.88. Even the figure at the upper end of the range fell short of the sum for which BankWest obtained judgment against the respondent on 1 August 2011. Clearly Mr Blakeley considered that that figure was a very optimistic one.
41 Mr Blakeley then deducted the entitlements due to PC's employees and the costs of the receivership, and calculated that the best case net recovery that could be achieved was $519,941.88, and that, in the worst case, the net figure would be negative to the tune of $958,962.62. For present purposes, I do not take these deductions into account, since they represent what is likely to be recovered in the receivership of PC. By contrast, my concern here is to consider whether the work in progress, if available to the respondent as he will seek in his appeal, would be sufficient to satisfy his creditors. By reference to the figures which I have set out in the previous paragraph, the applicant alone would not be satisfied. I must take it that the respondent's personal estate, to the extent that it is disclosed in this proceeding, would be insufficient to meet his existing debts, even if he had access to the work in progress.
42 I should say that Mr Blakeley was extensively cross-examined, but not in a way that suggested that the calculations to which I have referred were wide of the mark. Neither was any attack on those calculations contained in the final submissions made on behalf of the respondent.
43 Returning to the terms of the respondent's first ground of opposition, the making of a sequestration order would not, of course, "bar" the respondent's appeal: it would make it a matter for the trustee in bankruptcy to decide whether to prosecute the appeal. That, of itself, cannot be a legitimate basis upon which to oppose the making of a sequestration order. (I consider the related issue of whether the applicant's petition was an abuse of process for having been filed for the purpose of preventing the respondent from prosecuting the appeal below). The proposition that, if the appeal succeeds, there should be sufficient funds available to pay the debt in full must, for the reasons given above, be rejected.
44 That leaves only the aspect which is based on the hypothesis that the respondent does not win his appeal in the Supreme Court, namely, that, without the work in progress as an asset of his personal estate, it would be "futile" to bankrupt him. As has occasionally been observed in the authorities, a submission of this kind, coming from an insolvent debtor and made in advance of any independent verification of his or her asset position and financial circumstances generally, is one that should be treated with caution. It will be apparent from what I have said in paras 38-39 above that I consider that, as things presently stand, there is sufficient uncertainty about the respondent's general asset situation (ie taking no account of the work in progress claimed by the receivers of PC, but including more recent work in progress) to make it inappropriate to take what on any view would be the exceptional step of withholding a sequestration order on the ground of futility: see Radich v Bank of New Zealand (1993) 45 FCR 101 at 123.
45 Turning to the respondent's second main ground - that alleging abuse of process - it is clear that, if taken literally, the ground could not be upheld. The petition could not have been filed for the improper purpose of preventing the respondent from prosecuting his appeal in the Supreme Court, since the petition was filed more than 12 months before the appeal was instituted. However, I am prepared to treat the ground as involving the allegation that the petition was filed for the improper purpose of preventing the respondent from defending the Supreme Court action which led to the judgment of 1 October 2012 (which was the form of the allegation before the delivery of that judgment) and is still being pressed for the improper purpose of preventing the respondent from prosecuting his appeal.
46 In Williams v Spautz (1992) 174 CLR 509, Mason CJ and Dawson, Toohey and McHugh JJ endorsed (174 CLR at 528) the following statement of general principle by the English Court of Appeal in In re Majory [1955] Ch 600 at 623-624:
[C]ourt proceedings may not be used or threatened for the purpose of obtaining for the person so using or threatening them some collateral advantage to himself, and not for the purpose for which such proceedings are properly designed and exist; and a party so using or threatening proceedings will be liable to be held guilty of abusing the process of the court and therefore disqualified from invoking the powers of the court by proceedings he has abused.
