Elyard Corporation Pty Ltd v DDB Needham Sydney Pty Ltd

REASONS FOR JUDGMENT This is a bankruptcy petition founded on a District Court judgment for $184,214-80 together with certain other sums, making in all a total of $241,461-05. After the service of the petition, negotiations took place between the Deputy Commissioner and the debtor. Those negotiations culminated in a settlement reached last December, pursuant to which the debt was to be discharged by three instalments. The first instalment of $80,000-00 was paid on 16 December 1997, certain other amounts having already been paid, so that the total outstanding was reduced to $148,948-05. The second instalment, also of $80,000-00, was to be paid by 18 February 1998, and the third was to be paid by 30 June 1998 out of the proceeds of a claim for damages for personal injuries suffered in a motor vehicle accident, which the debtor expected to have available to him by then. I infer this claim was substantial, because the Deputy Commissioner was willing to settle on the basis of it, and has not since offered evidence to the contrary. It was contemplated that the second instalment would be raised by the debtor's mother, who would grant a mortgage over her house for the purpose. A difficulty arose when the proposed lender announced that the cheque for the second instalment, which had already been drawn, would be withheld until dismissal of the petition. It seems that the parties, when they reached their agreement, did not advert to the question of the life of the petition, or when it was to be dismissed, and the petitioning creditor felt able to refuse to accede to the lender's demand, which, of course, was virtually inevitable, since the debtor was required to guarantee the loan raised by his mother. The debtor, for his part, still desires to pursue the arrangements for settlement, and seeks to have the petition dismissed on the basis that the second payment would then be made immediately and that he would give an irrevocable authority to the solicitors handling his personal injuries claim to make the third payment out of its proceeds upon their receipt. The debtor, who is a solicitor aged fifty-one years in receipt of a reasonably substantial income, has sworn an affidavit showing that, apart from a family loan of $111,574-00 on which there is unlikely to be any demand, the claims of the petitioning creditor and the costs of the petition, his debts are negligible. In these circumstances, the first question which arises is whether the Court may dismiss the petition pursuant to s 52(2)(b) of the Bankruptcy Act 1966. Section 52(2) provides: "If the Court ... is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition." The leading authority on the meaning of "other sufficient cause" in a provision of this kind is Cain v Whyte (1933) 48 CLR 639, a case in which the High Court (Rich, Starke, Dixon, Evatt and McTiernan JJ) expressed itself (at 648) as "content to agree with the judgment of the learned primary Judge". Consequently, the judgment of Henchman J, sitting as a judge in bankruptcy for the District of Southern Queensland, is to be found reported in full in the Commonwealth Law Reports (ubi cit.) at 640 et seq. Henchman J said (at 645): "Mr Philp ... argues that the Court has a discretion even though the proofs that I have alluded to have been made. He suggests that in the present case 'other sufficient cause' exists, within the meaning of sec. 56(3)(b) [of the Bankruptcy Act 1924, the precursor of the Bankruptcy Act 1966], which throws upon me an obligation to dismiss, or gives me a discretion to dismiss, the petition. I agree that the sections do leave a certain amount of discretion in the Bankruptcy Judge ... , and I do not agree with the argument put forward by Mr Graham that the words 'other sufficient cause' should be limited to the one case where the Court is satisfied that the petition is put forward solely for some collateral illegitimate end, and not for the purpose of securing the equal distribution of the available assets amongst the creditors. To my mind, the High Court of Australia did not intend to put a limit on the meaning of the words 'other sufficient cause' in Dowling v Colonial Mutual Life Assurance Society (1915) 20 CLR 509, and I do not propose to be the first to say that such wide words as 'other sufficient cause' are necessarily limited to meaning a cause in the nature of fraud or abuse of the provisions of the bankruptcy law. I can well conceive that 'other sufficient cause' might arise in connection with any particular case. To my mind, it is the duty of the Bankruptcy Judge to examine in each case, if the question is raised, whether there is other sufficient cause than the fact that the debtor is able to pay his debts in full, for refusing to make an order." But his Honour went on to say that "prima facie, on proof of [the ground], the Court will proceed to make an order for sequestration, and that it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due." He added: "Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order." This exposition of the law emphasizes the width of the discretion conferred by the Act upon the Court. At the same time it points to a fundamental limitation imposed by the nature of the jurisdiction in bankruptcy, which requires the Court to keep in mind, not only the interests of the individual parties before it in the particular case, but also the public interest, which may be adversely affected by the propping up of insolvency. However, in the present case that factor does not provide the bar to an exercise of discretion in the debtor's favour that it would provide in many cases, since the debtor has a paucity of creditors, other than the petitioning creditor, who would be likely to have any reason for concern. Of course, that merely removes a bar; it does not provide a positive ground constituting "other sufficient cause" why a sequestration order ought not to be made. But there is a positive matter which, in the circumstances of this case, I find of particular importance. This is the debtor's