Meletsis v Yeo in his capacity as trustee of the bankrupt estate of Karas

Federal Court of Australia|2024-08-16|Before: Mr J, Allsop CJ, Colvin JJ, Gordon J, Kenny J, Hespe J

The Applicant's interlocutory application for review is dismissed.
The Applicant pay the Respondent's costs to be assessed by a registrar on a lump sum basis, if not agreed. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

INTRODUCTION 1 The Applicant seeks review of a decision of a registrar of this Court refusing to set aside a bankruptcy notice that was issued on the application of the trustee of the bankrupt estate of Mr Karas (Respondent) on the basis that the notice constitutes an abuse of process, pursuant to s 30(1) of the Bankruptcy Act 1966 (Cth) or the Court's inherent jurisdiction to control its process. 2 As a review of a registrar's exercise of power involves a hearing de novo (Bechara v Bates [2021] FCAFC 34; (2021) 286 FCR 166 at [1]-[7] (Allsop CJ, Markovic and Colvin JJ), the Court may admit and make its decision on review based on additional or different evidence to that upon which the registrar's exercise of power was founded: West International Pty Ltd v Ultradrilling Pty Ltd [2008] FCA 1443; (2008) 68 ACSR 108 at [6] (Gordon J); G & J Gears Australia Pty Ltd v Brobo Group Pty Ltd [2006] FCA 330; (2006) 229 ALR 638 at [55] (Kenny J). 3 The Applicant in the hearing relied upon affidavits dated 26 June 2024 and 19 July 2024.

The Bankruptcy Notice 4 Bankruptcy notice BN 260745 was issued on 3 July 2023 on the application of the Respondent as a creditor of the Applicant. The total debt reflected in the notice is $3,708,010.79, consisting of a judgment debt of $3,365,152.46 and interest of $342,858.33. The notice, when issued, required payment (or the making of an arrangement for settlement of the debt claimed) within 21 days after the date of service of the notice. By orders made on 24 October 2023, the notice was amended to require payment (or the making of an arrangement for settlement of the debt claimed) within 21 days after 7 November 2023. 5 The judgment debt arose as a result of orders of this Court made on 17 February 2022 in proceedings VID1279/2017.

ABUSE OF PROCESS 6 The Applicant contends that the bankruptcy notice is an abuse of process and should therefore be set aside for two principal reasons: (1) The Applicant was solvent at the time that the bankruptcy notice was issued and/or amended. (2) It would be unjustifiably oppressive to the Applicant and would bring the administration of justice into disrepute for the Respondent to invoke the bankruptcy jurisdiction of the Court in circumstances where the Respondent has obtained a freezing order over the Applicant's assets, thereby preventing the Applicant from paying the judgment debt and where the Respondent has not taken any steps to enforce the judgment debt by other means.