However, their Honours in the High Court made it clear that, if the putative plaintiff had a right to bring the proceedings concerned, and did so to derive the outcome conventionally associated with the proceedings, the circumstance that he or she also harboured the desire that such an outcome would bring other benefits, or would deliver other detriments to his or her opponent, would not make the proceedings an abuse of process. So much is clear from their Honours' alderman example (174 CLR at 526):
Thus, to take an example mentioned in argument, an alderman prosecutes another alderman who is a political opponent for failure to disclose a relevant pecuniary interest when voting to approve a contract, intending to secure the opponent's conviction so that he or she will then be disqualified from office as an alderman by reason of that conviction, pursuant to local government legislation regulating the holding of such offices. The ultimate purpose of bringing about disqualification is not within the scope of the criminal process instituted by the prosecutor. But the immediate purpose of the prosecutor is within that scope. And the existence of the ultimate purpose cannot constitute an abuse of process when that purpose is to bring about a result for which the law provides in the event that the proceedings terminate in the prosecutor's favour.
It would, their Honours said (174 CLR at 526-527), be "otherwise when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers".
47 In the present case, BankWest had two (presently relevant) levels of security with respect to the facilities which it had extended to PC. The first was the charge over the assets of PC itself. In that regard, the receivers were not only entitled but obliged to act in their best judgment to secure those assets. They brought the action against the respondent because there was a clear assertion by him of an entitlement to the work in progress to the exclusion of PC. The second level of security was the guarantee which the respondent had provided personally. BankWest was, in my view, entitled to enforce that guarantee if, as was the case, PC was in default. The circumstance that the respondent was asserting a right to the work in progress made it the more natural that BankWest would rely upon the guarantee. There was a relationship between the two forms of enforcement undertaken by BankWest in the sense that, absent action against the respondent directly, it might have fallen between two stools. Thus the filing of the petition should be seen as the action of a prudent creditor concerned to ensure that, one way or the other, its security was effective. Objectively, there is nothing in the way that BankWest proceeded which comes close to the concept of abuse of process as explained in Williams v Spautz.
48 As I perceived it, the respondent's point that the applicant's purpose in persisting with the present petition is the improper one of frustrating his appeal in the Supreme Court is based on the circumstance that the applicant is on the other side of the record in that appeal, and would obviously not have a financial interest in funding the prosecution of the appeal. It was not, of course, suggested that, if a trustee in bankruptcy were appointed, he or she would not (subject to funding) make an independent and objective assessment of the merits of the appeal. What the respondent complains about, however, is the inevitable result of the circumstance, mentioned above, that BankWest took two forms of security, and of the respondent's own decision to challenge PC's entitlement to the work in progress. Structurally, as it were, the applicant thus has two capacities, and it may well be that funding decisions which it makes take into account its interests as respondent to the appeal. But none of this bespeaks an improper purpose or an abuse of process in any other sense. It is, as I say, the inevitable result of the security which BankWest quite conventionally took to secure the facilities which it extended to PC.
49 Counsel for the respondent referred me to two Ontario judgments in which bankruptcy proceedings had been dismissed on grounds which included that they had been brought for a collateral purpose: Re Hydrofoil Lake Jet Lines Inc (2000) 18 CBR (4th) 212 and Re Dallas/North Group Inc (2001) 27 CBR (4th) 40. Those judgments were, however, based very much on their own facts, their only present point of interest being that they were examples of instances in which petitions brought for collateral purposes were dismissed for that reason. They are of no assistance in the determination of the issues now before the court.
50 In the result, and for the above reasons, I am not persuaded that the respondent has brought forward any proper ground to defeat the applicant's prima facie right to a sequestration order under s 52. I propose to make such an order as sought by the applicant. Andrew Scott and Scott Pascoe have consented to be appointed as trustees of the respondent's estate, and the order I make will provide for their appointment accordingly.
51 During the trial of the present proceeding, I made two interlocutory orders, and indicated that I would provide my reasons at the time of determining the applicant's application for a sequestration order. Those reasons follow below.
