Nolten v Groeneveld Australia Pty Ltd

Introduction 1 Wouter Nolten has made an urgent application for an interim stay of a sequestration order made against his estate by a Federal Magistrate on 9 December 2011. The stay was sought pursuant to s 52(3) of the Bankruptcy Act 1966 (Cth) ("the Act"). At the same time, Mr Nolten made an application for a stay of the sequestration order pursuant to Rule 36.08 of the Federal Court Rules 2011 (Cth) ("the Rules") or s 52(3) of the Act, pending the filing and final hearing of an appeal from the judgment in which the sequestration order was made. Rule 36.08 of the Rules provides as follows: (1) An appeal does not: (a) operate as a stay of execution or a stay of any proceedings under the judgment subject to the appeal; or (b) invalidate any proceedings already taken (2) However, an appellant or interested person may apply to the Court for an order to stay the execution of the proceeding until the appeal is heard and determined. (3) An application may be made under subrule (2) even though the court from which the appeal is brought has previously refused an application of a similar kind. 2 Section 52(3) of the Act provides that: The Court may, if it thinks fit, upon such terms and conditions as it thinks proper, stay all proceedings under a sequestration order for a period not exceeding 21 days. Section 29(2) of the Federal Court of Australia Act 1976 (Cth) also confers power on the Court or a judge to grant a stay of proceedings under the judgment under appeal, although this provision does not detract from the operations of any provision under another Act or the Rules. 3 The apparent urgency of Mr Nolten's application was due to the fact that an application by Mr Nolten concerning the reinstatement of an appeal had been listed for hearing in the Victorian Court of Appeal on 16 December 2011. On 15 December 2011, the Court granted an interim stay until 21 December 2011 or further order. As it happened, on 16 December 2011, the Court of Appeal adjourned Mr Nolten's reinstatement application sine die pending the outcome of proceedings in this Court. 4 The question now is whether the Court ought to make an order staying proceedings on the sequestration order until the hearing of the appeal. A notice of appeal dated 13 December 2011 was filed on 13 December 2011. It is therefore competent for the Court to stay proceedings under Rule 36.08 of the Rules: see Rule 36.08; see also Freeman v National Australia Bank Ltd [2002] FCA 427 ("Freeman") at [3] and the authorities there cited; Coleman v Lazy Days Investments Pty Ltd (1994) 55 FCR 297 ("Coleman") at 300-1; and Menzies v Paccar Financial Pty Ltd [2010] FCA 692 at [10].

Background 5 Groeneveld Australia Pty Ltd ("Groeneveld") sought a sequestration order against Mr Nolten's estate, pursuant to a creditor's petition dated 17 February 2011. Mr Nolten applied to adjourn the hearing of the petition. A debtor subject to a creditor's petition based on a judgment debt is ordinarily entitled to an adjournment if the judgment is subject to a genuine and arguable appeal, and if that appeal would leave the debtor solvent. 6 The circumstances in which the learned Federal Magistrate made her decisions adverse to Mr Nolten are complex. These circumstances appeared from the affidavits placed before her, including the affidavit of David Thomas Leggatt sworn on 10 November 2011 (to which I was also referred). 7 Mr Nolten has apparently been directly or indirectly involved in litigation at least since 2009. Mr Nolten was formerly managing director of Groeneveld. In July 2009, Groeneveld dismissed him for alleged breaches of duties as a director and employee. Also in July 2009, proceedings issued in the Supreme Court of Victoria in connection with these allegations. On 22 November 2010, in the Supreme Court, Davies J delivered judgment in proceeding 07564 of 2009, holding that the plaintiffs, Groeneveld and others, were entitled to judgment on all claims against the defendants, Wouter Nolten and companies associated with him. Essentially, the successful claims related to breaches of fiduciary duty on Mr Nolten's part. 8 On 1 December 2010, the plaintiffs obtained orders for the taking of accounts; and accounts were taken and profits determined. Various other orders were also made on that day, including that Mr Nolten pay Groeneveld the sum of $214,325; and that: The Defendants [subject to certain exclusions not presently relevant] shall pay the Plaintiffs' costs of the proceeding, including the costs of the counterclaim and any reserved costs, and the First Defendant shall pay the costs of proceeding number S Cl 2009 07585, including any reserved costs. Mr Nolten was the First Defendant. Proceeding number S Cl 2009 07585A was in respect of a search order. Also on 1 December 2010, a counterclaim relating to an agreement concerning certain put and call options over shares in Groeneveld was dismissed. 9 After the taking of accounts in the Supreme Court, Davies J was asked to determine two further issues: (1) whether the Court had ruled on whether Mr Nolten was jointly liable to account for the profits made by the other corporate defendants as the result of his breaches of duty; and (2) if not, whether Mr Nolten was in fact jointly liable to account for these profits as the result of his breaches of duty. On 13 October 2011, Davies J concluded that the issue of joint liability was res judicata and that Mr Nolten was, therefore, estopped from the claim that he should not be made jointly liable for the profits. 