Federal Magistrates Court of Australia|2003-10-01

Reid & Anor v Hubbard & Esandcee Pty [2003] FMCA 407 (1 October 2003)

BANKRUPTCY - Application by third party to set aside bankruptcy notice - circumstances in which bankruptcy notice can be set aside for abuse of process - whether unmeritorious defences in pending proceedings in the Supreme Court of Victoria constitute an abuse of process - Mareva Injunction - whether assets of the debtor subject to Mareva Injunction as debtor are available to a creditor for execution of judgment - Application dismissed.

Bankruptcy Act 1966 (Cth), ss.30, 30(1), 208, 40(1)(g), 41(1), 41(1)(g), 41(3)(b), 41(6A), 41(6C), 303

Legal Practice Act 1996 (Vic), ss.86(1), 86(2), 86(3)

Re Stirling; Ex parte Esanda Ltd [1980] FCA 61; (1980) 30 ALR 77

Re Sterling; Eex parte Esanda [1980] FCA 61; (1980) 44 FLR 125

Briggs, Re; Ex parte Briggs v Deputy Commissioner of Taxation (WA) (1986) 12 FCR 310

Re Howarth; Ex parte Mortgage Acceptance Nominees Ltd [1993] FCA 370; (1993) 43 FCR 587

Bourke v Beneficial Finance Corporation Ltd [1996] 47 FCR 264

Re Husten; Ex parte Kendall, McAdam & O'Dwyer [1985] FCA 465; [1985] 8 FCR 355

Re Longo; Ex Parte [1995] FCA 1324; (1995) 57 FCR 523

Lentini; Ex parte v CSR Ltd (t/a Readymix Group) (1991) 29 FCR 363

Brunninhausen v Glavanics [1998] FCA 230

Lindholdt v Merritt Madden Printing Pty Ltd [2002] FCA 260, (unreported delivered on 15 March 2002)

Amos v Brisbane TV Ltd [2000] FCA 825

Flower & Hart v White Industries (QLD) Pty Ltd [1998] FCA 806; (1998) 156 ALR 169

William v Spautz [1992] HCA 34; (1992) 174 CLR 509

R v Henderson (1898) AC 720

Metall and Rohstoff v Donaldson Inc (53) (1977) 1 WLR

Rozenbee v Kronhill [1956] HCA 65; (1956) 95 CLR 407

Re Ousley; Ex parte Commissioner of Taxation [1994] FCA 883; 48 FCR 131

Madestra v Penfold Wines Pty Ltd (1993) 44 FLR 303

Re Ling; Ex parte Enrobook Pty Ltd (1996)142 ALR 87

Noel Ling; Ex parte Enrobook Pty Ltd (1996) 1105 FCA

Ling v Enrobbok Pty Ltd [1997] FCA 226; (1997) 74 FCR 19

Reid & Hubbard v Mansell (No 1) [2003] FMCA 266

Fisse, B, Howard's Criminal Law, 5th ed, Law Book Co, 1990

MICHAEL JAMES REID (by his litigation guardian SUSAN REID)

(1) THAT the time for compliance with the bankruptcy notice be extended until 5.00pm on 7 October 2003.

(2) THAT the Application filed 18 August 2003 otherwise be dismissed.

(3) THAT written submissions in relation to costs be filed and served no later than 4.00pm on 7 October 2003.

SUSAN REID and MICHAEL JAMES REID (by his litigation guardian SUSAN REID)

1. This application is brought by the applicants to set aside a bankruptcy notice which was issued on 28 July 2003. The time for payment expired on 19 August 2003 and has been further extended by orders made on 18 and 20 August 2003 until the hearing and determination of the applicants' proceeding to set it aside.

2. The application is brought by the first and second applicants, (the second applicant being the son of the first applicant) against John Harold Hubbard, the first respondent ("the debtor") and Esandcee Pty Ltd, the second respondent ("the creditor"). Esandcee is the company through which the legal practice of Strongman and Crouch is conducted.

3. It is common ground that Strongman and Crouch have acted for the debtor in proceedings brought by the applicants in the Supreme Court of Victoria ("the Supreme Court proceedings"). Those proceedings are presently listed for hearing on 29 September 2003. They are at the heart of proceedings in this court.

Previous proceedings in the Federal Magistrates Court

4. Following a hearing on 18 and 20 June 2003 judgment was delivered in proceedings between the applicants and the debtor and Richard Gell Mansell who had been appointed the controlling trustee of the debtor's estate pursuant to s.188 of the Bankruptcy Act 1966 Cth ("the Act")[1]. The result of those proceedings was that pursuant to s.208 of the Act the property of the creditor was released from the control of the controlling trustee.

5. The background to the Supreme Court proceedings bears some explanation. In 1997 the father of the first applicant and the debtor ("the father") established a discretionary trust called the J R H Family Trust. The trustee of that trust is a company called Hubbard Holdings Pty Ltd. In 1997 a solicitor, Colin Boltman, and the debtor were appointed directors of Hubbard Holdings Pty Ltd. The primary beneficiaries of the trust are the first applicant and the debtor who are siblings. The class of general beneficiaries includes wider relations.

6. In 1997 the father advanced in excess of $8 million to Hubbard Holdings Pty Ltd on behalf of the J R H Family Trust by way of loan.

7. On 7 November 1998 the father died. By the terms of his will his residuary estate was to be divided into two equal parts, one part to form the corpus of a testamentary trust for Hubbard entitled "John's Fund" and the other part to form the corpus of a testamentary trust for the first applicant entitled "Susan's Fund".

8. The beneficiaries of John's Fund are the debtor, his wife and descendants (and their spouses). The general beneficiaries of Susan's Fund are the applicant and her descendants (and their spouses). Her only living descendant is the second-named applicant.

9. At 30 June 1998, just four months before the father died, the beneficiaries' loan accounts of the J R H Family Trust indicated a loan to the trust from the father in the sum of $9,163,577. The balance sheet of the trust as at 30 June 1998 indicated that the assets and receivables of the trust included $5,600,000 in term deposits and $3,400,000 in shares in listed companies, units in listed and unlisted trusts and investment property. The assets of the trust thus according to the balance sheet totalled $9 million.

10. At no relevant time has the first applicant been a director of Hubbard Holdings Pty Ltd and at all relevant times, since January 1997 the debtor has been a director of Hubbard Holdings Pty Ltd.

11. In March 2002 the debtor retained Ernst & Young Corporate Finance Pty Ltd to prepare a report in relation to the trust. The report estimated the total value of the trust and the applicant's father's estate and mother's estate to be in excess of $21 million. In particular, on information provided by the debtor to Ernst & Young, they estimated the net assets of the father's estate to be approximately $10,005,000 made up of a loan to the family trust of $8,874,612 and the balance being net assets of the estate. There are other assets which the applicant contends were omitted which total about $2 million.

12. In March 1999 the executors of the father's estate, being the debtor and Bruce Sundberg, a solicitor, met and signed the financial accounts of Hubbard Holdings for the financial year 30 June 1998. The accounts were prepared by Ernst & Young and recorded an asset of the father being his loan account standing to his credit in a sum in excess of

13. Some time after March 1999 the accountants for the trust were changed from Ernst & Young to Davies French Pty Ltd. The first financial report they prepared, which was for the financial year ended 30 June 1999, did not record the father's loan account in the beneficiaries' loan account summary or the balance sheet. The "receivables" simply recorded an asset of the trust as being loans to "other persons" of $3,951,992. It is common ground that the "other persons" is a company called Billingsby Pty Ltd ("Billingsby"). The applicants only recently became aware that Billingsby is the trustee for the Billingsby Estate Trust.

14. The sole director of Billingsby is the debtor's wife, Elizabeth Anne Hubbard (Mrs Hubbard). She is the beneficial owner of all the issued shares of Billingsby. Billingsby owns and operates a vineyard known as Kirwan Bridge Wines set up on land owned by Currawong Consultants Pty Ltd. This company is the trustee of the debtor's self-managed superannuation fund. Billingsby is not a beneficiary of the J R H Family Trust.

15. In January 2002 the applicant engaged solicitors to enquire about the present state of her father's estate. It is common ground that she has received only $100,000 to date. As a result of conferences which took place after appointment of solicitors the applicant learned that the directors of Hubbard Holdings Pty Ltd had loaned $6 million to Billingsby by selling the Trust's income producing assets and shares. In essence, instead of the debtor as director of Hubbard Holdings causing the trust to use its realisable assets to repay the loan account to the father's estate, and the executors of the father's estate causing half of the repaid amount to go to Susan's fund (and half to John's fund) almost the entirety of the trust's assets were transferred to Billingsby.

16. It has ultimately transpired that in addition to advances to Billingsby, which are unsecured, a loan of over $2 million has been made to a company called Resin Coated Sand Pty Ltd and Caddy Investments Pty Ltd which is also unsecured. In essence, it is the applicant's contention (largely conceded) that Hubbard Holdings advanced, unsecured and interest free, in excess of $6 million to Billingsby, and approximately $2.5 million to Resin Sand and Caddy Investments Pty Ltd.

17. The background is important because it indicates the circumstances in which the applicants claim against Hubbard in the Supreme Court of Victoria in proceedings 5682/02 .

18. In May 2002 the applicants commenced proceedings in the Supreme Court of Victoria against Hubbard. On 4 June 2002 a Mareva injunction was granted by Beach J ("the Mareva Injunction").The terms of that injunction are:

(1) "the defendant by himself, his servants or agents or howsoever otherwise be restrained until satisfaction by him of any judgment in favour of the plaintiffs in this proceeding or further order, from assigning, transferring, dealing with, encumbering, securing, disposing of or dissipating any interest of his in:

(b) the estates of the late John Rickett Hubbard and Minnie Isabelle Hubbard;

(d) the property at 1 Seymour Grove, Brighton in the State of Victoria;

(g) the trust of which Currawong Consultants Pty Ltd is trustee; and

(h) any trust of which Currawong Ski Club Pty Ltd is the trustee; and

(i) from removing from the State of Victoria by whatsoever means any of those assets."

19. On 4 December 2002 Hubbard applied to the Supreme Court to vary the Mareva injunction, primarily in order to access funds for his legal costs in the said proceedings.

20. On 17 December 2002, Beach J refused Hubbard's application and in a short judgment said as follows:

"I do not propose to restate my findings which I made when I dealt with the plaintiff's original application for a Mareva injunction on 4 June last, save to remind the Court that at the hearing on that day the defendant's then counsel conceded that there had been reprehensible conduct on the part of the defendant up to February this year, conduct which could not be justified, and one could not but agree more.

Since my order of 4 June it has become clear that the large sum of money of the order of $6 million which the defendant advanced to the companies controlled by his wife, and from whom he is now separated, which I shall simply refer to as Billingsby, has been lost to the trust. So, rather than there be a sum of the order of $5 million to $6 million in the plaintiff's fund, as was the wish of the late father of the plaintiff and the defendant, if my calculations are anything like accurate, the sum which will ultimately become available in the trust to be invested for the benefit of the parties will in all probability, be less than $2 million.

Not only of course, did the defendant make the unsecured loans he did to Billingsby, he also arranged for Billingsby to obtain an advance of $600,000 from the ANZ Bank, such advance being secured by first mortgage over the defendant's own property at 1 Seymour Grove, Brighton. What the defendant swore in his first affidavit of 3 June 2002 in relation to that property, was, in my opinion, calculated to mislead the Court as to the true situation concerning. ...

We know of course, that in March of 2002 the defendant mortgaged that property to the ANZ Bank for the purpose of securing the $600,000 loan to Billingsby. I should add, all loans made by the defendant to Billingsby are unsecured.

The defendant's behaviour to date in relation to his financial affairs has been such that I have no confidence that he has made a full disclosure of his assets to the Court; nor do I have any evidentiary material to demonstrate what actually became of the large sums of money advanced to Billingsby. In that situation I am not persuaded that it is appropriate to make any variation to the order of 4 June 2002 and the defendant's application in that regard is dismissed."

21. On or about the date that judgment was delivered, Strongman and Crouch, the debtor' solicitors, indicated that without funds they would not continue to act for him. On 26 April 2003 they filed a notice of seeking to act on his behalf.

22. Strongman and Crouch[2] acted for the debtor in relation to the Supreme Court proceedings. They ceased acting on 26 April 2003. They provided the debtor with a Statement in Compliance with ss.86(1)(2) and (3) of the Legal Practice Act 1996 (Vic) (as amended) together with proposed terms of Engagement and a Schedule of Charge out Rates ("the retainer") and confirmation of the retainer was signed by the debtor and notice of the adjustment was given during the continuancy of the retainer by way of letter. They rendered a bill of costs to the debtor which was unpaid. This was one of many bills that had been rendered, most of which had been paid.

23. As the particular bill of costs in question was unpaid the creditor the creditor commenced proceedings in the County Court of Victoria and obtained judgment by default on 14 July 2003 for $79,293.80. The judgment was unsatisfied and a bankruptcy notice was issued on 28 July 2003 by the creditor. The judgment debt was for a sum of $77,540.15 plus interest and costs. That sum was reduced to $54,293.80 because a relative of the debtor paid $25,000 to Strongman and Crouch ("Esandcee") to reduce the sum owing under the judgment debt. There being in excess of $54,000 owing under the judgment, the creditor served a bankruptcy notice on the debtor on 29 July 2003.

24. Section 41(6A) provides the circumstances in which the court can extend the time for compliance with a bankruptcy notice. Section 41(6A) provides:

"Where before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

(a) proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or

(b) an application has been made to the court to set aside the bankruptcy notice;

(c) the court may subject to subsection (6C) extend the time for compliance with the bankruptcy notice."

25. The express power in s.41(6A) of the Act to extend time for compliance with the requirements of a bankruptcy notice has been said to carry with it the power to set aside the notice itself (see Re Stirling ex parte Esanda Ltd [1980] FCA 61; (1980) 30 ALR 77 at 83 referred to in Re Briggs ex parte Briggs v Deputy Commissioner (WA) (1986) 12 FCR 310 at 311-312).

26. Although the Act does not expressly confer power on the court to set aside a bankruptcy notice, the court derives the power from at least two sources. Section 30(1) of the Act provides the court:

a) has full power to decide all questions, whether of law or fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognisance of the court; and

(b) may make such orders, including declaratory orders and orders granting injunctions or other equitable remedies, as the court considers necessary for the purposes of carrying out or giving effect to this act in any such case or matter.

27. Under section 303 of the Act where the Act provides that the court may exercise a power and does not specify the person on whose application the power may be exercised, the application may be made by, or the power may be exercised on, the application of any person aggrieved by or interested in the matter.

28. The court's power is thus derived from section 30(1) and section 303 of the Act and from the principle that a power conferred by parliament carries with it the power necessary for its performance or execution so that the express power to extend time for the compliance with the requirements of the bankruptcy notice when an application to set aside has been filed carries with it the power to set aside the bankruptcy notice itself (Re Sterling ex parte Esanda [1980] FCA 61; (1980) 30 ALR 77 ).

29. Although the section does not specify third parties applying to set aside a bankruptcy notice, provided that they can show that they are interested or aggrieved, they have standing to apply to set aside the bankruptcy notice or to extend the time for compliance, (see Re Howarth; Ex parte Mortgage Acceptance Nominees Ltd [1993] FCA 370; [1993] 43 FCR 587, per Einfeld J at 589). It was conceded that the applicants have standing to make this application.

30. Section 41 of the Act specifically deals with cases in which the debtor seeks to set aside a bankruptcy notice on grounds that the debtor has a counterclaim set off or cross-claim (s.41(1)(g)). The court has an implied power in an appropriate case to go behind the judgment or order relied upon and set aside a notice on the basis that the judgment was obtained by fraud or collusion (Bourke v Beneficial Finance Corporation Ltd [1996] 47 FCR 264) or that there has been a miscarriage of justice in other respects (Re Husten; Ex parte Kendall, McAdam & O'Dwyer [1985] FCA 465; [1985] 8 FCR 355 or that the judgment was obtained in relation to a debt that did not exist (Re Sterling supra )

31. However, in relation to an application to set aside a bankruptcy notice the reopening of the proceedings upon which the judgment was obtained will not usually be undertaken unless there are exceptional circumstances (Re Longo; Ex parte [1995] FCA 1324; [1995] 57 FCR 523).

a) extend the time for compliance with the bankruptcy notice permanently or until the conclusion of the Supreme Court proceedings; alternatively

c) adjourn the proceedings until the conclusion of the Supreme Court proceedings; or

33. The facts relied upon and the contentions of the applicants relate to all three heads of relief sought. In short, what the applicants seek to do is to prevent a situation in which the debtor will have committed an act of bankruptcy which will then enable the creditor to issue a creditor's petition and ultimately obtain a sequestration order against the debtor.

34. The relevant sections of s.41(1) of the Act provide:

"An official receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor:

(i) is of a kind described in paragraph 40(1)(g)."

"A debtor commits an act of bankruptcy in each of the following cases ...

(g) if a creditor who has obtained against the debtor a final judgment or final order being a judgment or order, the execution of which has not been stayed, was served on the debtor in Australia or by leave of the court elsewhere the bankruptcy notice under this act and the debtor does not:

(i) where the notice was served in Australia in the time specified in the notice ...

comply with the requirements of the notice or satisfy the court that he or she has a counterclaim, set-off or cross-demand equal to or exceeding the amount of the judgment debt or sum payable under the final order as the case may be being a counterclaim, set-off or cross-demand that he or she could not have set up in the Action or proceeding in which the judgment or order was obtained."

36. The creditor contends that Esandcee has properly conducted all the steps required under the Act prior to serving the bankruptcy notice because:

a) it obtained a final judgment, being a judgment or order on 14 July 2003 the execution of which has not been stayed;

b) it filed the requisite evidence with the Official Receiver seeking the issue by the Official Receiver of a formal bankruptcy notice and the bankruptcy notice was duly issued;

c) it subsequently served the bankruptcy notice on the debtor;

d) but for the interlocutory orders of this court made on 18 and 20 August 2003, the date for compliance being 19 August 2003, would have expired and the debtor would have committed an act of bankruptcy;

e) that as at this date the debtor has not paid the outstanding sum of $54,293.80 to the creditor.

37. There is no allegation that the bankruptcy notice is defective in a substantial way or defective in a formal way that is capable of causing substantial injustice to the debtor. The debtor does not seek to set aside the judgment or to set aside or extend the time for compliance with the bankruptcy notice.

38. The applicants' case was not always easy to follow. This is because the case as it was articulated at the commencement of the hearing was not the case that was ultimately argued and some of the cross-examination raised issues which were not articulated at the commencement of the case. There were, however, two main grounds upon which the applicants relied in support of their contention that the notice should be set aside. The first was that there was not a relationship of debtor-creditor between the debtor and the creditor such as would entitle the creditor to issue a bankruptcy notice. Secondly, that the issuing of the notice constituted an abuse of process by the creditor.

39. The debtor admits the debt. He acknowledges his indebtedness to the creditor and he accepted service of the writ and did not defend it. Judgment was obtained by default and the bankruptcy notice was issued and served. As to the correctness of the judgment (see Lentini; Ex parte v CSR Ltd (t/a Readymix Group) (1991) 29 FCR 363 at page 372). A bankruptcy court does not go behind the final judgment as a matter of course. It is entitled to do so where there has been fraud, collusion or miscarriage of justice (Wren v Mahony [1972] HCA 5; [1972] 126 CLR 212 at 222-223). The court has power to ensure that its processes are not abused by the improper invocation of its jurisdiction. This is an application of the general principles articulated in Walton v Gardiner (1993) 177 CLR 378. The court can set aside a bankruptcy notice as an abuse of process in the exercise of its jurisdiction (see Re Sterling; Ex parte Esanda Ltd [1980] FCA 61; [1980] 30 ALR 77). It has been held that the filing of a bankruptcy notice is an abuse of process where it is apparent that the purpose of the bankruptcy notice is to put pressure on a debtor to pay a debt rather than to invoke the court's insolvency jurisdiction (see Brunninhausen v Glavanics [1998] FCA 230).

40. The abuse of process manifests itself in the fact that the bankruptcy notice is issued merely to compel a recalcitrant debtor who is otherwise solvent to pay a debt that he declines to pay. In such a situation there is good reason for concluding that the bankruptcy notice would ultimately be ineffective in leading to the sequestration of the estate and thereby an abuse of process. There is no doubt that the court has power to ensure that its processes are not abused by the improper invocation of its jurisdiction (see Lindholdt v Merritt Madden Printing Pty Ltd [2002] FCA 260, per Weinberg J unreported judgment delivered

41. The court can only set aside a valid bankruptcy notice on the ground that the debtor is solvent if the creditor's use of the notice in all the circumstances of the particular case can be categorised as an abuse of process (Amos v Brisbane TV Ltd [2000] FCA 825 per Drummond J).

42. The court permits the debtor to go behind the judgment so as to have the bankruptcy notice set aside on the footing that the Act has not given effect to or not carried out if the bankruptcy notice has been issued for a debt which is liable to be set aside or varied such that the creditor does not have a debt upon which bankruptcy proceedings can be founded (Olivieri v Stafford [1989] 24 FCR 413 at 429-430 per Gummow J).

43. The gravamen of the applicant's case in relation to the abuse of process became apparent during the cross-examination and in their written submissions. The thrust of the applicants' case is that the creditor had an ulterior motive in issuing the bankruptcy notice. The applicants contend that the debtor has no proper defences to the Supreme Court proceedings and that by general reference to the decision in Flower and Hart v White Industries (QLD) Pty Ltd [1998] FCA 806; (1998) 156 ALR 169 a legal practitioner who represents a party and advances an "unmeritorious defence" is abusing the court's process.

44. The general contention is that the creditor having incurred costs (perhaps improperly) based on an extension of the Flower and Hart principles, has obtained a judgment and issued a bankruptcy notice for the purpose of assisting the debtor to become bankrupt and thus to invoke the provisions of the Bankruptcy Act in order to frustrate the applicants in proceeding to judgment in the Supreme Court proceedings. Whilst this contention was not articulated at the commencement of the proceedings, it appears clearly in the written submissions on behalf of the applicants.

45. The applicants further contend that the creditor has issued the bankruptcy notice, in the alternative, for the purpose of exerting pressure upon the applicants to cause them to settle in terms proposed by the debtor[3] and for the purpose of obtaining a sequestration order which would stay or delay the trial of the Supreme Court proceedings and which would prevent the applicants from obtaining judgment and from obtaining an order for costs, either against the debtor or against Strongman and Crouch. Indeed the applicants' submissions contend that the filing of the defence itself is an abuse of process[4] and that the defence in that proceeding was filed for a collateral purpose.[5]

46. To establish abuse of process the applicants must prove that there is an improper purpose in the issue of the bankruptcy notice and that the conduct of the creditor is the predominant purpose for the use of the bankruptcy notice (William v Spautz [1992] HCA 34; (1992) 174 CLR 509). At page 536 the court (Mason CJ, Dawson J, Toohey J and McHugh J) said:

"The observations of the Privy Council in R v Henderson (1898) AC 720 at 731 and those of Isaacs J in Dowling (41) (1915) 20 CLR at pp.521-522 to which we referred earlier, represent an attempt to achieve a formulation which keeps the concept of abuse of process within reasonable bounds. To say that a purpose of a litigant in bringing proceedings which is not within the scope of proceedings constitutes, without more, an abuse of process might unduly expand the concept. The purpose of a litigant may be to bring the proceedings to a successful conclusion so as to take advantage of an entitlement or benefit which the law gives the litigant in that event ...

It is otherwise when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed or some collateral advantage beyond what the law offers."

"It has been suggested that the criterion for abuse of process is whether the improper purpose is the "sole" purpose of the moving party. However, in more recent times it has been said, in our view correctly, that the "predominant" purpose is the criterion. That was the test applied by Lord Denning in Goldsmith v Sperrings Ltd (1977) 1 WLR at 496 and by the English Court of Appeal in Metall and Rohstoff v Donaldson Inc ...

It is of course well established that the onus of satisfying the court that there is an abuse of process lies upon the party alleging it. The onus is "a heavy one", to use the words of Scarman LJ in Goldsmith v Sperrings Ltd (1977) 1 WLR at 498, and the power to grant a permanent stay is one to be exercised only in the most exceptional circumstances."

48. The proceedings before the Court are proceedings to set aside a bankruptcy notice which has on its face been validly issued. There were many matters raised by the applicants in the course of cross-examination of Mr Joseph[6] and the debtor, upon which this court is asked by the applicants to make findings. Some of these are matters upon which this Court cannot make findings as they are matters which arise in, and which will be determined by, the Supreme Court proceedings. In particular, the issue of whether there are or are not meritorious defences is a matter for the Supreme Court to determine in those proceedings.

49. The collateral issue raised by the applicants of whether Strongman and Crouch acted in any sense improperly (in reliance on Flower and Hart) is a matter that may also flow from a determination of those proceedings.

50. It is difficult to articulate the applicants' case in relation to abuse of process succinctly. This is partly because it changed during the proceedings depending on how the evidence emerged. Nor do the applicants' written submissions set out in a clear way the legal principles relied upon and the evidence to support them. Rather, the submissions contain a number of rhetorical questions under the heading of "Inferences the Court Should Draw".[7] They are wide-ranging and go far beyond the basis upon which the case was opened. All that can easily be said is that the court is being asked to find that the creditor and the debtor colluded to file defences which were not available to the debtor and thus run up costs for the creditor who is then in a position to obtain judgment for costs and issue a bankruptcy notice for an improper purpose under the Act.

51. It seems to be asserted that the improper purpose was:

a) to obtain a benefit or preference over the applicants in relation to payment of the creditor's fees; and/or

b) to collude with the debtor to enable the debtor to put pressure on the applicant to settle in the expectation that the estate of the debtor would be sequestrated and a trustee appointed; and/or

c) to delay the Supreme Court proceedings by the appointment of a trustee.

52. By reason of these matters and others, it is alleged that there has been an abuse of process in the issuing of the bankruptcy notice by the creditor. Within these broad parameters many allegations have been made by the applicants, including an allegation that the creditors have "extorted" money from the debtor.

53. In my view, the question of whether the defence to the Supreme Court proceedings is unmeritorious is not for this court to determine and therefore is irrelevant to the considerations that are before me. That is because, firstly, the Supreme Court proceedings have not yet been decided and the question of whether there is a defence and whether it is a meritorious one will be determined in the Supreme Court proceedings. It is impossible for this court to determine an issue which is the subject matter of proceedings before another court, and difficult to see how this submission could reasonably have been made in the circumstances.

54. Secondly, the applicants appear to rely upon the decision in Flower and Hart to support the proposition that it is an abuse of process to knowingly advance an unmeritorious defence on behalf of a client. The decision in Flower and Hart related to the unreasonable institution of a proceeding that had no prospect of success and was brought for an ulterior motive rather than to vindicate the right claimed by a plaintiff. This principle as it stands is not applicable to the creditor who was the legal adviser to the defendant during the proceedings. The decision of a legal practitioner to act for a defendant and to explore all defences properly available in a situation where it is incumbent on the plaintiff to prove its case, is not on all fours with an unmeritorious claim brought by a plaintiff for an ulterior motive. In Flower and Hart v White Industries (QLD) Pty Ltd [1998] FCA 806; (1998) 156 ALR 169 at 240 Goldberg J said:

"A defendant does not invoke the structure and procedure of a court proceeding. Rather, it is imposed upon the defendant. By contrast, a plaintiff or applicant actively invokes the jurisdiction and process of the court and uses its structure within which to impose a framework upon the actions of the defendant against a defendant's will."

55. Thirdly, the applicants did not in any event establish as a fact, that it was the belief of Mr Joseph, who was advising the debtor, that there were no defences available to the defendant.

56. The inference the court was asked to draw from the assertion that there was no meritorious defence available to the debtor and that the creditor had acted as legal adviser and had caused a defence to be drawn knowing this, made it improper for him to charge a fee in those circumstances. No further submissions or authority to support that proposition was made by the applicants.

Whether there was a relationship of debtor-creditor existing between the debtor and the creditor

57. At the opening of their case the applicants submitted that they would establish that the debtor was not indebted to the creditor. The applicants contended that an examination of the trust ledger kept by the creditor on behalf of the debtor indicated, upon a proper analysis, that there were in fact funds available to meet the account rendered by the creditor and thus the debtor did not owe anything to the creditor and there was no debtor-creditor relationship. The applicants asserted in fact that not only did the evidence indicate that the debtor did not owe the creditor the sum for which the judgment was obtained, but that he either owed no more than a sum of $17,689.38 or that he owed them no money or that in fact he was in credit. The applicants failed to establish any of these propositions.

58. The trust account ledgers of the creditor were produced by Mr Joseph and he was cross-examined about them. The applicant's assertions appear to have been based upon the fact that their calculations took no account of amounts paid out to counsel on behalf of the debtor. I am satisfied that the trust account ledgers kept by the creditor, in particular the copy of the trust account ledger sheet which was sent to the applicants' solicitors on 29 August 2003, was an accurate accounting of the amounts received and disbursed on behalf of the debtor.

59. The creditor's statement of claim in the County Court proceedings in which the judgment was obtained, made reference to the retainer. The date of the agreement pleaded was April 2003 and initially the applicants alleged that as the work claimed was done prior to that date, that the creditor was not entitled to charge the debtor for work done. Both the creditor and the debtor gave evidence that there was a mistake in the date in the statement of claim and that the retainer was entered into in April 2002. The debtor acknowledged his liability to the creditor notwithstanding this error. That issue was not further pursued by the applicants in written submissions.

The contention of the applicants that there was a variation to the retainer

60. In opening, the applicants contended that they would establish that the creditor had entered into an arrangement with the debtor after 17 December 2002 in which in some unspecified way, the creditor had agreed with the debtor that he would not render an account or that he would not sue for his fees or take any action in respect of his fees incurred, until the Supreme Court proceedings were heard and determined. No evidence was led on behalf of the applicant to support this contention and the applicant sought to establish this contention, as with many others, by cross-examination of the debtor and creditor. Both the debtor and creditor denied any variation to the retainer and there was no evidence of any kind to support a contention that the creditor had waived any right to sue for his outstanding fees or to use whatever means were appropriate in recovery of outstanding fees.

61. This assertion was also part of the abuse of process assertions insofar as it was contended by the applicants at the commencement of the case, that it was an abuse of process for the creditor to seek payment of legal fees and to obtain judgment in respect of unpaid fees in circumstances in which there was some waiver of the creditor's rights to do so. However, the evidence did not support the contentions of the applicant that such a waiver had occurred.

The assertion that the judgment was faulty as the amount claimed did not take into account a payment by a third party

62. The evidence of Mr Joseph was that money paid by a third party on behalf of the debtor, had been received and paid into the trust account. Before applying the money to the debtor's account he believed it prudent to satisfy himself that the money could be released for payment of the account by seeking specific confirmation from the payer. When the County Court proceedings were commenced he did not have that confirmation and had not been able to apply the third party moneys to amounts outstanding. He subsequently received those instructions and the bankruptcy notice reflects the payment made.

63. The applicants asserted as part of their abuse of process argument that the creditor had extorted money from the debtor. No evidence was led to support this contention. It seems to have been put on the basis that if it could be established either:

a) that there was in reality no money owing by the debtor to the creditor as a matter of fact; or

b) that for some reason the creditor was not entitled to recover fees,

64. Alternatively, it seemed to be put that the creditor was not entitled to continue to incur fees on behalf of the debtor. Having come to a decision in December 2002 that he could no longer continue to act unless the debtor had recourse to the funds or to the assets the subject of a Mareva injunction, to continue to act in the knowledge that he could not be paid was simply to extort money from the debtor.

65. No evidence was led to support this proposition. The evidence of Mr Joseph, which I accept, was that he told the debtor in December 2002, once it was clear that his application to vary or discharge the Mareva injunction was unsuccessful, that he could not act unless funds were received from third parties. Funds were received from third parties and he continued to act. The proposition that he extorted money was put, as far as I can tell, without any evidence to support it.

66. Because of the way the applicants' case was conducted, it is not entirely clear whether the allegation of extortion extended beyond the creditor and the debtor, as was initially enunciated, or went further to a contention that the creditor had in some way conspired with the debtor to extort money from the applicants. If it was the latter, then Mr Joseph was not cross-examined about this issue.

67. An allegation of extortion is a serious allegation. In Rozenbes v Kronhill [1956] HCA 65; (1956) 95 CLR 407 Dixon CJ, Webb and Fullagar JJ identified the general principle at page 408 as follows:

"When the court sees that a bankruptcy petition is presented not with a bona fide view of obtaining an adjudication but for a collateral purpose and with the view of putting pressure on the debtor, it will refuse to make an adjudication even though there be a good petitioning creditor's debt and an act of bankruptcy has been committed."

"There is an abuse of process if a pending bankruptcy petition or a threat of proceedings in bankruptcy is used as the means of extortion. The word "extortion" is not a technical term and it has in bankruptcy law "no special and artificial significance divorced altogether from the ordinary implications of the word". The court will look strictly at the conduct of the creditor using or threatening bankruptcy proceedings. An extortion may be held to have taken place if the creditor has used or attempted to use a pending petition or a threat of a petition in order to extract from the debtor money which the debtor is not bound to pay or in order to obtain some secret and unfair advantage over other creditors, but extortion will not be held to have taken place in the absence of mala fides or anything amounting to oppression in fact. There must be a real intention on the part of the creditor to use the process for some other end than its legitimate end and there must be a real exertion of pressure."

69. There was no evidence of any such pressure upon the debtor and it should not be overlooked that to give the word its ordinary legal meaning, as the High Court said in Rozenbes v Kronhill, the offence of extortion, which is the demanding of money or other specified kinds of advantage with menaces or force, is a criminal act. Since extortion consists in the mere demanding of property and not the obtaining thereof, it is not an aggravated form of stealing but is analogous to attempted stealing[8] In my view the allegation was made without any evidentiary foundation.

70. It was asserted that this was an improper purpose of the debtor and creditor. This submission arises from the fact that subsequent to the creditor ceasing to act for him and on the weekend of 6 September 2003, the debtor delivered a written offer to the first applicant informing her of the bankruptcy notice and making an offer to settle. The applicants contend that the offer of settlement was a nonsense and could not have been concluded by the debtor even if accepted. They assert that the -

"only sense that can be made out of a solicitor suing a client for a sum of $75,000 which was not due and payable to the solicitor and at the same time the client accepting the writ without question, without consideration, without filing an appearance and at a time when he had a solicitor acting for him generally and in specific matters filing a defence, is that it was part of the tactic, strategy or game plan to get the applicants to agree to a settlement on terms favourable to the creditor, to JHH."

71. These assertions rely upon a number of facts that have not been established. First, they require the applicants to establish that the creditor was not entitled to sue the debtor for $75,000. Secondly, they require the applicants to establish that there was something improper about the debtor accepting that the amount was due and payable and not defending the proceedings although he had a solicitor acting for him. Thirdly, they require the applicants to establish that there was collusion between the debtor and the creditor as part of a strategy or tactic to get the applicants to agree to a settlement on terms favourable to the debtor. None of these facts were established by the applicants.

72. Notwithstanding that the debtor brought the bankruptcy notice to the attention of the applicants coupled with an offer of settlement, there was no evidence that the creditor was aware of the debtor's intention to bring this document to the notice of the applicant. Nor on the evidence would I be prepared to find that the debtor brought it to the applicants attention for an improper purpose.

73. The applicants ask, rhetorically, if there are other avenues of execution or payment available to the creditor, why has the creditor chosen to issue a bankruptcy notice? The applicants then contend that the Court should find, in the absence of any reasonable explanation from the creditor for not pursuing other remedies, that the issuing of the bankruptcy notice was for the sole purpose of putting pressure on the applicant to settle, or another improper purpose. The two avenues referred to are:

a) seizure and sale of the debtor's real estate; and

b) recovery of costs due to the debtor pursuant to the cost orders made in the Supreme Court on 9 and 16 May.

74. Order 69 of the County Court Rules provides for seizure and sale of assets of a judgment debtor. It is common ground that the debtor has a substantial equity in the property at Seymour Grove, Brighton, registered in his name. It is also common ground that the debtor's assets are the subject of the Mareva Injunction.

75. The applicants contend that the effect of the Mareva injunction was to operate in personam and did not prevent the creditor from executing against the assets of the debtor, notwithstanding the injunction. They contend that the failure to do so is inexplicable, and the court should infer an improper motive.

76. The Mareva injunction presents no impediment or restraint to execution on the assets by any creditor, including Esandcee, as it operates in personam against the debtor and not in rem against his assets (see Re Ousley; Ex parte Commissioner of Taxation [1994] FCA 883; (1994) 48 FCR 131 at 138-9 per Heerey J; Re Ling; Ex parte Enrobook Pty Ltd (1996) 142 ALR 87 at 89-93, per Lehane J; on appeal Ling v Enrobook Pty Ltd [1997] FCA 226; (1997) 74 FCR 19 at 28-9 (Davies, Wilcox and Branson JJ)). There was no evidence that there was an impediment to the creditor executing on the Seymour Grove property.

77. However, it is not incumbent upon the creditor to do so if he forms the view that the debtor is otherwise insolvent and not able to pay his debts. Madestra v Penfolds Wines Pty Ltd (1993) 44 FLR 303 at 307 and Re Ling; Ex parte Enrobook Pty Ltd. Furthermore, the funds the subject of the Mareva injunction would need to be available to meet the debt, at least in the near future, The question is whether there is a clear prospect of realisation in the reasonably near future of funds to pay creditors (see Re Ling; Ex parte Enrobook Pty Ltd).

78. The cross-examination by counsel for the applicants was really directed to what would occur in the event that the creditor was successful in the Supreme Court proceedings. The relevant passage of cross-examination is as follows:

"MS MOLYNEUX: Mr Joseph, upon a successful defence by Mr Hubbard, the Mareva injunctions would fall away and he then would have access to his readily available assets, wouldn't he?---Yes.

Presumably he would then be able to raise whatever moneys were needed to discharge whatever obligation he had at that time?---Yes.

But rather you've decided to embark on a course of seeking a sequestration order at sometime in the future upon the bankruptcy notice, or rather upon Mr Hubbard committing an act of bankruptcy?---I'm waiting for him to commit the Act of bankruptcy and then I'll have to consider what I'm going to do next.

Is it your position that what you will do following Mr Hubbard committing an act of bankruptcy, that you will then seek to sequestrate his estate?---I will take advice but my present position is that this man, in my opinion, is hopelessly insolvent and should be bankrupt but I haven't yet decided. I'll take advice about the issue of whether or not to issue a petition.

When did you decide he was hopelessly insolvent?---After I read the report of Mr Mansell."

79. No satisfactory answer was provided by Mr Joseph as to why he did not use the procedure in Order 69 given that the injunction operates against the debtor and not against a creditor. Esandcee were not acting for the debtor when judgment was obtained and therefore could not in any sense be his "servants or agents". The explanation in the end seems to rest upon the fact that Mr Joseph formed the view that the debtor was insolvent in any event, and his evidence is that he relied upon the evidence of Mr Mansell (who had been the controlling trustee until set aside) as to his solvency.

80. In fact the report of Mr Mansell said that he was only insolvent because of the Mareva injunction. Were it not for the legal actions taken by the applicants, Mr Mansell concluded that he would be able to pay his debts as and when they fell due. At page 6 of his report he said:

"Even if the Action by Mrs Reid is successful, nevertheless the debtor would be able to meet his financial obligations."

"I am also of the opinion that Mr Hubbard should not be made bankrupt when, even if the Action by Mrs Reid is successful, it appears that he can pay his debts."

82. Mr Mansell's opinion does not support the basis claimed by Mr Joseph for concluding that the debtor was in fact insolvent. However in my Reasons for Judgment in Reid v Hubbard and Mansell (2003) FMCA 266 (paragraph 40) I expressed the view that Mr Mansell's report had a number of "curious" aspects to it[9]. Because of these omissions from Mr Mansell's report, I left open the question of the debtor's solvency. But the whole issue of the debtor's solvency is attenuated by such doubt [10] that I would need to be satisfied to the relevant standard that Mr Joseph believed him to be solvent or, alternatively, that there were reasonable grounds upon which he should have concluded that he was solvent, before a finding could be made that the creditor had issued the bankruptcy notice for an improper purpose. I am not so satisfied.

83. The debtor was cross-examined on this issue[11]. It is clear from his evidence that there was no discussion between the debtor and creditor about the possibility of the seizure and sale of property. However the onus remains on the party seeking to set aside the bankruptcy notice on the ground of abuse and it is a heavy onus. The criterion for abuse of process is whether the improper purpose was the predominant purpose of the party using the legal process. That has not been established.

84. Furthermore, the improper purpose alleged is that the bankruptcy notice was issued in order to put pressure on the applicants to settle on advantageous terms to the debtor or at least disadvantageous terms to themselves. This suggests a degree of collusion between the debtor and the creditor in achieving this purpose. There was no evidence from which I could find or infer that Mr Joseph knew that the debtor was sending a copy of the bankruptcy notice to the applicant or putting an offer to settle to the applicants.

85. The second source of funds available to the debtor to meet the judgment of the creditor was asserted to be costs orders made in favour of the creditor. These costs orders were made in Supreme Court proceedings number 5390 of 2002 in an action between the applicant and others in relation to the will of John Ricard Hubbard and Minnie Isabel Hubbard. The relevant orders were made on 9 and 16 May 2002. On 9 May Order 4 provided:

"The costs of the plaintiff and the defendants as between solicitor and client be paid from the estate of the deceased."

"The estate of Minnie Isabel Hubbard pay the parties' costs of this proceedings as between solicitor and client."

87. The evidence established that no steps had been taken by the debtor either when the creditor was acting for him or subsequently, to obtain an order for costs by commencing the process of taxation.

88. The evidence in relation to this matter given by Mr Joseph was as follows:

a) on 29 August[12], Mr Joseph said in answer to the question was there any reason why the costs had not been taxed and recovered:

"I don't believe I have been instructed to do so."

b) No further elucidation of this was obtained because an objection was taken on the grounds of legal professional privilege. However, the debtor confirmed that no communication had been made by him at all to the administrator of the estate seeking to recover costs.

c) On 11 September[13], Mr Joseph was asked again why he did not apply to the estates for payment of costs. His response then was -

"as to why I didn't apply to the estates for money that was owed? I probably didn't have the barrister's accounts, quite apart from anything else.

What about your own accounts after the 9th and 16th of - - -?---I would have thought that Mr Brett would have wanted to have those bills taxed, as was his right. It's complete nonsense, in my opinion, to suggest that a solicitor would tax bills of costs in two or three weeks. It's just nonsense. You must know this is a process that takes months and months. To actually prepare a bill of costs in taxable form takes months and months. That that could possibly be done by the first week in June, I've never heard of such a thing."

d) The debtor was questioned about this issue[14]. He was asked about whether he discussed with Mr Joseph what he could recoup from the estates. This was met with an objection by senior counsel for the creditor who said:

"Mr Joseph yesterday gave evidence that he had a view about those costs, that they were covered by the Mareva injunction, as they clearly are."

e) The creditor confirmed that he was entitled to costs from the estates and that the applicants' costs had been in the sum of about $50,000. The debtor confirmed that he had not discussed the question of the recovery of costs from the estates.

f) Senior counsel for the applicant put to the debtor that:

"There was perhaps 50,000 that Strongman and Crouch could have recovered from the estates so that you did not owe any moneys, those defences - - -"

89. Senior counsel for the creditor objected and said:

"First of all, as I said before, if one goes to the Mareva injunction, it is perfectly clear that on the face of it, unless my learned friend has some argument that doesn't occur to me, the moneys in the estates could not be accessed. The second point, and perhaps more importantly, is so what if it could? The obligation on a creditor is not to chase up every avenue that might be available to the debtor. That's the debtor's obligation.[15]"

90. In the final submissions of the creditor[16], the question of the Estate cost orders is dealt with. The submission made is that the rights were those of the debtor and not of the solicitor and that the Mareva injunction prevented the debtor from making any claim to the Estate of either of his parents. I am not convinced as a matter of law that that proposition is correct. The Mareva injunction in its terms restrains the debtor (called the defendant) in the following terms:

"The defendant, by himself, his servants or agents or howsoever otherwise, be restrained until satisfaction by him of any judgment in favour of the plaintiffs in this proceeding or further order from assigning, transferring, dealing with, encumbering, securing, disposing of or dissipating any interest of his in ...

(b) the estates of the late John Ricard Hubbard and Minnie Isabel Hubbard."

91. The terms "assigning, transferring, dealing with, encumbering, securing, disposing of or dissipating any interest" seem to me to be directed to the disposal of or dissipation or removal of funds which might otherwise be available for the purpose of a judgment if the applicant is successful in the Supreme Court proceedings. The only applicable words, where the transaction is to recover costs from the estate which were due pursuant to orders made before the Mareva injunction, are "dealing with" and in my view those words should be read ejusdem generis with the other words in the paragraph; in other words, that the injunction was not to prevent Mr Hubbard from recovering assets to which he is entitled but, rather, preventing him from dissipating such assets.

92. Mr Joseph was not challenged about his belief that Mr Hubbard was prevented from obtaining costs because of the Mareva injunction. In any event, a solicitor is entitled to seek costs without waiting for previous costs orders to be satisfied by a third party.

93. It is curious that no discussion between Mr Joseph and the debtor took place as to either of these courses once judgment had been obtained, given the expressed compassion by Mr Joseph to the debtor and the debtor's wish to avoid being made bankrupt. The failure to have such a discussion, however, is not satisfactory proof that the bankruptcy notice was issued for an improper purpose. The applicants have failed to satisfy the heavy onus upon them that there is an abuse of process by the issue of the bankruptcy notice and that it has been issued predominantly for an improper purpose.

94. I have already mentioned the manner in which the applicants' various claims were put. I have dealt with those which, in my view, are relevant to the setting aside of the bankruptcy notice. To the extent that there are other matters raised by the applicants in their submissions, I have not referred to them specifically because, in my view, they are not relevant to the issue that requires determination and because they raise rhetorical questions where I have not made a finding of fact in favour of the applicants.

95. The applicants have raised in their submissions matters that they regard as procedurally unfair. There are two matters to which I need to refer. The first is at paragraph 23 and is in the following terms:

"What proper explanation exists to explain why counsel for Esandcee insisted his client go into the witness box before JHH, the first respondent, when no reason was given or submissions made and without first opening the case for Esandcee, and then when counsel for Esandcee had instructions that JHH maintained legal professional privilege other than to prevent the applicants from being accorded procedural fairness, particularly a senior counsel must have known that there would be a significant issue as to legal professional privilege."

96. This is an incorrect statement of what occurred. Counsel for the creditor requested that his client give evidence before the debtor and I ruled that that was appropriate. I did so because it seemed to me apparent from the opening of the case that the applicants were seeking to prove their case by cross-examination of the witnesses rather than by the provision of evidence to support them independently. As the application was to set aside a bankruptcy notice issued by the creditor, I ruled that procedural fairness required that the creditor give evidence first rather than the debtor, as the application was against the creditor.

97. The second matter relates to the submissions received on 19 August entitled Response to Applicants' Submissions Filed 17 September 2003. In order to ensure that submissions were made in a timely fashion and because the applicants complained that they were unable to complete submissions in the timetable which the court originally suggested, counsel for the creditor volunteered to provide submissions first and did so. Subsequent to receipt of the submissions on behalf of the applicants, the respondents' Counsel sent to my chambers a response to the applicants' submissions.

98. The applicant responded with a further document on 19 September. That document contends that it would be a procedural irregularity for the court to entertain the submissions filed 18 September without the applicants being given an opportunity to rebut them. I doubt that is the case as they were only submissions in response but, nevertheless, in order to bring this matter to a conclusion, I propose to ignore the response to the applicants' submissions filed by counsel for the creditor and I have determined this matter on the basis of the submissions filed by the creditor's solicitor on 15 September and by the applicants on 17 September in accordance with the directions that I gave.

99. Therefore, as the applicants have been unsuccessful, the application must be dismissed.

Reid & Anor v Hubbard & Esandcee Pty [2003] FMCA 407

At a glance

Court

Decision date

Source

Judgment (218 paragraphs)

Reid & Anor v Hubbard & Esandcee Pty [2003] FMCA 407 (1 October 2003)

Parties

Legislation Cited (2)

Cases Cited (14)