52 The first interlocutory order related to a Notice to Produce served by the respondent on 5 November 2012 (a week before the commencement of the trial). To the extent pressed, the respondent's Notice to Produce was in the following terms:
2) [D]ocuments which came into existence after 15 September 2008 which make reference to and/or are concerned with the sale of shares in Bankwest and/or assets of Bankwest from HBOS plc to CBA, including but not limited to documents:
1. which constitute and/or evidence the agreement for the sale of shares in, or assets of, Bank of Western Australia Ltd (ABN 22 050 494 454) (Bankwest) by HBOS plc (HBOS) to Commonwealth Bank of Australia Limited (ACN 123 123 124) (CBA) in or about 2008;
2. which constitute and/or evidence any variation, amendment, addition and/or alteration to the terms of the agreement for the sale of shares in, or assets of, Bankwest by HBOS to CBA;
3. any document, correspondence, email, file note, memorandum, report, submission, advice or electronic log which makes reference to, or is concerned with, an agreement:
a. for the making of adjustments to the consideration payable by CBA to HBCS under an agreement for the sale of shares in, or assets of, Bankwest;
b. for the making for adjustments of other amount payable by CBA to HBCS;
c. for an amount to be payable by HBOS to CBA in respect of, or arising out of, an agreement for the sale of shares in, or assets of, Bankwest;
d. for the making of adjustments for any amounts payable by CBA to HBOS under an agreement for the sale of shares in, or assets of, Bankwest by reason of:
i. impaired assets;
ii. impaired loans;
iii. a failure by HBOS plc to disclose any matter in respect of the assets of, and or loans by, Bankwest;
4. any document, correspondence, email, file note, memorandum, report, submission, advice or electronic log making reference to the characterisation of the loan from Bankwest to Pattison Consulting Pty Ltd and/or Pattisons Business Recovery & Insolvency Specialists Pty Ltd and/or Paul Anthony Pattison;
5. any document, correspondence, email, file note, memorandum, report, submission, advice or electronic log making reference to the characterisation of the security provided for the loan from Bankwest to Pattison Consulting Pty Ltd and/or Pattisons Business Recovery & Insolvency Specialists Pty Ltd and/or Paul Anthony Pattison;
6. any document, correspondence, email, file note, memorandum, report, submission, advice or electronic log made by an independent expert:
a. between 8 October 2008 and 19 December 2008;
b. after 19 December 2008
making reference to, or concerned with, the performance of, and/or the security provided for, the loan from Bankwest to Pattison Consulting Pty Ltd and/or Pattisons Business Recovery & Insolvency Specialists Pty Ltd and/or Paul Anthony Pattison;
7. any document, correspondence, email, file note, memorandum, report, submission, advice or electronic log which refers the debt in these proceedings as an "impaired loan" or "impaired asset";
8. any document, correspondence, email, file note, memorandum, report, submission, advice or electronic log which refers to, or is concerned with, the debt in these proceedings.
As the terms of the notice imply, what attracted the interest of the respondent about a week before the trial was the circumstance that, in late 2008, the shares in BankWest were sold by HBOS plc to the applicant. The respondent appears to have had some information upon which he supposed that, at the time of the sale, an allowance, in favour of the purchaser, was made for bad or doubtful debts, of which the loan to PC was one.
53 Quite clearly, the respondent's Notice to Produce was in all but name a notice for discovery, and one for the service of which leave had not been sought. Discovery is no longer the entitlement of a litigant. The extent of the discovery that should be made in this proceeding was the subject of consideration at a directions hearing many months ago, and of an order made by North J on 23 April 2012. 5 November 2012 was, in my view, too late for the respondent to have served a notice of this very broad-ranging nature, requiring as it did the production at trial not merely of documents known to be in the possession of another party (the traditional purpose of a Notice to Produce) but of documents, not known to exist, described generically by reference to categories of matters sought to be litigated.
