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[2004] FCA 840
Federal Court of Australia
2004-07-02
Moore J
Original judgment source is linked above.
REASONS FOR JUDGMENT 1 This is an application to annul the bankruptcies of Mr Eugene and Mrs Inge Maxwell-Smith ("the applicants"). A Registrar of this Court made the sequestration orders on 15 September 2003. I will refer to the events immediately preceding the hearing before the Registrar in more detail later in this judgment. On 10 September 2003 I gave judgment in an appeal against a judgment of a Federal Magistrate ("the appeal") dismissing an application by the applicants to set aside a bankruptcy notice (Maxwell-Smith v S & E Hall Pty Ltd [2003] FCA 953). It is convenient to set out some of the relevant history by repeating an account given in that judgment. It was to the following effect. 2 The Federal Magistrate gave judgment in relation to the application to set aside the bankruptcy notice on 22 April 2003. Revised reasons for judgment were published on 5 May 2003. The bankruptcy notice was issued on 4 December 2002 and was served on the applicants on 13 February 2003. The notice was based on a judgment of the Local Court of 20 May 1999 which was, in turn, based on a certificate assessing costs arising from orders made by the Supreme Court of New South Wales on 8 December 1998 and entered 19 May 1999. In the Supreme Court, the applicants sought a declaration that they had been denied natural justice by the Consumer Claims Tribunal ("the Tribunal") when acting as the Building Disputes Tribunal. The grounds on which a decision of the Tribunal can be challenged by way of appeal or judicial review were very limited under the Consumer Claims Tribunal Act 1987 (NSW). The applicants were unsuccessful and were ordered to pay the defendant's costs. 3 In its decision of 29 August 1997, the Tribunal dealt with a dispute between the applicants and the respondent, S & E Hall Pty Ltd ("the builder") who had built a home for the applicants at Tura Beach, Merimbula. The bankruptcy notice (with which the Federal Magistrate was dealing) was served by the builder. The builder ultimately became the petitioning creditor. Part of the case of the applicants before the Tribunal was that some of the building work was defective. This was accepted by the Tribunal (at least as to some of the work) and it allowed a sum of $596.50 for the work to be rectified. This sum was offset against an amount the Tribunal assessed was due to the builder. One feature of the building that the applicants said was not built satisfactorily was a skylight. 4 The essence of the complaint made by the applicants in the appeal was that the defective work had, since the Supreme Court proceedings, been assessed as costing, and in fact had cost, considerably more than the amount determined by the Tribunal. The work had cost $9,590. This was said to be illustrated by a report prepared by the Department of Fair Trading dated 4 August 1999 ("the Departmental report"), which, for example, had accepted that the rectification of the skylight would require reconstruction of a complete new skylight, which had been quoted as costing $4,500. It also had accepted, by way of further example, that patching up and re-painting a kitchen ceiling adjacent to the skylight damaged by water would cost $610. The Departmental report had accepted that both these matters (and other matters) were justified as general defects. I should note that the applicants complained in the appeal (perhaps with some justification on the material furnished in the appeal which includes video footage of the damage which was presented to the Tribunal) that the repair of the water-damaged ceiling had not been a matter addressed by the Tribunal and no allowance (by way of offset) had been made. 5 On the applicants' analysis, because it emerged that the cost of rectifying the defective work considered by the Tribunal exceeded (by a significant margin) the allowance the Tribunal made, it was apparent that the Tribunal's decision was fundamentally flawed. Accordingly, had these matters been known to the Supreme Court, it could have and perhaps would have reached a different conclusion with the result that the costs order would not have been made. I should make it plain in this judgment, that when I made the same observations (in the preceding two sentences) in the appeal judgment of 10 September 2003, I was not expressing my own conclusions about the Tribunal's decision and what had happened in the Supreme Court. Rather, I was only setting out the analysis of the applicants and the conclusions they had reached. 