willingness to give an irrevocable authority making available to the petitioning creditor, up to a large sum, the proceeds of his claim for damages for personal injuries. None of this money would be available in his bankruptcy. As well, it will be remembered, the debtor's mother has offered her home to enable further moneys to be provided, which also would not be available in his bankruptcy. In the context of the circumstances of this case, including the petitioning creditor's readiness last December to accept an arrangement outside bankruptcy, and the actual payment and acceptance of a substantial instalment, I regard the making available of the protected moneys and of the proceeds of the mortgage of the mother's house as providing "other sufficient cause". As Henchman J emphasized, each case has to be examined on its own facts in order to determine whether they raise the statutory discretion, and if so, whether it should be exercised in favour of the debtor. In my opinion, in this case, if the petition is otherwise proved, my discretion ought to be exercised so as to dismiss it. It is unnecessary to consider other defences which were argued. However, there is an anterior question. As I have said, the petition was presented on 20 February 1997. Since it came on for hearing before me outside the period of twelve months from that date, it is necessary to take account of the provisions governing the life of a petition which are set out in s 52(4) and (5). Those provisions are as follows: "(4) A creditor's petition lapses at the expiration of: (a) subject to paragraph (b), the period of 12 months commencing on the date of presentation of the petition; or (b) if the Court makes an order under subsection (5) in relation to the petition - the period fixed by the order; unless, before the expiration of whichever of those periods is applicable, a sequestration order is made on the petition or the petition is dismissed or withdrawn. (5) The Court may, at any time before the expiration of the period of 12 months commencing on the date of presentation of a creditor's petition, if it considers it just and equitable to do so, upon such terms and conditions as it thinks fit, order that the period at the expiration of which the petition will lapse be such period, being a period exceeding 12 months and not exceeding 24 months, commencing on the date of presentation of the petition as is specified in the order." What happened in the present case is that on 19 February 1998 a deputy registrar ordered by consent that the life of the petition be extended up to and including 25 March 1998. Then, on 19 March 1998, another deputy registrar purported to order that the life of the petition be extended up to and including 8 April 1998. The matter came before me on 7 April 1998, when it was adjourned to 16 April 1998. Although I doubted the power of the Court to grant successive extensions after the expiration of the period of twelve months from the date of presentation of the petition, I took the view that, as such a power had already been purportedly exercised, neither party would be prejudiced by my granting a further short purported extension. Accordingly, I made an order purportedly extending the life of the petition until 23 April 1998, and subsequently until the expiration of thirty days from that date. The question which now has to be decided is whether the petition had in reality lapsed immediately after 25 March 1998, so that the purported extensions of it thereafter were ineffective or should be rescinded as unauthorized by the statute. The argument turns on the effect of the words in s 52(5) "at any time before the expiration of the period of 12 months commencing on the date of presentation of a creditor's petition". Those words qualify the power given to the Court to order that the period at the expiration of which the petition will lapse be some other period not exceeding twenty-four months from the presentation of the petition. The power, so limited, is of relatively recent origin. Indeed the fixing of a period after which a petition will lapse is itself not very much older. Prior to the enactment of the Bankruptcy Act 1966, the Bankruptcy Act 1924 contained no such provision. However, in paragraph 85 of the well known report generally referred to as "the Clyne Committee Report", it was suggested that there ought to be "some limit to the right of debtors and petitioning creditors to have indefinite adjournments" and that "unless a sequestration order is made on a creditor's petition within twelve months after the presentation of the petition, the petition should cease to have any force". This recommendation was accepted by Parliament in the original form of s 52(4) of the Bankruptcy Act 1966, which contained no provision for extension of the life of the petition beyond twelve months. The present sub-section (4) was substituted and sub-section (5) enacted by the Bankruptcy (Amendment) Act 1980. Plainly enough, the qualification of an absolute limit of twelve months by a discretion to substitute a longer period not exceeding twenty-four months is not a policy reversal. The policy of limiting the period during which a petition can remain unresolved was retained; only the length of the period was qualified for those particular cases in which a discretion might be exercised. (See the comments of Lockhart J (with whom, as well as with Lindgren J, Black CJ agreed) in Elyard Corporation Pty Ltd v DDB Needham Sydney Pty Ltd (1995) 61 FCR 385 at 392.) In this context, it does not seem to me that there is any justification for straining the language of sub-section (5) to make it confer any greater discretion than its terms naturally convey. The leading decision on the provisions of s 52(4) and (5) is Re Young; Ex parte Smith (1985) 5 FCR 204, in which the full court (Bowen CJ, Sweeney and Lockhart JJ) considered the question whether the Court had power to extend the period at the expiration of which a creditor's petition will lapse if the period of twelve months commencing on the date of presentation of the petition has