OCT, Ton meee ce ne ue v epeycaes

Federal Court of Australia|1987-09-15|Before: Wilcox J, Neaves JJ

PRACTICE and PROCEDURE - Leave to appeal from the decision of primary

Judge's refusal to adjourn bankruptcy petition - appellate court's review of primary judge''s discretion refusing adjournment - general principles of review by appellate courts apply to bankruptcy

proceedings - application of sub-s. 201(1) Income Tax Assessment Act

BANKRUPTCY - Judgment obtained by Commissioner for tax owing - - whether sequestration order should have been made when tax appeals in Supreme Court against assessments were pending when petition for sequestration heard.

t Administrative Decisions (Judicial Review) Act 1977

JOHN WAYMOUTH AHERN v. DEPUTY COMMISSIONER OF TAXATION

BETWEEN: JOHN WAYMOUTH AHERN Appellant AND: DEPUTY COMMISSIONER OF TAXATION Respondent JUDGES MAKING ORDER: DAVIES, LOCKHART and NEAVES JJ. DATE OF ORDER: 15 SEPTEMBER 1987 WHERE ORDER MADE: SYDNEY

Leave be granted to the appellant to appeal from the order of the primary Judge refusing an adjournment of the petition presented on 1 May 1987 to seguestrate the estate of the

The appeal be allowed from the order mentioned in 1. above and from the order made by the primary Judge on 29 June 1987

The sequestration order and the order for costs made by the

Costs of the proceedings at first instance be reserved and

The appellant's costs of the motion for leave to appeal and

The petition for sequestration and the applications for

directions, adjournment of the hearing of the petition and

for judicial review under the Administrative Decisions

(Judicial Review) Act, 1977, be restored to the list for

Settlement and entry of orders is dealt with in Order 36 of

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT On 29 June 1987 a single Judge of this Court (Wilcox J.)

refused an application by John Waymouth Ahern ("the appellant") to adjourn a bankruptcy petition presented by the Deputy Commissioner of Taxation ("the respondent"). The learned primary Judge, having refused the adjournment, then heard the petition and made a sequestration order against the appellant's estate. The appellant seeks leave of this Court to appeal from the order refusing the adjournment, it being an interlocutory order, and appeals against the

The petition was presented on or about 1 May 1987. It claims that the appellant is indebted to the respondent in the sum of

$4,148,374.80 being the amount owing under a final judgment obtained

by the respondent against the appellant in the Supreme Court of Queensland on 8 May 1986 for income tax, provisional tax and

The act of bankruptcy upon which the petition is based is the failure of the appellant to comply with the requirements of a bankruptcy notice served upon him on 4 April 1987. The above judgment for $4,148,374.80, which is a default judgment, is the foundation of the bankruptcy notice. The assessments which underlie the judgment relate to income allegedly derived by the appellant during the years

ended 30 June 1974 to 30 June 1982 inclusive and 30 June 1984.

A notice of intention to oppose the petition was filed by the

appellant in which four grounds are relied upon, namely:-

"1. The Petitioner failed to serve on the Applicant a valid Bankruptcy Notice.

The Applicant has not committed the act of bankruptcy referred to in paragraph 4 of the Petition or at all.

The judgment debt referred to in the Bankruptcy Notice 1s in respect of Notices of Assessment issued by the Petitioner, relating to appeals from the Petitioner's decision not to allow the objections in respect thereof, which appeals have not yet been determined by the Supreme Court of Queensland.

The Applicant has applied to the Federal Court of Queensland [sic] pursuant to the provisions of the Administrative Decisions (Judicial Review) Act 1977 for review of decisions of the Petitioner relating to these proceedings."