Applicable Principles 7 It is well-established that the Court has inherent power to set aside a bankruptcy notice as an abuse of process where it is satisfied that it is in the interests of justice to do so: Re Sterling; Ex parte Esanda Ltd [1980] FCA 75; 30 ALR 77 at 83 (Lockhart J); Seller v Deputy Commissioner of Taxation [2011] FCA 865; 282 ALR 80 at [15]-[20] (Flick J); Royal v Nazloomian, in the matter of Royal [2019] FCA 555 at [26] (Stewart J). 8 An order setting aside a bankruptcy notice which constitutes an abuse of process may also be made pursuant to s 30(1) of the Bankruptcy Act 1996 (Cth), which provides: 30 General powers of Courts in bankruptcy (1) The Court: (a) has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and (b) may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter. 9 The circumstances in which a Court may set aside a bankruptcy notice as an abuse of process are "not governed by rigid rules and do not fall into fixed categories": Clyne v Deputy Commissioner of Taxation (NSW) (No 4) [1982] FCA 166; 42 ALR 703 at 708 (Lockhart J). However, as McHugh J observed in Rogers v R [1994] HCA 42; 181 CLR 251 at 286: abuses of procedure usually fall into one of three categories: (1) the court's procedures are invoked for an illegitimate purpose; (2) the use of the court's procedures is unjustifiably oppressive to one of the parties; or (3) the use of the court's procedures would bring the administration of justice into disrepute. 10 The issuing of a bankruptcy notice to persuade the debtor to pay the debt, and in the event of default, to proceed with a petition for sequestration is a legitimate purpose: Nobarani v Mariconte [2021] FCAFC 96 at [32] (Allsop CJ, Farrell and Derrington JJ); Slack v Bottoms English Solicitors [2002] FCA 1445 at [20]-[21] (Spender J). 11 The time at which to assess abuse of process is the time the bankruptcy notice is issued: Killoran v Duncan, in the matter of Killoran [1999] FCA 1574 at [13] (Gyles J), Royal v Nazloomian at [30] (Stewart J); Nobarani at [32] (Allsop CJ, Farrell and Derrington JJ). 12 The Applicant bears the onus of establishing an abuse of process. The allegation of an abuse of process is a serious one which cannot be made without a sufficient factual foundation: Williams v Spautz [1992] HCA 34; 174 CLR 509 at 529 (Mason CJ, Dawson, Toohey and McHugh JJ); Prentice v Fewin Pty Ltd, in the matter of Prentice [2017] FCA 490 at [48]-[49] (Bromwich J); Royal v Nazloomian at [37] (Stewart J): Nobarani at [32] (Allsop CJ, Farrell and Derrington JJ). Establishing an abuse of process does not require direct evidence of an ulterior purpose and may be established by way of inference drawn from objective facts: Royal v Nazloomian at [37] (Stewart J). 13 Solvency is not a ground for setting aside a bankruptcy notice: Re Athans; Ex parte Athans (1991) 29 FCR 302 at 310 (Hill J). 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: Bryant v Commonwealth Bank of Australia (1994) 217 ALR 251 at 254. However, knowledge of the debtor's solvency by the creditor at the time the bankruptcy notice is issued may be capable of supporting an inference that the Court's procedures are invoked for an illegitimate purpose: see for example Maxwell-Smith v S & E Hall Pty Ltd (2006) 233 ALR 81 at [49] (Jacobson J). 14 Although more usually framed as amounting to a stay of execution of the judgment (see for example, National Australia Bank v Pollak [2001] FCA 1408; (2001) 186 ALR 44 at [41] (Madgwick J)), it may be accepted that the issue of a bankruptcy notice may amount to an abuse of process if the creditor has by his or her own actions done something that "actually and in fact prevents the debtor from paying": Re Sedgwick, Ex parte Sedgwick (1888) 5 Morr 262 (Lord Esher MR), cited in Pollak at [43]. 15 The purpose of a freezing order is to prevent an abuse of process by the disposition of assets preventing the enforcement of the Court's orders. The whole purpose of a freezing order is to aid in the execution of a judgment: Re Ousley; Ex parte Commissioner of Taxation (1994) 48 FCR 131 at 139 (Heerey J), cited in Re Ling; Ex parte Enrobook Pty Ltd (1996) 142 ALR 87 at 92 (Lehane J). The obtaining of a freezing order per se does not amount to an action on the part of the creditor that prevents the debtor from paying. A freezing order is distinguishable from the appointment of a receiver to take control of debtor's property: Re Ousley at 138 (Heerey J); Ling v Eurobrook (1997) 74 FCR 19 at 29 (Davies, Wilcox and Branson JJ). 16 It is not sufficient to show that the actions of the creditor have made it more difficult for the debtor to pay the debt than if the creditor had done nothing at all: Pollak at [52] (Madgwick J).

Solvency 17 The Applicant contends that subject to the freezing order issue (discussed below), he is solvent. The Applicant relied on his ownership of a property in North Balwyn (North Balwyn Property) and contends that if not for the freezing order, he could sell the property and pay the judgment debt. 18 The Applicant tendered a valuation report from Global Estate Agents Pty Ltd dated 4 July 2024 which assessed the fair market value of the North Balwyn Property to be $2.35 million. 19 The title to the property records the following encumbrances, caveats and notices: (1) A mortgage held by Westpac. The Court was provided with a loan statement showing an outstanding loan balance of $783,971.70 owed as at 2 April 2024. (2) A mortgage held by Glendora Pty Ltd. (3) A mortgage held by Custodian Australia Pty Ltd. (4) A caveat held by the Respondent, supported by a ground of claim in the following terms: Registered proprietor(s) being entitled to possession of the certificate of title of the land and to prevent improper dealings. (5) A caveat held by the Applicant's ex-wife, supported by a ground of claim in the following terms: Implied, resulting or constructive trust. (6) A caveat held by the Applicant's father and brother, supported by a ground of claim based on an agreement with the Applicant dated 30 June 2020 in respect of a life estate. 20 For the following reasons, I am not satisfied that the evidence proves the Applicant is solvent. 21 First, even accepting the valuation material at its highest, the fair market value of the North Balwyn Property does not cover the whole of the judgment debt. Furthermore, based on the evidence, there is at least one registered mortgage held by a party unrelated to the Applicant over the North Balwyn Property. 22 Second, it is not possible on the material before me to ascertain the extent of the interests of the caveat parties in that property. Although the caveat registered by the Respondent is supported by a ground of claim that relates to an order appointing him as a receiver of the property in circumstances where that appointment appears to have now expired, the Applicant has not adduced any evidence in respect of the basis for the remaining caveats. The extent of the interest of the Applicant's ex-wife, in particular, is unknown. 23 Third, aside from a bare hearsay assertion by the Applicant, there is no evidence of an agreement with the Applicant's ex-wife and/or his brothers that they would be willing to allow the Applicant to apply the whole of the proceeds of sale of the North Balwyn Property to the payment of the judgment debt. 24 Furthermore, there is no evidence from which it may be concluded that the Respondent had knowledge that the Applicant was solvent. 25 The Applicant's contention that the bankruptcy notice constitutes an abuse of process by reason of his being solvent to the knowledge of the creditor is not accepted.