54 The respondent justified the lateness of the service of his Notice to Produce by reference to the deregistration of BankWest, presumably in consequence of the restructuring which provided the basis for the operation of the Act of 1999 to which I have referred in para 2 above. Apparently anticipating that there would be a substitution of applicant pursuant to s 22(3) of that Act (the Interlocutory Application for substitution was not filed until 9 November 2012), the respondent's advisers, according to what I was told by his counsel, "wanted to reassure [themselves] that it was appropriate that there be the substitution in the circumstances". This seems to have put them to thinking about the relationship between BankWest and the applicant, and from there to the events of 2008 when the applicant acquired the shares in BankWest. It was those events, rather than the deregistration of BankWest in 2012, which became the concern of the Notice to Produce.
55 I was assured by counsel for the respondent that the sale of the BankWest shares in 2008 was public knowledge at the time, and has been since. Indeed, the terms of the Notice to Produce seem to assume as much. Had the respondent desired to make the circumstances of that sale controversial, therefore, he might have done so when he first filed his grounds of opposition on 21 December 2011. What happened in October 2012 was not the appearance, for the first time, of evidence upon which he might have based a new ground. Rather, it was an event, related in a sense, which caused the respondent's advisers to turn their minds to the events of 2008. The latter were always there, and were always available as a basis for opposition, but, as counsel for the respondent agreed during the course of argument, were something upon which the respondent had not previously shone his headlights. The circumstances do not, in my view, amount to a satisfactory explanation for the respondent leaving it so late in the piece to serve a very broad-ranging Notice to Produce.
56 For the above reasons, on 12 November 2012 (the first day of the trial), I ruled that compliance with r 30.28(3) be dispensed with, in relation to the notice, pursuant to r 1.34 of the Federal Court Rules 2011 (Cth).
57 The second interlocutory order which I made during the trial was to refuse an application on behalf of the respondent further to amend his grounds of opposition. The proposed new ground was that BankWest was not, and the applicant is not, a creditor of the respondent as at the date of bankruptcy or the date of the hearing. The respondent had been informed by the solicitors for the applicant, in correspondence dated 11 November 2012 (and in response to the respondent's Notice to Produce) as follows:
We are instructed that in November 2008, prior to the sale of the Bankwest business, the Pattison debt was provisioned. The Pattison debt has never been written off in the books of Bankwest and remains due and payable.
Not accepting that at face value, but treating, in effect, the comment about provisioning as smoke that might bespeak fire, the respondent desired to argue that the circumstances of 2008 were such as produced the result that the debt by PC to BankWest no longer existed.
58 The respondent's proposed ground is based on the proposition that a bankruptcy court may go behind the judgment upon which the bankruptcy notice in question was based. In the present case, the debt on which the judgment was based was that of a guarantor. The guarantee of 30 November 2006 was in evidence. Counsel for the respondent made no attack on it. Neither was there any attack made on the judgment of the Supreme Court of 1 August 2011. As I have indicated above, that judgment was made with the consent of the respondent, and it was not suggested that the means by which that consent was procured provided a legitimate basis to go behind it.
59 Rather, as I understand the way the proposed new ground would be supported, the respondent desired to contend that BankWest wrote off the debt which was owing by PC. If so, there would be no amount which was payable by PC within the definition of "guaranteed money" in the guarantee of 30 November 2006, and thus nothing for the respondent to guarantee. For the respondent to advance the proposed ground so understood would, quite obviously, open up a substantial new area of factual controversy. The question arises whether the court should allow this reconfiguration of his case at this very late hour. Particularly having regard to the terms of ss 37M and 37N of the Federal Court of Australia Act 1976 (Cth), the court should not, in my opinion, do so in the absence of a good explanation of why the respondent's case did not include the proposed ground from the outset, and of a plausible basis to anticipate that the ground would have a reasonable prospect of succeeding.
60 The respondent's explanation for not having previously made the application to amend was that it was not until he received the applicant's correspondence of 11 November 2012 that he had reason to suspect that PC's debt might have been written off by BankWest at about the time that the shares in it were acquired by the applicant. The correspondence, of course, provided no justification for such a suspicion: it stated in terms that the "Pattison debt" - presumably the debt owing by PC - had never been written off. But, as I understand it, the respondent's point, if he were allowed to amend, would be that the act of "provisioning" had the effect that the debt no longer existed.
