Kovacic v A&S Powersellers Pty Ltd

Background 6 On 25 February 2019, A&S obtained a default judgment for a debt in the amount of $17,362.93 against Mr Kovacic in the Dandenong Magistrates' Court in proceeding J13101693 A&S Powerseller Pty Ltd v Zoran Kovacic. 7 On 2 September 2019, A&S served a bankruptcy notice on Mr Kovacic for the amount of the judgment debt. 8 The judgment debt not having been paid, on 28 November 2019 A&S filed a creditor's petition for a sequestration order under s 43 of the Bankruptcy Act against the estate of Mr Kovacic. The petition claimed that Mr Kovacic owed A&S the amount of $17,362.93 and had failed to comply with the requirements of the bankruptcy notice served on him on 2 September 2019. 9 On 6 February 2020, Registrar Ryan ordered that the estate of Mr Kovacic be sequestrated under the Bankruptcy Act. The Court noted that the date of the act of bankruptcy was 23 September 2019 and that a consent to act as trustee signed by Neil Stewart McLean had been filed under s 156A of the Bankruptcy Act. 10 On 27 February 2020, Mr Kovacic applied to the Court for review of Registrar Ryan's order. 11 On 13 March 2020, Justice Kerr ordered that the proceedings under the sequestration order be stayed until a further hearing of the application for review. 12 Justice Kerr heard the application for review on 7 April 2020. Mr Kovacic submitted that, notwithstanding the default judgment that had been entered against him, in reality Mr Kovacic was not indebted to A&S. After considering the evidence and submissions, Justice Kerr dismissed the application for review. His Honour also noted that the order staying the proceedings under the sequestration order had no further operation. 13 In this proceeding, Mr Kovacic appeals from the decision of Justice Kerr. The notice of appeal states 21 grounds of appeal. All of the grounds are directed to the question whether Mr Kovacic is indebted to A&S, and challenge Justice Kerr's factual findings in respect of that question.

Representation of A&S 14 Rule 4.01 of the Federal Court Rules 2011 (Cth) (Rules) provides as follows: (1) A person may be represented in the Court by a lawyer or may be unrepresented. (2) A corporation must not proceed in the Court other than by a lawyer. 15 The rationale for the rule was explained by Emmett J in Checked-Out Pty Ltd v Eagle Eye Inspections Pty Ltd [2002] FCA 1002 at [8]: The accessibility of the Courts to any citizen is fundamental to the system of justice in any common law jurisdiction such as Australia. That ready accessibility should also be available to juristic persons such as corporations. However it has for long been regarded as appropriate that, where a trader decides to use a corporate form in which to carry on his business, for the advantages that flow from those arrangements, accessibility to the courts should be made conditional that the corporation be represented by a qualified legal practitioner. 16 However, acting under r 1.34, the Court may dispense with the requirement in r 4.01(2) that a corporation must not proceed in the Court other than by a lawyer. The Court will not do so unless the corporation wishing to act otherwise than by a lawyer demonstrates a "sufficient reason" to be permitted to do so: see Re Molnar Engineering Pty Ltd v Burns (1984) 3 FCR 68 at 74-75 per Smithers J and 80 per Keely J; Pharm-a-Care Laboratories Pty Ltd v Commonwealth of Australia (No 12) [2012] FCA 289 at [9]-[21] per Flick J. Considerations relevant to the exercise of the discretion in a given case were summarised by White J in Basetec Services Pty Ltd v CPB Contractors Pty Ltd (formerly Leighton Contractors Pty Ltd) [2017] FCA 510 at [8]: The exercise of the Court's discretion pursuant to r 1.34 in relation to r 4.01(2), is to be exercised by reference to "all relevant considerations": Pharm-a-Care Laboratories Pty Ltd v The Commonwealth (No 12) [2012] FCA 289 at [18]. The authorities indicate the variety of matters which may bear upon the exercise of the discretion in a given case. These include: (a) the financial capacity of the company and those standing behind it and whether a lack of financial capacity would inhibit a company from obtaining legal representation: Deputy Commissioner of Taxation v Compumark Pty Ltd [2012] FCA 583 at [19]-[20]; Termi-Mesh Australia Pty Ltd v Josu Manufacturing Pty Ltd [1999] FCA 1241 at [13]; Worldwide Enterprises Pty Ltd v Silberman [2009] VSC 165 at [20]; (b) the factual complexities of the case and the capacity of the proposed representative to conduct it effectively having regard to the skills, training, qualifications and experience of that representative: Damjanovic v Maley (2002) 55 NSWLR 149 at [77]; Compumark at [19], Termi-Mesh at [13]; (c) the overarching purpose of the civil practice and procedure provisions specified in s 37M of the Federal Court of Australia Act 1976 (Cth) (the FCA Act) and the effect on the achievement of that purpose if the company proceeds with, or without, legal representation: Australian Competition and Consumer Commission v Adata (Vic) Pty Ltd (No 2) [2015] FCA 272; Compumark at [20]; Silberman at [20]; (d) the ability of the proposed representative to exercise the objectivity expected of a legal practitioner: Pacific Air Freighters (Qld) Pty Ltd v Toller [2000] FCA 0343; (2000) 171 ALR 519 at [11]; (e) whether a lack of available disciplinary measures in relation to the persons seeking to represent the company will affect the administration of justice: Compumark at [20]; Damjanovic at [76]; (f) the manner in which the case has progressed to date and the manner in which it may progress without the party having legal representation: Compumark at [20]; Silberman at [20]; (g) when the company in question is a respondent, a more liberal approach to the exercise of the discretion may be warranted: Termi-Mesh at [14]. 17 In his affidavit, Mr Lau deposed as follows: 1. I am the General Manager of Respondent and I am authorised to make this affidavit on the Respondent's behalf. 2. I wish to represent the Respondent in this matter. 3. The Respondent does not wish to be represented by a lawyer for the following reasons: (a) The debt owed by the Appellant to the Respondent (an amount of around $15,500) has been well exceeded by the legal costs incurred by the Respondent in attempting to recover the debt (around $29,000 incurred with MST Lawyers). (b) MST Lawyers has given a further cost estimate of $10,000 to $30,000 to represent the Respondent in this appeal proceeding. (c) It is not financially feasible for the Respondent to spend monies on legal representation when such costs will significant exceed the original debt amount. 4. Notwithstanding the above, and in order to assist the Court, the Respondent has engaged Tyson Wodak of Counsel on a limited retainer, specifically to assist in preparing the Respondent's legal submissions opposing the appeal. Mr Wodak has been retained on a limited basis because the Respondent cannot afford, or justify, the costs involved in engaging lawyers to undertake all of the work involved in resisting the appeal. If the appeal is dismissed, the Respondent will seek an order that costs incurred in respect of Mr Wodak's engagement be paid out of the bankrupt estate of the Appellant and afforded the same priority as the petitioning creditor's costs. 18 Mr Lau is not a lawyer and has no legal qualifications. He appeared before me at a case management hearing on 14 August 2020. With no disrespect intended, it is clear to me that Mr Lau would be able to provide very limited assistance to A&S and the Court in the defence of the appeal. Despite that, I am persuaded that the circumstances warrant the exercise of the Court's discretion to grant leave to allow A&S to be (nominally) represented by Mr Lau. The primary considerations are the following. 19 First, A&S has instituted a routine proceeding in this Court under the Bankruptcy Act to recover a modest debt from an individual, Mr Kovacic. A&S now finds itself in the position that the legal costs incurred in seeking to recover the modest debt substantially exceed the amount of the debt. Consistently with the overarching purpose of civil litigation stated in s 37M of the FCA Act, the Court will exercise its discretionary powers in relation to practice and procedure with the aim of facilitating the just resolution of disputes as inexpensively and efficiently as possible. 20 Second, A&S has been successful in each proceeding it has instituted (with the assistance of lawyers) for the recovery of the amount claimed from Mr Kovacic: in the Dandenong Magistrates' Court, in this Court before Registrar Ryan and then on review before Justice Kerr. It is now forced to respond to an appeal instituted by Mr Kovacic in this Court. As recognised by the authorities referred to above, the Court adopts a more liberal approach to the grant of leave where the corporation is a respondent because the corporation has not chosen to be before the Court and prolong the dispute. I accept that if A&S were to engage lawyers to represent it, the recovery of the debt from Mr Kovacic would become even more costly and uneconomic. 21 Third, A&S has indicated that it will retain counsel on a limited retainer to assist it in preparing its legal submissions opposing the appeal. That should go a considerable way to overcoming the disadvantages associated with A&S being represented by its general manager. The present proceeding is an appeal, not a trial. In certain cases, an appeal of this kind could be decided on the basis of written submissions without the need for oral submissions. I consider that both A&S and the Court should obtain significant assistance from written submissions prepared by counsel. 22 Having regard to those matters, I will grant the leave sought by A&S. However, I emphasise that the leave has been granted on the basis of the evidence given by Mr Lau that A&S proposes to retain counsel to assist it in preparing its legal submissions opposing the appeal. If that does not occur, the grant of leave may be revoked. For that reason, I will grant leave subject to further order.

