Bankruptcy Act 1966 (Cth), ss.30, 40(1)(g), 41(6A), 41(7), 82(3AA)

Corporations Law, ss.1317EA(3)(b), 1317EB(1), 1317EG

Cartwright v Cartwright [2002] EWCA Civ 931

Christianos v Aloridge Pty Ltd (1995) 13 ACLC 1851

Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 461

Gould v Day [1999] FCA 1650

Guss v Johnson [2000] HCA 26; (2000) 171 ALR 598

Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254

Raymond Levy v Legal Services Commission [2000] EWCA Civ 285

Re A Debtor [1958] 1 Ch 81

Re A Debtor; ex-parte Berkshire Finance Co Ltd [1962] 106 SJ 468

Re Cox (1934) 7 ABC 98

Re Higgins; Ex parte Higgins (1989) 4 FCR 523

Russell v Russell [1998] BPIR 259

_Tame v New South Wale_s [2002] HCA 35; (2002) 76 ALJR 1348

Vogwell v Vogwell (1939) 11 ABC 83

At [1] in line 10 where it says "Each of the respondents" this should be replaced with "Each of the applicants".

At [21] where it says "Their Honours" this should be replaced with "Their Lordships".

(1) Application allowed. Bankruptcy Notices set aside.

(2) Respondent to pay the applicant's costs which are to be taxed if not agreed under the Federal Court Act and Rules.

WILLIAM ARTHUR FORGE, JOZSEF ENDRESZ, ALAN PAUL ENDRESZ AND DAWN ENDRESZ

1. In all of these matters the Australian Securities & Investments Commission has issued a bankruptcy notice against each of the applicants. The bankruptcy notices are based upon pecuniary penalties imposed pursuant to s.1317EA(3)(b) of the Corporations Law by Foster AJ in the Supreme Court of NSW on 28 August 2002. The penalties were imposed against each of the applicant's for a series of breaches of duty as directors or officers of a corporation known as CTC Resources NL. The amount of the penalties is the sum of $245,000.00 for each of the applicants except Alan Paul Endresz whose penalty is $200,000.00. Each of the respondents filed an application under ss.30, 41(6A) and 41(7) of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act"). The application was served within 21 days of the service of the bankruptcy notice. So far as is required, orders extending time for compliance have been made.

2. The grounds upon which the applicants seek to set aside the bankruptcy notices are as follows:

(1) The notices are invalid because they were issued by the Australian Securities & Investments Commission when the debt which is owed pursuant to the pecuniary penalty orders is a debt to the Commonwealth.

(2) The applicants each have a counter-claim against the Commonwealth greatly in excess of the fund on which the bankruptcy notices are founded pursuant to s.40(1)(g) and s.41(7) of the Bankruptcy Act.

(3) The bankruptcy notices are invalid or should be set aside because the debts which found them are not provable debts in bankruptcy (s.82(3AA) of the Bankruptcy Act).

The applicants also seek an order extending the time for compliance with the bankruptcy notice pending any decision by the Court of Appeal of NSW against the judgment of Foster JA under which the penalties were ordered. I will deal with each of these grounds of application in turn.

3. There is no dispute that although these matters arose under the Corporations Law the rights which are sought to be enforced by the respondent are still available to it pursuant to transitional provisions of the Corporations Act. I will therefore refer to sections of the Corporations Law as they stood at the time of the proceedings.

4. The respondent is a person entitled to apply for a pecuniary penalty order (s.1317EB(1)). The Court (in this case the Supreme Court of NSW) is entitled to make an order requiring a person to pay to the Commonwealth a pecuniary penalty (s.1317EA(3)). Section 1317EG is in the following form:

"Section 1317EG Where the Court makes under paragraph 1317EA(3)(b) an order that a person pay a pecuniary penalty:

(a) the penalty is payable to the Commission on the Commonwealth's behalf; and

(b) the Commission or the Commonwealth may enforce the order as if it were a judgment of the Court."