10 Mr Nolten has appealed to the Victorian Court of Appeal against the dismissal of the counterclaim. A question remains as to whether leave is required to appeal against the costs order made in relation to the search order proceedings. Mr Nolten also appealed against Davies J's orders that Mr Nolten and the relevant corporate defendants were jointly and severally liable to pay Groeneveld the profits as determined. This appeal is currently deemed to be abandoned on account of non-compliance with the relevant Court Rules. A summons seeking an order that the appeal be reinstated was listed for hearing on 16 December 2011; and, as mentioned above, this summons was adjourned sine die. 11 Groeneveld filed the creditor's petition in Proceeding MLG207 of 2011 in the Federal Magistrates Court on 17 February 2011. In an affidavit filed in the Federal Magistrates Court (see par [6] above), Mr Leggatt, Groeneveld's solicitor, deposed that: The litigation between [Groeneveld] and Mr Nolten has been extremely time consuming and expensive. From June 2009 to January 2011, [Groeneveld] has spent $1, 302,017.38 in legal costs. 12 Mr Leggatt summarised his understanding of Mr Nolten's costs position as follows: Search Order Proceeding 07585 of 2009 - Costs 18. This is a related proceeding where search orders were obtained against Mr Nolten prior to the commencement of the principal proceeding. Justice Davies ordered on 1 December 2010, that Mr Nolten was to pay [Groeneveld] the costs of the search order proceeding. Principal Proceeding - Judgment & Costs 19. In the principal proceeding, the plaintiffs alleged various dishonest breaches by Mr Nolten of his fiduciary duty. The Court ordered that Mr Nolten pay [Groeneveld] the sum of $214,325.00. It is also ordered that Mr Nolten and the fourth, fifth and sixth defendants in the principal proceeding pay the plaintiffs' costs. Account of Profits - Judgment & Costs 20. … Mr Nolten is further indebted to the plaintiffs for $974,965.43. The Court ordered that Mr Nolten and the fourth, fifth and sixth defendants in the principal proceeding pay the plaintiffs' costs of the proceeding. 21. The costs of the Search and Seizure Proceeding, Supreme Court Proceeding and the Account of Profits have not yet been taxed. However, given the very significant sums that have been spent by [Groeneveld] in pursuing this matter, taking a conservative view as to the likely recovery on taxation, I estimate Mr Nolten's liability for costs as follows: $300,000 for the Search and Seizure Proceeding; $550,000 for the Supreme Court Proceeding; and $35,000 for the Account Proceeding. TOTAL: $885,000 … 23. The counterclaim was a discrete point in the principal proceeding. It has been agreed between the parties that the counterclaim is valued at $474,242.00 and that the rent value is $70,216.00. If successful on appeal, Groeneveld will be indebted to Mr Nolten for the amount of $544,458.00. 13 Examination of the grounds of appeal set out below shows that Mr Nolten challenges the failure of the Federal Magistrate not to uphold his objection to the admissibility of the opinion set out in paragraph [21] of Mr Leggatt's affidavit.

Federal Magistrate's Decision 14 As appears from the affidavit and exhibits, on 9 December 2011, the Federal Magistrate dismissed Mr Nolten's application for an adjournment of a creditor's petition and made a sequestration order against his estate. The Federal Magistrate also refused Mr Nolten's application for a stay pending appeal. 15 The Federal Magistrate stated the essential circumstances as follows: 4. Davies J found in favour of the Applicant on their claim and also found against the Respondent on the counterclaim. The Respondent was ordered to pay the Applicant the sum of $214,325.00. In addition, the Court ordered that various accounts be taken in relation to profits made by the Respondent or the companies described by Davies J as his corporate alter egos. Orders were subsequently made for the Respondent to pay $975,965.43 arising from those proceedings. 5. The Respondent was also ordered to pay "costs of the proceedings, including the costs of the counterclaim and any reserved costs . . . and the costs of proceedings SCI2009 07585 including any reserved costs". Proceedings SCI 2009 07585 were proceedings, at an earlier stage in the litigation, when search orders were obtained by the Applicant against the Respondent. 6. The Respondent has not appealed against the judgment debt nor sought a stay of the orders. He has appealed against the dismissal of the counterclaim. There is a dispute between the parties, which remains unresolved concerning whether the Respondent requires special leave to appeal against the costs order made in relation to the search order proceedings. 7. A second Creditor's Petition has been served by the Applicant with respect to the debt arising out of the proceedings in relation to the accounting for profits. An appeal was also lodged against that decision but is currently deemed abandoned because of a failure to comply with the relevant rules. A summons seeking an order that the second appeal not be deemed abandoned has been filed and is due to be heard on 16 December 2011. 8. The Respondent concedes that he has no real assets and states that he has no liabilities due and payable aside from the judgment debts owed to the Applicant. 9. The Applicant contends that costs in the principal proceedings and search order proceedings would together amount to some $850,000.00. The counterclaim is valued at $474,242.00 and if the Respondent was successful, it would also reduce the judgment debt by some $70,216.00. 16 The case for Groeneveld was that, if Mr Nolten successfully appealed dismissal of his counterclaim and aspects of the judgment debts, it was likely that the debtor would still be insolvent by reason of the costs arising from the appeals. Mr Nolten argued to the contrary - that he would not be insolvent if he were successful. 17 After detailing the parties' submissions, her Honour observed that this was not a case in which the debtor sought to dispute the debt upon which the creditor's petition was based. Rather: The situation is rendered more complex by the range of matters which the [debtor] would need to overcome in order to establish that he is solvent. 