Stay of proceedings 23 As stated earlier, Mr Kovacic seeks a stay, pending the hearing and determination of the appeal, of both the whole of the judgment and the orders of Registrar Ryan made on 6 February 2020 and the whole of the judgment and the orders of Justice Kerr made on 7 April 2020. The application for a stay is made under r 36.08(2) of the Rules. 24 The orders made by Justice Kerr were to dismiss the application for review. As such, the operative order of the Court is the order of Registrar Ryan made on 6 February 2020. Mr Kovacic's application is properly directed to that order. 25 As Stewart J recently explained in Du Bray v ACW [2020] FCA 1142 at [5]-[9], the effects of ss 43(2) and 58(1) of the Bankruptcy Act are that a sequestration order takes effect immediately it is made: the debtor immediately becomes a bankrupt and his or her property immediately vests in the trustee in bankruptcy. Section 37(2) of the Bankruptcy Act provides that the Court does not have power to suspend the operation of a sequestration order. If an appeal against a sequestration order is successful, the sequestration order can be set aside (under s 28 of the Federal Court of Australia Act 1976 (Cth)): Simon v Vincent J O'Gorman Pty Ltd [1979] FCA 75; (1979) 27 ALR 619 at 625 per Franki J and 631 per Lockhart J; De Robillard v Carver (2007) 159 FCR 38 at [149]-[150] per Buchanan J and [1] per Moore and Conti JJ; or the bankruptcy may be annulled (under s 153B(1) of the Bankruptcy Act). In either event, the sequestration order has operation while it remains extant: Pattison v Hadjimouratis (2006) 155 FCR 226 at [58]. It follows that the Court does not have power to stay the sequestration order but may stay proceedings under the order. 26 In what follows, I will treat Mr Kovacic's application as an application for a stay of proceedings under the sequestration order made by Registrar Ryan on 6 February 2020. 27 In relation to the principles applicable to an application for a grant of a stay of judgment or orders pending an appeal, in Powerflex Services Pty Ltd v Data Access Corporation (1996) 67 FCR 65 at 66, the Full Court of the Federal Court agreed with the principles stated by the New South Wales Court of Appeal in Alexander v Cambridge Credit Corporation Ltd (Receivers Appointed) (1985) 2 NSWLR 685 at 694-5. Usually, in the case of an application for a stay of proceedings under a sequestration order, the appellant must establish that there is an arguable point on the proposed appeal or some "rational prospect of success" in relation to any of the grounds of appeal, and that the balance of convenience favours the grant of a stay: see Endresz v Australian Securities and Investments Commission [2014] FCA 1139 at [16] per Beach J. In relation to the prospects of success on the appeal, the stay application is not the occasion for a detailed analysis of the grounds of appeal: Bryant v Commonwealth Bank of Australia [1996] HCA 3; (1996) 134 ALR 460 at 463 per Kirby J. In relation to the balance of convenience, the appellant must satisfy the court that a stay is required to preserve the subject matter of the litigation, or that the refusal of a stay would make it difficult for the court, in the determination of the appeal, to grant the relief sought. 28 In relation to the prospects of success on the appeal, Mr Kovacic's written submissions largely repeated the grounds of appeal. His affidavit exhibited what I understand to be various documents adduced in evidence in the hearing below. As the grounds of appeal relate to findings of fact made by the primary judge, and numerous complaints that the primary judge failed to make certain findings of fact, it is difficult on this application to make an assessment of the prospects of the appeal. 29 Very limited evidence was adduced by Mr Kovacic in relation to the balance of convenience. However, Mr Kovacic deposed that he resides at 5 Glenelg Road, Werribee, Victoria and that he is the owner of that house. Exhibited to his affidavit is a search extract from the Victorian Land Registry showing that Mr Kovacic is the registered proprietor of that property. In his affidavit, Mr Kovacic deposed that: I want to keep my family home and any other assets I may have because of the reasons stated herein, because I never entered into any legally binding contract or agreement with the Respondent of any description. If a stay is not granted the Trustee in Bankruptcy will continue to take steps to liquidate my estate which in all probability will lead to the sale of the family home which would be devastating to my family, my wife and my young son of six years of age. My parents in particular have invested a substantial amount of money in the family home. There is a real risk that if a Stay is not granted, it will not be possible for me to be restored substantially to my former position if I were to succeed in this Appeal if the Sequestration Order dated 6 February, 2020 was executed and my estate liquidated and the family home was sold. 30 The same statements were made in Mr Kovacic's written submissions. No other evidence was adduced about the steps that have been taken in respect of Mr Kovacic's bankruptcy or any correspondence between Mr Kovacic and his Trustee in Bankruptcy. 31 As noted earlier, A&S did not file any evidence or submissions in response to Mr Kovacic's stay application. 32 There is no evidence that Mr Kovacic gave notice of the stay application to his Trustee in Bankruptcy. The Trustee in Bankruptcy has not filed any evidence or submission on the application. It is possible that the Trustee may wish to be heard on the application. 33 On the evidence before the Court, it is difficult to make an assessment whether Mr Kovacic's apprehension that his home will be sold is realistic. Nevertheless, I accept that the consequences for Mr Kovacic, were that to occur, are irreversible and would undermine any relief granted on the appeal. In the absence of evidence or submissions on the part of A&S in opposition to the stay, I consider it appropriate to grant the stay. However, I will also order that: (a) the stay will not take effect until 14 days after the appellant has served a copy of the order on his Trustee in Bankruptcy by prepaid post; and (b) the Trustee has liberty to apply to vary or set aside the stay order. 34 The effect of those orders is to ensure that the stay is brought to the attention of the Trustee, affording the Trustee an opportunity to apply to vary or set aside the stay, and that the stay does not come into effect until the Trustee has been notified of the stay.

Conclusion 35 In conclusion, I will make the interlocutory orders sought by each of the parties to the appeal in modified forms. 36 As to the costs of the applications, Mr Kovacic sought an order that there be no order as to costs. A&S did not seek any particular order. In circumstances where neither application was effectively opposed by the other party, it is appropriate in my view to make an order that there be no order as to costs. I certify that the preceding thirty-six (36) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan.