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[2019] FCA 877
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Federal Court of Australia
2019-06-12
Davies J
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DAVIES J: 1 The appellant has appealed orders of the Federal Circuit Court of Australia ("FCC"): (a) releasing the appellant's property from control under Part X of the Bankruptcy Act 1966 (Cth) ("the Act"), pursuant to s 208 of the Act; and (b) making a sequestration order against the appellant's estate. 2 The basic facts are as follows: (a) The appellant is a debtor of the respondent ("the DCT"). (b) In October 2017, the DCT filed a creditor's petition against the debtor in the FCC. (c) The appellant filed a notice of opposition stating that he intended to oppose the petition on grounds of solvency. (d) In March 2018, orders were made by consent that the hearing of the creditor's petition be adjourned to 10 May 2018 and the appellant file and serve an affidavit setting out his current financial position, including details of all assets, liabilities, income and expenses with supporting documentation by 30 April 2018. (e) On 10 May 2018, further orders were made by consent that the hearing of the creditor's petition be adjourned to 28 June 2018 and extending the time by which the appellant was to file an affidavit setting out his current financial position to 17 May 2018. (f) On the day before the return date, the appellant filed an affidavit in support of an application for another adjournment of the hearing of the creditor's petition. In his affidavit he deposed that the adjournment was sought to: (i) prove that [he was] solvent; and (ii) make an application to have [the] proceeding dismissed. The affidavit set out some financial information including, relevantly the appellant's assertion that he believed he was solvent because he was the owner and developer of an asset in the UK, being a business known as Aero Cards Ltd ("Aero"), the value of which he believed was at least $2 million and exceeded the value of his debts. (g) On 11 July 2018, an affidavit was filed on behalf of the DCT referring to a search of the United Kingdom's register of companies, which contained the information that the appellant was Aero's sole director and shareholder and in his capacity as sole director had approved Aero's balance sheet as at 31 March 2018 on 30 May 2018. Aero's balance sheet as at 31 March 2018 showed that it had total current assets of £15,000, total current liabilities of £953,641, and a negative net worth of -£938,641. (h) On 19 July 2018, the appellant filed a further affidavit in which he deposed that the value of his share in Aero was worth at least $1 million from an urgent sale. He sought a further adjournment of the hearing of the creditor's petition, which was granted and adjourned to 27 July 2018. The appellant was ordered to file and serve any further affidavit as to his solvency by 25 July 2018. (i) On 25 July 2018 the appellant filed and served an affidavit in which he deposed that his liabilities were as set out in an authority pursuant to s 188 of the Act which he had executed in May 2017 and as described in the minutes of a meeting of creditors held on 17 June 2017. He deposed that he had incurred no further liabilities since then. (j) On 27 July 2018, the appellant filed another affidavit in which he deposed that he had sold his share in Aero for $500,000 to a Mr Adam Troost with settlement to take place on 31 July 2018. He also deposed that the settlement was unconditional. The hearing was again adjourned by consent to 17 August 2018. A notation in the orders made 27 July 2018 stated that the DCT had provided his consent to the adjournment on the basis of representations made by the appellant that he would pay the outstanding debt due to the DCT by 15 August 2018. (k) The appellant failed to pay the amount by 15 August 2018 and on 16 August 2018 he signed a further s 188 authority authorising Mr Tony Cant to be his controlling trustee. (l) At the hearing on 17 August 2018, the DCT applied for an order under s 208 of the Act for the release of the appellant's property from control under Part X of the Act and for a sequestration order to be made. The DCT was successful on both applications. 3 Before turning to the decision appealed from, it is necessary to refer to the following other facts set out in the FCC decision: 13. The [appellant] has previously deposed that his share in Aero was worth AU$2 million. Subsequently, he deposed that the value of that share in Aero was worth at least $1 million from an urgent sale. After this, he deposed that he sold his share in Aero for the sum of $500,000 to a Mr Troost with settlement taking place on 31 July 2018. He also deposed that the sale was unconditional. 14. The [appellant] swore two affidavits on 16 August 2018. In the first affidavit, at [15], he states the following in relation to the sale of Aero: In my affidavit sworn 25 July 2018, I deposed to selling my interest in [Aero] to Mr Troost for $500,000. I arranged that sale between the 19 July and 27 July hearings in this proceeding. On 1 August 2018, I went to Sydney to complete the settlement of that transaction. Mr Troost said he wanted to vary the transaction to include my wife's interest in a business in Singapore called Tigereum and would pay the sum of $820,000 so I could pay the applicant in full. I agreed to that change as I considered it to be in the best interests of creditors. At 11 am yesterday, he told me that he did not wish to proceed with the transaction. The substance of his concern was that since the applicant had imposed its DPO upon me, there had been upgrades in the software that runs the banking implementation of Aero. As a consequence of that, he could not be sure that the software infrastructure still works and because I could not travel to the UK to show him or fix it as the case may be, he was not going to proceed with the transaction. 