18 Her Honour continued: 66. At present the [debtor] faces the following: a) The judgment debt on which the creditor's petition is founded in the sum of $214,325.00. b) An amount of $70,216.00 which is subject to the appeal. c) Costs of: i) The principal proceedings which the Applicant quantifies at $550,000.00; and ii) Costs of the search order proceedings which the Applicant quantifies at $300,000.00. d) Orders arising out of the accounting for profits in the sums of $76,213.00 which is accepted and $898,753.00 which is the subject of the second appeal. e) Costs of the account proceedings which the Applicant estimates as $35,000.00. 67. The [debtor] had a counterclaim in the proceedings which is admitted to be at least $474,242.00. The first appeal is substantially an appeal against the decision to dismiss the counterclaim. The [debtor] will need to: a) Win the appeal against the decision to dismiss the counterclaim on all the grounds i.e. the 'General Law' claim, the misleading and deceptive conduct claim, the deceit claim and the breach of implied 'good faith' term claim. b) Have the costs order made in the substantive proceedings set aside and costs awarded in his favour. c) Establish that he does not need leave to appeal against the search costs order, or convince the Court that he should be granted leave, and in either case have that order set aside. d) Have the second appeal reinstated. e) Win the appeal against the orders made against him arising from the account of profits and decision of Davies J of 13 October 2011. 68. In essence, all of these cards need to fall in favour of the [debtor], in order for him to avoid facing a debt to the Applicant which he apparently is unable to pay. 19 The learned Federal Magistrate accepted that, as a general rule, a Court should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceeding, provided the appeal is based on genuine and arguable grounds. Her Honour affirmed that the same rule should apply where the appeal is against the dismissal of a counterclaim, "provided the likely outcome is that the amount owed to the Debtor at the end of the process exceeds his indebtedness to the Creditor". After discussing the expression "genuine and arguable", her Honour found that Mr Nolten had satisfied the arguable grounds requirement, saying: 71. I have considered the arguments advanced by the Respondent in this case. I accept that there are arguable grounds particularly with the 'good faith' term findings and the finding that the conduct occurred 'in trade or commerce'. With respect to the issue of whether Davies J correctly identified and applied the fiduciary obligations of the Respondent and in particular, those obligations with respect to disclosure, I am not convinced that the argument put by the Respondent is strong. Nonetheless, I accept that there may be argument which, all other things being equal, the Respondent should be allowed to run. 20 Notwithstanding this, however, her Honour refused Mr Nolten's application for an adjournment because her Honour apparently formed the view that Mr Nolten would be likely to remain insolvent even if he were successful in his appeals. Her Honour said that, even if successful on the appeal with respect to the counterclaim, there was likely to be "substantial costs against him with respect to the substantial success of the Applicant at trial and the search order". Her Honour explained (at [72]) that "a significant part of the trial was taken up with the evidence concerning the Applicant's claim. Further the search order, even if the costs awarded for those proceedings cannot be separated from the trial costs, which I am not convinced cannot be done, was not challenged and the Respondent [Mr Nolten] has advanced nothing save a general reference to 'costs following the event' to justify why that costs order should be set aside". Her Honour concluded: 73. Even if the whole of the costs order made in the Applicant's favour were set aside, which I consider to be most unlikely, the Respondent would in all likelihood still be indebted to the Applicant if the search order costs were to stand. 74. Further, the Respondent still has to establish that his second appeal should be reinstated to avoid the orders made arising from the accounting for profits which completely swamp any success in the first appeal. 75. The Respondent has argued that the appeal is likely to be reinstated because it would be unjust to the Respondent that the appeal be taken to be abandoned for non-compliance with the rules. The Applicant may, of course, argue that it should not be reinstated because the appeal was bound to fail. 76. Should the Respondent be allowed to continue, at least until the issue of whether the second appeal can proceed is determined? 77. The Respondent on his own admission has no assets and if the current orders stand will be indebted to the Applicant for a figure likely to exceed $2,000,000.00. He has admitted dishonesty as a fiduciary and does not contest the debt on which the Applicant brings the petition. It is difficult to see how, even if he were to succeed in the appeal, he would be successful in convincing the Court of Appeal to set aside the costs order to the extent that his indebtedness to the Applicant would not exceed any order in his favour. In reaching that view, I have also considered the argument that the Court might award 'special costs' and on the material, I cannot see that this is a likely outcome. 78. I have also considered the Respondent's arguments with respect to the second appeal and while the Court of Appeal may not consider the appeal to be 'bound to fail', it is difficult to see how the Respondent can ultimately avoid liability for profits extracted by his corporate alter egos as a direct result of his dishonesty as a fiduciary. Accordingly, the Federal Magistrate dismissed Mr Nolten's application for an adjournment and made the sequestration order sought by Groeneveld.

Notice of appeal 21 As noted, on 13 December 2011, Mr Nolten filed a notice of appeal and, on 15 December 2011, made the stay applications currently before me. 22 The notice of appeal sets out many grounds of appeal, as follows: 1 The learned magistrate erred in dismissing the application for an adjournment of the creditors' petition pending the final hearing and determination of the appellant's two appeals to the Court of Appeal of the Supreme Court of Victoria (from the orders made by Davies J on 9 December 2010 and 13 October 2011 in the Supreme Court of Victoria proceeding No 7564 of 2009) in circumstances where: a. the learned magistrate did not find that either of the two appeals were other than based on genuine and arguable grounds; b. counsel for the respondent expressly told the learned magistrate, at the conclusion of his oral submissions, that the respondent would not suffer any relevant prejudice if the adjournment was granted. 2 The learned magistrate erred in relying upon the costs order [Order 12 of the Orders made by Davies J on 1 December 2010) (the "costs order")] as otherwise justifying the making of the sequestration order in circumstances where: a. the costs order has not been taxed and is therefore not due and payable; b. alternatively, there was no proper evidential basis for the asserted quantification of the costs order in any event. 3. Further to ground 2(b) above, the learned magistrate erred by failing to consider or determine the objection of the appellant to the admission into evidence of the so-called quantified amount of the costs order referred to in paragraph 66 of the Reasons (and the "table" referred to in paragraph 46 of the Reasons) notwithstanding that the learned magistrate had earlier noted the making of the objection in paragraph 23 of her Reasons. 4. The learned magistrate should have ruled against the admission of such opinion evidence in circumstances where the only basis for the opinion was said to be as follows: "taking a conservative view as to the likely recovery on taxation, I estimate Mr Nolten's liability for costs as follows: $300,000 for the Search and Seizure Proceeding [and] $550,000 for the Supreme Court Proceeding …" and where the respondent otherwise admitted that it had made a deliberate decision not to tax the costs order. 5. Further or in the alternative to grounds 2, 3 and 4 above, the learned magistrate erred by finding: a. in paragraph 67(b) of the Reasons that "The Respondent will need to have the costs order made in the substantive proceedings set aside and costs awarded in his favour"; b. in paragraph 73 of the Reasons that "Even if the whole of the costs order made in the Appellant's favour were set aside, which I consider to be most unlikely"; and c. in paragraph 77 that "it is difficult to see how, even if he were to succeed in the appeal, he would be successful in convincing the Court of Appeal to set aside the costs order to the extent that this indebtedness to the Appellant would not exceed any order in his favour"; in circumstances where: d. the costs order will be set aside as a necessary corollary of the success of the appeal in accordance with usual principle and will not need to be set aside on any independent basis: Etna v Arif [1999] 2 VR 353; Harvey Poynton Ltd v Ali (No 2) [2005] VSCA 314 at [17]; Penhalluriack v Farnell [2008] VSCA 250 at [41]; e. the respondent did not submit to the learned magistrate that the costs order (insofar as it related to costs not made in the search order proceeding): (i) did not follow the event; (ii) would need to be set aside on some independent basis; f. the respondent did not submit to the learned magistrate that the costs discretion (insofar as it related to costs not made in the search order proceeding) would not fall to be re-exercised as a necessary corollary of the success of the first appeal in accordance with usual principle; g. (as the learned magistrate observed at paragraph 67 of the Reasons) the value of the counterclaim is "admitted to be at least $474,242.00"; h. (as the learned magistrate also observed at paragraph 67 of the Reasons) the value of the counterclaim greatly exceeds the value of the "judgment debt on which the creditors petition is founded in the sum of $214,325.00"; i. if successful on his appeal against the dismissal of the counterclaim, the appellant will be entitled to his costs of the counterclaim below and his appeal costs, which costs will constitute a further significant offset against any judgment debt and any new costs order (if any) made in favour of the respondent on the re-exercise of the costs discretion; j. the respondent's estimate of "$550,000 for the Supreme Court Proceeding" must in any event include a significant (and unidentified) amount for the defence of the counterclaim below such that such unidentified costs will not be recoverable if the appellant is successful on his appeal against the dismissal of the counterclaim; k. the learned magistrate was therefore merely speculating and had no evidential basis, alternatively proper evidential basis, for finding that "it is difficult to see how, even if he were to succeed in the appeal, he would be successful in convincing the Court of Appeal to set aside the costs order to the extent that his indebtedness to the Appellant would not exceed any order in his favour." 6. The learned magistrate erred in paragraph 67(c) of the Reasons by giving apparent weight to the submission of the respondent that leave to appeal the costs order (insofar as it related to the search order proceeding) would be required in circumstances where the only evidence before the learned magistrate unequivocally showed that the costs order (insofar as it related to the search order proceeding) was also made on the basis that it followed the event. ….. 7. Further to ground 6 above, and irrespective of whether or not: a. leave to appeal the costs order is required insofar as it applies to the costs of the search order proceeding; and/or b. the costs order for the search order proceeding remains undisturbed, the learned magistrate erred at paragraph 72 of the Reasons by finding that "the respondent would in all likelihood still be indebted to the Appellant if the search costs order were to stand" in circumstances where: c. the value of the counterclaim ($474,242.000) exceeds the asserted quantum of the costs of the search order proceeding ($300,000); d. if successful on his appeal against the dismissal of the counterclaim, the appellant will be entitled to his costs of the trial of the counterclaim below and his appeal costs, which costs would constitute a further significant offset against the judgment debt of $214,325.00 and: i. the asserted quantum of the costs of the search order proceeding ($300,000); and ii. any new costs order (if any) made in favour of the respondent e. the respondent's estimate of "$550,000 for the Supreme Court Proceeding" must include a significant (and unidentified) amount for the defence of the counterclaim below such that those unidentified costs will not be recoverable if the appellant is successful on his appeal against the dismissal of his counterclaim; f. the learned magistrate failed to have regard, on the question of the re-exercise of the costs discretion, to the rejected open offer of compromise made by the appellant in the substantive proceeding and which open offer of compromise, as submitted to the learned magistrate: i. may not have been beaten if the appellant's appeal against the dismissal of the counterclaim is successful; ii. will otherwise be relevant on the question of the re-exercise of the costs discretion. 8. The learned magistrate should have found, in light of the circumstances outlined in ground 7 above, that it was not possible to determine whether or not the Respondent would still be indebted to the Appellant if the search costs order were to stand.

The second appeal 9. The learned magistrate erred in giving weight at paragraphs 75 and 76 of the Reasons to the fact that the second appeal "may be taken to be abandoned for non-compliance with the rules" in circumstances where: a. the respondent refused to tell the court whether it would oppose reinstatement or, if it did, what the basis of that opposition would be; b. the appellant submitted to the learned magistrate that "if there be any contrary submission about that, then this application should be adjourned until after the reinstatement hearing on 16 December 2011"; c. there was no proper basis to conclude, and the learned judge did not otherwise conclude, that the second appeal would not be reinstated having regard to the relevant circumstances outlined in the Second Affidavit of Lachlan Thanh Nguyen made 15 November 2011 (which was not objected to) and the usual practice of the Court of Appeal in such circumstances. 10. The learned magistrate erred at paragraph 78 of the Reasons by finding that "it is difficult to see how the Respondent can ultimately avoid liability for profits extracted by his corporate alter egos as a direct result of his dishonesty as a fiduciary" where: a. the respondent did not make any such submission to the learned magistrate in the adjournment application; b. the joint and several liability of the appellant in respect of the account was based on a finding of issue estoppel and res judicata only and not on any finding of alter ego; c. there was no finding below that the corporate defendants were the "alter egos" of the appellant; d. the proceeding before Davies J was not conducted on the basis that the corporate defendants were the appellant's alter egos; e. the learned magistrate did not seek any submissions from counsel for the appellant on the question of alter ego; whether in reply or otherwise.

The stay application 23 Mr Nolten's stay application was supported by the affidavit of his solicitor, Lachlan Thanh Nguyen, affirmed on 12 December 2011. Mr Nguyen deposed (amongst other things) that: (1) he represented Mr Nolten on 9 December 2011 when the Federal Magistrate delivered her reasons for judgment and that he unsuccessfully requested a stay at that time; and (2) Mr Ehrlich, of counsel, who appeared before the Federal Magistrate on the adjournment application, had identified various grounds for appeal. 24 Rule 36.08 of the Rules confers a broad discretion to order a stay notwithstanding that an appeal shall not operate as a stay of execution or of proceedings under the judgment appealed from. In Powerflex Services Pty Ltd v Data Access Corporation (1996) 67 FCR 65, a Full Court of this Court held that the appropriate test for a stay under the equivalent of Rule 36.08 of the current Rules was that set down in Alexander v Cambridge Credit Corporation Ltd (1985) 2 NSWLR 685, namely, whether the applicant for a stay showed a reason or an appropriate case to warrant the exercise of discretion in his favour. More specifically, with respect to an application for a stay of a sequestration order, the question is whether there is an arguable point on the proposed appeal and whether the balance of convenience favours the granting of a stay: see Freeman at [3]-[4]; Coleman at 303; Beames v Rigby [2002] FCA 806 at [2]; Kellow v Dudzinski [2003] FCA 238 ("Dudzinski") at [8]; and Shirreff v Beck Legal Pty Ltd [2010] FCA 1407 at [67], (2010) 119 ALD 284 at 293-294 [67]. The test for a stay under s 52(3) of the Act is not materially different. Was there an arguable point? 25 Counsel for Mr Nolten, Mr Ehrlich, relied on the fact that the Federal Magistrate accepted that the appeals sought to be brought in the Victorian Court of Appeal were based on genuine and arguable grounds; and that there would be no relevant prejudice if the adjournment were granted. In this context, so Mr Ehrlich argued, the Federal Magistrate was at least arguably wrong with respect to her conclusion regarding the search order costs. That is, counsel contended that, if Mr Nolten succeeded on appeal, then the whole of the costs discretion would fall to be re-exercised. It followed, so Mr Ehrlich submitted, that her Honour arguably fell into error at par [73] of her reasons for judgment. Counsel for Mr Nolten put it this way: … if the appeal against the dismissal of the counterclaim is successful $470,000 odd, plus the costs of the counterclaim below, plus the costs of the appeal on the dismissal of the counterclaim, arguably, it's just impossible on the evidence … for her Honour to come to the view we would still be indebted. 26 As counsel for Mr Nolten noted, the judgment debt supporting the creditor's petition amounted to $214,000. In essence, Grounds 5 to 8 of the Notice of Appeal challenged what Mr Ehrlich characterized as the essentially speculative character of her Honour's determination that Mr Nolten would likely remain insolvent even if successful on the appeals. Amongst other things, these grounds effectively challenged the Federal Magistrate's holding (at [77]) that, even if Mr Nolten were to succeed in his appeal against dismissal of the counterclaim, "he would be [unlikely to be] successful in convincing the Court of Appeal to set aside the costs order to the extent that his indebtedness to the Applicant would not exceed any order in his favour". 27 Mr Leggatt, who appeared for Groeneveld, argued strongly in support of the Federal Magistrate's determination with respect to Mr Nolten's insolvency. Ultimately, it was his position that Mr Nolten had to succeed on both the appeals (both extant and subject to reinstatement) before insolvency could be avoided. As Mr Ehrlich noted, however, if the appeals were genuine and arguable (as the Federal Magistrate apparently accepted), success would remain a possibility. In this circumstance, it is at least arguable that, as Mr Ehrlich said, the Federal Magistrate's conclusions about the effect of judgments and costs orders were ill-founded. Of course, Mr Ehrlich would go further, submitting that her Honour's conclusions were based on inadmissible evidence that was subject to an objection that ought to have been upheld. 28 Grounds 9 and 10 of the Notice of Appeal specifically challenged the manner in which the Federal Magistrate dealt with the appeal sought to be brought against the 13 October 2011 judgment of Davies J. The Federal Magistrate held that "it is difficult to see how the Respondent can ultimately avoid liability for profits extracted by his corporate alter ego as a direct result of his dishonesty as a fiduciary". It is plain enough, however, from a reading of Davies J's judgments, especially that of 13 October 2011, that the issues that arose for determination were not as straightforward as the Federal Magistrate's statement would indicate. Indeed, the Federal Magistrate heard no real argument on the corporate alter ego issue. More particularly, Davies J's judgment did not involve a finding of the specific kind to which the Federal Magistrate referred. Davies J was concerned with a different issue, namely, whether the Court had in fact ruled on whether Mr Nolten was jointly liable to account for the profits made by the other corporate defendants as the result of his breaches of duty. Moreover, the Federal Magistrate's observation about Mr Nolten's liability for profits is at odds with her finding that Mr Nolten's appeal from the 13 October 2011 judgment was genuine and arguable. It would appear that the Federal Magistrate was, arguably, taking an ill-founded consideration into account. 29 Bearing in mind that the relevant threshold of arguable point is relatively low, I am persuaded that there is an arguable point to be raised on the appeal that Mr Nolten wishes to bring in this Court against the judgment of the Federal Magistrate. 30 The balance of convenience therefore falls for consideration. In determining where the balance of convenience lies, relevant considerations include whether the appeal, if successful, will be rendered nugatory in the absence of a stay, and the prejudice to the other party should a stay be granted. 31 Mr Leggatt, for Groeneveld, argued that the balance of convenience was against the grant of a stay. Summarising his argument as best I can, this was because: 1. Public policy weighed against the stay by reason of the fact that Mr Nolten had admitted that he was a defaulting fiduciary. Mr Nolten was said to be responsible for the misappropriation of nearly $1 million. 2. If the appeal were to be pursued by Mr Nolten, Groeneveld would be put to further expense, which would not be recoverable. Groeneveld had already expended a great deal in the lengthy litigation in the Supreme Court of Victoria. 3. Whether the appeals in the Supreme Court were to be pursued was properly a matter for the trustee. 4. The prospects of success of the appeal against the Federal Magistrate's judgment were low. 32 Mr Ehrlich, for Mr Nolten, argued that the balance of convenience favoured the grant of a stay. Summarising his argument as best I can, this was because: 1. There were good prospects of success on the appeal against the judgment of the Federal Magistrate. 2. The governing principle is that a court in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against a relevant judgment provided the appeal is based on genuine and arguable grounds. The exercise of discretion on the part of the Federal Magistrate miscarried. 3. The Federal Magistrate has accepted that the appeals in the Supreme Court were based on genuine and arguable grounds. It should not be presumed that the trustee of Mr Nolten's estate would pursue them. The fact that Mr Nolten had admitted breaches of fiduciary duty was irrelevant to the consideration of these matters. 4. It was open to Groeneveld to seek security for the costs of the appeal in this Court. 33 Where does the balance of convenience lie in this case? First, the making of the sequestration order does not have the necessary effect of rendering Mr Nolten's appeal from that order nugatory or partly nugatory, in the absence of an order staying the operation of the sequestration order until the hearing of the appeal. This is because the right to appeal against the making of a sequestration order is not property within the meaning of s 5 of the Act and, therefore, does not vest in the trustee on Mr Nolten's bankruptcy: see Cummings v Claremont Petroleum NL (1995) 185 CLR 124 ("Cummings v Claremont Petroleum") at 133-136; Jury v Westpac Banking Corporation [1997] FCA 1277; and Kellow v Dudzinski at [9]. If so minded, Mr Nolten is not prevented by the sequestration order form pursuing the appeal against that order in this Court. The trustee need not realise the bankrupt's assets or make any distribution to creditors until the appeal is finalised. 34 It is, in this circumstance, unnecessary to express any view about the prospects of the appeal against the sequestration order, save to say (as I have already done) that Mr Nolten has raised an arguable point or points. It is also unnecessary to consider further here the basal principle to which Mr Ehrlich referred (see sub par [2] above) or his further proposition that the Federal Magistrate's discretion miscarried. 35 There are, in this case, essentially two other factors bearing on the balance of convenience. The first is the litigation in the Supreme Court - the appeal against dismissal of Mr Nolten's counterclaim and the appeal, which though deemed abandoned would ordinarily be thought to have good prospects of reinstatement. For present purposes, assuming that reinstatement of the second appeal were ordered, I further accept (as indeed the Federal Magistrate found) that the appeals were bona fide and raised arguable questions of law or fact for determination of the appellate court. These circumstances alone are not, however, sufficient for a grant of a stay pending appeal: see Starbourne Holdings Pty Ltd v Radferry Pty Ltd [1998] FCA 548 and the authorities there cited. 36 Mr Ehrlich has submitted that the making of the sequestration order will prevent Mr Nolten from pursuing these appeals, and that this strongly militates in favour of the grant of a stay. In the course of this part of his argument, Mr Ehrlich referred in passing to Adamopoulos v Olympic Airways SA (1990) 95 ALR 525. A reading of this case indicates that Mr Ehrlich intended to refer to a passage in the reasons for judgment of Burchett and Gummow JJ. In discussing the circumstances bearing on the making of a sequestration order, their Honours observed (at 531) that it was not "realistic to entertain any confidence, other than in a special case, that a trustee in bankruptcy will decide to pursue an appeal with merit." Their Honours' observations may provide guidance, especially with respect to the making of a sequestration order, but they are not intended to be definitive, especially in a different, though related, context. 37 In relation to Mr Nolten's capacity to pursue litigation in the Supreme Court, it is necessary to distinguish between claims for personal injury and wrongs and other claims for damages or compensation. Claims of the former kind do not become property of the trustee and may be continued by the bankrupt in his or her own name: see the Act, s 60(4). Claims in the latter category cannot be so continued. As Cooper J said in Kellow v Dudzinski at [12]: Causes of action seeking recovery of damages or compensation, not amounting to personal causes of action for personal injury or wrong done to the bankrupt, are property which vest in the trustee upon a person becoming bankrupt: s 58(1), s 116. A bankrupt has no right to bring or prosecute proceedings to protect, enhance or add to the property of which he or she has been divested on bankruptcy: Cummings v Claremont Petroleum at 135 - 136. 38 The appeal against the dismissal of the counterclaim apparently relates to an action that constitutes property vested in the trustee. The precise characterisation of the second putative appeal might be less straightforward, but, since the point was not argued, I assume (in Mr Nolten's favour) that it too constitutes property vested in the trustee. 39 Decisions regarding the further prosecution of actions after bankruptcy fall to be determined in accordance with s 60(2) of the Act, which provides: 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. Under s 60(5), an action means any civil proceeding and thus includes an appeal: see Cummings v Claremont Petroleum at 132. 40 To the extent that a bankrupt has an interest in seeing claims for the benefit of the estate being litigated to a fruitful conclusion, a decision by the trustee to discontinue such proceedings is reviewable by the Court at the suit of the bankrupt: see the Act, s 178; see also Cummings v Claremont Petroleum at 132, 139, and 142. If the trustee of Mr Nolten's estate decides not to continue with the appeals, the decision is reviewable, either because the appeal was not in the class that passed to the trustee as property, or, if passed, ought in the circumstances to have been pursued, or been made available to the bankrupt to pursue: see Kellow v Dudzinski at [16]. 41 Having regard to the parties' submissions and the statutory regime created by the Act, I am not persuaded that Mr Nolten's interest in seeing that the Supreme Court appeals are pursued will be unreasonably prejudiced by the sequestration order, if a stay is not granted. If the appeals constitute property of the bankrupt vested in the trustee, then, if justified, the appeals could be continued by the trustee. The Act affords the bankrupt an opportunity to challenge a trustee's decision not to pursue the appeals, if the trustee should make such a decision. Compare Cook's Construction Proprietary Limited v Stork Food Systems Australasia Pty Ltd [2008] 2 Qd R 453, where Keane JA (McMurdo P and White AJA agreeing) held that, even if the refusal of a stay were, in the circumstances of that case, to lead to the receivership or liquidation of the appellant, substantive rights could nevertheless be pursued by the receiver or the liquidator. 42 In any event, since the Court of Appeal has adjourned Mr Nolten's reinstatement application sine die pending the outcome of the hearing and determination of his appeal in this Court, it seems likely that none of Mr Nolten's interests in the appeals in the Court of Appeal will be unreasonably prejudiced if a stay of the sequestration order pending the appeal in this Court is not granted. 43 For these reasons, I am not persuaded that there is a real risk of irreparable harm to Mr Nolten if a stay is not granted pending the hearing of the appeal against the judgment of the Federal Magistrate. 44 Against this, there is the position of Groeneveld to be considered. Groeneveld, as petitioning creditor, succeeded in the Federal Magistrates Court. The discretion conferred by Rule 36.08, although broad, is an exception to the general proposition that an appeal does not operate as a stay. Mr Leggatt submitted that there was a public interest dimension to be considered and that this militated against the grant of a stay; and, in general terms, I accept that this is so, although perhaps not for the reason Mr Leggatt advanced. As Greenwood J said in Citrus Queensland Pty Ltd v Sunshine Orchards Pty Ltd [2008] FCA 1867 ("Citrus Queensland") at [39]: That is because the judgment appealed from is prima facie assumed to be correct and a person put to trial in a controversy rather than enjoying the benefit of performance or settlement is entitled to enforce the orders which when made reflect the position inter-parties according to law. … A reason tipping the balance in favour of an applicant in an appropriate case will take account of whether the applicant has discharged an onus of demonstrating that a stay order, in the terms proposed, is "fair to all parties" (Alexander v Cambridge Credit at 694F) having regard to the balance of convenience (i.e. the balance of risks and irremediable harm) and the competing rights of the parties (Alexander v Cambridge Credit at 694G). Furthermore, for a number of years, Groeneveld has been engaged in necessarily expensive litigation in the Supreme Court, in which it has to date been largely successful. 45 Mr Leggatt raised the matter of non-recoverability of costs expended on the appeal in this Court. Absent any particular provision for them (whether by way of undertaking, security, or otherwise) there is an evident risk that Mr Nolten will not be able to satisfy any costs order made against him in the appeal in this Court. Mr Ehrlich did not intimate that any such undertaking, security or other provision might be forthcoming in respect of the appeal in this Court. Circumstances of this kind have been regarded as relevant in the exercise of the discretion conferred by the Rules to grant or refuse a stay pending appeal: see Citrus Queensland at [45]-[46]. Of course, in the present case, the weight accorded this consideration may be affected by the circumstance that a stay is sought against a sequestration order upon the basis of litigation relating to the judgment debt. 46 Ultimately, as Greenwood J observed in Citrus Queensland at [48], "[t]he underlying question is what is fair in striking a balance between the interests of the successful party entitled to its judgment and the risk of irremediable harm to a party should it be successful in the absence of a stay". As stated already, I am not persuaded that there is a real risk of irreparable injury to Mr Nolten if a stay is not granted pending the hearing of the appeal. Against this, there is the prejudice to the successful petitioning creditor in the circumstances mentioned if a stay is granted. 47 In the circumstances of this case, I would refuse the application for a stay of the sequestration order, pending the hearing of the appeal in this Court from the judgment in which the sequestration order was made. The parties will have the opportunity to file short submissions on costs, if they so wish. If no such submissions are filed by 4 pm on 23 December 2011, then I would order that Mr Nolten pay the costs of and incidental to his stay application. I certify that the preceding forty-seven (47) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Kenny.