THE APPLICATION FOR LEAVE TO APPEAL
10 The parties were agreed that the test I should apply in determining whether or not to grant leave to appeal was that articulated by the Full Court in Décor Corporation Pty Ltd v Dart Industries Inc (1991) 33 FCR 397 at 398: whether the decision is attended with sufficient doubt so as to warrant it being reconsidered by a Full Court; and whether substantial injustice would result if leave were refused, supposing the decision to be wrong.
11 Counsel for Mr Kakavas submitted that the errors allegedly made by the Federal Magistrate could be discerned by reference to the following paragraphs of his reasons:
"[23] … In this case, there do not appear to be any assets that are not the subject of security to other creditors that are available to protect, nor injunctions or undertakings that could usefully be made or given to provide any level of protection to the creditor. It seems that, if the judgments stand, [Mr Kakavas] is insolvent and, indeed, likely to be insolvent even if the judgments do not stand, although it is put by [Mr Kakavas] that the other creditors are not actively pursuing him at present.
…
[25] … There is no specific prejudice [to Mr Kakavas] that can be pointed to, for example, other business arrangements or agreements or credit arrangements that would be terminated as a result of an act of bankruptcy, nor any ongoing transactions or undertakings which may be affected by this course of events. It is difficult to see that this would be of any significant impact upon the reputation of the applicant in this particular case.
[26] The potential prejudice to the creditor in this case is the question of the later start date for the bankruptcy. On this issue, no specific prejudice can be pointed to. However, it is a real consideration as I see discussed in cases such as Re Nguyen; ex parte Deputy Commissioner of Taxation … (1995) 54 FCR 403 by Heerey J and by Lehane J in Byron v Southern Star Group Pty Ltd … (1997) 73 FCR 264. This is not a case of a simple consumer transaction of a person that would be likely to have simple affairs. The estate in this case is likely to be complex: there is said to be potentially $50 million in debts, including some $25 million in family debts.
[27] In these circumstances, the potential of prejudice as a result of a later start to the bankruptcy must be seen as, at least, a consideration to take into account.
[28] There do not appear to be any other significant factors in the context of this particular case."
12 The principal error which, according to Mr Kakavas, was made by the Federal Magistrate was that he took into account an extraneous or irrelevant matter, namely, Mr Kakavas' insolvency. This consideration, it was contended, was not and could not be a relevant factor in the exercise of the Court's discretion under s 41(6A). Mr Kakavas' draft notice of appeal also contained a discrete ground which alleged that the Federal Magistrate was wrong in principle in having regard to Mr Kakavas' solvency. The two grounds may, conveniently, be considered together.
13 These grounds are founded upon a passage in the judgment of the Full Court in Bryant v Commonwealth Bank of Australia (1994) 217 ALR 251. In that case the bank had obtained final judgment against Mr Bryant in a Supreme Court for a substantial sum. An appeal hearing was pending. A bankruptcy notice was issued claiming that the judgment debt was due to the bank. Mr Bryant applied to the Court for orders setting aside the bankruptcy notice and, in the alternative, extending time for his compliance with the notice. The primary judge refused to extend time in the exercise of the discretion conferred on the Court by s 41(6A) of the Act. At the time the applications were made the judgment debt had not been paid. The primary judge refused to extend time having regard to his view that the prospects of Mr Bryant succeeding in an appeal were "very slight".
14 On appeal, one of Mr Bryant's grounds was that the trial judge had erred in refusing to admit into evidence an affidavit in which Mr Bryant attested to his solvency. In dealing with this ground the Full Court said (at 254) that:
"It is not clear that his Honour refused to admit into evidence an affidavit by Mr Bryant attesting to his solvency. The trial judge indicated, however, that solvency was not relevant. In that respect his Honour was correct. A solvent debtor may commit an act of bankruptcy by failing to comply with a bankruptcy notice served upon him. Solvency becomes relevant when a petition based upon the act of bankruptcy is presented."
15 I have read the unreported judgment of the trial judge (Hill J) and can find no ruling that an affidavit attesting to Mr Bryant's solvency was inadmissible. Nor can I find any statement, in his Honour's reasons, that "solvency was not relevant." He dealt with the exercise of discretion under s 41(6A) in two paragraphs of his reasons. There is no mention in those paragraphs of the relevance of Mr Bryant's solvency (or lack of it) as a consideration relevant to the exercise of the discretion.
16 There is some reference, in a separate section of the trial judge's reasons, to an attempt by Mr Bryant to satisfy him that he had a viable cross-claim against the bank for an amount exceeding the judgment debt. His Honour was not persuaded that Mr Bryant had a viable counterclaim much less one for the sum which he asserted: see s 40(1)(g) of the Act.