15. I note that he had previously sworn that the transaction was complete. 16. In this first affidavit sworn on 16 August 2018, [the appellant] deposed that on 16 August 2018, he had executed an authority pursuant to s 188 of the Act authorising Mr Tony Cant to become "my controlling trustee". He exhibited the authority and the consent for Mr Cant to become trustee, which was executed on 16 August 2018. He also referred to a receipt of lodgement from the Australian Financial Security Authority. A note of search conducted by the [DCT] of the register maintained by that body did not indicate that any authority or a s 188 agreement had been lodged as at 2:00pm this day. 17. The second affidavit of the [appellant] was filed on 16 August 2018 and that exhibited the following documents: a) the personal insolvency agreement ('PIA') checklist; b) the draft personal insolvency agreement; c) a statement of prescribed information; and d) the [appellant's] statement of affairs. 18. In the proposed PIA, it was proposed that: [6.1] The debtor covenants with the trustee to pay to the trustee the debtor's contribution, being the amount of $820,000, to be paid as follows: (i) the sum of $100,000 has been paid into the trust account of the trustee. The $100,000 is to be transferred to the PIA account following the passing of the special resolution of creditors; (ii) the instalment of $100,000 per month for a period of seven months commencing on or before the expiration of 30 days of the execution of the PIA; and (iii) one instalment of $20,000 prior to the expiration of the eighth month. 19. The statement of affairs which was lodged with the draft PIA noted the summary of expected income for the next 12 months was zero. In terms of employment status, the [appellant] indicated he was not currently employed, had been unemployed for three years and that he had no income. In terms of assets, he stated that he had no cash, no moneys in bank accounts, no tools of trade, no superannuation and no real estate. He did have a motor vehicle worth $7,500. In terms of shares, he stated that he had one share in Aero with a market value of $1.00. 20. The exhibits to the second affidavit sworn 16 August 2018 identified new creditors that had not been previously named by the [appellant] in relation to his financial affairs. These newly identified creditors and the amounts owed to them are: a) Joy Olney, the [appellant's] mother - $15,000; b) Robin Geoffrey - $30,000; c) Ross Smith - $10,000; d) Simon Dickson - $50,000; e) Tom Sergeant - $50,000; and f) Mr Stops, the [appellant's] solicitor - $30,000. 21. According to the [appellant's] proposal and draft PIA, all of the aforementioned creditors (except for Mr Stops) are entitled to vote at the meeting of creditors but will not be entitled to prove for a dividend. The value of those new creditors totals $185,000. The [appellant] deposed on oath that he had not incurred any further liability since the creditors' meeting held on 17 June 2017. [footnotes omitted]
The FCC decision 4 The FCC concluded that it was satisfied that the appellant's conduct in filing the affidavit material referred to at [13]-[21] of the FCC's reasons and submitting the draft personal insolvency agreement ("PIA") amounted to a special circumstance as that expression is used in s 208 of the Act so as to justify the making of an order releasing the appellant's property from control. The FCC reasoned as follows: 23. I was referred to the decision of Beaman v Bond [2014] FCWA 21. At [102] of that decision, the Court stated: Whilst the term "special circumstances" can and often does include an abuse of process, there is nothing to suggest that an abuse of process is pivotal to a finding of special circumstances. Special circumstances are simply those which are out of the ordinary. 24. Where a sophisticated person has sworn numerous affidavits in relation to his financial position and has failed to make reference to these newly identified creditors, has asserted solvency, and has been provided by the Court with the opportunity to establish solvency, the filing of this PIA naming these new creditors constitutes a special circumstance such as to warrant an order releasing the debtor's property from control under that Division. 25. In my view, the [appellant] has been given every opportunity to establish solvency and the material that has been put before the Court by the [appellant] is not such as to persuade the Court that it is in the interests of justice to adjourn the matter further. The [appellant] sought an adjournment until about 28 September 2018, which would take the matter beyond the first meeting of creditors to be held to consider the proposed PIA. Conclusion 26. Given the matters I have raised in relation to the circumstances; the lack of any evidence as to how a personal insolvency agreement is to be funded; the fact that there is such a conflict in the evidence as to the value of any assets that the [appellant] has, and the varying evidence as to the realisation of the value of the assets as it has proceeded through each of the hearings, I conclude that the circumstances warrant an order pursuant to s 208 of the Act and that a sequestration order be made.
Notice of appeal 5 The notice of appeal raised four grounds as follows: 1. Section 189AAA of [the Act] operates as an automatic stay of the proceedings related to a creditor's petition once an authority of section 188 of the Act becomes effective until the conclusion or adjournment of the creditor's meeting, and the Court does not have power to circumvent that stay. 2. Special circumstances did not exist to justify making any order releasing the Appellant's property from control in accordance with section 208 of the Act and the Court was wrong to find that they did. 3. Even if the Court were to release the debtor's property in accordance with section 208 of the Act that would not terminate the stay provided under section 189AAA of the Act as the authority given under section 188 is still effective unless it itself were to be set aside as an abuse of process, which the Court did not do. 4. The Appellant was denied procedural fairness in the Court making an order pursuant to section 208 of the Act in response to an oral application unsupported by affidavit material by the Respondent and based on submissions provided approximately an hour before the hearing. The Court ought to have allowed the Appellant an opportunity to respond to the application and the Applicant was prejudiced in having to respond to the application without notice.
Legislation 6 The relevant provisions of the Act are as follows. Section 189 - Control of property of a debtor who has given authority under s 188 (1) When an authority given by a debtor under s 188 becomes effective, the property of the debtor becomes subject to control under this Division. (1A) The control continues until one of the following events happens: (a) the creditors resolve at a meeting called under this Part that the property cease to be subject to control; (b) the debtor and a trustee execute a personal insolvency agreement following a special resolution of creditors; (d) 4 months pass since the authority under section 188 became effective; (e) the Court, under section 208, releases the property from control; (f) the debtor becomes a bankrupt; (g) the debtor dies. Section 189AAA - Stay of proceedings relating to creditor's petition until meeting of debtor's creditors (1) If: (a) an authority signed by a debtor under section 188 has become effective; and (b) either: (i) a creditor's petition was presented against the debtor before the authority became effective; or (ii) a creditor's petition is presented against the debtor after the authority became effective but before the first or only meeting of the debtor's creditors called under the authority; proceedings relating to that petition are, by force of this subsection, stayed until: (c) the conclusion of the meeting; or (d) the adjournment of the meeting; whichever is the earlier. (2) This section does not limit subsection 206(1). Section 190 - Duties and powers of controlling trustee (1) The controlling trustee must call a meeting of the debtor's creditors under this Division. (2) The controlling trustee is empowered: (a) to take immediate control of the debtor's property and affairs; (b) to make such inquiries and investigations in connexion with the debtor's property and examinable affairs as the trustee considers necessary; (c) to carry on a business of the debtor if, in the opinion of the trustee, it will be in the interests of the creditors to do so; and (d) to deal with the debtor's property in any way that will, in the opinion of the trustee, be in the interests of the creditors. Section 206 - Court may adjourn hearing of petition where creditors have passed resolution for personal insolvency agreement (1) Where: (a) a meeting of creditors has, in accordance with this Part, passed a special resolution requiring a debtor to execute a personal insolvency agreement; and (b) a creditor's petition was presented against the debtor before the passing of the resolution or is presented against him or her after the passing of the resolution but before the agreement has been duly executed; the Court may, upon application by the debtor, a creditor or a person nominated as trustee of the proposed agreement, if it appears to the Court that it would be for the advantage of the creditors that the debtor's affairs be administered under the agreement, adjourn the hearing of the petition for such period as it considers necessary to allow the agreement to be executed and, if the agreement is duly executed within that period, shall dismiss the petition. Section 208 - Termination of control of debtor's property by the Court The Court may make an order releasing the debtor's property from control under this Division if: (a) an interested person applies to the Court for such an order; and (b) the Court is satisfied that special circumstances justify it making the order.
Decision 7 It is convenient to start with ground 4 first. The claim of denial of procedural fairness was not based on the refusal of an adjournment request by reason of the late notice of the s 208 application. Counsel for the appellant acknowledged the legal representative who appeared for the appellant at the hearing on 17 August 2018 did not apply for an adjournment to enable the appellant to respond to the DCT's application for an order under s 208 of the Act. Rather, the basis of the claim of denial of procedural fairness was that the appellant appeared at the hearing represented by his solicitor, not counsel, expecting the statutory stay under s 189AAA of the Act to apply in consequence of the s 188 authority and that the hearing of the creditor's petition would be stayed for 25 business days. It was submitted that the FCC in those circumstances should have adjourned the hearing of the s 208 application to enable the appellant to brief counsel on his behalf to oppose the s 208 application, albeit there was no application for an adjournment made by the solicitor who appeared. The ground is devoid of any merit. The appellant was legally represented and absent any application for an adjournment by the solicitor appearing for the appellant, there was no denial of procedural fairness in the Court proceeding to hear the application. 8 Grounds 1 and 3 can be considered together. Counsel for the appellant argued that an order under s 208 releasing the debtor's property from control under Part X does not have the consequence that an authority signed by a debtor under s 188 ceases to be effective for the purposes of s 189AAA. It was argued that s 189AAA, by its terms, still operates to stay a creditor's petition upon the debtor signing an authority under s 188. It was submitted that to interpret s 208 in any other way is to read down s 189AAA. The extension of the argument was that the only way to negate the effect of s 189AAA would be to find that the authority itself was an abuse of process. 9 These grounds also have no merit. Division 2 of Part X must be read as a whole and read as a whole it is clear that once an order is made under s 208, the provisions of Div 2 of Part X, including s 189AAA, no longer have application to the debtor's property. The effect of a s 188 authority is to enliven the application of the Part X provisions with respect to the affairs of a debtor, which happens by force of s 189(1) which provides that upon giving an effective s 188 authority to a controlling trustee, the property of the debtor becomes subject to control under Div 2 of Part X. Section 189AAA is contained in Div 2 of Part X. The clear purpose of that section is to ensure that once a debtor's property has become subject to control under Div 2 of Part X, the debtor has an opportunity to attempt to come to an agreement with his or her creditors without sequestration by the mechanism of a stay of any creditor's petition until the earlier of the conclusion of the meeting of creditors called by the controlling trustee or the adjournment of the meeting. 10 It is also clear from the statutory scheme that the provisions of Div 2 of Part X apply only where a debtor's property is under the control of that Division. Section 188 must be read together with s 189 and, under s 189(1A)(e), the debtor's property ceases to be subject to control under Div 2 of Part X upon the Court making an order under s 208 releasing the property from control. Section 208 must therefore be read in conjunction with s 189(1A)(e). On the plain terms of these provisions, read together, the effect of an order under s 208 releasing a debtor's property from control under Div 2 of Part X of the Act is that Div 2 of Part X ceases to apply to the debtor's property. Once the provisions of Div 2 of Part X cease to apply to the debtor's property and the debtor's property is no longer subject to control under that Division, s 189AAA also ceases to have any operation. This construction of s 208 does not involve a reading down of s 189AAA, as submitted for the appellant, but is to construe s 208 in its statutory context. 11 In support of ground 2, counsel for the appellant argued that the relevant authority on what constitutes "special circumstances" is Deputy Commissioner of Taxation v Johns (2005) 144 FCR 112; [2005] FCA 1143 ("Johns") and not Beaman v Bond (2014) 328 FLR 256; [2014] FCWA 21 (Crisford J) ("Beaman"), to which the FCC referred. However, there is nothing in that point. In Johns, Edmonds J stated at [110]: The phrase 'special circumstances' is obviously designed to accommodate a great variety of circumstances which are 'out of the ordinary course' in the sense used by his Honour, however, they must be circumstances which justify an order releasing the debtor's property from control of the controlling trustee. 