Ling v The Commonwealth of Australia

The bankruptcy proceedings brought by the Commonwealth against Mr Ling came before Hill J: see (1995) 58 FCR 129. Later, on 14 May 1996, Lehane J made a sequestration order against Mr Ling's estate on the Commonwealth's petition. Mr Ling appealed against that order, the issue being whether a claim he wished to make against the Commonwealth was barred by the principle adopted in Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589. The Full Court held it was not and, on 25 July 1996, set aside the sequestration order and ordered that the further hearing of the Commonwealth's bankruptcy petition be adjourned until the determination of the appellant's action against the Commonwealth, or an earlier date determined by a judge of the Court: see (1996) 139 ALR 159. In the meantime, on 14 December 1995, the present respondent had served a bankruptcy notice on the appellant. The appellant failed to comply with the requirements of the notice or to satisfy the Court that he had a counter-claim, set-off or cross-demand equal to or exceeding the sum specified in it. On 7 February 1996, the respondent presented to the Court a petition for a sequestration order against the estate of the appellant. This petition was heard by Lehane J on 17 September and 1 November 1996. On 18 December 1996 his Honour made the sequestration order which is the subject of this appeal and gave reasons for judgment. Before Lehane J the appellant placed reliance on s52(2)(b) of the Bankruptcy Act 1966 (Cth) ("the Act"). Section 52(2) provides, so far as is here relevant, as follows: "52 (2) 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 appellant identified at the hearing before Lehane J three matters said to amount to "other sufficient cause" for a sequestration order not to be made. The first was the existence of his action against the Commonwealth claiming damages for negligent misrepresentation. The appellant contended that, if he were successful in those proceedings, he would be able to pay his debts in full. The second was that there was in existence a prior pending petition, issued by the Commonwealth of Australia, for a sequestration order against the appellant's estate. The third was that the bankruptcy notice was invalid on the ground that "the petitioning creditor did not have an immediate right to execution of the judgment debt because of the existence of the Mareva injunction ordered by the Honourable Justice Lockhart in matter No.G182 of 1992 on 2 December 1993". His Honour found against the appellant on each of the three grounds. GROUNDS OF APPEAL

On the appeal to this Court the appellant contended that the learned primary judge erred in "failing to find that the existence and circumstances of the Appellant's claim against the Commonwealth of Australia for damages for negligent misstatement amounted to 'other sufficient cause' within the meaning of s52(2)(b) of the Bankruptcy Act 1966". He further contended that his Honour erred in that he: "(a)found that the existence of an injunction made by the Honourable Justice Lockhart in proceeding No. G 182 of 1992 on 2 December 1993 restraining the Appellant from dealing with his assets ('the mareva injunction') did not preclude the issue of a bankruptcy notice against the Appellant; but (b)ought to have found that the Respondent did not have an immediate right to execution of its judgment debt because of the existence of the mareva injunction and accordingly the Bankruptcy Notice No. NN 1834 of 1995 was invalid." The appellant seeks the following orders: "1. The sequestration order made 18 December 1996 against the estate of the Appellant be set aside. 2. There be an adjournment of the petition No. NP 168 of 1996 until such time as proceeding no. NG 751 of 1995 has been finally determined. 3. Costs."

The respondent sought leave to tender as evidence at the hearing of the appeal the following documents: (a) the appellant's statement of affairs; and (b) a letter dated 31 January 1997 from Messrs J.M. Smith & Emmerton to the Insolvency & Trustee Service Australia. Each of the above documents came into existence after the decision of the primary judge. It was not apparent to us that they were relevant to the issues on the appeal. Accordingly, we refused leave. But we invited counsel to renew the application if at any time it should appear that the documents were relevant to the appeal. The application was not renewed. CONTENTIONS

Counsel for the appellant contended that the primary judge misstated the relevant principle when he said: "As a general proposition ... there is no apparent reason why a petitioning creditor should not be entitled to have a sequestration order made, if the requirements of s 52 are otherwise satisfied, simply because the debtor may have a counter-claim or cross-demand against some other creditor."