6 The applicants submitted in the appeal that in these circumstances, the Federal Magistrate should have gone behind the judgment debt and, in particular, should have done so on the footing that to leave the judgment untouched would cause a substantial miscarriage of justice: Corney v Brien (1951) 84 CLR 343. In the appeal judgment of 10 September 2003, I dealt with this submission in the following way at [7] and following: The power to set aside a bankruptcy notice is a discretionary one: see, for example, Farrugia v Farrugia (2000) 99 FCR 16 at 23-24. The principles which apply in an appeal from the exercise of a discretionary power are well settled: see, for example, House v R (1936) 55 CLR 499. It is clear to me from paragraph 9 of his reasons for decision, that the Federal Magistrate was aware of, and dealt appropriately with, the point that the [applicants] were making. His Honour said: It is possible that the Tribunal was mistaken in its assessment of the cost of the rectification work. However, the fact that the Tribunal may have been in error in assessing that cost is not a reason to go behind the judgment of the Supreme Court, let alone the subsequent costs determination enforced in the Local Court. The Supreme Court found that there was no legal error in the proceedings before the Tribunal justifying that Court in interfering with the decision of the Tribunal. Nothing that has been advanced before me today by Mr Maxwell-Smith supports a conclusion that I should go behind the decision of the Supreme Court, or the Local Court. Mr Maxwell-Smith cannot in these proceedings re-open the issue dealt with in the Tribunal. In my opinion, the approach taken by the Federal Magistrate was an approach open to his Honour and is not attended by error of the type discussed in House v R (above) at 504-555. That is, his Honour did not act on a wrong principle, did not allow extraneous or irrelevant matters to guide or effect him, did not mistake the facts and did not fail to take into account some material consideration. In any event, the underlying approach of the [applicants] in inviting the Federal Magistrate to go behind the judgment founding the bankruptcy notice is almost certainly misconceived. The costs order was made in the administrative law proceedings brought by the [applicants] in the Supreme Court. A process of assessment of the costs payable under the order was undertaken under the Legal Profession Act 1987 (NSW) resulting, it can be inferred, in the filing of a certificate of an assessor in a Local Court. By operation of s 208J of that Act, the certificate (once filed) can be taken to be a judgment of that Court. There is, in effect, nothing to go behind insofar as the Local Court is concerned. Indeed the [applicants] appeared to disavow any interest in the process of certification and filing when I raised it with them, even though that process has the appearance of converting an order of the Supreme Court into an order of the Local Court. Insofar as the Supreme Court order is concerned, it was an order requiring the payment of an unspecified amount as costs. It is not an order for the payment of a sum arising from a contested hearing (or even a consent order) where the underlying legal or factual foundation (or both) for the order might, in an appropriate case, be scrutinised by a court exercising bankruptcy jurisdiction to determine whether the sum was, in truth (as a matter of fact and law), owing. It was that type of case that was considered by the High Court in Corney v Brien (involving a default judgment for an amount allegedly due for the sale of a tractor). A court exercising bankruptcy jurisdiction does not have a general power to consider the "fairness" of the liability on which the bankruptcy notice is founded. In the present case the Supreme Court determined the proceedings brought by the applicants on the material before it (as it was duty bound to do). Because, by reference to the material, the [applicants] failed to obtain the orders they sought, they were ordered to pay the defendant's costs. Again there is really nothing, in substance, to "go behind" in relation to the costs order in the Supreme Court. The [applicants], in their written submissions, also alleged bias on the part of the Federal Magistrate on the basis that his Honour, before the parties had put their submissions, said words to the effect that he gave the [applicants] very little chance of success with their application. While the comment (accepting for present purposes it was made) may have been taken to indicate a predisposition on the part of the Federal Magistrate, it would not have been taken by a fair-minded observer to evidence a closed mind. The [applicants] have not established a ground for setting aside the judgment of the Federal Magistrate. Accordingly the appeal should be dismissed with costs. However I also propose to ascertain whether I should make an order requiring the parties to mediate. The [applicants] believe they have been, in effect, the victims of a gross unfairness. Not only do they complain about what happened in the Tribunal, but they also point to their liability under costs orders in this Court in relation to proceedings concerning (as I understand it) the legal efficacy of a bankruptcy notice which was ultimately not relied upon in a later application for sequestration orders based on a creditor's petition because the notice was viewed by the petitioning creditor (the respondent) as defective. Whether the [applicants'] complaints are justified or (scilicet) not is not a matter about which I should express