Dunlop v Fishburn

Solicitor for the Fifth Respondents: Mr J Gardner

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1686 of 2011

MORGAN JAMES CHUBB as trustee of the bankrupt estate of James Henry Dunlop

JUDGE: KATZMANN J DATE OF ORDER: 21 OCTOBER 2011 WHERE MADE: SYDNEY

1. Morgan James Chubb as trustee of the bankrupt estate of James Henry Dunlop be joined as fifth respondent pursuant to r 9.05 of the Federal Court Rules 2011 (Cth).
2. The interlocutory application filed on 14 October 2011 be dismissed.
3. The applicant pay the respondents' costs.
4. The applicant file and serve any further evidence in support of his application filed on 30 September 2011 for an extension of time within which to file a notice of appeal ("the application") on or before 20 November 2011.
5. The respondents file and serve any evidence in reply on or before 27 November 2011.
6. The application be listed for hearing on a date to be fixed with my associate.
7. Liberty to the parties to apply on 24 hours' notice. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1686 of 2011

MORGAN JAMES CHUBB as trustee of the bankrupt estate of James Henry Dunlop

JUDGE: KATZMANN J DATE: 21 october 2011 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 On 10 November 2009 a sequestration order was made in the Federal Magistrates Court against the estate of the applicant, James Henry Dunlop. The debt, the subject of the sequestration order, arose from a judgment of the Local Court of New South Wales registering a costs assessment in respect of unpaid legal fees. The petitioning creditors (the first four respondents) are solicitors of a firm that Mr Dunlop has previously instructed. They are amongst a number of individuals and companies to whom Mr Dunlop was and remains indebted. Mr Dunlop had resisted the making of the sequestration order, maintaining that he was able but unwilling to pay the debt and that he was therefore solvent. But the federal magistrate said that he was not satisfied that Mr Dunlop was either in a position to pay the judgment debt, which was the subject of the creditors' petition, or that he was solvent. 2 The federal magistrate stayed all proceedings under the sequestration order for a period of 21 days, pursuant to s 52(3) of the Bankruptcy Act 1966 (Cth), to enable Mr Dunlop to focus clearly on his financial situation "and to consider his options". See Fishburn v Dunlop [2009] FMCA 1331. 3 That 21 day period coincided with the period prescribed by the Federal Court Rules 1979 (formerly O 52 r 15(1)(a)) in which he could appeal the federal magistrate's orders. He did not appeal. Nearly two years later, however, on 30 September 2011, Mr Dunlop filed an application for an extension of time within which to appeal, including a draft notice of appeal. The draft notice of appeal listed one ground of appeal, which reads, simply: The appellant was solvent at the time the sequestration order was made. 4 In support of this application Mr Dunlop swore an affidavit in which he again asserted that he was solvent at the time the order was made. He said he was able to pay off his debts but was unwilling to do so because of a pending dispute between him and his creditors about the amount of professional fees they sought to recover from him. 5 Last Friday, 14 October 2011, Mr Dunlop filed an interlocutory application seeking a stay of "all proceedings including the execution of the issued writ of possession [issued by the Federal Magistrates Court on 19 August 2011] until the determination of the outcome of the Appeal of the sequestration order". Later that day, when the application came before me, I was informed that the writ would be executed on 24 October 2011. The writ was issued because Mr Dunlop failed to provide vacant possession of his property at Karangi in northern New South Wales in accordance with an order made by the Federal Magistrates Court on 27 July 2011. 6 Earlier on 14 October 2011 the parties had argued an interim application filed in the Federal Magistrates Court in which Mr Dunlop sought to have the orders made on 27 July 2011 set aside and to stay the writ of possession. The federal magistrate dismissed the application: Chubb v Dunlop [2011] FMCA 813. His Honour said that the evidence raised no valid ground of opposition, and so there was no sufficient basis for him to exercise his discretion to set aside his previous order and recall the writ: Federal Magistrates Court Rules 2001 r 16.05(2)(a). His Honour also held that he had no power to issue a stay on the writ or the administration of the estate in bankruptcy, referring, among other things, to s 37(2) of the Bankruptcy Act, which provides that the Court does not have power to rescind, discharge, or suspend the operation of a sequestration order. 7 When the matter came before me, I declined to grant a stay but offered Mr Dunlop an early hearing of his application for an extension of time on 19 October 2011, provided it was acceptable to the other parties. Ms Tangsilsat, who appeared for Mr Dunlop, initially agreed to the proposal and the other parties accepted but she later withdrew her consent and applied for an adjournment of that application to enable her to put on further evidence and to brief counsel. Over the opposition of the respondents, I granted the adjournment, which meant that the question of whether a stay should be granted was revived. 8 Before I deal with the stay application, however, I order that Morgan James Chubb as trustee of the bankrupt estate of James Henry Dunlop be joined as fifth respondent pursuant to r 9.05 of the Federal Court Rules 2011. He was not named as a respondent, although he is obviously a person who ought to have been joined as a party to the proceeding and whose cooperation is required to enforce any judgment. To the extent that the relevant rules have not been complied with in this regard, I dispense with compliance pursuant to r 1.34. 9 I now turn to consider the stay application. 10 This raises two broad questions: whether the Court has power to order a stay where no appeal has been instituted and, if so, whether it should.