Counsel further contended that in exercising the s52(2)(b) discretion his Honour made errors of principle in - (a) failing to consider whether there was at the time of the hearing before him a need for the making of a sequestration order or dismissal of the petition on the basis that further adjournment was not feasible because the petition would lapse; (b) placing insufficient weight on the fact that the appellant's creditors were protected by the Mareva injunction made by Lockhart J and by a petition presented by the Commonwealth which could not lapse (see Deputy Commissioner of Taxation v Clyne (1984) 4 FCR 156); (c) placing undue weight on the fact that the appellant's claim against the Commonwealth had not advanced far without giving weight to the factors which had rendered it impossible or inappropriate for its claim to be further advanced; (d) placing undue weight on the fact that the appellant's claim against the Commonwealth was not likely to produce funds from which the appellant will be able to satisfy the respondent "within a relatively short space of time"; (e) giving insufficient weight to the acceptance by the Full Court of this Court in the proceedings on the petition against the appellant presented by the Commonwealth of a submission made on behalf of the appellant that: "The allegation that the conduct of the Commonwealth caused the debtor's acknowledged breaches of his contract with numerous overseas students is a matter which necessitates the conclusion that the debtor ought not to be made bankrupt in respect of liabilities incurred as a direct consequence of the debtor's reliance on that conduct." (f) giving insufficient weight to the fact that the debt due to the judgment creditor arose out of actions taken by the appellant in reliance upon representations made by Ministers and officers of the Commonwealth. It therefore was encompassed by the claim made by the appellant against the Commonwealth; (g) giving no or insufficient weight to the likely operation of s60(2) and (3) of the Act whereby the Commonwealth could control the voting at any creditors' meeting called to consider whether the Official Trustee should adopt the appellant's action against the Commonwealth; and, to summarise, a number of grounds of complaint, (h) the way in which he gave consideration to the relationship between the debt owed by the appellant to the respondent and the matters in contest between the appellant and the Commonwealth. As to the Mareva injunction made by Lockhart J, counsel for the appellant contended that its existence amounted to "other sufficient cause" for a sequestration order not to be made within the meaning of s52(2)(b) of the Act. It was further contended that by reason of such Mareva injunction having been in force as at the date of the bankruptcy notice, the respondent's judgment against the appellant had been stayed within the meaning of ss40(1)(g) and 41(3)(b) of the Act. Particular reliance was placed on a passage from the judgment of the Full Court in Wiltshire-Smith v Mellor Olsson (1995) 57 FCR 572 at 586-587 said to establish a "new jurisprudence". CONCLUSIONS ON APPEAL

Both the wording of s52(2)(b) of the Act and the authorities make it clear that the debtor carries the onus of proof of establishing "that for other sufficient cause a sequestration order ought not to be made". In Cain v Whyte (1933) 48 CLR 639, a case concerning s56 of the Bankruptcy Act 1924 (Cth), the predecessor of s52 of the Act, the High Court approved the judgment of the primary judge in that case which included the following passage at 645-646: "... 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 C.L.R. 509]... 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. I rule then that I am fully entitled to examine the contention put forward to Mr. Philp on behalf of the debtor that there is, in the present case, other sufficient cause sufficient to justify the dismissal of this petition. I approach that question with the full appreciation that, prima facie, on proof of the matters mentioned in sec. 56 (2), 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 the unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. 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." See also Rozenbes v Kronhill (1956) 95 CLR 407 at 414 and Re Burlock; Burlock v Commissioner of Taxation & Anor (1994) 49 FCR 522 at 530. A review of the authorities discloses that in certain circumstances, but not in all circumstances, the fact that the debtor has pending before a court a legitimate claim to funds sufficient to satisfy the petitioning creditor's debt will amount to "other sufficient cause" not to make a sequestration order (In re Yeatman (1880) 16 Ch D 283; Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303; Re James; ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No. 2) (1994) 51 FCR 14; Ling v The Commonwealth of Australia (1996) 139 ALR 159). The circumstance that the legitimate claim of the debtor is one against the judgment creditor is likely to be a significant circumstance for the purposes of s52(2)(b). Lehane J's reasons for judgment show that his Honour understood the principles established by the relevant authorities. His Honour rightly said - "As a general proposition (and those authorities say nothing to the contrary) there is no apparent reason why a petitioning creditor should not be entitled to have a sequestration order made, if the requirements of s 52 are otherwise satisfied, simply because the debtor may have a counterclaim or cross-demand against some other creditor."