12 As the relevant passage in Beaman makes clear, the Court in that case did not attribute any different meaning. The Court said at [100]-[102]: Edmonds J in [Johns] considered and applied the meaning of 'special circumstances' as adopted by Burchett J in Minister for Community Services and Health v Chee Keong Thoo (1988) 8 AAR 245 at 324, albeit in a different statutory context: ... the core of the idea of "special circumstances" is that there is something unusual or different to take the matter out of the ordinary course... Edmond[s] J continued in Johns at [110]: The phrase "special circumstances" is obviously designed to accommodate a great variety of circumstances which are "out of the ordinary course" in the sense used by his Honour, however, they must be circumstances which justify an order releasing the debtor's property from the control of the controlling trustee. Whilst the term special circumstances can and often does include an abuse of process there is nothing to suggest that an abuse of process is pivotal to a finding of special circumstances. Special circumstances are simply those which are 'out of the ordinary course'. 13 The salient point made in both cases is that the "special circumstances" requirement simply requires circumstances "out of the ordinary" that bear upon the question of whether the Court should exercise its power under s 208. As the cases demonstrate, what will amount to "special circumstances" is not capable of an exhaustive statement but, to constitute "special" circumstances enlivening the Court's power under s 208, the circumstances must be such as to justify an order releasing the debtor's property from control under Div 2 of Part X. It then becomes a question of the proper exercise of discretion. 14 No error is discernible in the reasoning of the FCC that there were features of the case amounting to special circumstances justifying the making of an order under s 208, albeit the reasons were stated succinctly. As the history of the proceedings set out above shows, the appellant persistently maintained he was solvent and supported his claim of solvency with several affidavits. Yet in direct contradiction of his own earlier sworn affidavit evidence that he had not incurred any further liabilities since the creditor's meeting held on 17 June 2017, he filed a further affidavit in which he identified new creditors who had not been previously named by the appellant in relation to his financial affairs. The new creditors identified were: (a) Simon Dixon in the amount of $50,000 for debts incurred between "2016-2018"; (b) Tom Sergeant in the amount of $50,000 for debts incurred between "2016-2018"; (c) Robin Jeffery (a related creditor) in the amount of $30,000 for a debt incurred "5/2017"; (d) Ross Smith in the amount of $10,000 for a debt incurred in "July 2018"; (e) Joy Olney (the appellant's mother and a related creditor) in the amount of $15,000 for a debt incurred in "2018"; and (f) Walpole Menzies (the appellant's solicitor) in the amount of $30,000 for a debt incurred in "2018". 15 In addition, according to the appellant's draft PIA, all of these newly identified creditors (except for the solicitor) were entitled to vote at the meeting of creditors but were not entitled to prove for a dividend. 16 The lateness and timing of the appellant making reference to the newly identified creditors in contradiction of his earlier sworn evidence, in the context of signing a s 188 authority on the eve of the hearing of the creditor's petition, and putting forward a draft PIA which gave these creditors voting rights but no rights to prove for dividends were, in combination, factors capable of supporting a finding of "special circumstances" for the purposes of the exercise of the discretion under s 208. These were factors which distinguished the events from the usual or ordinary case and, in my view, the FCC did not err in law in construing "special circumstances" within the meaning of s 208 of the Act, or act on a wrong principle. There is no identifiable error in the exercise of discretion to release the debtor's assets from control under Div 2 of Part X. The decision was both open to the FCC and justified for the reasons given. I add that if it were necessary to find that the s 188 authority was an abuse of process, that finding would be open on the material before the Court. 17 Accordingly the appeal must be dismissed. I certify that the preceding seventeen (17) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Davies.
Olney-Fraser
Deputy Commissioner of Taxation