expired before the Court is asked to make an order extending it. Since the question was not whether an extended period could itself be further extended by an order made after the expiration of the initial period of twelve months, what the Court said can only operate by way of obiter dicta in the present case. However, in a joint judgment, the Court did expound its understanding of the provisions at some length, and its views, so far as they bear on the question before me, must obviously be given the greatest respect. At the very beginning of the judgment (at 204) the Court said: "Section 52(5) provides that the court may make an order of this kind at any time before the expiration of the first period of twelve months." Having regard to the broad words "an order of this kind", I think it is significant that the Court's summary of the position limits the power to a power to be exercised "before the expiration of the first period of twelve months". But after a full and careful discussion, the Court used language pointing in the same direction even more strongly. It stated its view of the effect of s 52(4) and (5) in the following terms (at 208): "These considerations support the conclusion that s 52(4) and (5) ensure, first, that petitions lapse upon the expiration of twelve months from the date of presentation of the petition unless, within that period, the court extends the duration of the petition to a maximum of a further twelve months; andsecond, that the court's power cannot be exercised outside the initial twelve months period. No problems of uncertainty arise during the first twelve months because the events that bring an end to the petition are clearly ascertainable. Indeed, they are matters of public record: the making of a sequestration order or the dismissal or withdrawal of a petition. Also, if the duration of the petition is extended by order of the court made during the first twelve months then certainty will necessarily attend its extended life." (Emphases added.) The Court went on to consider whether the power in s 33(1)(c) to extend "any time limited by this Act ... for doing an act or thing" could be utilized to solve the problem in the case. As to this, it said (at 208) that the power to extend time in s 33(1)(c) did "not sit comfortably with the language of s 52(4) and (5) or with the role which they perform in the Act". The reasons continue: "Section 52(4) and (5) define the power of the court to extend the life of a creditor's petition at any time before the expiration of the period of twelve months from the date of presentation of the petition." Accordingly, to construe the language of s 52(4) and (5) so as to make them amenable to the power in s 33(1)(c) would not be "consonant with their evident purpose". Finally, the joint judgment summarised the position (at 209) as follows: "Sections 52(4) and (5) do not fall within s 33(1)(c) because the reference to time in those subsections is in the context of the time within which the court may exercise a specific power conferred upon it by the same provision. The reference to time is a necessary ingredient in the court's power to extend the duration of the petition. The time limit of twelve months is expressly tied to the court's power to extend the duration of the petition." This decision (as was made clear at 209) does not exclude the application of the slip rule in an appropriate case. That is to say, where an order made within the relevant period of twelve months omits, by an error falling within the terms of the slip rule, to include an order under s 52(5), the situation is not beyond remedy: Re Howell; Ex parte Commissioner of Taxation (1996) 70 FCR 261. But the joint judgment plainly states the power under s 52(5) as a power the "evident purpose" of which, as well as "the role which [it] perform[s] in the Act", limits it so that it must be exercised within the initial period of twelve months from the date of presentation of a petition. As the final passage, among those I have quoted from the joint judgment, makes clear, the reference to time in sub-s (5) is a qualification upon the power that the provision confers. Compliance with that time is also "a necessary ingredient in the Court's power to extend the duration of the petition". Following the decision in Re Young, Pincus J in Re Hibbard; Ex parte Playroom Pty Ltd (unreported, 5 December 1988) referred to "the requirement in s. 52(5) that any order extending the petition be made before the expiration of the period of twelve months commencing on the date of presentation of the petition". He saw this provision as "significantly different" in its effect from s 41(6A) which was considered by a full court in Streimer v Tamas (1981) 37 ALR 211. While these authorities firmly support the construction of s 52(5) that requires any order having effect under this provision to be made within the period of twelve months from the date of presentation of a petition, they do not contain any precise application of the provision to a case where successive extensions have purportedly been granted after the expiration of that twelve months. Research has revealed only two cases, neither of which seems either to have been noted in the Bankruptcy Practice or judicially commented on, where a situation of this kind has been discussed. In Re Hamilton; Ex parte Deputy Commissioner of Taxation (unreported, 24 April 1990), Northrop J said: "In the present case, the petition was presented on 22 February 1989. Before the expiration of the period of 12 months commencing on that date, a Deputy District Registrar ... ordered that 'The life of the Petition be extended to 27 February 1990'. At the same time, the hearing of the petition was adjourned to the same date. Two comments are made relating to that order. If it is considered just and equitable to do so, an order under sub-section 52(5) should be in the form of that sub-section namely 'that the period at the expiration of which the petition will lapse' be a specified period. In specifying that period, care must be taken to ensure that the order is made at