5. The applicants argue that the Commission is only the agent of the Commonwealth and has no right to enforce the judgment in its own name. They argue that whilst s.1317EG(b) gives the Commission the power to enforce the order it can only do so in the name of the Commonwealth so that the Commonwealth should be named as creditor in the bankruptcy notice not the Commission. I do not read the section in this way. Read as a whole, it is clear that the arrangements for obtaining civil penalties against persons are arrangements which have been delegated to the Commission. The Commission applies for the orders, the Commission instigates the proceedings pursuant to which orders are made, the penalty is payable to the Commission and the Commission may enforce the order. The effect of s.1317EG(b) is to give the Commonwealth's agent statutory authority to collect the debt in its own name, which it might not have had absent the provision. I am of the view that the bankruptcy notice should not be set aside on this ground.

6. The applicants cross-claim is brought in proceedings SC75 of 1995 between the Commonwealth of Australia and twenty-nine defendants. The applicants are respectively the fifth, seventh, eighth and ninth defendants. For the purposes relevant to these proceedings the Commonwealth's action is to recover money which it claims its consultant, the second defendant, wrongly paid to the first defendant and the sixth defendant. This money found its way out of the hands of the first defendant and the sixth defendant for the benefit of the applicants. The factual matrix of those proceedings is included in the factual matrix which was considered by Foster AJ in the civil penalty proceedings. I have reviewed the respondent's submissions. I have not found them to contain an argument that there is no mutuality between the applicants as payors of the civil penalties and the Commonwealth as alleged tortfeaser.

7. It was also accepted by the respondent that the counterclaim was not one which could have been raised in the original proceedings.

8. It was the respondent's argument that I could not, in all the circumstances, have the degree of satisfaction concerning the cross-claims which is required by the authorities. In particular whether the judgment debtor has discharged the necessary onus, that is, by satisfying the court that there is a "reasonable probability of success" (Re A Debtor [1958] 1 Ch 81 at 99 per Roxburgh J).In addition, there must be evidence "that the debtor had...some reasonable ground for bringing his action" (Re Cox (1934) 7 ABC 98 at 100-101). More recently this exercise has been described in the High Court case of Guss v Johnson [2000] HCA 26; (2000) 171 ALR 598 at 606 as a:

"...weighing up of considerations as to the legal and factual merit of the claim relied upon by the debtor and the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim."

(See also Bhagat v Global Custodians Ltd [2002] FCA 223)

9. In Gould v Day [1999] FCA 1650 Sackville J said in relation to the obligations on a debtor under s.40(1)(g):

"It follows from Ebert v The Union Trustee Co of Australia Ltd [1960] HCA 50; (1960) 104 CLR 346 at 350 and from Re Brinks; Ex Parte Commercial Banking Company of Sydney Limited [1980] FCA 78; (1980) 30 ALR 433 at 439, that the Court does not undertake a preliminary trial of the counterclaim, set off or cross demand. Rather, it is necessary that the Court be satisfied that the debtor has a fair chance of success. These principles continue to apply under s.41(7) of the Bankruptcy Act in its amended form; see Crimmins v Glenview Home Units [1999] FCA 515 at [27].

In His Honour's view it was necessary that the debtor supply sufficient evidence to support, to the necessary standard, the elements of the cause of action which he intends to raise. In this case the applicants have provided the court with a copy of the cross-claim itself and some further and better particulars, but these particulars go to the damages rather than to the cause of action itself. The possibility that the Commonwealth would have some tortious or trade practices liability for the criminal acts of its consultant is not high. The consultant invested the Commonwealth money with CTC which is a company controlled by the applicants. It also invested some monies with Davis Samuel, which at the relevant time may have been a partnership in which one of the applicants was involved, but which later became a company. It seems to me there is force in the respondent's argument that these are cross-claims properly brought by the companies themselves and not by their shareholders. This is the rule in Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 461 which was considered by the Federal Court in Christianos v Aloridge Pty Ltd (1995) 13 ACLC 1851 at 1856 per Beaumont, Whitlam and Tamberlin JJ:

"It is well established that in an action to address a wrong done to a company, or to recover money or damages alleged to be due to it, the company is the only proper plaintiff; and that the company's name should only be used as the plaintiff by the direction of the company or its directors or, where the company has been placed in liquidation by the liquidator."