Does the Court have power to order a stay where no appeal has been instituted? 11 There is power to order a stay under s 52(3) of the Bankruptcy Act, but that is limited to a stay of proceedings under a sequestration order and may only be granted for a maximum of 21 days from the time the order is made. Ms Tangsilsat did not contend otherwise. She submitted that the source of the power was s 29 of the Federal Court of Australia Act 1976 (Cth) ("FCA Act"). The respondents made no submissions on this issue. 12 Section 29 is plainly not the source of the power. Section 29 relevantly provides: 29 Stay of proceedings and suspension of orders (1) Where an appeal to the Court from another court has been instituted: (a) the Court or a Judge ... may order, on such conditions (if any) as it or he or she thinks fit, a stay of all or any proceedings under the judgment appealed from; and (b) the Court or a Judge may, by order, on such conditions (if any) as it or he or she thinks fit, suspend the operation of an injunction or other order to which the appeal, in whole or in part, relates. (2) This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the stay of proceedings. 13 As the opening words to s 29(1) make clear, the power in s 29 is predicated on the institution of an appeal. Here, no appeal has been instituted and so the power is not enlivened. 14 Nevertheless, s 25(2B)(ab) confers a power on a single Judge or Full Court to make an interlocutory order pending the determination of an appeal. Subsection (2BA) provides that a reference to an appeal in subsection (2B) includes a reference to an application of the kind mentioned in subsection (2). One such application is an application for an extension of time to institute an appeal. A stay of the orders in the court below pending the determination of an application for an extension of time is plainly an interlocutory order. If any authority is required, see Hi-Fert Pty Ltd v Kiukiang Maritime Carriers Inc (No 3) (1998) 86 FCR 374. 15 For completeness, I should note that in Shirreff v Beck Legal Pty Ltd (2010) 119 ALD 284 Dodds-Streeton J queried (but did not decide) whether, despite the power to order a stay pending an appeal conferred by s 29 of the FCA Act, the power to stay proceedings under a sequestration order is limited to the 21 day period under s 52(3) of the Bankruptcy Act. Her Honour referred to a number of authorities that are not necessary to discuss here. I am of the view that s 25(2B)(ab) gives the Court the power to stay proceedings under a sequestration order, if not the operation of the order (assuming there is any difference), pending the determination of the application. 16 I am therefore satisfied that I have the power to grant a stay pending the determination of the application (though not necessarily in the terms sought) and, if that is granted and a notice of appeal filed, a stay pending the determination of the appeal. But should a stay be granted?