Effect of the Freezing Order 26 The Applicant submits that the order freezing his assets has prevented him from paying the debt. 27 For the following reasons, the freezing order did not prevent the payment of the debt. 28 First, the amount of debt in the bankruptcy notice is $3,708,010.79. The Applicant has given evidence that he owns real property which an estate agent has assessed as having a fair market value of $2.35 million. Taking the evidence at its highest, the value of the Applicant's real property is less than the value of the debt. This is not a case in which it can be said that absent the freezing order, the Applicant was able to pay the debt. The evidence does not support a conclusion that the Applicant's assets and income were sufficient to enable him to satisfy the judgment debt. 29 Second, the effect of the freezing order was not to transfer control of the Applicant's property to a third party or court officer. As Lehane J stated in Re Ling at 92-3: It is important, in my view, to bear in mind the precise character of Mareva relief ... A number of particular aspects of it are important for present purposes. It deprives the party subject to its restraint neither of title to nor of possession of the property to which it extends. It does not create a security interest, confer priority or in any sense rewrite insolvency law … it is an order in personam restraining the party to whom it is directed from disposing of assets or removing them from the reach of creditors. The administration of the property is not placed in the hands of a receiver, trustee or other officer of the court, nor is it assumed by the court itself. For those reasons, to speak of a Mareva injunction as "freezing" assets may, with respect, be somewhat misleading: it operates as a personal restraint against the party to whom it is directed. … the purpose of a Mareva injunction is to prevent a defendant from dissipating assets, or putting them beyond the reach of creditors, in circumstances where there is a real fear that, unless restrained, the defendant will do so. Its purpose is not to prevent creditors from exercising their rights. 30 Third, the terms of the order provided for the Applicant and the Respondent to reach an agreement to vary the exceptions to the order. There was nothing preventing the parties from approaching the Court to vary the order to deal with the property or the proceeds of sale. The freezing order in the present case provides that: 11 You and the applicants [for the freezing order] may agree in writing that the exceptions in the preceding paragraph are to be varied. In that case the applicants or you must as soon as practicable file with the Court and serve on the other a minute of a proposed consent order recording the variation signed by or on behalf of the applicants and you, and the Court may order that the exceptions are varied accordingly. 12 (a) This order will cease to have effect if you: (i) pay the sum of $4,200,000 into Court; or (ii) pay that sum into a joint bank account in the name of your lawyer and the lawyer for the applicant as agreed in writing between them; or (iii) provide security in that sum by a method agreed in writing with the applicant to be held subject to the order of the Court. (b) Any such payment and any such security will not provide the applicant with any priority over your other creditors in the event of your insolvency. (c) If this order ceases to have effect pursuant to order 12(a) above, you must as soon as practicable file with the Court and serve on the applicant notice of that fact. 31 The fact that the Respondent had obtained a freezing order against the Applicant does not result in the issue of the bankruptcy notice amounting to an abuse of process.

Other 32 The Applicant relied upon the following additional facts in support of a contention that the issue of the bankruptcy notice amounted to an abuse of process: (1) Delay between the date of the judgment giving rise to the judgment debt and the date of issue of the bankruptcy notice; and (2) The fact that the Respondent had not taken steps to execute the judgment aside from the issue of a bankruptcy notice. 33 I am not persuaded that delay is relevant in this case. In any event, there was no substantial period of inaction by the Respondent. Following the delivery of the judgment giving rise to the judgment debt, the Respondent sought and obtained freezing orders in VID1279/2022, first made on 1 March 2022. On 2 September 2022, the Respondent applied for the appointment of receivers for the purposes of preventing any dealings in the North Balwyn Property. Interim receivers were appointed by order of the Court made on 5 September 2022. The appointment was until the hearing and determination of the appeal in VID226/2022 or such further order of the Court. On 16 December 2022, the Court delivered judgment in VID1279/2017 dismissing an application to set aside the appointment of interim receivers. As the chronology of events discloses, the Applicant appealed the decision giving rise to the judgment debt to the Full Court in VID226/2022 and upon the dismissal of that appeal in June 2023, applied for special leave to the High Court. The appeal process was effectively exhausted in November 2023. 34 The Court was not directed to any authority suggesting that there is a requirement that a creditor take some enforcement step in relation to a judgment debt before the issue of a bankruptcy notice. It is not a precondition to the issue of a bankruptcy notice that other means of enforcing the debt be exhausted: Nobarani v Mariconte at [43] (Allsop CJ, Farrell and Derrington JJ). There is no abuse of process in issuing a bankruptcy notice in the circumstances of this matter. The Applicant's interlocutory application is to be dismissed. I certify that the preceding thirty-four (34) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Hespe.

Bankruptcy Act 1996(Cth)

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