a time before the expiration of the period of 12 months commencing on the date of the presentation of the petition and that the new period does not exceed 24 months commencing on the date of the presentation of the petition. Secondly, as a matter of discretion, it should be noted that it may be unwise, where other options are available, to extend the period so that it expires on the day that the petition is to be heard. The uncertainty of litigation illustrates dangers that can arise if this is done. Thus, if the hearing is not completed on the adjourned day, the petition lapses. After the expiration of the period of 12 months commencing on the date of the presentation of the petition, the period cannot be further extended." His Honour referred, among other cases, to Re Young. To the contrary, is the decision of Lee J in Re Uratoriu; Ex parte M S McLeod Ltd (unreported, 15 June 1989). There, his Honour took the view that there was implied in the power of extension conferred on the Court by s 52(5) "the power to further extend the period fixed in the original order provided that such further extension is effected whilst the petition remains on foot. That implied power will not be lost by any failure to make the initial order subject to an appropriate condition in that regard or subject to further order." In this state of the authorities, I am placed in the invidious position of choosing between the opposite views of two other judges of the Court. But the burden of doing so is lightened by the full exposition of the relevant provisions contained in the appellate judgment in Re Young and by the fact that, much more recently, another full court has considered the application of the slip rule to a provision comparable to s 52(4) and (5) on the basis, as it seems to me, of the view of the operation of such a provision that was taken in Re Young and in Re Hamilton. That was in Elyard Corporation, where Lockhart J referred (at 393) to "the statutory time limit" imposed by s 52(5) for the making of an order. Once s 52(5) is seen as imposing a time limit, not merely on the duration of an order, but on the making of it, the view taken by Northrop J seems inescapable. Particularly having regard to the basis on which the full court in Re Young rejected any application of s 33(1)(c), and its insistence on the role and evident purpose of s 52(4) and (5) in defining the relevant power of the Court, I do not think it is possible to accept an implied power of the kind suggested in Re Uratoriu. Such an implication would be in the teeth of the full court's view in Re Young that the time specified in the statute is "a necessary ingredient in the court's power to extend the duration of the petition", and would be inconsistent with the later full court's insistence in Elyard Corporation that the slip rule was available, not as permitting an order to be made after "the statutory time limit", but because an exercise of it operated nunc pro tunc as at the date of the earlier order involving the slip, which was made within the statutory period. For these reasons, I have concluded that the orders purportedly extending the life of the petition, made after the expiration of 12 months from its presentation, were not authorized by the statute and should be rescinded. Subject to one further matter, it follows that, rather than make any order on the petition, I should declare that it has lapsed and should order that the petitioning creditor pay the debtor's costs from 19 March 1998. The one outstanding matter to which I have referred is an argument raised by counsel for the petitioning creditor that the Court retains the power under s 37 of the Act to vary the original order extending the life of the petition. It is urged that I should exercise a discretion under that section on the basis that, had the deputy registrar been aware of the true construction of s 52(5), the life of the petition would have been extended for a longer period in order to avoid the very lapse that has occurred. There are many difficulties about this argument. In the first place, I think that the same reasoning which led the full court in Re Young to reject the application of s 33(1)(c) to s 52(5) should lead me to reject the application of s 37 also. However, even if s 37 be applicable, I would not be prepared to exercise a discretion under that provision to vary, so long after the event, the order that was made on 19 February. I certainly do not think it can be concluded that the deputy registrar would have fixed a period not expiring before the present date. There is a note in the court file indicating that the deputy registrar may well have contemplated the early termination of the proceedings on the petition, and in any case there is just no basis for the supposition that a sound exercise of discretion, as at 19 February, should have produced an extension of the life of the petition for a substantial period. As events turned out, the purported extension made the settlement which had been negotiated impossible of exact performance. But the question, in an application under s 37, is not what the deputy registrar would have done in February, but what the court, in the exercise of its discretion, should do now. In all the circumstances, which are unusual, I would decline to exercise my discretion in this case in favour of the petitioning creditor, as I am not satisfied that I should consider it just and equitable to do so. There is no ground, on the facts of the case, on which it would be right to avoid the difficulties of s 37 by an application of the slip rule. There was simply no slip: Elyard Corporation at 404-405, per Lindgren J. The consent order made was intended to operate according to its terms. In any case, here too, I would exercise my discretion, if the rule applied, against the petitioning creditor, who, in my opinion, would not thereby suffer injustice in the circumstances of this matter, and having regard to the policy of s 52(4) and (5). I certify that this and the preceding nine (9) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Burchett