Should a stay be granted? 17 The Court's discretion is a broad one. The weight of authority in this Court does not require special or exceptional circumstances: Stirling Harbour Services Pty Ltd v Bunbury Port Authority (No 2) [2000] FCA 87 at [13]-[14]. Still, there is an onus on the applicant to demonstrate a proper basis for a stay. As the mere filing of an appeal will not suffice (Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685 ("Alexander") at 694), it follows that the mere filing of an application to extend the time to appeal cannot. The following considerations are relevant to the exercise of the Court's discretion: (a) The starting point is that a successful party is entitled to the benefit of the judgment and is entitled to commence with the presumption that the judgment is correct. Where an applicant for a stay has not made out an appropriate case but has left the situation in a state of speculation or mere argument, weight must be given to the fact that the judgment below was given against the applicant. (b) Although a judge will generally not be required to speculate about the prospects of success, a stay will not be granted in the absence of arguable grounds of appeal or where the appeal is not bona fide, and so will not be granted if an appeal has no prospect of success. (c) Whether there is a likelihood that a successful appeal will be rendered nugatory. (d) Where the balance of convenience lies. See, for example, Alexander at 694; and Australian Workers Union v Pilkington (Aust) Ltd (2000) 101 FCR 35 at [30]-[31] per Finkelstein J. 18 Ms Tangsilsat submitted that the stay should be granted because her client was solvent, had been disadvantaged by self-representation, may not have put in all the evidence, would lose his house and the creditors would not be disadvantaged. She also submitted, in effect, that the proposed appeal would be rendered nugatory if the writ of possession were executed. 19 On the question of solvency s 5 of the Bankruptcy Act provides that a person is solvent if and only if (s)he is able to pay his or her debts, as and when they become due and payable and that otherwise the person is insolvent. The test of solvency is the cash flow test: Keith Smith East West Transport Pty Ltd v Australian Taxation Office [2002] NSWCA 264 at [33]. (This was a case involving s 95A of the Corporations Act 2001 (Cth) but the statutory definition is essentially the same as the definition in the Bankruptcy Act.) 20 Ms Tangsilsat relied on Mr Dunlop's affidavit sworn on 29 September 2011, which annexed documents purporting to demonstrate that funds were available. Some of this material was before the federal magistrate but some post-dated the sequestration order. Mr Gardner, who appeared for the trustee, relied on evidence that appears to confirm the correctness of the federal magistrate's decision that Mr Dunlop was not solvent. 21 But it would not be right to determine the question at this point. While the alleged error or errors on the part of the federal magistrate who made the sequestration order are elusive (they do not appear in the draft notice of appeal, and they were not identified in any submission), and the trustee raised questions about Mr Dunlop's bona fides, I am prepared to assume for present purposes that Mr Dunlop has an arguable case. 22 On the evidence before me, however, it could not be said that the prospects of success are high. Ms Tangsilsat submitted that Mr Dunlop had a line of credit available which would enable him to discharge the debt to the petitioning creditors. She referred to a copy of a bank statement annexed to her submissions, although she did not tender it and it was not in evidence. The document dealt with the period 8 September 2009 to 7 October 2009 and revealed a closing balance of $257,222.98 in debit. In handwriting, which Ms Tangsilsat identified as her own only when I queried it, appeared the words "LIMIT $300,000". Even if there were evidence to support the submission, the remaining credit could not meet the full extent of Mr Dunlop's indebtedness. Evidence tendered by the trustee showed that there were two additional creditors at the time the sequestration order was made (the debts to them were incurred in 2007), who last year lodged a proof of debt and whose existence was not disclosed to the federal magistrate. Indeed, the debt owing to the petitioning creditors of $45,499.95 represented about a third of the amount owing to unsecured creditors. 