Re Bryant ex parte Bryant v Commonwealth Bank of Australia

Federal Court of Australia|1994-05-04|Before: Hill J, Kiefel J

CATCHWORDS BANKRUPTCY - application to extend time for compliance with bankruptcy notice - arguable case - whether Court must consider prospects of success - discretion of Court - contribution by co-surety Bankruptcy Act 1966 s 41(6A),(6B),(6C) Re Bryant ex parte Bryant v Commonwealth Bank of Australia (unreported decision of Hill J Federal Court of Australia 4 May 1994) Refd Re Bryant v Commonwealth Bank of Australia (unreported decision of Full Court 9 November 1994) Cons Re Lentini ex parte Lentini v CSR (1991) 29 FCR 363 Refd Re Taylor ex parte Deputy Commissioner (1983) 74 FLR 377 Cons Ahern v Deputy Commissioner of Taxation (1987) 76 ALR 137 Refd Adamopoulos & Anor v Olympic Airways SA & Anor (1990) 95 ALR 525 Refd Re Dowson ex parte The Abovenamed v Kaku (unreported decision of Kiefel J Federal Court of Australia 1 September 1995) Refd Monk v Smith (1893) 14 NSWR (Eq) 311 Refd Mahoney v McManus (1981) 180 CLR 370 Refd Re Noela May Baker ex parte The Abovenamed v Douglas Reginald Staples Re Peter James Baker ex parte The Abovenamed v Douglas Reginald Staples No QN 613 of 1995 No QN 614 of 1995 Kiefel J Brisbane 4 September 1995

IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND No. QN 613 of 1995 RE: NOELA MAY BAKER EX PARTE: THE ABOVENAMED Applicant AND: DOUGLAS REGINALD STAPLES Respondent JUDGE MAKING ORDER: Kiefel J. DATE OF ORDER: 4 September 1995 WHERE MADE: Brisbane MINUTES OF ORDERS THE COURT ORDERS THAT: 1. The time for compliance with the bankruptcy notice be extended until the determination of the appeal. 2. The judgment creditor pay the costs of and incidental to this application. NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND No. QN 614 of 1995 RE: PETER JAMES BAKER EX PARTE: THE ABOVENAMED Applicant AND: DOUGLAS REGINALD STAPLES Respondent JUDGE MAKING ORDER: Kiefel J. DATE OF ORDER: 4 September 1995 WHERE MADE: Brisbane MINUTES OF ORDERS THE COURT ORDERS THAT: 1. The time for compliance with the bankruptcy notice be extended until the determination of the appeal. 2. The judgment creditor pay the costs of and incidental to this application.

NOTE: Settlement and entry of orders is dealt with in Rule 124 of the Bankruptcy Rules.

IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND No. QN 613 of 1995 RE: NOELA MAY BAKER EX PARTE: THE ABOVENAMED Applicant AND: DOUGLAS REGINALD STAPLES Respondent IN THE FEDERAL COURT OF AUSTRALIA GENERAL DIVISION BANKRUPTCY DISTRICT OF THE STATE OF QUEENSLAND No. QN 614 of 1995 RE: PETER JAMES BAKER EX PARTE: THE ABOVENAMED Applicant AND: DOUGLAS REGINALD STAPLES Respondent CORAM: Kiefel J. DATE: 4 September 1995 PLACE: Brisbane

REASONS FOR JUDGMENT The judgment debtors, Mr and Mrs Baker, apply pursuant to s.41(6A) Bankruptcy Act 1966 to extend the time for their compliance with bankruptcy notices issued on 10 May 1995 which were founded upon judgments, each in the sum of $108,204.12, entered in the District Court of Queensland against them. The alternative order sought in the applications, to set aside the bankruptcy notice, is not presently pursued and it may be unnecessary to do so depending upon the outcome of this application. An appeal from the decision of the District Court Judge was filed on 2 June 1995. No issue arises as to the appeal being instituted bona fide or as to its prosecution, with due diligence (see s.41(6C)). The only matter raised by the judgment creditor against an extension is that the appeal has only slight prospects of success, if that. Sub-section (6A) of s.41 provides as follows: "(6A) Where, before the expiration of the time fixed by the Court or the Registrar for compliance with the requirements of a bankruptcy notice - (a) proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or (b) an application to set aside the bankruptcy notice has been filed with the Registrar, the Court may, subject to sub-section (6C), extend the time for compliance with the bankruptcy notice." and the "proceedings to set aside the judgment or order" in respect of which the section speaks are apt to refer to an appeal to set aside the judgment in respect of which the bankruptcy notice was issued. This is clear enough from the words used in the sub-section and its purposes and I respectfully concur with the observations of Hill J. in Re Bryant ex parte Bryant v. Commonwealth Bank of Australia (unreported decision, 4 May 1994 pages 17, 18). His Honour's view was confirmed on appeal: Bryant v. Commonwealth Bank of Australia (unreported decision of the Full Court 9 November 1994, p. 13. Any doubts which had been expressed in Re Lentini; ex parte Lentini v. CSR Limited (1991) 29 FCR 363, must in my view be regarded as concluded to the contrary. During the course of this hearing it emerged that, in an application for a stay against the judgment heard by the Court of Appeal of the Supreme Court of Queensland (which was refused but on grounds not relevant here), senior counsel then appearing for the judgment creditor made the concession that the appeal was arguable. Faced with that, Mr Martin who was junior counsel on that application, submitted that whilst it was arguable, the appellants' prospects were so slight that in the wide discretion which arises under s.41(6A) I should decline an extension of time until the determination of the appeal. I was not taken to any authority for this proposition nor was it made apparent to me why, as a matter of principle and having regard to the purpose of the sub-section, that that should be so. Clearly the discretion under the sub-section is at large: see Re Taylor ex parte Deputy Commissioner (1983) 74 FLR 377, 379. But that is to say that account may be taken of whatever factors appear relevant in the particular case. It does not say much of the position where, as here, there is only one factor to consider, namely the existence of a bona fide and arguable appeal which has been instituted and prosecuted with diligence. In such a case I can see no warrant for inquiring into the relevant merits of the grounds of the appeal and forming a view as to its outcome. I can think of sound practical considerations why that course should not be pursued, not the least of which is that what is presented to this Court under the guise of this "factor" going to discretion is not even a fully argued case. If the grounds of appeal were hopeless and completely without merit then a finding could fairly readily be made that it is not an arguable appeal and indeed the view may be taken that it was not instituted bona fide but for the purposes, for instance, of delay. But that is not the case here, and it is noteworthy that the argument about its prospects ranged over some hours. It ought to be borne in mind that I am not asked here by the debtor to go behind the judgment, which may arise on the hearing of a petition. By that time however the question as to whether the judgment stands will have been determined. Section 41(6A) allows for the matter to be litigated and finally determined although, of course, the filing of an appeal will not alone produce that result. At this point whether there is a liability for the debt is sought to be ascertained by the process of appeal. Cases concerned with whether an adjournment of a petition ought to be granted, where an appeal is outstanding, hold that it is generally desirable to permit the conclusion of investigation into liability before a sequestration order is made: Ahern v. Deputy Commissioner of Taxation (1987) 76 ALR 137 and Adamopoulos & Anor v. Olympic Airways SA & Anor (1990) 95 ALR 525, at least where it is shown that the dispute is "genuine". In this respect I have recently referred to that requirement in Re Dowson ex parte The Abovenamed v. Kaku 1 September 1995. A similar approach ought, in my view, apply to the grant of an extension of time in which to comply with the bankruptcy notice. In Ahern, 148, the Full Court said: "It is also well established that in general a court exercising jurisdiction in bankruptcy 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 proceedings provided that the appeal is based on genuine and arguable grounds: Re Rhodes; Ex parte Heyworth (1884) 14 QBD 49; Bayne v. Baillieu (1907) 5 CLR 64 and Re Verma; Ex parte DCT (1985) 4 FCR 181. 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." Sub-sections (6A) (6B) and (6C) of s.41, in providing for an extension of time where a judgment or order is under investigation, recognise the serious consequences which follow if a bankruptcy notice is not complied with. At least where the proceeding taken is genuine and arguable, the course the sub-section allows is that a person ought not be called upon to answer the notice and have his/her solvency tested without the order upon which it is based being first tested. It would hardly be of comfort to the judgment debtors or a just outcome to have the judgment set aside and then be faced with all that flows from having committed an act of bankruptcy in failing to comply with it. The sub-sections must be taken to recognise those problems. It is, I think, not to the point to suggest, as the judgment creditor did here, that they ought be required to make payment if the creditor secures repayment to them in the event their appeal succeeds. Some reference was made in argument to a decision of the Full Court in Bryant's case, p. 13 where the Court said: "... in determining whether or not to extend the time for compliance, his Honour was obliged to form some view of the prospects of success. We would not disagree with his Honour's finding that the prospects of success were slight, in the light of the very limited issue ...

We seen no error in the manner in which the trial Judge exercised his discretion. His Honour was bound to take account of the prospects of success and of the period of time likely to pass before the Appeal is heard and determined. ..." In the circumstances of that case however, I do not take it as authority for the proposition that the view to be formed is one which goes beyond whether an appeal is properly arguable. It might there have well been said that his Honour, Hill J., was obliged to form some view about the prospects of success, for there were obviously none. Hill J. (p.19) referred to the fact that, at the hearing, liability had been admitted, no evidence was offered with respect to the issue of quantum and that a question as to whether the appeal was instituted bona fide was raised. A view as to prospects was obliged in that sense but it seems that his Honour's description of them as "slight" was merely by way of polite expression of a hopeless case. Similarly, in Re Taylor the question of the "prospect of success in the appeal" was raised in unusual circumstances. There it appeared that counsel for the debtor had not even turned his mind to the question and left it to Sheppard J. to research the matter. Having undertaken that invidious task, his Honour however came to the view that there was not "any reasonable basis for a successful challenge". Whilst I do not then consider that it is necessary to determine whether the debtors' appeal can be said to have more than slight prospects, given here that further applications are likely, I propose to say something about the matter. The judgment debtors, the judgment creditor and the judgment creditor's son were all guarantors of an advance by the Queensland Industry Development Corporation ("QIDC") to a company which conducted their business. The security which had been provided by way of mortgages was respectively over the debtors' house property and the father and son's farm property upon which the business was actually conducted. That land was in turn leased to the business. After dispute arose between the parties their guarantees were called upon. The judgment debtors paid to QIDC the sum of $170,000 representing the net proceeds of the sale of their house property. The judgment creditor contended that he had paid $346,000 (and his son $173,000) and it was for contribution to that sum paid by him that the proceedings in the District Court were brought. The son, by this time, had entered into an arrangement with his creditors under Part X of the Bankruptcy Act and indeed it appears his financial difficulties had been apprehended by him and his father for some time. That provides some background to the view of the facts for which the debtors contend. The two principal grounds sought to be argued in the Appeal are, firstly, whether the father in fact made the contribution and, secondly, whether he acting in concert with his son was in breach of an obligation as co-surety to preserve assets to which the debtors might have recourse. It is to the first of these grounds which I propose to refer being that which has, in my view, more than a slight prospect of success. The debtors do not seek to affect any finding of credit made by the trial Judge. Rather they will argue that the contemporaneous documents clearly disclose the true nature of the transaction and by whom the amount of $346,000 was paid or, if it is not so clear, at least that such questions were raised as to require an explanation, which could have been provided by witnesses such as the judgment creditors' solicitor and other witnesses from the QIDC and the Commonwealth Bank who were opened and not called at the trial. On one view of the documents, it seems to me, the monies were not in truth paid by the father. They were the son's monies. The son however was not a plaintiff in the District Court proceedings. By a document which is dated 22 February 1993, which appears to record in an informal way some agreement between the judgment creditor and his son, reference was made to a debt of $340,000 owed to the father for a debt under a guarantee in terms: "$340,000 bank guarantee re QIDC loan. DRS has to pay under his guarantee for the QIDC loan" (DRS being the father). Taken with other monies due by way of rent, a total liability to the father exceeding $500,000 was recorded. It appears the parties then contemplated taking a charge over the son's interest in the property jointly owned with the father, to secure this indebtedness. In fact no payment of $340,000 had been made on that date. On 24 March 1993 a letter from the Commonwealth Bank recorded that payment had been made on that day to QIDC and two advances by that financier one of $170,000 in the name of the son and $335,000 to the father. That letter might support the view that the father in fact paid the sum advanced to him to QIDC but for the transaction earlier recorded which appears to have been confirmed by subsequent events. I say "might" because it does not necessarily follow that because loans are taken by two persons that a payment or payments to a third party are to be regarded as emanating from the same persons and in the same amounts.

On 30 March 1993 a Deed of Loan was prepared by the solicitor for the father and son recording a debt of $500,000. There were no debts other than those referred to in the agreement of 22 February 1993, which included the sum of $340,000. This document was not stamped until 19 November 1993. By that time the solicitor had recorded an advance of that amount to the son, and perhaps his wife. The minutes of the son's later creditors meeting convened under Part X (over which the solicitor for the son and father presided) records the son advising the meeting that he had granted a mortgage in the sum of $500,000 to his father over his interest in the jointly owned property because he had received an advance from his father to pay out a loan to QIDC. Despite the date which there appears it can only refer to the payment to QIDC in March 1993. His Honour placed some reliance upon the terms of the agreement of 22 February 1993 which I have set out above to come to a different conclusion as to whether the monies paid were the father's. It does not appear to me however to be clear that it was referring to the father's guarantee and, in any event, the statement was made in the background of the recital that a charge was intended to be given to the father to secure repayment "of certain loans made to me" (the son) which were listed and included the sum of $340,000. The father lodged a proof of debt for that sum in his son's estate. Given the terms of the agreements, the representations to the Commissioner of Stamp Duty upon the loan agreement, and the assertion to the trustee and creditors that the mortgage had been given by the son to secure monies due to his father a conclusion that an amount of $340,000 was advanced to the son and not paid by the father to QIDC seems inescapable, unless of course it were suggested that the mortgage of his interest in the land was not for valuable consideration. The creditor's counsel did not make this submission. It was however acknowledged that those parties sought to place the father in a position where he could sue for contribution, since the son was likely not to be able to bring proceedings himself in the near future. But on the view I take of the matter they cannot have it all ways. The result sought to be achieved by them was a total payment between them of about $518,000, with recourse however by the father to another $173,000 from Mr and Mrs Baker and an interest in land which, if the first mortgage had to be paid out, would return at least $320,000. It goes without saying that a person can only claim contribution if payment has been made by that person. On that basis alone the father's claim might be defeated. But even were he held to have made the payment on his own account that would not necessarily conclude the matter, for here he has only taken on that obligation, not by agreement with all co-sureties, but by indemnifying himself. In those circumstances equity might require him, if he called for contribution with respect to the payment so secured, to bring into account a proportion of the same security: see eg Monk v. Smith (1893) 14 NSWLR (Eq) 311, the doctrine of contribution being equitable and applied "to equalise the burden": Rowlatt on Principal and Surety 4th ed. p. 152 and see Mahoney v. McManus (1981) 180 CLR 370, 378. No doubt the legal representatives for the judgment creditors might say that the view I have taken of the documents and of the position which the father and son sought to achieve reflects an insufficient understanding of all of the facts of the case including the oral evidence to which I was not referred. If that is so, it serves to show why such a process should not be undertaken on applications such as this. It is unnecessary, I consider, to deal with the second point to be raised on the appeal which in any event was considerably less persuasive given the trial Judge's finding that no loss was suffered. I propose to order that the time for compliance with each of the bankruptcy notices issued against the judgment debtors be extended until the determination of their appeal and that the judgment creditor pay their costs of and incidental to these applications. I certify that this and the preceding ten pages are a true copy of the reasons for judgment herein of the Honourable Justice Kiefel. Associate Date: 4 September 1995 Counsel for the applicant: Mr K Varley Solicitors for the applicant: Barwicks Counsel for the respondent: Mr M Martin

Solicitors for the respondent: Baker Johnson Date of Hearing: 31 August 1995 Place of Hearing: Brisbane Date of Judgment: 4 September 1995

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