The evidence before me indicated that the money, which was paid to CTC, was, to a very large extent, immediately paid out to the applicants or interests with which they were associated. It was those payments that were the subject of the civil penalty proceedings. They were considered by Foster AJ to be wrongful. I find it difficult to understand how the applicants would have a claim against the Commonwealth for not allowing a company to use money, which the Commonwealth had given it, when that money was not being used by the company at all but rather was placed into the hands of the applicants themselves or their associates.

10. These comments are not common to the Davis Samuel monies.

I understand that those monies were placed on deposit with that organisation but I have no evidence as to the terms of that deposit. In any event, it would appear that the only person who might reasonably be alleged to have a cross-claim in respect of those monies is Mr Alan Endresz. Mr Alan Endresz is the subject of certain criminal proceedings arising out of these matters. Because of those criminal proceedings it has been agreed that the proceedings in which the cross-claim has been filed should be placed in abeyance. It is notorious that criminal proceedings of a `white collar' nature where the defendant is not on remand do not hold a high priority of the calendar of the criminal courts. The lengthy delay before this counterclaim is likely to be heard must be a matter that I should take into account when considering "the justice of allowing the bankruptcy proceedings to go ahead or requiring them to await the determination of the claim" (Guss v Johnson (supra)).

11. Finally, apart from the problems raised by the alleged criminal behaviour of one of the parties, see Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254 at [29], there is also a difficulty over the very large amount of money claimed by all of the applicants for loss of reputation. This type of claim appears to have been rejected by the High Court in _Tame v New South Wale_s [2002] HCA 35; (2002) 76 ALJR 1348 per Gaudron J at [58] and McHugh J at [122-3]. Defamation is not a matter pleaded in the cross-claim.

12. I do not believe that this cross-claim has a reasonable probability of success. I do not think that it is just that the claim should be determined before the bankruptcy proceedings are allowed to continue (Vogwell v Vogwell (1939) 11 ABC 83 at 85 per Latham CJ).

Can a non-provable debt form the basis of a bankruptcy notice?

13. The respondent accepts that the civil penalties are excluded from the definition of provable debt by virtue of s.82(3AA) of the Bankruptcy Act. I have been provided with a copy of the explanatory memorandum which appears to apply to the old s.82(3A) which says:

"...thus, if a person whom a civil penalty applies becomes a bankrupt, any pecuniary penalty payable by the bankrupt will not reduce the amount received by the bankrupts other creditors in the bankruptcy. The bankrupt will however remain liable to pay the civil penalty out of his or her post bankruptcy or assets."

14. The respondent made much of the fact that even if this debt was not provable there was a claim for costs in the proceedings which might ground a bankruptcy notice. However, it appears that an award for costs in a proceeding for a penalty or a fine for an offence is a penalty and is within subsection 82(3AA). In Re Higgins; Ex parte Higgins (1989) 4 FCR 523 at 537 Spender J held that:

"Section 82(3) of the Bankruptcy Act 1966 (Cth) makes it quite clear that fines or penalties imposed in respect of offences are not provable debts."

15. Although neither Counsel were able to provide me with authorities, the applicant submitted that there would be no utility in pronouncing a sequestration order in respect of a non provable debt and thus any proceedings for such an order (and it must follow, the issue of a bankruptcy notice) would lack utility and would therefore be an abuse of process. The respondent argued that there was a public interest in bringing a person who owed money into bankruptcy so that all his creditors could be marshalled and his affairs managed by his trustee. The non-provable applicant for the sequestration order (and thus the bankruptcy notice) was performing a public service which negated any suggestion that it was acting in abuse of process.

16. Although the matter has not been considered in Australia it has been considered at appellate level in the United Kingdom. In England there is a new bankruptcy regime founded on the Insolvency Act 1986 (The Insolvency Act). This Act happily combines insolvency provisions for both corporations and individuals. It abolishes the bankruptcy notice in favour of a Corporations Act type "notice of demand." However, the similarities between the two types of notice remain. Failure to comply with a notice of demand constitutes an action upon which a creditor can apply for a bankruptcy order.

17. Rule 12.3 of the Insolvency Rules deals with what are and what are not provable debts. Sub-rule (1) is in the following terms:

"Subject as follows, in ... bankruptcy, all claims by creditors are provable as debts against ... the bankrupt whether they are present or future, certain or contingent, ascertained or sounding only in damages.

