Bankruptcy - Judgment founding Bankruptcy Notice subject to appeal - correct approach of court sitting in Bankruptcy to petition for sequestration order brought while appeal still pending - appeal not trivial or insubstantial - Ahern v. Deputy Commissioner of Taxation (Qld) [1987] FCA 312; (1987) 76 ALR 137 applied, sequestration order set aside and petition stood over to a date to be fixed.

Appearance for Appellants: Mr Adamopoulos appeared for

himself and by leave for

Mrs Adamopoulos

Counsel for the First and Mr M.R. Aldridge

Solicitors for the First and Messrs Minter Ellison

UPON the appellants undertaking to this court to prosecute their appeal to the Court of Appeal of the Supreme Court of New South Wales with all due diligence:

2. The orders of Wilcox J. of 5 June 1990 be set aside;

(a) that the petition for sequestration be

adjourned to a date to be fixed;

(b) that the parties to the proceedings by way of

petition may apply to restore the petition to the list

upon reasonable notice;

4. Costs of the appellants of and incidental to the appeal, if any, be taxed and paid by the respondents.

NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

Olympic Airways S.A. ("Olympic) and Qantas Airways Limited ("Qantas"), as petitioning creditors, brought proceedings founded on non-compliance with a bankruptcy notice, against the appellants Constantinos and Andriana Adamopoulos ("Mr and Mrs Adamopoulos"). On 5 June 1990, the matter came before a judge of the court, as a defended matter, when Mr Adamopoulos appeared in person, and was permitted also to appear for Mrs Adamopoulos, his wife. He relied on the fact that the judgment referred to in the bankruptcy notice had been challenged by an appeal, which had not been heard. However, Mr Adamopoulos, whose understanding of court procedures is very far from adequate for the conduct of a case, did not put into evidence the notice of appeal. The learned judge was told that an appointment had been made, in the Court of Appeal of the Supreme Court, to settle the appeal index on 20 July 1990. He pointed out that it was quite obvious the appeal had not been diligently pursued, some thirteen months having passed since the judgment, and held that the pending of the appeal failed to provide a ground for declining to make an immediate sequestration order against each debtor. Accordingly, the appellants' estates were sequestrated and the present appeal followed. It is convenient to consider the issues under two headings.

2. The Bankruptcy Notice, which was dated 21 September 1989, was addressed to the first appellant (Mr Adamopoulos) and to the second appellant (Mrs Adamopoulos) and commenced as follows:

"WHEREAS OLYMPIC AIRWAYS SA of 44 Pitt Street,

Sydney in the State of New South Wales and QANTAS AIRWAYS

LIMITED of Level 15, Qantas International Centre, Jamison

Street, Sydney in the State of New South Wales

(hereinafter collectively referred to as 'the judgment

creditors') have claimed the sum of $85,020.00 together

with interest thereon calculated at the rate of 17 per

centum per annum from 8 May 1989 which at 15 September

1989 amounts of $5,028.98 making a total of $90,048.98

due by you to it (sic) under final orders obtained by

them against you in the Equity Division of the Supreme

Court of New South Wales on 8 May 1989, being orders, the

execution of which has not been stayed:

THEREFORE TAKE NOTICE that within fourteen (14)

days after service of this notice on you, excluding the

day on which the notice is served on you, you are

required -

(a) to pay the sum of $90,048.98 so claimed by

the judgment creditors to the judgment creditors; or

(b) to secure the payment of the sum referred

to in paragraph (a) to the satisfaction of the Federal

Court of Australia or the judgment creditors or compound

the sum so specified to the satisfaction of the judgment

creditors.

. . ."

3. The proceedings in the Equity Division referred to in the Bankruptcy Notice had been commenced by Summons filed 18 August 1988. Olympic was the plaintiff. Qantas did not join as a plaintiff in the equity proceedings. It was joined as the fifth defendant. Mr Adamopoulos was the first defendant in the equity proceedings, and Mrs Adamopoulos was the fourth defendant. Olympic claimed various kinds of relief. In particular, it sought a declaration that the sum of $85,010.00 allegedly paid to Mrs Adamopoulos by the third defendant, Australia and New Zealand Banking Group Limited ("the ANZ") on or about 11 August 1987, from the account of Mr and Mrs Adamopoulos with the Marrickville Branch of the ANZ, No. 78-41785, was the property of Olympic and Qantas, the fifth defendant. There was no cross-claim by Qantas seeking any such relief against Mr or Mrs Adamopoulos. Olympic also sought an order that Mrs Adamopoulos pay to it and Qantas the sum of $85,010.00, together with interest calculated from 11 August 1987 in accordance with s. 94 of the Supreme Court Act 1970 (N.S.W.).

4. At the hearing in the Equity Division, before Powell J., on 4 May 1989, Mr Adamopoulos appeared in person and, by leave, on behalf of Mrs Adamopoulos. In his reasons for judgment, delivered ex tempore on 4 May 1989, Powell J. dealt in detail with the history of various matters in dispute between the parties. We do not repeat what his Honour said, save insofar as it is necessary to do so in order to understand the proceedings in this Court.

5. The second defendant, Trans Atlantic Freight Services Pty Limited (Receiver Appointed) ("Trans Atlantic"), was a company of which Mr and Mrs Adamopoulos, it appears, were at all relevant times the only shareholders and directors. Trans Atlantic had carried on business as a travel agent and had become an accredited agent of the International Air Transport Association ("IATA"). His Honour referred to the decision of the New South Wales Court of Appeal in Stephens Travel Service International Pty Ltd (Receivers and Managers Appointed) v Qantas Airways Ltd (1988) 13 NSWLR 331, as establishing that moneys received by a travel agent, accredited to IATA, in respect of airline tickets issued by the agent on behalf of an IATA member such as Qantas or Olympic, being moneys not yet accounted for to the relevant IATA member, were held on trust by the agent for that IATA member.

"Although the material which is before me does not

enable me to identify all of the tickets in respect of

which, during the course of June, and early July, 1987,

moneys were paid to Trans Atlantic by, or on behalf of,

its customers, such material as is before me does enable

me to say, with confidence that sums totalling well in

excess of $120,000.00 were, during that period, paid to

Trans Atlantic in respect of the tickets issued by it, on

behalf of Olympic and Qantas, during June 1987. Such

material also enables me to say, with confidence, that,

contrary to what ought to have been done, those moneys to

which I have just referred were paid, not into Trans

Atlantic's Trust Account, but into its General Account,

at the Marrickville Branch of the Third Defendant ('the

ANZ') which Defendant was, at all relevant times, Trans

Atlantic's banker.

On 7th July 1987 - at which time Trans Atlantic's

General Account with the ANZ stood in credit in a sum in

excess of $130,000.00 (Exhibit 'C(i)') - Mr. Adamopoulos

drew on that account, in favour of himself and Mrs.

Adamopoulos, a cheque for $120,000.00 (Exhibit 'C(ii)')

the proceeds of which cheque were then placed on fixed

deposit, for 7 days, with the ANZ in the names of Mr. and

Mrs. Adamopoulos (Exhibits 'C(iii)', 'C(iv)'); that fixed

deposit appears thereafter to have been 'rolled over' on

a number of occasions, the last of which was 4th August

1987 (Exhibits 'C(iii)', 'C(iv)').

. . .

On 10th August 1987 - that is, on the day prior to

the fixed deposit with the ANZ maturing - or on 11th

August 1987 - the position is anything but clear - there

were delivered to the Manager of the ANZ at its

Marrickville Branch, two documents - both apparently

signed by Mrs. Adamopoulos - the first of which (Exhibit

`C(v)') was as follows: -

`10/8/1987

The Manager,

ANZ Bank,

MARRICKVILLE.

RE: FIXED DEPOSIT $121,126.10

C and A ADAMOPOULOS DUE 11/8.1987

Please part prepay the above deposit today

and pay $60,000 as follows: -

- $10,000 CASH

- $50,000 T/T $A to A/c

A. Adamopoulos at

Grindlays Bank, Athens

A/c No. 20 27 71 3050.

20.00 to pay cost of T/T.

Y.F.

A. Adamopoulos

C and A ADAMOPOULOS.

Received $10,000

CASH

A. Adamopoulos'

and the second of which (Exhibit `C(vi)') was

as follows:-

`The Manager,

ANZ Bank,

MARRICKVILLE.

RE: FIXED DEPOSIT $61,126.10

C and A ADAMOPOULOS DUE 11/8/87

Please part renew the above deposit as

follows:-

- $36,371.85 and Interest for a further 7

days.

- $25,000 CASH

$61,371.85

A. Adamopoulos

Y.F.

It does not seem to be disputed that these documents

were signed by Mrs. Adamopoulos, at least with the

knowledge of, if not at the direction of, Mr. Adamopoulos

(see Affidavit C. Adamopoulos sworn 22nd March 1989

Paras. 14,15; . . .).'"

7. His Honour also found that on 10th or 11th August 1987, the ANZ acted on the requests or directions contained in these two documents.

8. His Honour went on to hold that the detailed evidence placed before him made it clear that such moneys as stood to the credit of Trans Atlantic's general account on 7 July 1987, the day on which the cheque for $120,000 was drawn by Mr Adamopoulos on that account in favour of himself and his wife, "were impressed with a trust in favour of one or other of Olympic and Qantas". His Honour said it followed that when the $120,000 was withdrawn from that general account and placed on deposit in the names of Mr and Mrs Adamopoulos, the moneys were misapplied in breach of trust.

"It is, further, clear that, as Mr. and Mrs.

Adamopoulos were the only Directors of Trans Atlantic,

and as, in addition, some part, at least, of the moneys

so misapplied, was paid to one, or other, of them, or

otherwise applied to their personal purposes, they must

be regarded as having facilitated the commission of the

breach of trust, and as having received the proceeds the

moneys (sic) so applied, upon trust for one or other of

Olympic and Qantas (see Consul Development v. D.PC

Estates Pty. Limited [1975] HCA 8; (1974-1975) 132 CLR 373; Stephens

Travel Service International Pty. Limited (Receivers and

Managers Appointed) v. Qantas Airways Limited (supra)).

The result must necessarily be that, to the extent

to which the moneys can be traced, and their present

whereabouts identified, the person - in this case, the

ANZ - in whose control they now are can be directed to

pay them direct to Olympic and Qantas; and to the extent

to which those moneys may no longer be traced, Mr. and

Mrs. Adamopoulos are liable to pay them to Olympic and

Qantas - since they have been privy to the breach of

trust, with interest (see, for example, Re Emmett's

Estate (1881) LR 17 Ch D 142, Re Barclay (1899) 1 Ch

674; Wallersteiner v. Moir (No. 2) (1975) QB 373

(CA); (1975) 1 AER 849 (CA))."

10. It will be recalled that the moneys withdrawn on 10th or 11th August 1987 from the fixed deposit were drawn partly in cash and as to $50,000 remitted by telegraphic transfer to an account in Athens. It follows from his Honour's reasoning, as applied to these sums, that as the consequence of their facilitation of the breach of trust by Trans Atlantic, Mr and Mrs Adamopoulos had a personal liability in equity to account to Olympic and Qantas. There was no suggestion that Qantas and Olympic were asserting a joint right of recoupment from Mr and Mrs Adamopoulos. Therefore, it became necessary to quantify the respective claims of the airlines in the funds misapplied in breach of trust. His Honour said that the evidence before him did not permit him to say what was "the exact content of each trust". His Honour indicated that could be determined only upon an inquiry, but that Olympic and Qantas had "determined upon a commercial solution". His Honour then set out the terms of that solution which included the following:

"3. if, and when, the $85,020.00 - not, as

appears in Summons, Amended Summons and the Notice of

Motion, '$85,010.00' - the subject of Prayers 5, 6 and 7

in the Notice of Motion and interest thereon is ever

recovered from Mr. and Mrs. Adamopoulos, such amount as

is, from time to time, recovered will be divided between

Olympic and Qantas in the proportions 64:36

respectively."

11. There is nothing in his Honour's reasons to suggest that Mr and Mrs Adamopoulos consented to this arrangement between Olympic and Qantas. Further, it will be recalled that in the equity proceedings Qantas and Mr and Mrs Adamopoulos appeared on the same side of the record, as defendants; there was no cross-claim brought by Qantas against its fellow defendants.

12. The orders designed to give effect to Powell J.'s judgment appear to have been entered on 8 May 1989. It was, inter alia, declared that the sum of $85,020 paid to Mr and Mrs Adamopoulos by the ANZ from the account in question "is the property of the plaintiff (Olympic) and the fifth defendant (Qantas)". Paragraphs 6 and 7 were orders that:

"6. the first and fourth defendants pay to the plaintiff and the fifth defendant the sum of $85,020.00;

7. the first and fourth defendants pay to the

plaintiff and the fifth defendant interest on the said sum of $85,020.00 calculated from 11 August 1987 under and in accordance with Section 94 of the Supreme Court Act, 1970 (NSW);"

13. A question arises (and there is no need to attempt to resolve it at the present stage of the proceedings in this Court) whether orders drawn in this way did in truth give effect to his Honour's reasons for judgment, there having been no inquiry to quantify the separate rights of the two airlines as against Mr and Mrs Adamopoulos, but merely a consensual arrangement arrived at between the airlines, which, however, did not reflect any res judicata binding Mr and Mrs Adamopoulos.

14. We have set out the relevant portion of the Bankruptcy Notice dated 21 September 1989. It does appear to be drawn on the footing that the sum claimed by the creditors is a joint debt. In particular, the Bankruptcy Notice is not drawn in such a way as to reflect the proportions 64:36 provided for in the commercial arrangement between the creditors. Further, whilst to express the sum claimed as if it were an obligation owed to the airlines jointly might reflect the tenor of the orders taken out in the Supreme Court, that circumstance attracts attention to the possible disconformity between the orders and the reasons for judgment of Powell J. On either way of looking at the matter, there appears to be a difficulty with the Bankruptcy Notice.

15. The Petition is dated 1 November 1989, and is based upon non-compliance with the Bankruptcy Notice. It may be that, on the hearing of the Petition, it would be appropriate for this Court to "go behind" the orders of the Supreme Court upon which the Bankruptcy Notice was purportedly based.

16. But the first question to be answered is, what is the effect of the appeal? The learned judge said:

"I do not think that it would be a correct exercise

of discretion for this Court to refuse a sequestration

order upon the basis that a judgment entered after a

contested hearing before a Supreme Court judge is subject

to an appeal, particularly with a history of dilatoriness

in prosecuting an appeal from that decision. If a

sequestration order is made it will be a matter for the

trustee of the bankrupt estates to determine whether to

pursue the appeal. One may be confident that, if there

is any substantial merit in the appeal, this step will be

taken."

17. With respect, we do not think this view of the matter is consistent with authority. An appeal against the very judgment which founds the bankruptcy notice is a matter of significance requiring advertence to the possibility that the appeal may be justified. Nor is it realistic to entertain any confidence, in other than a special case, that a trustee in bankruptcy will decide to pursue an appeal with merit. The extremely experienced counsel who appeared for the respondents was unable to recall any instance where such a thing had happened. A much more likely consequence of a sequestration order is the abandonment of the appeal, whatever its merits, and its dismissal for non-prosecution.

18. In Ahern v. Deputy Commissioner of Taxation (Qld) [1987] FCA 312; (1987) 76 ALR 137 at 148, the joint judgment of Davies, Lockhart and Neaves JJ. laid down the governing principle in the following terms:

"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)

[1907] HCA 39; 5 CLR 64 and Re Verma; Ex parte DCT [1984] FCA 340; (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

19. It will, of course, be observed that the principle is stated in terms which acknowledge the existence of exceptions; it operates "in general". For situations which were held to raise considerations making them fall outside the general rule, see Re Verma (supra); Re Lewin and Glasson; Ex parte Milner (1986) 67 ALR 591.

20. In the present case, the misstatement of principle caused the court's discretion to miscarry. It was therefore necessary for us to exercise the discretion in the manner which appeared to us to be appropriate. We took account of the difficulties attending the judgment of the Supreme Court, some of which only emerged during the course of the argument upon the appeal. While those difficulties might be resolved adversely to the appellants, they should not be considered trivial or unimportant. They appear to us to involve a genuine dispute. If the prosecution of the appeal has been dilatory, that dispute has not been terminated in the obvious way, by an application to the Court of Appeal for its dismissal. On the contrary, it was not questioned that settlement of the appeal index was due to proceed on 20 July. In the circumstances, it would be wrong (if not, as Bowen L.J. said in Ex parte Heyworth. In re Rhodes (1884) 14 QBD 49 at 52, "a monstrous thing") to make the appellants bankrupt upon this judgment. As was emphasized in Ahern, bankruptcy is more than the enforcement of a judgment: it adversely changes status and subjects the bankrupt to potential criminal liabilities. The court must be satisfied, when making an order of such gravity, that its foundation is secure.

21. For these reasons, which we now publish, we thought it right to order, at the conclusion of the hearing of the appeal, that the appeal be allowed and, upon undertakings by the appellants to prosecute their appeal to the Court of Appeal with all due diligence, that the sequestration orders against the appellants be set aside and that the petition be adjourned to a date to be fixed. Liberty was reserved to apply to restore the petition to the list upon reasonable notice.

I have read the reasons of Burchett and Gummow JJ. I would be content to express my agreement with what their Honours have said, except that I prefer to express my own view of the principle laid down in Ahern v. Deputy Commissioner of Taxation (Qld) (19987-1988) [1987] FCA 312; 76 ALR 137. It is my opinion that it is necessary to keep firmly in mind that the power to adjourn a bankruptcy petition is one of a discretionary kind. Where an adjournment of the petition is sought on the ground that an appeal has been instituted against the judgment debt underlying the proceedings, a variety of factors may have an important bearing on the exercise of the discretion. It may be influenced by evidence that the judgment debtor is, in any event, insolvent, by the Court's forming the opionion that the appeal, although arguable, has little chance of success, by consideration of the possibility that the costs of the appeal may significantly diminish the amount available for distribution to creditors and by other matters: see, for example, Re Lewin and Glasson; Ex parte Milner (1986) 67 ALR 591. It would be unfortunate if the general principle stated in Ahern's case were to be applied too rigidly, particularly where execution on the judgment appealed against has not been stayed, so that the judgment creditor may have the debtor's assets sold pending the appeal; there is no general rule that a money judgment is stayed pending appeal: Myer Emporium Ltd v. Federal Commissioner of Taxation (No. 1) [1986] HCA 13; (1986-1987) 160 CLR 220 at 222, 223.

2. However, I respectfully express the opinion that here the learned primary judge exercised his discretion without regard to the general principle laid down in Ahern's case and I concur in the reasons of Burchett and Gummow JJ. subject to what is said above.