17 It may be that the Full Court had access to a different version of his Honour's reasons from the one which I have examined. Whether that be so or not, I do not understand the Full Court to have held that the solvency of a person on whom a bankruptcy notice has been served can never be a relevant consideration when a Court is considering whether or not to exercise its power under s 41(6A) of the Act. The trial judge's findings as to the lack of a viable counterclaim negated any claim by Mr Bryant to having been solvent at the time at which the bankruptcy notice was issued. In those circumstances solvency was not a relevant factor to be put in the balance against the single consideration which guided the exercise of the trial judge's discretion under s 41(6A), that is, the very slight chance that Mr Bryant might be successful in an appeal from the judgment which established the relevant debt.
18 The exercise of a statutory discretion will miscarry if the decision-maker acts upon a wrong principle or allows extraneous or irrelevant matters to be brought into account: see House v The King (1936) 55 CLR 499 at 505. Where the terms in which a statutory discretion is conferred are unconfined "the factors that may be taken into account in the exercise of the discretion are similarly unconfined, except in so far as there may be found in the subject-matter, scope and purpose of the statute some implied limitation on the factors to which the decision-maker may legitimately have regard": Minister for Aboriginal Affairs Peko-Wallsend Limited (1986) 162 CLR 24 at 40 (per Mason J). Even when an irrelevant consideration has been taken into account it must be demonstrated that that consideration has had a material effect on the decision under review: ibid.
19 In the present case the Federal Magistrate had regard to Mr Kakavas' insolvency in dealing with potential prejudice to the Respondent were the start date for the bankruptcy to be delayed.
20 I can detect nothing in the scope and purpose of the Act which would suggest that the Federal Magistrate was not entitled to have regard to Mr Kakavas' solvency in this context. His substantial debts were, I note, a consideration which Bongiorno JA took into account in refusing a stay in the Crown case: see at [9]-[11] and [13].
21 I note also that in the two decisions of this Court, which were specifically relied on by the Federal Magistrate, Nguyen and Byron, the primary judges both had regard to the applicants' insolvency in refusing to make orders extending time under s 41(6A): see Nguyen at 408 and Byron at 269-270 (quoting the unreported judgment of Sheppard J in Re Geard; Ex parte Reid).
22 These cases also make it clear that the scope and purpose of the Act, far from imposing an implied limitation on solvency being a relevant consideration for the purposes of s 41(6A), support the view that, depending on the circumstances, this may be a relevant consideration. In Nguyen (at 408) Heerey J said:
"… it seems to me this is not an appropriate case for interfering with the ordinary mechanism of the bankruptcy notice, which is a mode of proof designed to enable a creditor to prove that a debtor is insolvent."
In Byron (at 270) Lehane J quoted the following passages from the judgment of Sheppard J in Geard:
"A further factor is that this is an application to extend time for compliance with a bankruptcy notice; it is not the hearing of a bankruptcy petition. The refusal of the application will not affect the status of the debtor but it will mean that he, in all probability, will commit an act of bankruptcy. That act of bankruptcy will be available to the petitioning creditors or to any other creditor upon which to base a bankruptcy petition at any time in the period of six months after the act of bankruptcy has been committed. Otherwise the debtor's position will remain unaffected by what the Court does.
If the appeal is ultimately dismissed and the judgment stands with the consequence that the bankruptcy proceedings go on, it may be quite important to the petitioning creditor, whoever he or she may be, to the general body of creditors and to the trustee in bankruptcy, that there be, for the purposes of the administration of the bankrupt estate, an act of bankruptcy committed at an earlier time than would be the case if this application were acceded to."
23 Lehane J then continued:
"In my view the considerations to which Sheppard J refers indicate that the principles to be applied where the question is whether a petition should be adjourned or dismissed are not necessarily those which should guide the exercise of the discretion to set aside, or extend time for compliance with, a bankruptcy notice. The commission of an act of bankruptcy is, undoubtedly, a serious matter; it is, however, of a different order of gravity from the change of status brought about by the making of a sequestration order; and there is also to be taken into account the interest of both the judgment creditor and other creditors of the judgment debtor in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs earlier rather than later."
24 As these judgments make clear, the issuing of a bankruptcy notice is but the start of a statutory process which may culminate in the making of a sequestration order. A failure to comply with the notice may lead the person to whom the notice is directed to commit an act of bankruptcy. If this happens a petitioning creditor is able to exercise certain rights under the Act to protect (insofar as he or she is able) his or her position vis a vis the debtor. A failure by the debtor to comply with a demand for payment is a means by which the creditor may establish the insolvency of the debtor. The bankruptcy will date from the commission of the act of bankruptcy: see s 115(1). The creditor has access to the property belonging to the debtor at the commencement of the bankruptcy: see s 116(1). It is for this reason that it may be disadvantageous to a creditor if the Court extends time for compliance with the demands made in the bankruptcy notice. If the evidence suggests that the debtor is (as is presently the case) hopelessly insolvent, there will be no point in delaying the inevitable.
25 The Federal Magistrate was entitled to have regard to the insolvency of Mr Kakavas when considering his application for an enlargement of time in which to comply with the bankruptcy notice. He made no appellable error in doing so.
26 The next ground relied on by Mr Kakavas was that the Federal Magistrate erred in law when (in paragraph [25] of his reasons) he found that Mr Kakavas would not suffer any specific prejudice were the application to be refused. In so holding, Mr Kakavas alleges that the Federal Magistrate failed to have regard to "the fact, effects and seriousness of the commission …. of an act of bankruptcy on the expiry of the bankruptcy notice" and impermissibly had regard to Mr Kakavas' insolvency.
27 This ground may be dealt with shortly. In terms, it can only be understood as dealing with the statutory effects and seriousness of the commission of an act of bankruptcy. This is because Mr Kakavas did not adduce any evidence of prejudice to support his application in the Federal Magistrates Court. The Federal Magistrate's reasons make it clear that he was well aware of the possible statutory consequences for Mr Kakavas of the commission by him of an act of bankruptcy. Although his Honour did not essay the legislative provisions he did specifically refer to the judgments in Nguyen and Byron in which these consequences were specifically canvassed in dealing with applications under s 41(6A). I have already held that Mr Kakavas' insolvency was a matter to which the Federal Magistrate was entitled to have regard.
28 The next bracket of grounds focus on the Federal Magistrate's observation (in paragraph [26] of his reasons) that Mr Kakavas' estate was likely to be complex. Mr Kakavas complains that there was no evidence to support such a conclusion, that this was, in any event, an irrelevant consideration and that, in having regard to this consideration, the Federal Magistrate had acted on a wrong principle.
29 The Federal Magistrate had before him, at least in summary form, the contents of an affidavit which Mr Kakavas had sworn in the Victorian Court of Appeal in support of his application for a stay of the judgment in the Crown proceeding. That affidavit, as the passages quoted by the Federal Magistrate from the judgment of Bongiorno JA on the stay application disclosed, confirmed that Mr Kakavas had debts totalling almost $50 million. Of these debts approximately $25 million were debts which, he said, were owed to members of his family and friends. He had lost this money gambling between 2000 and 2006. He deposed that the debts were not documented in any way and that, as a result, he could not be more precise as to their extent.
30 This evidence, in my view, amply supported the finding of the Federal Magistrate relating to the potential complexity of Mr Kakavas' estate. The absence of any documentation supporting the various loans, totalling approximately $25 million, which Mr Kakavas had received from his family and friends, could reasonably be expected to give rise to considerable complexity in the administration of the estate if and when the lenders were called on to prove that Mr Kakavas was indebted to them.
31 The amount of the debt admitted to by Mr Kakavas and the potential complexity of his estate were matters which the Federal Magistrate was entitled to take into account in determining the potential for prejudice to creditors should Mr Kakavas' application for enlargement of time be granted.
32 There is no substance in any of these three grounds.
33 The final ground in the draft notice of appeal asserts that, having regard to all of the matters outlined in his reasons (which are extracted above at [11]), other than Mr Kakavas' insolvency, the Federal Magistrate "ought to have granted the application".
34 This ground, in effect, invites the Court to re-exercise the discretion conferred on the Federal Magistrate by s 41(6A) of the Act. This invitation should not and cannot be accepted in the absence of any demonstrated error of the kind identified in House v The King. This ground would, inevitably, fail.
35 I do not consider that the Federal Magistrate's decision has been shown to be attended by sufficient doubt as to warrant it being considered by a Full Court or a single judge exercising the powers of a Full Court under s 25(1AA) of the Federal Court of Australia Act 1976 (Cth).
36 The only injustice which Mr Kakavas submits would flow from a refusal of his application is the inevitability that he will commit an act of bankruptcy by not complying with the demand made in the notice. As already noted, the commission of an act of bankruptcy will be the prescribed consequence of such a failure. The inevitability of his failure to comply flows from his admitted insolvency.
37 If Mr Kakavas commits an act of bankruptcy he may be faced with a creditor's petition. If such a petition is presented it will be open to him to apply to have the hearing adjourned pending the hearing and determination of his appeal to the Court of Appeal: see Warner v Frost [1999] FCA 830 at [9]-[10] (per Hely J). If he has a proper basis for doing so he may even then apply for an enlargement of time within which to comply with the notice: see Guss v Johnstone (2000) 171 ALR 598 at 610. The potential consequences for Mr Kakavas of the making of a sequestration order would be far more prejudicial than are the consequences of the serving of a bankruptcy notice.
38 In my view Mr Kakavas has failed to demonstrate that he would suffer substantial injustice were his application to be refused.