(a) In bankruptcy, any fine imposed for an offence, and any obligation arising under an order made in family proceedings or under a maintenance assessment made under the Child Support Act 1991;"

Although these debts are not provable in a bankruptcy they are within the definition of a "bankruptcy debt" defined in s.382(1) of the Insolvency Act and therefore a petition may be presented against a debtor by a creditor to whom such a debt is owed (ss.264 and 383). It has been accepted by the High Court in Russell v Russell [1998] BPIR 259 that the court had jurisdiction to make a bankruptcy order on a petition based on a non-provable debt.

18. It would be fair to say that the courts are not happy about this apparent anomaly. Chadwick J in Russell v Russell (supra) made it clear that there would have to be exceptional circumstances and this was accepted by Evans Lombe J in Levy v Legal Aid Board [2000] EWHC Ch 155. In that case His Honour went on to find special circumstances in the conduct of the debtor.

19. Levy went on appeal where sub-nom Raymond Levy v Legal Services Commission [2000] EWCA Civ 285 it was considered by a Court of Appeal constituted by Lord Justice Peter Gibson, Lord Justice Waller and Lord Justice Jonathan Parker. Because their Lordships considered a matter upon which there is no Australian authority I set out in extenso the relevant findings:

[38] I therefore agree with Chadwick J in Russell v Russell that since the Act plainly allows a creditor with a non-provable debt to present a bankruptcy petition based upon that debt, it must follow that the court has jurisdiction under the Act to make a bankruptcy order on such a petition.

[39] In what circumstances, then, will the jurisdiction be exercised? In Russell v Russell Chadwick J referred to the need for "special circumstances"...

[40] He went on to conclude that special circumstances existed in that case justifying the making of a bankruptcy order. He identified three special circumstances, as follows:

[There follows the three references to the conduct of the debtor].

[41] It is apparent from the nature of the special circumstances which he identified that Chadwick J regarded misconduct by the debtor as a relevant factor in determining whether a bankruptcy order should be made on a petition based on a non-provable debt. For my part I find it difficult to see why misconduct by the debtor should be relevant in this context. However badly or irresponsibly the debtor may have behaved, the position still remains that the petitioning creditor has no financial interest in the bankruptcy process. Nor in my judgment, does the debtor's failure or refusal to pay other debts (whether provable or non-provable) constitute a "special circumstance" in this context. If debts are non-provable then non-payment of them is a matter outside the bankruptcy regime; if they are provable, then the creditor concerned has remedy.

[42] To my mind, the fact that the debtor may have so misconducted his affairs that it may be said that he (in effect) deserves to be made bankrupt cannot justify the making of a bankruptcy order on a petition based on a non-provable debt.

[43] It was suggested in argument (indeed it was suggested by Evans-Lombe J in the passage from his judgment which I quoted earlier, in which he refers to an administration of Mr Levy's estate in bankruptcy still being of use to Mrs Levy notwithstanding that she cannot prove in the bankruptcy) that a petitioning creditor with a non-provable debt may nevertheless have a legitimate interest in initiating a bankruptcy if there is a prospect of a surplus being available after all proving creditors have been paid in full. In my judgment, however, it would be an abuse of the bankruptcy process to have recourse to it for that purpose. The fundamental purpose of the bankruptcy regime is the distribution of the bankrupt's estate rateably among proving creditors: that is its raison d'etre. To seek to use the bankruptcy regime for the purpose of establishing a surplus after the proving creditors have been paid in full is, in my judgment, to seek to use it for a collateral purpose and is not permissible.

[44] In what circumstances, then, might the court be persuaded to exercise its jurisdiction to make a bankruptcy order on a petition based on a non-provable debt? Since the jurisdiction exists, I have to accept that there may be wholly exceptional cases where the court will be persuaded, in its discretion, to do so. I confess, however, that I find it extremely difficulty to foresee the circumstances in which that may occur, since, for reasons already given, the jurisdiction itself seems to me to be wholly anomalous. As at present advised, the only situation in which I can envisage that there might be a possibility of the court making a bankruptcy order on a petition based on a non-provable debt is where a supporting creditor with a provable debt obtains a change of carriage order pursuant to Rule 6.31. The effect of such an order is that, in contract to the situation where a supporting creditor is substituted as petitioner and the petition is amended accordingly, the petition remains unamended but the creditor who has obtained the change of carriage order has the carriage of the petition in place of the petitioning creditor. But I am far from saying that a change of carriage order would necessarily be made in such circumstances, or that, if it were to be made, the court hearing the petition would necessarily make a bankruptcy order.