a view. However the applicants presently appear to be heading down a path of further litigation in which liability for costs may arise which they have no capacity to manage or meet. Indeed that point may have already been reached. They also face the possibility of sequestration orders being made. The [applicants] informed me that their only significant asset was their retirement home (the building of which was the subject of the dispute before the Tribunal), they are pensioners and their income is thus limited. It would be unfortunate if some further attempt were not made to resolve all issues between the parties. However, it would probably not be productive to order mediation in this matter unless the parties agreed to engage in the process. It is for this reason I have made orders requesting the parties to advise whether they agree to mediation, and generally restricted the entry of these orders until this position is made clear. 7 It can be seen that, in the appeal judgment, I intended to dismiss the appeal of the applicants to set aside the bankruptcy notice but to put in train a procedure which, if agreed to by the parties, might have resulted in a settlement of the dispute between them through mediation. 8 The orders I made were in the following terms:
The bankrupt's complaint appeared to be that the Registrar should have adjourned the hearing scheduled for 11 March 1998, until a date when he had recovered from his illness. We are prepared to assume, without deciding, that an erroneous refusal to adjourn a creditor's petition might be sufficient of itself to establish that the order "ought not to have been made" for the purposes of s 153B of the Bankruptcy Act. 21 I am satisfied, for these reasons, that the sequestration orders ought not to have been made. However such a conclusion does not necessarily lead to annulment orders. The Court has a residual discretion not to make such orders. However, four points need to be made. 22 First, counsel for the builder contested the application on the basis that the Registrar was correct in making the sequestration orders and no case had been made out that the sequestration orders ought not to have been made. The submissions were directed to the first ground for annulling the sequestration order (see [18] above). However, no submission was put that if the applicants established the sequestration orders ought not to have been made, the Court should nonetheless, as a matter of discretion, not make orders annulling them. 23 Secondly, the Trustee led evidence about the conduct of the applicants during the administration of their estates which pointed to an attitude of antipathy on their part and a desire not to cooperate fully in the administration. Because no submissions were made by the party opposing the application, the builder, that the discretion should not be exercised against making annulment orders, it is probably strictly unnecessary for me to deal with this material. Nonetheless I make the following observations about the exercise of discretion. While the applicants have failed to recognise or acknowledge the consequences of their own actions in repeatedly pursuing litigation which has failed (with resultant costs orders that are, in effect, unimpeachable), their conduct should not be characterised as totally inexcusable having regard to their belief (which may possibly have some foundation in fact - though it is not for me to express a view one way or the other) about the unfairness of the Tribunal's determination and the unfairness, as they would see it, visited on them by the making of the sequestration orders. That is not to suggest, of course, that the applicants were absolved, because of their beliefs, from meeting all obligations imposed on them as bankrupts by the Act while the sequestration orders were on foot. They were plainly required to comply with the Act in these circumstances. 24 Thirdly, counsel for the Trustee acknowledged in submissions that probably the applicants were solvent when the sequestration orders were made. Counsel for the builder did not dispute this proposition. There is, however, insufficient evidence before me to make a positive finding that the applicants were solvent. Counsel for the Trustee quite properly pointed out that the annulment application was not brought on the basis that the sequestration orders ought not to have been made having regard to the applicants solvency at the time they were made. Nonetheless, that the applicants may well be solvent (and may well have been solvent when the sequestration order was made) would militate against exercising the discretion to refuse the relief they seek. It is settled that the fact of insolvency, if not excluding an exercise of the discretion (see: Re Coyle (1993) 42 FCR 72 at 77 and Official Trustee, In the matter of the Estate of Smith [1999] FCA 1755) weighs heavily against an exercise of the discretion: Re Dennehy; Ex parte Dennehy (1895) 16 LR(NSW) (Bank & Pro) 40 at 47; Re Finn; Ex parte Amoco Australia Ltd and Official Receiver in Bankruptcy (1982) 41 ALR 487; Miller v Bondi Securities [1994] FCA 654. Similarly there are authorities which suggest that a bankrupt whose assets exceed his or her debts at the date of the sequestration order ordinarily would be entitled to an annulment of the bankruptcy at least if the bankrupt gives undertakings to pay the costs of the petitioning creditor and the Trustee's costs of administration. These authorities were referred to by the Full Court in Stankiewicz v Plata (supra) at [29] which assumed, without deciding, the authorities were correct. 