The appellant asserts that the income to which' the

assessments relate was received, not by him, but by certain trustees

a Sale tied icaeeatecigliaien aeetatcneen nian ntaeiee at

-or companies, by whom the appellant was retained from time to time,

which had been constituted in the normal course of lawful family tax planning activities. The solicitor for the appellant has sworn that if the taxation appeals are upheld the appellant's liability to the

The appellant was convicted on 19 December 1986 on a charge of conspiracy to defraud the Commonwealth and was sentenced to a term of eighteen months' imprisonment. At all material times the appellant has been held as a prisoner in the Palen Creek Prison Farm in

The appellant lodged notices of objection against the various assessments. The objections were disallowed by the respondent and, at the request of the appellant, the objections were treated as appeals and transmitted to the Supreme Court of Queensland for determination. The appeals were instituted on 28 October 1985. They were listed for directions before a Judge of the Supreme Court on 8 November 1985 when various directions were made by consent of the parties including directions for request and provision of particulars, discovery of documents, the administration of interrogatories, service of notices to admit facts or documents and an order that all appeals be

Certain of the directions were complied with by the parties but, because of the volume of work involved, the matters were listed for further directions before another Judge of the Supreme Court of Queensland on 17 April 1986 and his Honour ordered by consent that

time for compliance with certain of the directions be extended. The

reason for the extension of time was that the Australian Taxation

Office had located a large number of relevant documents then held by the Director of Public Prosecutions and it became necessary for the respondent to file supplementary affidavits of documents. The total number of documents disclosed in the various affidavits of documents

exceeded 13,000 and inspection was not completed until May 1987.

In the writ issued by the respondent out of the Supreme Court of Queensland, in addition to claiming the recovery of the amount of income tax, provisional tax and additional tax, the respondent also sought a Mareva injunction to restrain the appellant from disposing of his assets within the jurisdiction. Shortly after the issue of the writ the respondent obtained a Mareva injunction against the appellant but on 9 May 1986 it was set aside by the Full Court of Queensland. A Mareva injunction on modified terms was then granted to the respondent against the appellant on 16 May 1986 by a single Judge of the Supreme Court of Queensland. Pursuant to leave given to the respondent to amend the writ in the Supreme Court proceedings, a claim was inserted against the appellant s for declarations that certain specific alienations of property by the appellant were void pursuant to s. 228 of the Property Law Act 1975 (Qld). More than one amendment has been made by the respondent to the writ, the most recent amendment being on 1 April 1987 pursuant to an order of a Master of the Supreme Court made on 25 March 1987. Mr. Carter, the solicitor for the appellant, has sworn that the appellant has not yet received a statement of claim amended to give effect to the general endorsement now appearing on the writ. The Mareva

injunction granted on 16 May 1986 restrains the appellant and a

company, Karpouzi Pty. Limited ("Karpouzi"), from disposing of or

.dealing with their assets in the State of Queensland and from removing

any such assets from the State of Queensland; but the injunction specifically excepts from its operation living expenses of the appellant, his wife and youngest child, legal expenses of the appellant and Karpouzi and the reimbusement to a son of the appellant

of certain legal expenses paid by him for the appellant and Karpouzi

On 29 June 1987, when the petation came before the primary Judge, the solicitor for the appellant was in the course of drafting notices to admit facts and documents in the tax appeal proceedings, to be settled by counsel; but because of the volume of work involved he expected that the preparation of the draft documents would not be completed until, at the earliest, late July 1987. In accordance with the practice directions of the Supreme Court of Queensland, once a letter signed by both parties certifying that a taxation appeal is in all respects ready for hearing is filed, the appeal is placed in a callover list with priority. The solicitor for the appellant has sworn that as soon as the time limited for replying to the notices to admit facts and documents expires he will enter the appeals for

The bankruptcy notice was issued on 18 March 1987 and served on the appellant on 4 April, 1987. Mr. Carter, the appellant's solicitor, has sworn that on or about 1 April 1987 his office was informed by an officer of the respondent's solicitor that they were contemplating issuing a bankruptcy notice against the appellant. He swore that he did not know that the bankruptcy notice or the

creditor's petition had been issued or served upon the appellant until

_20 May 1987 when the appellant, who was then in prison, informed hin

that the petition had been served on him recently and that he had given that petition to his wife to deliver to Mr. Carter. Mr. Carter

received the petition from Mrs. Ahern on Sunday, 24 May 1987.

Following the informal intimation from the respondent's solicitors that bankruptcy proceedings were contemplated a request was made on behalf of the appellant to the respondent on 8 April 1987 seeking a statement under s. 13 of the Administrative Decisions

(Judicial Review) Act 1977 (the "Judicial Review Act"). On 7 May 1987

the Australian Government Solicitor refused to furnish the statement on the ground that by virtue of paragraph (f) and/or paragraph (m) of

the Second Schedule to the Judicial Review Act s. 13 did not apply to

On 19 June 1987 the following documents were filed in this

(a) the appellant's notice of intention to oppose the petition;

(b) an application by the appellant under the Judicial Review Act to review certain decisions of the respondent, namely, the decision to cause a bankruptcy notice to be issued to the appellant, the decision to serve the bankruptcy notice upon the appellant, the decision not to furnish to the appellant a statement in writing under s. 13 of the Judicial Review Act, the decision to cause a creditor's petition to be issued relying on the bankruptcy notice, the decision not to consent to the dismissal of the petition and the decision not to consent to the adjournment of the hearing of the petition

until after the determination of the taxation appeals;

an application by the appellant for an order adjourning the hearing of the petition until after the final determination of the taxation appeals by the Supreme Court;

an application by the appellant for directions as to the future conduct of the appellant's application for the adjournment of the hearing of the petition and for the hearing of the appellant's notice of intention to oppose the petition; and

two affidavits sworn by Mr. Carter. In one of these

affidavits, Mr. Carter swore that he had a close knowledge of

determination will last several weeks." Mr. Carter also swore that the inmates of Palen Creek Prison Farm do not have access to the telephone in the normal way and they mainly depend upon visits from relatives and friends to communicate with the outside world. He also swore that to the best of his knowledge and belief the appellant has no

other creditors who would prove in his bankruptcy apart from

Mr. Carter also swore that in his opinion the hearing of the application for an adjournment of the bankruptcy petition would take up to two weeks to enable the appellant to demonstrate to the Court that his taxation appeals are based

On 19 June the Queensland registry of this Court informed Mr. Carter's office that the following matters would be heard by the Court

(b) a directions hearing in respect of the appellant's application for an order of review;

A clerk employed by the appellant's solicitor had attempted before 19 June 1987 to file the appellant's application for directions in the Queensland registry of the Court, but the District Registrar informed her that he declined to allocate a return date for that application and the other applications to which I have referred until he had an opportunity to peruse the material in support thereof,

to estimate the time involved and to consult with the Judges.

On 19 June 1987 the solicitor for the appellant wrote to the solicitor for the respondent and served upon him copies of the application for directions, the application for adjournment of the hearing of the petition, the notice of intention to oppose the petition, the application for an order of review and the affidavits of Mr. Carter together with exhibits. In the letter the statement was made that the solicitor for the appellant had endeavoured to obtain a return date before the return date of the petition but the current

commitments of the Judges of the Court precluded this being done. The

.letter also stated that the District Registrar of the Court had asked

the solicitor for the appellant to inform the solicitor for the respondent that the petition could not in the circumstances be dealt with by the District Registrar in the Friday list, a usual bankruptcy list, namely, 26 June 1987, and would have to be adjourned to the following Monday, 29 June 1987. The matter was apparently mentioned on 26 June 1987 by solicitors for the parties and then formally

All the matters were listed for hearing on 29 June 1987 before the primary Judge and both parties were represented by senior and junior counsel. Senior counsel for the appellant submitted to the Court that the matters were clearly ones where it would be appropriate to seek directions before the hearing of the petition in view of the

complexity of the issues and the considerable documentation involved.

The primary Judge heard the petition and other matters on 29

June 1987. His Honour said in ex tempore reasons for judgment

"IT am of the opinion that the application for an adjournment of the hearing should not be granted.

The position, as appears from the evidence to which I have been taken, is that the solicitor for the Gebtor, Mr A B Carter, was informed on 1 April last by an officer of the Deputy Commissioner of Taxation of the possibility of bankruptcy proceedings being taken against the debtor. It appears , according to the allegation in the petition, that a bankruptcy notice was served upon the debtor on 4 April 1987 requiring compliance on or before 27 April 1987. The petition was served on 14 May. There was apparently a delay of about 10 days in Mr Carter being instructed in the Matter. But even if one counts from that time -- that is to say, 24 May -- a period of five weeks has elapsed. The petition was made returnable on

Friday, 26 June; that is to say, last Friday. I should have thought that it would be obvious to the debtor and to those acting on his behalf that it would be essential by that date to have material which was persuasive that there ought to be an adjournment.

It is true that an attempt was made to have the matter listed for hearing before today; but that attempt was apparently not made until 17 June. Even if it had been possible to arrange an early directions hearing, prior to 26 June, it seems inevitable that after any directions date there would not have been sufficient time for the evidence to be put in order between then and the return date of the petition. Had the Registrar, on 17 June, been able to arrange a prompt directions hearing -- for example, last Monday, 22 June -- the judge giving directions would have been confronted with the situation that he was being asked to make directions which would ensure that there would be an adjournment of the hearing. There would have only been two possible courses if Mr Ahern was to give evidence in support of the application for adjournment. One of these would have been to have taken his evidence orally; a course which, in my opinion, would have been highly inappropriate, involving, as it would, his giving oral evidence of a multitude of transactions over a period of ten years. This would have been a very slow and inefficient way of putting his evidence before the Court. But even if a judge had been persuaded to adopt this course, it would have been most unlikely that this could have been arranged before the return date. The alternative would have been to direct that Mr Ahern's evidence be taken on affidavit, but, given its complexity, there would have been no chance of a satisfactory affidavit being filed before 26 June. In consequence, the result of the late application for directions was that the Court would have been forced into a situation of granting an adjournment despite the lack of proper material to ground that application.

I deal with the matter on the same basis as I would have done had I been considering directions prior to a hearing date. I do not think that the debtor should be prejudiced by the fact that a directions hearing could not be arranged last week. But it seems to me that the cause of the debtor's problem is the lack of action between 24 May and 17 June. If it had been desired to seek a lengthy adjournment of the petition, promptly upon service and instructions being given to the debtor's solicitors, steps should have been taken to prepare a substantive affidavit on behalf of the debtor. If, for some reason, it was thought inappropriate immediately to prepare that affidavit without

directions, the matter coujd have been listed for directions very shortly after Mr Carter was instructed on 24 May.

It would then have been possible for the judge dealing with the matter to have made appropriate directions to ensure a proper hearing of the adjournment application not later than the return date of the petition. The debtor and his advisers appear to have allowed the critical weeks to slip by. I do not think that the Court should simply bow to this by granting an adjournment today, when

there is no material to justify that course being taken.

Consequently, I refuse the application for an adjournment. There are a number of grounds of opposition advanced, and I will consider these after the luncheon adjournment. I will adjourn now until 2.15 p.m."

Later that day the primary Judge proceeded to hear the petition. He dealt with the four grounds of opposition to the petition to which we have referred earlier and considered the first two grounds together. He said that the point taken on behalf of the appellant was that the bankruptcy notice was served upon him whilst he was held as a prisoner at the Palen Creek Prison Farm. He rejected the argument that the bankruptcy notice was invalid because he was unable, by reason of his imprisonment, personally to go to the office

of the respondent and attempt to compound his debt. His Honour said:

"The consequence of the argument is that, in the case of a person who is precluded from making personal contact with his creditor, para. (g) would be unavailable as a source of an act of bankruptcy. The argument would have to extend beyond prisoners to all debtors who for other reasons -- such as illness or distance -- are unable to make personal contact with their creditor.

Counsel for the debtor has informed me that there is no authority on the matter. It seems to me that the submission is inconsistent with principle and must be rejected. The purpose of para. ({g) is to provide a method of determining whether a debtor is able to pay his debts as they fall due. The

legislature has taken into account the possibility

debtor necessarily has to have the opportunity personally to approach the creditor. An approach might be made through an agent."

The references to "para. (g)" are, of course, references to

para. 40(1)(g) of the Bankrutpcy Act 1966 ("the Bankruptcy Act").

H1s Honour then dealt with the fourth ground. He said that it referred to the fact that on 17 June 1987, only nine days before the return date of the petition, the application was filed under the

Judicial Review Act. The application was in fact filed on 19 June

His Honour held that the pendency of those proceedings did not provide a reason for exercising the Court's discretion under para. 52(2)(b) of the the Bankruptcy Act adversely to the respondent. His

"It is well settled that the effect of the Income Tax Assessment Act 1936 is to give to the Deputy Commissioner of Taxation the right to take proceedings for recovery of unpaid tax notwithstanding the pendency of other proceedings. This applies even when proceedings challenging the correctness of the assessment are awaiting hearing. It is sufficient to refer to Clyne v The Deputy Commissioner of Taxation (1983) 57 ALJR 673. The principle adopted by the High Court in that case must apply a fortiori to proceedings which are merely collateral to the issue whether or not the assessments were properly made."

The third ground of opposition was then dealt with by his Honour which was the one which he said occupied the greatest attention at the hearing before him. His Honour referred to the evidence that substantial funds are available to the appellant from various

proprietary companies. He mentioned that the appellant was not a

Girector of any of the companies, two of which appear to be controlled by persons in the Channel Islands, and the other by one or more of his sons. However, the companies, and in particular Karpouzi, have apparently been willing to provide funds as required by the appellant. His Honour said that he gathered that Karpouzi is the trustee of a family trust of whom the appellant's wife is a beneficiary and that the appellant's wife has only to ask her son when she needs money and she then receives it. It appears that Karpouzi has contributed something like half a million dollars towards legal expenses in recent times, mostly in connection with the criminal proceedings. His Honour said that Karpouzi retained very considerable assets in Queensland and

"In consequence, there is no reason to believe that the effect of a sequestration order would be that the necessary funds for prosecution of the tax appeals were lacking. It is true that the Official Receiver would have to determine his attitude towards continuation of the tax appeals. But this is not a case where he would be dependent upon the opposing party to fund those appeals, if he thinks that they are well based. As Mr Carter put it, if Mr Ahern was made bankrupt today, he thought that the companies would wish to carry on the appeals and would offer to fund them. Having regard to the fact that the funding of the appeals will come from assets which are subject to a Mareva injunction, I see no detriment in having an independent view taken about the prospects of the appeals before further substantial expense is incurred.

The other aspect of the matter is that, contrary to the impression which might have been gained from the fact that there is here no evidence of any personal assets of Mr Ahern, it appears that he is in the fortunate position of being able to control considerable assets owned by the companies. It was said in an affidavit by Mr Carter that the basis of Mr Ahern's dispute about his taxation liability is that he has been assessed for income which was, in fact, earned by various companies. The identity of those companies has not been spelt out. But, having regard to the assets apparently controlled by Karpouzi, it may be that this is one of the companies about which Mr Carter was speaking. It

is possible that Karpouzi's assets have nothing to do with Mr Ahern, in the sense that they are not part of his divisible estate upon bankruptcy; but the contrary is also possible, and it seems to me that there is a public interest in the administration as soon as possible of Mr Ahern's estate by a person in the position of an independent trustee. For all of these reasons, I am of the view that the Court should exercise the

discretion conferred by s. 52(2) of the Act in favour of the petitioning creditor.

I reject each of the grounds of opposition. The appropriate formal evidence as to the continuance

of the debt having been filed and read, I propose to pronounce a seguestration order."

His Honour then made a sequestration order against the estate of the

At the outset of the hearing before us we decided, for convenience, to hear together the application for leave to appeal against the primary Judge's order refusing the adjournment of the petition and the substantive argument in support of the contention

that his Honour erred in refusing to grant the adjournment.

In support of the application for leave to appeal it was submitted by counsel for the appellant that the decision to refuse an adjournment was wrong in that it put an end to the dispute between the parties by effectively barring the appellant from adducing sufficient evidence to persuade the Court to dismiss the petition or adjourn it until after the hearing of the tax appeals by the Supreme Court. It was argued that the primary Judge erred in finding that the appellant and his advisers allowed critical weeks to slip by and that the giving of oral evidence on the full hearing of the application for adjournment would be inappropriate. It was submitted that, as the

appellant had filed affidavit material which showed that the facts of

the case were seriously in contest, the primary Judge failed properly to exercise his discretion and that the result was unjust as the

In support of the appellant's argument that the primary Judge erred in refusing an adjournment it was submitted that his Honour acted erroneously in that he failed to approach the matter on the basis that it was, prima facie, the right of the appellant that he be entitled to present his case. There was a breach of the fundamental principle of natural justice that a litigant must be given reasonable opportunity to appear and present his case. It was said that the appellant was deprived of a fair hearing of his case in opposition to the petition. It was clear that a great deal of evidence existed which the appellant wished to adduce in seeking an adjournment or dismissal of the petition and that the primary Judge failed to give

The same arguments to which we have already referred were, in substance, relied upon by counsel for the appellant in submitting that the primary Judge erred in making the sequestration order. In addition it was argued that the appellant was deprived of a hearing on the merits of the application for an order of review under the

Judicial Review Act. The same argument that was put unsuccessfully to

the primary Judge was put to us, namely, that, as the appellant was in prison at the time of service of the bankruptcy notice, he could not comply with its requirements and therefore no act of bankruptcy was

Counsel for the respondent argued that, in respect of his Honour's decision refusing the grant of an adjournment and his decision to make a sequestration order, the appellant did not discharge the onus of persuading the primary Judge to adjourn the hearing of the petition or persuade him, pursuant to sub-s. 52(2) of the Bankruptcy Act, that for other sufficient cause a sequestration

It was submitted that his Honour did not err in making the sequestration order. It was argued that his Honour took into account the fact that the tax appeals were pending in the Supreme Court and correctly refused to dismiss the petition on that basis. It was also submitted that his Honour correctly found that the making of a sequestration order against the appellant would not frustrate the conduct of the tax appeals as the right to conduct them vested in the Official Trustee. His Honour correctly relied on evidence from the solicitor for the appellant that he would confidently expect the tax appeals to contzrnue and to be funded from the same sources as the appellant, his wife and family are presently funded. It was submitted that evidence exists which shows that there is "available" to the appellant in excess of one million dollars in Australia and in excess of one million dollars overseas and that it is unlikely that he will be deprived of money to conduct his tax appeals or any other

It was also submitted by counsel for the respondent that the

fact that the Judicial Review Act proceedings were pending and became

academic because of his Honour''s order is not relevant as counsel for the appellant did not oppose the hearing of the petition prior to the

determination of the Judicial Review Act proceedings.

petition was within the discretion of the primary Judge.

This sufficiently summarises the arguments of counsel for

The decision whether or not to adjourn the hearing of the It is well

established that an appellate court will rarely interfere with a trial

Judge's exercise of discretion upon an application for adjournment.

However, the refusal to grant an adjournment may in some cases prevent

the party seeking it from presenting his case or defence and in some

circumstances this may result in injustice of such kind or magnitude

described this passage from the judgment of Aitkin L.J.

"I quite agree the Court of Appeal ought to be very slow indeed to interfere with the discretion of the

learned judge on such a question as an adjournment of a trial, and it very seldom does do so; but, on

the other hand, if it appears that the result of the order made below is to defeat the rights of the parties altogether, and to do that which the Court of Appeal is satisfied would be an injustice to one or other of the parties, then the Court has power to review such an order, and it is, to my mind, its

"the rule in terms which have won general acceptance."

"First where the refusal of an adjournment would result in a serious injustice to the party requesting the adjournment, the adjournment should only be refused if that is the only way that justice can be done to the other party; and, secondly, that although the granting or refusal of an adjournment is a matter of discretion, if an appellate court is satisfied that the discretion has been exercised in such a way as would result in an injustice to one of the parties, such appellate court has both the power and the duty to review the exercise of the discretion."

A related principle, though derived from a different strean

of authority, was expressed in Cameron v. Cole (1944) 68 C.L.R. 571 by

"Tt is a fundamental principle of natural justice, applicable to all courts whether superior or inferior, that a person against whom a claim or charge is made must be given a_ reasonable opportunity of appearing and presenting his case."