[45] Subject to that possibility (if it be such) I find myself unable to envisage any circumstances in which the court could properly make a bankruptcy order on a petition based on a non-provable debt."

20. Lord Justice Waller agreed with the reasons for judgment given by Lord Justice Jonathan Parker. Lord Justice Peter Gibson also referred to the anomaly which allowed a petition to be brought for a non-provable debt and at [58] said:

[58] The statutory scheme to my mind is plain: a bankruptcy order is designed to vest the debtor's assets in the trustee to enable the trustee to pay the provable and proved debts of the debtor (s.324 Insolvency Act 1986). A non-provable debt is a bankruptcy debt (as defined in s.382; see in particular s.281(5)(b)). But, that being so, it would appear that Chadwick J. was right in Russell v Russell to say that a creditor with a non-provable debt may present a bankruptcy petition based upon that debt. However, like Jonathan Parker L.J., I find it extraordinarily difficult to conceive of any circumstances in which the court would make a bankruptcy order on a petition founded on such a debt. And if the court will not make such an order (save in some wholly exceptional circumstance) on the hearing of the petition, it would be strange if it was appropriate for the debtor to seek to free himself of the threat of bankruptcy by an application to set aside the statutory demand based on such a debt. The presentation of a petition may have seriously adverse effects on the debtor, and in my judgment it would be wrong to deny him the opportunity at the statutory demand stage to avoid that harm by having the statutory demand set aside when it is based on a non-provable debt which is highly unlikely to lead to a bankruptcy order. There is no suggestion that any special circumstances for making a bankruptcy order based on a non-provable debt exist in the present case.

[59] In my judgment there is no realistic prospect of a bankruptcy order being made on the non-provable debt on which the Legal Services Commission's petition is based. The statutory demand should therefore be set aside now."

21. Although Their Honours provided no authority for their firmly held views they might have obtained some comfort from the decision in Re a Debtor; ex-parte Berkshire Finance Co Ltd [1962] 106 SJ 468 where Cross and Ungoed-Thomas JJ overturned a decision by a District Registrar to grant a sequestration order based upon a judgment for what Their Honours considered to be damages and therefore non-provable. The decision in Levy was affirmed by the Court of Appeal in Cartwright v Cartwright [2002] EWCA Civ 931 in respect of a debt due under similar legislation in Hong Kong.

22. Levy was a case which involved a statutory demand. It is clear that in England a demand which cannot be translated into a bankruptcy order will not be permitted. It is to be noted that the views of the Court of Appeal were given against the context of a statutory ability to bring an application for a bankruptcy order. In Australia the legislation (ss.40(1)(g), 41(1) and (3)) would permit the issuance of a bankruptcy notice against a debtor based on a non provable judgment debt. Section 43 would permit an act of bankruptcy based upon the failure to comply with such a bankruptcy notice to ground a petition. Thus the situation in both countries is similar. The Parliament has, in its wisdom, decided that penalty orders should not be provable in bankruptcy. There is little logic in allowing such a debt to be the trigger for the very state of affairs which it is legislatively prohibited from enjoying.

Should the time for compliance with the bankruptcy notice be extended?

23. I was advised by the parties that a date for the hearing for the appeal against the decision of Foster AJ has been set by the NSW Court of Appeal on 14 May 2003. In those circumstances, consistent with the decision I made in Lui v Schnabel [2002] FMCA 274 I would have extended the time until 7 days after the determination of the appeal with liberty to the parties to apply on 7 days notice in order to prevent any undue delay.

24. In the circumstances I must grant the application. I set aside the bankruptcy notices. I order that the respondent pay the applicants' costs which are to be taxed if not agreed under the Federal Court Act and Rules.

I certify that the preceding twenty four (24) paragraphs are a true copy of the reasons for judgment of Raphael FM