23 Furthermore, without wishing to pre-empt the outcome of the application for an extension of time, the lengthy delay in approaching the Court counts heavily against Mr Dunlop. In his affidavit in support of the application for an extension of time to file the notice of appeal, Mr Dunlop sought to explain the delay by saying that he did not know his rights. Whether that explanation is acceptable is a matter to be determined on a later occasion. But the federal magistrate's orders of 27 July 2011 were not challenged, nor his refusal to set aside those orders on 14 October 2011. And the delay in seeking to stay the execution of the writ of possession is largely, if not entirely, unexplained. Certainly, the affidavit in support of the stay application did not include any explanation and I was informed that, although Ms Tangsilsat did not receive instructions until 25 August 2011, Mr Dunlop had previously consulted a solicitor in connection with the application for the issue of the writ. 24 The evidence of the trustee, Mr Chubb, shows that the application for the writ of possession was filed after the trustee afforded Mr Dunlop with a reasonable opportunity to arrange for the annulment of his bankruptcy, including refinancing the mortgage on his property with a view to paying all his creditors. It was not until 29 October 2010 that the trustee first required Mr Dunlop to surrender his keys to the property and certain machinery and asked him to vacate the property by 15 November 2010 in order to enable the property to be sold. The trustee foreshadowed at that time filing an application in the Federal Magistrates Court. 25 There was no evidence to support the submission that the proposed appeal would be rendered nugatory if the stay were refused. Indeed, there was no evidence touching upon the execution of the writ. Mr Dunlop told me that he no longer resided on the property. There was no evidence of an imminent sale. There was no evidence that the trustee had even advertised the property for sale or had located an interested purchaser. 26 I should, however, point out that in an affidavit sworn on 10 October 2011 Mr Chubb deposed to the extraordinary circumstance that when the matter came before the Federal Magistrates Court for directions on 20 September 2011 Ms Tangsilsat told the Court that she had exchanged contracts on property the subject of the writ of possession, although the trustee had at no stage given his consent to the sale. Even so, Mr Chubb said that a request from Mr Gardner to Ms Tangsilsat for a full copy of the contract and the deposit cheque (purportedly for 0.25% of the purchase price rather than the standard 10%) went unanswered and the sale price was well below the true value of the property, causing the trustee to conclude that the purported sale was merely a device to further delay the administration of the estate. 27 In all the circumstances I am not satisfied that the execution of the writ would cause any great inconvenience to Mr Dunlop. 28 While I accept that the consequences of refusing a stay would disadvantage Mr Dunlop, his private interests are not the only matters to be taken into account. The Court must also have regard to the interests of the creditors, particularly unsecured creditors, and the community, which is also concerned with the due administration of the estate of a bankrupt. See, for example, Bryant v Commonwealth Bank of Australia (1996) 134 ALR 460; and Cirillo v Consolidated Press Property Pty Ltd (formerly known as Citicorp Australia Limited) [2007] FCAFC 167 at [51]. I reject Ms Tangsilsat's submission that a stay would not disadvantage the creditors. They have been waiting now for years. In relative terms, an additional period of delay might seem inconsequential. But with every day that passes while they remain unpaid, the greater the disadvantage is likely to be. A stay, of course, would not cancel the sequestration order. By operation of law Mr Dunlop's property has already vested in the trustee; a stay cannot alter that. What it would do, however, is frustrate the orderly administration of the estate. This is a material consideration where no steps were taken to apply to have the sequestration order set aside for nearly two years and the prospects of a successful appeal are not high. 29 Mr Dunlop's failure to disclose the true extent of his indebtedness either to the federal magistrate or to this Court is another significant factor weighing against him in the exercise of the Court's discretion. 30 In all the circumstances, I am not persuaded to grant a stay. 31 The interlocutory application should therefore be dismissed with costs. The application for an extension of time should be heard at the earliest convenient date. I propose making orders now so as to avoid the further cost of a directions hearing. The orders I will make are that:

1. Morgan James Chubb as trustee of the bankrupt estate of James Henry Dunlop be joined as fifth respondent pursuant to r 9.05 of the Federal Court Rules 2011 (Cth).
2. The interlocutory application filed on 14 October 2011 be dismissed.
3. The applicant pay the respondents' costs.
4. The applicant file and serve any further evidence in support of his application filed on 30 September 2011 for an extension of time within which to file a notice of appeal ("the application") on or before 20 November 2011.
5. The respondents file and serve any evidence in reply on or before 27 November 2011.
6. The application be listed for hearing on a date to be fixed with my associate. I grant liberty to the parties to apply on 24 hours' notice. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Katzmann.