25 Fourthly, the applicants did not seek a review of the Registrar's exercise of powers under the Act (in making the sequestration orders) and it was many weeks before these proceedings were commenced. 26 Having regard to these matters, I would not have exercised the discretion to refrain from making the annulment orders if counsel for the builder had invited me to do so. 27 In this application, the applicants appear to challenge collaterally the costs, charges and expenses of the Trustee, including his remuneration. However, s 154(1)(b) creates a statutory entitlement or charge enforceable by the Trustee which I have no power to modify or alter. That section relevantly provides: If the bankruptcy of a person (in this section called the former bankrupt) is annulled under this Division: … (b) the Trustee may apply the property of the former bankrupt still vested in the Trustee in payment of the costs, charges and expenses of the administration of the bankruptcy, including the remuneration and expenses of the Trustee;… (emphasis original) It may possibly be that, as a matter of construction, the reference to costs, charges and expenses as well as remuneration should be treated as amounts reasonably incurred in the administration of the estate. Such a construction might be apt because, arguably, the section is not intended to confer on the Trustee a right to apply the former bankrupt's property for costs, charges and expenses arising from activities the Trustee should not have engaged in as part of the proper administration of the bankrupt's estate. In the present case, having regard to the material before me, I am not satisfied that any aspect of the administration of the bankrupts' estates could be characterised as conduct the Trustee should not have engaged in, including appearing in these proceedings represented by counsel. It will, of course, be open to the applicants to discuss with the Trustee, a scheme of the type raised by the Trustee's counsel at the hearing, namely the creation of some type of security over their home to enable the satisfaction of amounts due to the Trustee. Consistent with authority, the Trustee is entitled to his costs of this application: Re Gollan: Ex parte Gollan (1992) 40 FCR 38. 28 There remains the question of the amounts owing to the builder, which are debts the builder sought to prove and were accepted by the Trustee. There appear to be no other creditors. There are authorities that predate the enactment of s 153B of the Act indicating that an annulment order should only be made when the debts of the bankrupt have been paid in full. That precondition to annulment is reflected in s 153A which creates a mechanism for annulment without the intervention of the Court but which requires the payment of all the bankrupts' debts. However, I am not aware of any authority which holds that an order should not be made under s 153B unless it is made conditional on the payment of the bankrupt's debts. Perhaps more importantly, the power is not conditioned in this respect by s 153B or the Act more generally. At its highest, the discretion to make an order is not ordinarily exercised unless all of the provable debts have been paid in full: see Hardaker v Phair trading as Proctor Phair & Associates, in the matter of Hardaker [2002] FCA 1176 at [19]. In the circumstances of this case, I do not propose to make any orders about the provable debts of the builder. However the applicants must accept that those debts are taxed costs for legal proceedings they have been involved in and often initiated by them. Unless those debts are satisfied, one can reasonably expect the applicants will continue to be involved in further legal controversy, with the real prospect of incurring future legal costs. 29 I propose to order that the bankruptcy of each applicant be annulled. I will give liberty to apply on seven days notice to the Trustee and the applicants if consequential orders need to be made. I certify that the preceding twenty-nine (29) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moore.
Associate: Dated: 2 July 2004 The Applicants appeared in person.
Counsel for the Respondent: E Petersen
Solicitor for the Respondent: Sautelle White
Counsel for the Trustee (Ferrier Hodgson): P Walsh
Solicitor for the Trustee (Ferrier Hodgson): Church & Grace
Date of Hearing: 11 June 2004
Date of Judgment: 2 July 2004
Maxwell-Smith
S & E Hall, in the matter of Maxwell-Smith
[1994] FCA 654
(2003) 198 ALR 293
(1985) 11 FCR 127
(1993) 42 FCR 72
(1988) 19 FCR 347
(1982) 41 ALR 487
(1992) 40 FCR 38
(1968) 13 FLR 10
(1978) 20 ALR 323
(1951) 84 CLR 343
(2000) 99 FCR 16
(1936) 55 CLR 499