The primary submission pressed on behalf of the appellant was that - "the public interest in allowing Mr Ling to prosecute his action against the Commonwealth ... is ... a public interest which overrides the ... present respondent's interest and prima facie entitlement to a sequestration order." It was contended that the primary judge erred in principle in supposing that the relevant public interest factor can be confined to cases where the petitioning creditor is the defendant in the debtor's action.

In Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-116 Gibbs J said: "The second main contention of the debtor is that he is entitled to damages for the wrongful removal of his own property. ... The question immediately arises whether I should proceed to determine the existence and extent of the debtor's alleged claim. The position is different from that which arose in relation to his claim that the trucks were sold at an undervalue. In that regard any sum which the mortgagee was entitled to have brought to its credit as the amount which was realized, or ought to have been realized, on the scale [sic] of the mortgaged property must also be allowed to the credit of the debtor as surety, thus pro tanto reducing the amount of his indebtedness. It was therefore necessary to determine in this Court the questions that arose in relation to that aspect of the matter. Where, however, the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor the position seems to me to be different. As a general rule this Court is not an appropriate forum to decide such a claim and is limited to forming a view as to whether it appears that there is sufficient validity in the debtor's claims to justify a dismissal or adjournment of the petition. ... Considerable evidence directed to this issue has been given before me and it seems to me that I ought to consider this evidence for the purpose of deciding only whether it is probable that the debtor has against the petitioning creditor a claim which is likely to succeed. If I am satisfied that the debtor has a claim against the petitioning creditor equal to or exceeding the amount of the judgment debt, I should not make a sequestration order. If, however, it appears that the debtor has a claim which is less than the amount of the petitioning creditor's judgment debt, the proper course would seem to be to require the debtor, if he desires to avoid a sequestration order, to pay the difference between the amount of the judgment debt and the amount which it seems probable to me that he will recover in the proceedings against the petitioning creditor. In many cases it would be more convenient, assuming that the debtor showed that he had a real claim to litigate, to adjourn the proceedings to enable his claim to be tried in the ordinary courts, but that course was not taken in the present case, partly because the existence of any valid claim was vigorously denied by the petitioning creditor and partly because the proceedings in the Supreme court have been somewhat dilatory."

The above approach was adopted in this Court by Olney J in Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No. 2) and applied by the Full Court of this Court in Ling v Commonwealth of Australia (1996) 139 ALR 159. The above authorities do not, in our view, support the appellant's contention that the courts recognise a public interest in allowing a debtor to prosecute litigation commenced by the debtor. The public interest recognised by such authorities is that which, in broad terms, is reflected also in s40(1)(g) of the Act; that is, that a sequestration order ought only to be made on the basis of an indebtedness which is not counterbalanced by a claim by the debtor against the petitioning creditor. Such authorities provide no comfort to a debtor who asserts a claim, not against his or her creditor, but against a third party. The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts may well provide a basis for a finding that there is a "sufficient cause" for a sequestration order not to be made (see, for example, Maddestra v Penfolds Wines Pty Ltd (1993) 44 FCR 303). But the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally. They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of only short duration. The above two categories of authorities should be distinguished from the decision of the Full Court of this Court in McLean v Biztole Corporation Pty Ltd (unreported, Full Federal Court, 30 August 1996). That case was principally concerned with the issue whether the primary judge erred in failing to go behind the judgment which supported the judgment debt. The debtor sought to challenge the appointment of the receiver whose actions had made the debts owed by the respondent to the judgment creditor immediately due and payable. In the sense in which the term was used by the primary judge in this case, the claim of the debtor in McLean's Case "impeached" the claim there made against the debtor. Nothing of that sort is asserted here. In considering whether or not to exercise the discretion conferred by s52(2)(b) of the Act, the primary judge had regard to the appellant's claim against the Commonwealth and its history. He considered whether the petition before him could be extended for a sufficient time to enable the appellant to receive any fruits of his litigation against the Commonwealth. He also noted that a sequestration order need not prevent the debtor's action against the Commonwealth from proceeding. We see no reason to conclude that, in doing this, the primary judge overlooked s60(2) and (3) of the Act. Those subsections provide: "60 (2) An action commenced by a person who subsequently becomes a bankrupt is, upon his becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action. (3) If the trustee does not make such an election within 28 days after notice of the action is served on him by a defendant or other party to the action, he shall be deemed to have abandoned the action." There is also no reason to conclude that the primary judge overlooked the provisions of s177(1) of the Act which are in the following terms: "177(1) Subject to this Act, in the administration of the estate of a bankrupt, the trustee shall have regard to any lawful directions given by resolution of the creditors at a meeting of the creditors or by the committee of inspection." While a trustee must have regard to directions of the creditors of a bankrupt, he or she is not necessarily bound to comply with them (Re Peters (1960) 18 ABC 213 at 216; Re Weiss; ex parte Official Trustee in Bankruptcy (unreported, Burchett J, 29 August 1986). A recognition of the proper operations of s60(2) and (3) and s177(1) of the Act is, in our view, to be read into the primary judge's statement that "[t]he making of a sequestration order need not prevent the negligence action from proceeding ...". We do not consider that the appellant has identified any matters which the primary judge failed to take into account in the exercise of his direction which he ought to have taken into account. Subject to the issue of the Mareva injunction, to which we turn below, the appellant has not demonstrated that his Honour made any error of principle in the exercise of such discretion. On 2 December 1993 in the proceeding in which the Commonwealth was the applicant and the appellant was the first respondent, Lockhart J made an order, the first three paragraphs of which are in the following terms: "1. That until further order either in these proceedings or in any appeal therefrom the First Respondent be restrained from removing, or causing or permitting to be removed from Australia, any of his assets therein, or selling, charging or in any way dealing with, or causing or permitting any of those things to be done to any of his assets wherever situated, PROVIDED THAT this Order shall not prevent:- (a) The First Respondent paying ordinary living and business expenses; (b) The First Respondent paying reasonable legal expenses as incurred in these proceedings, proceedings G225 of 1992, G656 and G657 of 1993 or any appeal from any judgment in any of those proceedings. (c) The First respondent satisfying any judgment in these proceedings G225 of 1992, G656 and No G657 of 1993; 2. That the First Respondent forthwith upon being notified of this Order direct the Office of the Public Trustee in the State of Queensland to continue to hold the sum of $850,000.00 and any interest which has accrued or will accrue thereon, referred to in the affidavit of Julie-Anne Vens sworn 7 April 1992 and filed in these proceedings and to deal with that money only in accordance with either: (a) any further order of this Court; or (b) a written direction signed by both the Commonwealth of Australia and Mr Ling (or their respective solicitors). 3. These orders shall continue in force after entry of judgment in this proceeding and proceedings G225 of 1992, G656 of 1993 and G657 of 1993 in aid of execution." It is not disputed that the above order was in force when the bankruptcy notice was issued and served. Section 40(1)(g) of the Act provides, so far as is here relevant, as follows: "40 (1) A debtor commits an act of bankruptcy in each of the following cases: ... (g) if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor ... a bankruptcy notice under this Act and the debtor does not ... comply with the requirements of the notice ..." As Beaumont J pointed out in Re Solomon; Ex parte Reid (1986) 10 FCR 423 at 425-426: "It is well established that, for the purposes of s41(3)(b), execution is deemed to have been stayed where a judgment creditor is not 'in a position to issue immediate execution upon it': per Bowen LJ in Ex parte Ide; Re Ide (1886) 17 QBD 755 at 760; Re Panwowitz; Ex parte Wilson (1975) 38 FLR 184 at 187-188; cf Re a debtor [1894] 1 WLR 1143 at 1153-1154. It is also trite law that a judgment creditor may not, without leave of the court which appointed the receiver, levy execution against the property comprised in the appointment of the receiver: see O'Donovan, Company Receivers and Managers (1981), at p 321; Meagher, Gummow and Lehane, Equity, Doctrines and Remedies (2nd ed 1983), at p 663. Any attempt to interfere with that property is an interference with an officer of the court in the performance of his function. If done without leave of the court, it is a contempt of court." See also Penning v Steel Tube Supplies Pty Ltd (1988) 18 FCR 568 which approved Re Solomon and applied it in circumstances in which a trustee had been appointed under s50 of the Act to take control of a debtor's property. It is also well established that "conduct by a judgment creditor which prevents a judgment debtor from paying the debt may operate to disentitle the judgment creditor from proceeding to immediate execution" (see Wiltshire-Smith v Mellor Olsson at 585-586 and the cases referred to there). The Court went on to say, at 586-7: "Once it is recognised that a petitioning creditor may be disqualified from issuing a bankruptcy notice by reason of a restraint imposed by order of a court on all the property of the judgment debtor thereby removing his ability to make payment, there is no reason why a court order imposed on some only of the property of the judgment debtor which has the same practical effect should not be recognised as a relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution. In our opinion, such an order will have this consequence where in practical reality, although not strictly in law, the order 'in any way prevent(s) the debtor from paying his debt' (Re Bond; Ex parte Capital and Counties Bank Ltd [[1911] 2 KB 988] at 991) or where it 'deprives or may well deprive the judgment debtor of assets which he could otherwise use to pay the judgment creditor and thus comply with the bankruptcy notice' (Wallace v Trade Credits Ltd [(1983) 72 FLR 252] at 254). To adapt the test proposed by Lord Esher MR in Re Sedgwick; Ex parte Sedgwick [(1888) 5 Morr 262] ... the factual inquiry to determine the practical effect of the order is whether in the eyes of ordinary fairness in business it will be said that the order has in a business sense prevented the debtor from paying." Counsel for the appellant submitted that this passage established a "new jurisprudence" and that it was sufficient for a debtor, in answer to a claim based upon a bankruptcy notice, to show that a circumstance had arisen which had deprived the debtor of assets which he could otherwise have used to pay the judgment creditor. However, the comments of their Honours should be read in the context with which their Honours were dealing. Their Honours were considering a receivership. This had been brought about by a creditor other than the judgment creditor. Thus, no "equity" arose by reason of the conduct of the judgment creditor. However, as their Honours pointed out, once the receiver had been appointed, the judgment creditor could not levy execution upon the assets which were in the receiver's hands. The particular point with which their Honours dealt, in the passage we have cited, is that, although the receiver had not been appointed to take control of all the assets of the debtor, the receivership covered sufficient of the debtor's assets to prevent payment of the judgment debt. No such circumstance arises in the present case. The "restraint imposed by an order of a court" relied upon by the present appellant is the effect of Lockhart J's order of 2 December 1993. Its relevant terms are set out above. They are in the nature of a Mareva injunction. In considering this matter, Lehane J referred to the decision of Heerey J in Re Ousley; Ex parte Commissioner of Taxation (1994) 48 FCR 131. In that case his Honour expressed the opinion that a Mareva injunction does not impose on execution similar restrictions to those imposed by the appointment of a receiver or a trustee to control the debtor's property. Indeed, he pointed out that one of the functions of a Mareva injunction, which creates rights in personam but not in rem, is to aid execution (Stewart Chartering Co. Ltd v C & O Managements SA [1980] 1 WLR 460 at 461; Orwell Steel (Erection and Fabrication) Ltd v Asphalt and Tarmac (UK) Ltd [1984] 1 WLR 1097). We find the analysis of Heerey J in Re Ousley persuasive. We do not need to consider whether there is any conflict between the approach of the Full Court in the passage set out above from the Wiltshire-Smith Case and the views expressed by Heerey J in Re Ousley. The passage from Wiltshire-Smith on which the appellant placed reliance speaks of a court order which has "the same practical effect" as a court order "removing his ability to make payment" of the judgment debt. It thus assumes an ability to pay the debt absent the court order; or, put another way and in the language of the Full Court, that "the practical reality" is the "the order in any way prevent(s) the debtor from paying his debt". In this case there is no evidence that the Mareva injunction removed the appellant's capacity to pay the judgment debt and the appellant's counsel conceded that it could not be assumed that it did so. In our view the appellant is unable to bring himself within the principle expressed by the Full Court in the Wiltshire-Smith Case upon which he placed reliance.

The appeal should be dismissed. The costs of the respondent should be paid out of the appellant's estate.

I certify that this and the preceding nineteen (19) pages are a true copy of the reasons for judgment of the Court.

Associate: Date: Counsel for the appellant: Mr G.T. Bigmore QC with Mr M.R. Aldridge

Solicitor for the appellant: Gadens Ridgeway as agents for J.M. Smith & Emmerton Counsel for the respondent: Mr V.R.W. Gray

Solicitor for the respondent: Sally Nash & Co. Hearing day: 18 February 1997