To similar effect Dixon C.J. and Webb J. said in Commissioner of

».- it is a deep-rooted principle of the law that before anyone can be punished or prejudiced in his person or property by any judicial or quasi-judicial proceeding he must be afforded an adequate opportunity of being heard."

See also Taylor v. Taylor (1979) 143 C.L.R. 1 per Gibbs J. at 4.

The principles that guide a court when sitting on an appeal from a discretionary order or judgment have been referred to many times. The principles are summarised by Kitto J. in Australian Coal

and Shale Employees' Federation v. Commonwealth (1953) 94 C.L.R. 621

"Tt shall not repeat the references I made in Lovell v. Lovell (1950) 81 C.L.R. 513, at pp. 532-4 to cases of the highest authority which appear to me to establish that the true principle limiting the manner in which appellate jurisdiction is exercised in respect of decisions involving discretionary judgment is that there is a strong presumption in favour of the correctness of the decision appealed from, and that that decision should therefore be affirmed unless the court of appeal is satisfied that it is clearly wrong. A degree of satisfaction sufficient to overcome the strength of the presumption may exist where there has been an error which consists in acting upon a wrong principle, or giving weight to extraneous or irrelevant matters, or failing to give weight or sufficient weight to relevant considerations, or making a mistake as to the facts. Again, the nature of the error may not be discoverable, but even so it is sufficient that the result is so unreasonable or plainly unjust that the appellate court may infer that there has been a failure properly to exercise the discretion which the law reposes in the court of first instance: House v. The King (1936) 55 C.L.R. 499

This passage was cited with approval in the joint judgment of

the Full Court of the High Court in Rodgers v. Rodgers (1964) 114

C.L.R. 608 at 619-20. See also Niemann v. Electronic Industries Ltd

[1978] V.R. 431, especially per Murphy J. at 435-6.

These principles apply to proceedings under bankruptcy legislation including, as here, the hearing of a petition to sequestrate a debtor''s estate. The court hearing a bankruptcy petition is directed by statute to require proof of the fact that the debt on which the petitioning creditor relies is still owing (para. 52(1)(c)); and it is not until the court is satisfied with proof of that matter and other matters of which paras. 52(1)(a) and (b) speak

that it may make a sequestration order against the estate of the

son err anthers iva teeaeeniin? Hak Miebenieineiicy derent aneties

It is well established that a court exercising bankruptcy jurisdiction has undoubted discretion to go behind a judgment, particularly one obtained by default or compromise or where fraud or collusion is involved and inquire whether the judgment is founded on a

real debt: Corney v. Brien (1951) 84 C.L.R. 343. Where the judgment

is by default the court will go behind the judgment if there is a bona fide allegation that no real debt underlies the judgment: Corney v. Brien (supra). Even where the judgment was obtained following a hearing on the merits where both parties appeared, if there are substantial reasons for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor, the court will go behind the judgment and inquire into the consideration

for it: Wren v. Mahony (1972) 126 C.L.R. 212 per Barwick C.J., with

whose reasons Windeyer and Owen JJ. agreed; Menzies and Walsh JJ.

"The judgment is never conclusive in bankruptcy. It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment. But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor's debt. In that sense that court has a discretion. It may or may not so accept the judgment. But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as_ such satisfactory proof. It must then exercise its power, or if you will, its discretion to look at what is behind the judgment: to what is its

It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to seguestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds: Re

Rhodes; ex parte Heyworth (1884) 14 Q.B.D. 49; Bayne v. Baillieu

(1907) 5 C.L.R. 64 and Re Verma: Ex parte Deputy Commissioner of

These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It

involves change of status and has quasi-penal consequences.

In income tax cases an additional consideration to be taken into account is the policy expressed in sub-s. 201(1) of the Income

Tax Assessment Act 1936 whereby the fact that an appeal 1s pending

shall not in the meantime interfere with or affect the assessment the subject of the appeal or reference; and income tax may be recovered on the assessment as if no appeal were pending. This section is called in aid by the respondent. In one sense proceedings in bankruptcy are proceedings to recover an assessment within the meaning of s. 201, but that provision must operate within the general framework of the law of

bankruptcy including the provisions of s. 52 of the Bankruptcy Act.

Section 201 is a relevant matter for the Court to consider when

exercising its powers on the adjournment of the bankruptcy petition or

on considering whether to make a sequestration order, but it is not

itself dispositive of the matter. The Court's powers and discretions

In the present case it is significant that all the evidence relating to the question of the adjournment of the petition was given on behalf of by the appellant. The facts were not in dispute before the primary Judge. Central to his Honour's reasoning was the fact that in his view the appellant had delayed unduly in adducing evidence

to support the application for the adjournment of the petition.

The appellant sought a return date of the application for directions to deal with the question of the adjournment of the petition and the further question of proving an arguable case to support the adjournment or dismissal of the petition. Affidavits were filed by the appellant's solicitor based in part on information and belief. It does not appear to us to have been unreasonable for the evidence to be based on information and belief because the appellant himself was in prison and there was evidence from Mr. Carter, which was not disputed, that there was difficulty in obtaining prompt instructions from him due to the problems necessarily attendant upon the appellant being in prison. The appellant's legal advisers took the view that the issues involved in the tax appeals before the Supreme Court were so complex that it was proper to seek this Court's directions as to the proper conduct of both the application to adjourn the hearing of the petition and the hearing of the grounds of opposition to the petition itself. The solicitor for the appellant endeavoured to obtain an earlier date for the directions hearing; but,

through no fault of any person, he was unable to obtain that date

-before 29 June 1987 when all matters were listed before the primary

Judge in Brisbane. In our view there was nothing unreasonable in the

attitude of the solicitor for the appellant in filing the application for directions and affidavit in support and in approaching the hearing on 29 June 1987 on the basis that the application for directions should be the primary matter for hearing that day. Indeed, it seems

to us to have been in all the circumstances a sensible course to have

We respectfully disagree with the primary Judge that the appellant was guilty of delay in preparing his case in support of the application to adjourn the petition or in support of his grounds of opposition to the petition. We have already recited the relevant

facts. They do not in our opinion establish dilatory conduct on the

It 1s not a case where the challenge by a debtor to the petitioning creditor's debt had not even commenced in a court of competent jurisdiction. The tax appeals to the Supreme Court were well advanced. They had been instituted in the Supreme Court in October 1985. Directions had been given by that Court on more than

one occasion. Though the proceedings had not progressed with any

evident sense of urgency, it is significant that discovery of

documents has occupied a long time; principally, it seems, because the respondent had filed more than one affidavit of discovery in view of the very large number of documents involved which were found to be in the possession of the Director of Public Prosecutions. There 1s no suggestion of undue delay in the Supreme Court proceedings by the

appellant or the respondent. The proceedings are almost ready for the

. issue of a certificate for trial and the hearing of them should take

place in the not too distant future. No attempt has been made in the Supreme Court to strike out or dismiss the proceedings as vexatious or embarrassing or an abuse of process, yet there has been ample time for

the respondent to have taken this course if he thought it appropriate.

We would be slow to interfere with the discretion of the primary Judge on the question of the adjournment of the bankruptcy petition. But the appellant has been made bankrupt when the granting of the adjournment would have enabled appropriate material to have been placed before the Court, following the giving of directions, so that the Court would be in a position to determine whether there is a reasonably arguable case for the appellant in support of his tax appeals to the Supreme Court. The appellant has been deprived of an opportunity to present his case in support of the adjournment of the

petition pending the outcome of the Supreme Court tax appeals; and he

In our opinion the appropriate course for the primary Judge to have followed was to have heard the application for directions and to have adjourned the petition to a later date when the question whether the appellant had established a reasonably arguable case in support of his tax appeals to the Supreme Court could have been determined. Whether a hearing of some two weeks is necessary for this purpose, as is foreshadowed in the evidence filed on behalf of the appellant before the primary Judge, is a matter for debate. It surprises us, as some method must surely be found of narrowing the issues, whether by a sampling process as to certain receipts of income

or otherwise. It is plainly not desirable that there be a mini trial

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Judgment (210 paragraphs)

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Cited By (6)