61 In this respect, I was referred by counsel for the applicant to the judgment of Barrett J in Timms v Commonwealth Bank of Australia [2004] NSWSC 76. His Honour said (at [225]-[226]):
225 The accounting process of writing off debts as bad is one directed towards the objective of ensuring that assets in the form of receivables that are, from a realistic perspective, not going to come to fruition should not be brought to account. Relevant principles, as they apply for the purposes of the particular form of accounting required by income tax legislation, were considered by the High Court in Point v Federal Commissioner of Taxation (1970) 119 CLR 453, Kratzmann v Federal Commissioner of Taxation (1970) 44 ALJR 293, Franklin's Selfserve Pty Ltd v Federal Commissioner of Taxation (1970) 125 CLR 52 and G E Crane Pty Ltd v Federal Commissioner of Taxation (1971) 126 CLR 177. The process is a unilateral and internal bookkeeping process undertaken by a creditor for the purpose of assigning a value to its assets (receivables) for the purposes of financial reporting, as distinct from any form of bilateral process involving creditor and debtor and definition of the rights and obligations prevailing between them.
226 The same is true where, instead of writing off a debt as bad, a creditor makes a provision because it considers the debt doubtful in the sense that it is not expected in the long run to realise for the creditor the whole of its principal amount plus contracted interest. That course is dictated, in the preparation of the creditor's financial statements, by the need to ensure that assets are not taken into account at more than their fair value. The relevant concepts are not new. They are reflected in the judgment of Lindley LJ in In re London and General Bank (No 2) [1895] 2 Ch 673 at 687:
The real truth is that the assets of the bank were put down in the balance-sheet at too high a figure ... . The value of the principal asset depended on the probability of the Balfour group of companies and some of the other large borrowers repaying their loans. They were financing each other; their indebtedness to the bank had increased largely during the year; the securities held by the bank for these loans were, to say the least, to a great extent of very doubtful value; and yet the total amount due to the bank in respect of these loans is inserted in the balance-sheet as a good asset, without any deduction and without a word of explanation to the shareholders.
Although these criticisms were made more than a century ago, the thinking behind them is probably even more uncompromising today. A bank must not reflect as an asset in its financial statements the full amount of principal and interest accrued in respect of a debt owing by a customer where it believes that the full amount will not be recovered. By write-off or provision, it must recognise, for financial reporting purposes, the impact of the loss it anticipates. The records the bank in the present case kept in its central accounting system reflecting write-offs or diminutions in respect of the Timms parties' debts may be accepted as kept in accordance with these principles. But they are entirely irrelevant to the content of the contractual obligations owed by the Timms parties to the bank.
The applicant accepted that BankWest had provisioned PC's debt in 2008. On the law as explained in Timms, however, that did not affect the existence of the debt.
62 Had the respondent wanted to contend that the events of 2008 in effect expunged PC's indebtedness to BankWest, there is no reason why he could not have done so from the outset. It was not the correspondence of 11 November 2012 that opened up that possibility. What that correspondence did was to reveal what were, according to the respondent, the facts of the matter. But the facts, as so revealed, justified no more than a contention that the debt had been provisioned, and that would not be enough for the respondent's present purposes. Beyond that, as counsel for the respondent accepted (indeed, in their own terms) there were no more than "grounds to speculate that the debt may have been written off". Even assuming, contrary to Timms, that such an event would have had external consequences along the axis between BankWest and PC, I would not accept the possibility of such speculation as providing a legitimate basis for exercising my discretion favourably to the respondent on his application to amend. Neither would I accept that the applicant's correspondence of 11 November 2012 was the earliest occasion upon which the respondent's advisers might have engaged in such speculation, or might have turned their mind to the need to make an amendment of the kind proposed.
I certify that the preceding sixty-two (62) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup.