Schepis v Osborne

REASONS FOR JUDGMENT 1 The appellant, Ashely Marie Schepis, appeals against a judgment of the Federal Circuit Court of Australia given on 19 February 2014. By that judgment, the Federal Circuit Court dismissed Ms Schepis' application for review of a sequestration order made by a registrar of that Court on 23 January 2014, with costs. 2 It is necessary to set out something of the history of the matter in order to place Ms Schepis' appeal into context. 3 The creditors are three members of a firm of solicitors, McLachlan Chilton, who obtained a costs order against Ms Schepis in proceedings in the District Court of New South Wales. Ms Schepis had sued her former solicitors for damages for negligence and breach of contract. The details of that claim are vague, but it appears that a judgment debt for $625,207 had been assigned to Ms Schepis and she alleged that her solicitors had failed to exercise reasonable care to secure the debt. 4 Ms Schepis was represented in the District Court proceeding by a solicitor named Paul Mee Ling of Mee Ling Solicitors in Sydney. It appears that Mr Mee Ling failed to comply with procedural orders made by the District Court and, as a result, Ms Schepis was required to show cause why her proceeding should not be dismissed. On 9 November 2012, his Honour Judge McLoughlin declined to dismiss the proceeding, but made orders which included an order that Ms Schepis pay the defendant's costs in respect of an appearance on 26 July 2011. His Honour also ordered that Mr Mee Ling show cause as to why he should not indemnify Ms Schepis in respect of those costs. 5 On 24 November 2012, Judge McLoughlin ordered that Mr Mee Ling indemnify Ms Schepis in respect of the costs ordered against her. The precise circumstances that led to the making of the order against Mr Mee Ling are not clear, but it may be inferred that the Court considered that there was neglect of his professional duties towards Ms Schepis. Costs orders are not made against a solicitor for a party to litigation without some serious dereliction of duty: see, for example, Myers v Elman [1940] AC 282 at 292 per Viscount Maugham, at 319 per Lord Wright, Edwards v Edwards [1958] P 235 at 248 per Sachs J, De Sousa v Minister for Immigration, Local Government & Ethnic Affairs (1993) 41 FCR 544 at 547-548 per French J. Mr Mee Ling consented to the order, so he must have recognised that the making of the costs order against Ms Schepis was his fault. 6 The solicitors whom Ms Schepis had sued were indemnified by an insurer, LawCover. A firm of lawyers, apparently acting on the instructions of LawCover, demanded that Ms Schepis pay the costs ordered against her. Her response was to repeatedly write to Mr Mee Ling asking him to indemnify her in respect of those costs. Mr Mee Ling did not respond. Ms Schepis then wrote directly to his professional indemnity insurer, which was also LawCover, seeking that she be indemnified. 7 LawCover's response was: LawCover's investigations have not revealed any wrong doing [sic] on the part of Mr. Mee Ling in relation to his handling of the claim against McLachlan Chilton. As a result, your claim is denied. 8 LawCover's response that Mr Mee Ling had done nothing wrong was surprising, to say the least, in light of Mr Mee Ling's consent to the order made by Judge McLoughlin. That response was all the more surprising because Mr Mee Ling had been removed from the roll of solicitors on 25 July 2012 following a number of complaints about his conduct: Council of the Law Society of New South Wales v Mee Ling [2012] NSWADT 146. LawCover was at once the insurer of two firms of solicitors which Ms Schepis had alleged to be negligent. There was a costs order made against Ms Schepis in favour of one of those firms, but the principal of the other had been ordered to indemnify Ms Schepis in respect of the same costs. Instead of proceeding on what Ms Schepis thought to be the reasonable basis that the orders cancelled each other out, LawCover proceeded to enforce the costs order against Ms Schepis, while denying that Mr Mee Ling had done anything wrong. One possible explanation for LawCover's conduct was that it wished to bankrupt Ms Schepis with a view to having her proceedings against McLachlan Chilton stayed pursuant to s 60(2) of the Bankruptcy Act 1966 (Cth). 9 Lawyers instructed by LawCover had appeared for the creditors at the first directions, but did not appear at the hearing of the appeal. As a result, LawCover has not offered any explanation of its conduct. It may well be that its conduct is, contrary to Ms Schepis' belief, legitimate and not disingenuous, but it is not hard to see why she feels aggrieved about the conduct of her former lawyers and their insurer. 10 On 25 June 2013, the solicitors who had obtained the costs order against Ms Schepis ("the creditors") served a bankruptcy notice on Ms Schepis by leaving it at her parents' address in Townsville. The bankruptcy notice required her to pay $15,685.86, which appears to consist of $14,318.68 for the costs awarded against Ms Schepis in the District Court and $1,367.18 for interest. 11 Ms Schepis did not respond to the bankruptcy notice. She states that she was estranged from her parents at the time it was served, was not living with them and was unaware that it had been served. She does accept, however, that she had notified the creditors that her parents' address was her address. 12 The creditors then filed a creditor's petition, which did come to Ms Schepis' attention. The hearing of the creditor's petition was set down for 23 January 2014. Ms Schepis did not appear at the hearing. In the absence of any appearance, a registrar made a sequestration order against the estate of Ms Schepis and ordered that she pay the creditors' costs. 13 Ms Schepis states that she did not appear at the hearing because of a misunderstanding with a registrar in the Sydney Registry of the Federal Circuit Court who had set the matter down for hearing in Brisbane. Ms Schepis understood that because she was living in Townsville, some 1,700 kms from Brisbane, she was to appear by telephone. She waited for a telephone call but it did not come. The registrar who made the sequestration order was unaware that Ms Schepis expected that she would be contacted by telephone. 14 Ms Schepis then applied to the Federal Circuit Court for review of the registrar's orders. That application came on for hearing before the Federal Circuit Court on 19 February 2014. The creditors were legally represented, but Ms Schepis was not. 15 The hearing was very short. After appearances were announced, the primary judge identified the material that Ms Schepis wished to rely on and then read that material. Ms Schepis had placed before the Federal Circuit Court affidavits filed on 11 and 17 February 2013. Those affidavits are not before me, but from the transcript and the reasons for judgment of the primary judge, it appears that Ms Schepis deposed, at least, that she had not appeared at the hearing of the creditor's petition because of miscommunication with the registry, that she had brought proceedings against her creditors alleging negligence, that she claimed she was not indebted to the creditors because of the order made that Mr Mee Ling indemnify her against the costs order and that she claimed she had not been properly served with the bankruptcy notice. 16 A transcript of his Honour's exchanges with Ms Schepis after he had read her material and prior to giving judgment is set out below: HIS HONOUR: All right. Ms Schepis. MS SCHEPIS: Yes. HIS HONOUR: Do you own any assets? MS SCHEPIS: Sorry? HIS HONOUR: Do you own any assets? MS SCHEPIS: No, I don't. I'm paying off a bed and a few other things that I'm renting. That's about it. HIS HONOUR: Well, the unfortunate fact is that you might have an order, which you've exhibited to material, which purports - and I'm not denying its effect, but it purports to indemnify you in respect of costs. But it is still an order made against you, and that does not bear upon the creditor's entitlement - - - MS SCHEPIS: ….. HIS HONOUR: It does not bear upon the creditor's entitlement to seek to recovery or enforce it against you. MS SCHEPIS: I don't understand what you mean. HIS HONOUR: Well, I will just go back to the order that was made by Judge McLaughlin [sic]. MS SCHEPIS: ….. from Judge McLaughlin [sic]? HIS HONOUR: Just bear with me. So Mr Ling agreed to indemnify you. A costs order had been made against you. Do you understand that? MS SCHEPIS: Yes. HIS HONOUR: And Mr Ling agreed to indemnify you in respect of those costs. MS SCHEPIS: Yes. HIS HONOUR: So that means he agreed to pay the costs if you didn't pay the costs. MS SCHEPIS: Yes. HIS HONOUR: But the fact remains the costs order stands against you. MS SCHEPIS: But it's not my debt. HIS HONOUR: It is your debt. It's a costs order made against you. You have a right to, in turn, enforce your claim against Mr Ling, but you haven't exercised that right. But that matter should not trouble the creditor. The creditor is entitled to be paid its costs. MS SCHEPIS: So what do I do now? HIS HONOUR: Well, there's nothing you can do. The application will be dismissed. I will give you some reasons. 17 The primary judge then gave his reasons for judgment. His Honour said, relevantly: 4. The simple fact remains that she is indebted. While she may have a claim against Mr [Mee] Ling, she has not sought to enforce it. On the day that the matter came before the registrar she was not present. That was because of a misunderstanding on her part, but the determination to proceed to hear the application in her absence was not occasioned by any error on the registrar's behalf. Accordingly, even though it might seem that, prima facie, she was not afforded a right to be heard, the registrar proceeded correctly on the basis that the debtor had been served with the proceedings and had notice of the application. 5. That matter aside, having heard what the debtor has to say I do not believe that the court would have come to any different conclusion to that reached on 23 January 2014, that is, that she had committed an act of bankruptcy. She was prima facie insolvent. The evidence produced to the court on that occasion demonstrated the continuing insolvency and that the order sought was appropriate. 6. I make two observations in relation to service. I note that in her application for review the applicant also complains about service. Her complaint in this regard is somewhat confused, as she complains that she was never served with the bankruptcy notice as she was working at her job at Bi-Lo, and then refers to the rules relevant to the service of creditor's petition. 7. The bankruptcy notice does not have to be served personally, but in any event there is affidavit evidence to indicate that service was effected personally. Likewise, there is evidence that the creditor's petition was served personally. 8. I have enquired of the debtor as to whether or not she may have some other reason or cause as to why a sequestration order ought not be made, including by asking whether she has any assets against which a judgment might be executed. In short, she has none. There is, in my view, no reason why the registrar's order ought be set aside. It was an appropriate order, and I would have made an order in the same terms had I heard the application on 23 January 2014. It follows that the application is dismissed. 18 As I have indicated, the creditors elected not to appear at the hearing of the appeal. I have therefore had to decide the appeal without the benefit of a contradictor. Although the creditors filed written submissions and an affidavit, I have not had regard to those documents in the absence of any appearance on their behalf. 19 The grounds stated in Ms Schepis' notice of appeal allege that the primary judge did not give her the opportunity to be heard and placed too little importance on the effect of bankruptcy on her. In Ms Schepis' written submissions and her various affidavits, she also argues that the primary judge erred in failing to make the following findings: (a) that the bankruptcy notice had not been properly served because it had not come to her attention, having not been personally served and having been left at her parents' home; (b) that the creditor's petition was not valid because it did not have attached to it an affidavit of search, an affidavit verifying the petition and an affidavit of service of the bankruptcy notice; (c) that she does not owe any debt because the order made by Judge McLoughlin required Mr Mee Ling to indemnify her against the costs order; (d) that the creditor's petition is an abuse of process because of LawCover's conduct in seeking to enforce the costs order made against her on one hand, but refusing to take into account the order for indemnity against Mr Mee Ling on the other hand. 20 For the purposes of this appeal, it is only necessary to focus on the allegation by Ms Schepis that she was denied a fair hearing before the Federal Circuit Court. Her other arguments are, however, relevant to the question of relief. 21 Procedural fairness requires that each party is given a reasonable opportunity to present his or her case: Minister for Immigration and Multicultural Affairs v Bhardwaj (2002) 209 CLR 597 at [40] per Gaudron and Gummow JJ; Sullivan v Department of Transport (1978) 20 ALR 323 at 343 per Deane J. 22 What will constitute a reasonable opportunity for a party to present his or her case in a given situation depends upon the whole of the circumstances, including the nature of the jurisdiction exercised and the statutory provisions governing its exercise: The Queen v Conciliation & Arbitration Commission; Ex parte Angliss (1969) 122 CLR 546 at 552-553; SZBEL v Minister for Immigration and Multicultural and Indigenous Affairs (2006) 228 CLR 152 at [26]. 23 Section 27 of the Bankruptcy Act provides that the Federal Circuit Court has jurisdiction in bankruptcy. Section 43 provides: (1) Subject to this Act, where: (a) a debtor has committed an act of bankruptcy; and (b) at the time when the act of bankruptcy was committed, the debtor: (i) was personally present or ordinarily resident in Australia; … the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor. 24 Section 52 of the Bankruptcy Act provides: (1) At the hearing of a creditor's petition, the Court shall require proof of: (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (b) service of the petition; and (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor. … (2) If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor: (a) that he or she is able to pay his or her debts; or (b) that for other sufficient cause a sequestration order ought not to be made; it may dismiss the petition. 25 It appears that the source of the registrar's power to make the sequestration order on 23 January 2014 was r 2.02 of the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth) and s 102(2) of the Federal Circuit Court of Australia Act 1999 (Cth). 26 In the judgment under appeal, the primary judge was engaged in a review of the registrar's orders. In that respect, s 104 of the Federal Circuit Court of Australia Act 1999 (Cth) provides, relevantly: Review of the exercise of Registrars' powers (2) A party to proceedings in which a Registrar has exercised any of the powers of the Federal Circuit Court of Australia under subsection 102(2) or under a delegation under subsection 103(1) may…apply to the Federal Circuit Court of Australia for review of that exercise of power. (3) The Federal Circuit Court of Australia may, on application under subsection (2) or on its own initiative, review an exercise of power by a Registrar under subsection 102(2) or under a delegation under subsection 103(1), and may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercised. 27 Rule 20.03 of the Federal Circuit Court Rules 2001 (Cth) provides that the review of an exercise of power by a registrar must proceed by way of a hearing de novo. The primary judge was required to conduct a new hearing of the application for a sequestration order and decide whether the requirements of ss 52(1) and (2)(a) of the Bankruptcy Act were met and whether, under s 52(2)(b), there was other sufficient cause why a sequestration order ought not be made: Martin v Commonwealth Bank of Australia (2001) 217 ALR 634 at [14]-[18] per North, Mansfield and Katz JJ; Totev v Sfar (2008) 167 FCR 193 at [14] per Emmett J, at [52] per Bennett J, at [94] per Cowdroy J. It is fundamental to the conduct of such a hearing that each party must be given a reasonable opportunity to make relevant submissions: cf Annetts v McCann (1990) 170 CLR 596 at 600-601 per Mason CJ, Deane and McHugh JJ, at 621 per Toohey J; Dobbie v Department of Social Security [1995] FCA 303; The Queen v Windridge, Ex parte Pacific Coal Pty Ltd [1992] 2 Qd R 180 at 191 per Thomas J. 28 The sequestration order had serious consequences for Ms Schepis. Such consequences have been described as quasi-penal: Hamilton v Warne (1907) 4 CLR 1293 at 1297 per Griffith CJ, 1300 per Issacs J and 1302 per Higgins J, Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148 per Davies, Lockhart and Neaves JJ. Those consequences emphasise that fairness required that Ms Schepis be given a genuine opportunity to make submissions as to why the sequestration order ought be set aside. 29 Ms Schepis participated in the hearing before the Federal Circuit Court by telephone. She had prepared a document setting out her argument as to why the sequestration order ought to be set aside that she intended to read out to the Court. She says she was given no chance to present the arguments contained in that document, which included submissions about the allegedly defective service and abuse of process. 30 The transcript of the hearing bears out Ms Schepis' claim that she was given no real opportunity to make and develop submissions as to why her application should succeed. The primary judge commenced by asking Ms Schepis whether she owned any assets. His Honour then proceeded to tell her why she could not succeed. The only submission that Ms Schepis had the chance to make was "But it's not my debt." His Honour's response was "It is your debt." Ms Schepis then asked "So what do I do now?" His Honour's response was "Well, there's nothing you can do. The application will be dismissed." The primary judge controlled and dominated the hearing to such an extent that Ms Schepis only had the opportunity to respond to the questions she was asked and the comments made to her, and was given no real chance to raise the arguments she wished to raise in support of her case. 31 In the course of his reasons, the primary judge indicated that he had enquired of Ms Schepis "as to whether or not she may have some other reason or cause as to why a sequestration order ought not be made, including by asking whether she has any assets against which a judgment might be executed." That statement is only partly accurate. His Honour did ask Ms Schepis whether she owned any assets (although, unsurprisingly in the absence of an explanation, she did not understand that the purpose of the question was to ascertain whether she was able to pay her debts for the purpose of s 52(2)(a) of the Bankruptcy Act). His Honour did not ask Ms Schepis whether she may have some other reason or cause as to why a sequestration order ought not be made. That is a question that his Honour ought to have asked. 32 A judge is required to give a self-represented litigant sufficient information about the practice and procedure of the court to allow a fair trial to be conducted: SZRUR v Minister for Immigration and Border Protection (2013) 216 FCR 445 at [53] per Allsop CJ, [37], [43] per Robertson J, [58]-[60] per Mortimer J. His Honour did not inform Ms Schepis of her entitlement to make submissions and, in fact, seemed to take the attitude that there was no point in her making submissions because there was nothing she could usefully say. 33 The primary judge gave Ms Schepis no reasonable opportunity to make submissions in support of her application. In my opinion, she was denied procedural fairness in the hearing before the Federal Circuit Court. Ms Schepis is entitled to think that she has been treated poorly by different aspects of the legal system. 34 Where there is denial of procedural fairness, there should be a new trial unless it appears that a properly conducted hearing could not possibly have produced a different result: Stead v State Government Insurance Commission (1986) 161 CLR at 141 at 145, 147. It is difficult to conclude that compliance with the requirements of procedural fairness could have made no difference in a situation where the denial of procedural fairness affected the entitlement of a party to make submissions: cf Stead at 145. In my opinion, at least some of the arguments raised by Ms Schepis as to why a sequestration order ought not to be made against her estate have sufficient prospects of success to warrant an order that there be a further hearing. 35 I will order that the appeal be allowed, that the judgment of the Federal Circuit Court be set aside and that Ms Schepis' application for review of the sequestration order made by the registrar be remitted to the Federal Circuit Court for further hearing and determination. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rangiah.