Smits v Lillas & Loel Lawyers Pty Ltd

The primary judge's reasons 26 In his reasons of 20 January 2016, his Honour said that Mr Smits had led no evidence in support of an adjournment of the hearing of the petition other than to tender the deed. The primary judge said that it was a moot point, as to whether Mr Pitman remained entitled to vote in the amount admitted by Mr McDonald. 27 Obviously, had Morgan Conley not been admitted to proof for $667,722, but only $10,000, the resolution to enter into the personal insolvency agreement would have been lost. The inevitable result would have been that Mr Smits would have been made bankrupt on 20 January 2016 when the petition was heard. His Honour noted that Mr Smits had not put before him any sworn evidence of his current financial circumstances. Indeed, that position has continued until today in respect of the appeal. He observed that Mr Smits had argued that the proximity of the adjourned return date of the petition to the date of the adjourned creditors' meeting worked against putting before the Court a statement of Mr Smits' financial circumstances that had been verified. Mr Smits contended that was a reason why he sought a further adjournment of the hearing of the creditor's petition. 28 His Honour rejected that as a reason for an adjournment. He said, and we agree: There has been, since 25 November 2015, a contingency that the petitioning creditor, and perhaps another creditor, might choose either to continue, or, as the case may be, to seek substitution for the prosecution of the creditor's petition. Viewed against that much longer timeframe, there has been ample opportunity to prepare in draft an affidavit which might support an adjournment. 29 In those circumstances, his Honour referred to the statement of affairs on which Mr McDonald had relied in his reports to creditors. The primary judge found, which is again not contested, that Mr Smits was hopelessly insolvent and that no submission to the contrary had been made. His Honour noted that Mr Smits was presently 63 years of age, that his usual occupation was that of a property developer and company director, but he was presently unemployed. He said that Mr Smits had, among other difficulties, relationship difficulties that had contributed to his unfortunate financial circumstances that, in turn, were a reflection of unsuccessful property developments, perhaps, also a sequel to the global financial crisis of 2008 and that he also had some health issues. 30 Mr McDonald had initially proposed to recommend to creditors that it was in their interests to accept the personal insolvency agreement. In its original form, a third party was to contribute $55,000 to the controlling trustee for distribution, after deducting his expenses, to creditors. The amount of the third party contribution in the proposal did not change by the time of the adjourned meeting on 19 January 2016, however, the trustee's costs had changed radically. The trustee's remuneration, which was approved at the meeting, was $40,000. As his Honour found, after the costs of administration and advertising, it was likely that about $650 would be available for distribution to the creditors, resulting in an estimated dividend of .0008 cents in the dollar based on the estimated claims of creditors disclosed in Mr Smits' statement of affairs. In effect, as his Honour found, there would be no return to creditors at all. 31 His Honour then set out some of the paragraphs in the trustee's report. Those included the fact that since his appointment the trustee had received and sent about 750 emails in dealing with a number of claims by Mr Smits. One of the more bizarre allegations in the notice of appeal is Mr Smits' complaint that Mr McDonald had rejected creditors with claims of over $5.5 million who would have supported the execution of the personal insolvency agreement. No doubt, the investigation of those claims contributed to the volume of emails, although there is no evidence before us about that matter, other than the statement of affairs. 32 Mr McDonald informed the creditors in his supplementary report: The Debtor is not willing to make any divisible property available to the creditors. This is the most significant factor which has influenced my decision to recommend that the creditor's interests are not served by accepting the PIA proposal. Whilst the Debtor may yet decide to amend his proposal, the fact that any amendment is offered after I had set a deadline would cause me some concern about the bona fides and degree of co-operation that would be forthcoming to the Trustee of any PIA under Part X of the Act. 33 His Honour noted that the sum of $55,000, therefore, was the only amount of money that would be contributed by anyone to any trustee of a personal insolvency agreement, were it executed by Mr Smits and a trustee, subject to supplementation by a theoretical income contribution that was unlikely given Mr Smits' present unemployment and his unfortunate health position as detailed in Mr McDonald's reports. His Honour found there was no present reason to expect any particular benefit to creditors from an income contribution by Mr Smits. 34 The primary judge found that Mr McDonald, whose integrity was not in question, had made a considered value judgment that it was in the interests of Mr Smits' creditors that he be made bankrupt. Although his Honour did not regard that opinion as determinative, he took it into account in coming to his conclusion that he should refuse an adjournment for the purposes of s 206(1) of the Act. That section provides: (1) Where: (a) a meeting of creditors has, in accordance with this Part, passed a special resolution requiring a debtor to execute a personal insolvency agreement; and (b) a creditor's petition was presented against the debtor before the passing of the resolution or is presented against him or her after the passing of the resolution but before the agreement has been duly executed; the Court may, upon application by the debtor, a creditor or a person nominated as trustee of the proposed agreement, if it appears to the Court that it would be for the advantage of the creditors that the debtor's affairs be administered under the agreement, adjourn the hearing of the petition for such period as it considers necessary to allow the agreement to be executed and, if the agreement is duly executed within that period, shall dismiss the petition. 35 His Honour said that Mr Smits accepted that he carried an onus of making it appear to the Court that it would be to the advantage of creditors for his affairs to be administered under the proposed personal insolvency agreement, rather than his being made bankrupt. The primary judge found that, given the miniscule return for which the personal insolvency agreement provided, there was little to be said in favour of allowing it to proceed, rather than for an adjudication that there be a sequestration order. His Honour set against that, the value judgment made by the creditors voting at the meeting, that the agreement should nonetheless be accepted. But the primary judge considered correctly, in our opinion, that the views of the majority of the creditors were not decisive on the question. 36 His Honour noted that the deed between Mr Pitman, Mr Smits and others did not appear to have been before the meeting and that Mr Smits carried the onus of establishing that it had been. He pointed out that it was a document which might have been expected to have been of interest to the creditors generally, given, among others, that it provided for one particular voting creditor, Mr Pitman, through his control of the debt owed to Morgan Conley, to have an advantage which others did not. Namely, he had been paid $70,000 on the day before the meeting by a party related to Mr Smits and would be paid by Mr Smits somehow, if the personal insolvency agreement were entered into, a further $10,000 that was not being made available to any of the other creditors. In those circumstances, his Honour made his observations about Mr Pitman's entitlement to vote, or at least to vote in the total amount for which he had been admitted to vote and that, without his vote, the resolution would not have been carried. 37 His Honour found that he was satisfied that the petitioning creditor's debt remained owing for the purposes of s 52(1)(c) of the Act. He had regard to the pendency of the appeal to be heard on 4 March 2016 from the Federal Circuit Court judge's refusal to set the bankruptcy notice aside and he noted that Mr Smits had put no submissions as to the strength or otherwise of the notice of appeal. The primary judge also noted that the petitioning creditor, Lillas & Loel, had applied for security for costs in respect of that appeal and that application was to be heard on 3 February 2016. He found that Mr Smits had committed the act of bankruptcy by failing to comply with the bankruptcy notice that the Federal Circuit Court had not set aside. 38 His Honour also considered the proximity of the return date of the creditor's petition to the date of the meeting, but, having regard to the background, he found that circumstance did not support granting an adjournment. The primary judge rejected the submission that this had not allowed Mr Smits to prepare particular material, such as that he may have taken proceedings in the Administrative Appeals Tribunal or in this Court under Pt IVA of the Taxation Administration Act 1953 (Cth) to challenge, as excessive, any assessment upon which the Commissioner relied in support of the debt to which he had been admitted to proof at the meeting of creditors. His Honour considered Mr Smits' argument that there were no suggestions in the trustee's report that any preferential dealings had occurred, such as would result in recovery of assets from third parties. The primary judge concluded: 30. The case is different to those where an application for adjournment is made after the execution of a s 188 authority and prior to the holding of a creditor's meeting and the taking of a vote. That difference is reflected in the particular test posited in s 206(1) of the Act, as opposed to a more general discretion. 31 It only comes to this. Having regard to the miniscule return to creditors, the interrogative note at least, which attends the majority in favour of the personal insolvency agreement, the opposition voiced by the petitioning creditor and the only creditor who has chosen to appear today, the Commissioner, I am not persuaded that it would be for the advantage of creditors that the debtor's affairs be administered under the agreement. 32 To adjourn the petition would visit further costs on Lillas & Loel Lawyers in respect of a debt which, as proved, is relatively modest and in respect of which that company has already incurred the costs of contesting an application to set aside the bankruptcy notice. It would also visit further costs on the Commissioner. It appears unlikely that either would recover anything in respect of costs although, of course, that might change after investigations by a trustee in bankruptcy. These considerations in themselves, in my view, are sufficient to refuse the adjournment application. Being satisfied that the act of bankruptcy has been committed, that the debt remains owing and in respect of the other matters which a creditor must prove on the hearing of a petition, I make a sequestration order against the estate of the debtor. I note that the Official Trustee will be the trustee.

The grounds of appeal 39 The grounds of appeal relevantly contended, as best we can distil, that the primary judge erred by: acting in excess of the jurisdiction of the Court and miscarried the exercise of his discretion by making the sequestration order; failing to recognise or determine the advantages of the execution of a personal insolvency agreement: failing to adjourn the hearing of the creditor's petition to allow a fair and reasonable period for Mr Smits to procure execution of the personal insolvency agreement so as to give effect to what the majority of creditors had voted for; refusing, on 2 February 2016, to reopen the proceedings and by holding that s 37 of the Act was a bar to setting aside the sequestration order. (We would observe that this was a matter about which no argument has been advanced on the appeal, and in respect of which his Honour was undoubtedly correct. That is because the very terms of the Act precluded him from so doing); failing to accord procedural fairness to the debtor, because somehow, on 2 February 2016, his Honour should have undone his earlier order; on 20 January 2016, acting contrary to the principles in House v The King (1936) 55 CLR 499 by taking into account irrelevant considerations and attaching undue weight to such considerations, for among other reasons, that the controlling trustee had rejected claims of creditors to be allowed to vote in respect of debts of $5.5 million; erring "by allowing abuses of the process of the Court and of the Supreme Court of New South Wales during the hearings which caused substantial injustice to the Debtor and other Creditors". (That ground was not elaborated during the course of argument but was, in any event, incomprehensible); failing to exercise the discretion to adjourn the hearing of the proceedings and to allow a reopening. 40 During the course of submissions today counsel for Mr Smits argued that the Commissioner's debt was allegedly statute barred pursuant to s 105-50 of Sch 1 of the Taxation Administration Act. However, that was not a point taken in the 29 pages of the second amended notice of appeal. We refused leave to argue it. The argument was not supported by any evidence before the primary judge.

The application to adduce further evidence on appeal 41 Mr Smits applied by an interlocutory application filed on 8 August 2016 to adduce further evidence, being an expert's report of a Mr Brett Walker that had been filed on 1 March 2016. Mr Walker was a registered tax agent and Fellow of the Institute of Chartered Accountants. He prepared a report that contained a number of assertions about matters that did not appear to have, first, a statement of the assumptions upon which the assertions were made, or, secondly, a reasoning process leading to the conclusion the subject of the assertions. For example, he said that the Australian Taxation Office accounts relating to Mr Smits' "alleged" indebtedness to the Commissioner: …are not capable of being understood, reconciled or explained without more information from the ATO with demonstrated linkages to, and verification with, reference to the relevant assessments. I concluded that the ATO has removed amounts and BAS from the ICA [integrated client account] and transferred them to the debt recovery file or replaced them with revised amounts that were different to the original BAS amounts lodged by the Taxpayer. … Due to the above considerations I had no way of verifying or reconciling with accuracy or completeness substantial discrepancies and apparently missing data entries for broken periods with what has happened in and as between the ICA and the debt recovery file. … In my opinion the tax related liability of the Taxpayer is less than $95,473 subject to the lodgement of amended BAS returns and it is reasonably likely that the second respondent [the Commissioner] is a debtor of the Taxpayer. 42 In our opinion the application to adduce fresh evidence should be rejected. First, Mr Walker's evidence does not comply with the requirements of s 79 of the Evidence Act 1995 (Cth). In Dasreef Pty Limited v Hawchar (2011) 243 CLR 588 at 604 [36]-[37] French CJ, Gummow, Hayne, Crennan, Kiefel, and Bell JJ said: 36. … in HG v The Queen, Gleeson CJ pointed out that, "[b]y directing attention to whether an opinion is wholly or substantially based on specialised knowledge based on training, study or experience, [s 79] requires that the opinion is presented in a form which makes it possible to answer that question" [(1999) 197 CLR 414 at 427 [39]]. 37 It should be unnecessary, but it is nonetheless important, to emphasise that what was said by Gleeson CJ in HG (and later by Heydon JA in the Court of Appeal in Makita (Australia) Pty Ltd v Sprowles [(2001) 52 NSWLR 705 at 743-744 [85]] is to be read with one basic proposition at the forefront of consideration. The admissibility of opinion evidence is to be determined by application of the requirements of the Evidence Act rather than by any attempt to parse and analyse particular statements in decided cases divorced from the context in which those statements were made. Accepting that to be so, it remains useful to record that it is ordinarily the case, as Heydon JA said in Makita [(2001) 52 NSWLR 705 at 744 [85]], that "the expert's evidence must explain how the field of 'specialised knowledge' in which the witness is expert by reason of 'training, study or experience', and on which the opinion is 'wholly or substantially based', applies to the facts assumed or observed so as to produce the opinion propounded". (emphasis added) 43 In our opinion, nothing that Mr Walker said explained the opinion he propounded. Rather his evidence was in the form of assertions that did not portray a sufficiently developed reasoning process to enable them to be understood. The Court's discretion to permit fresh evidence under s 27 of the Federal Court of Australia Act 1976 (Cth) is at large. However, the Court can have regard to a number of discretionary considerations, including those developed by the common law, which may be relevant to the exercise of that discretion, although not as binding rules in the way the common law fixed, as Rares J explained in Wills v Australian Broadcasting Corporation (2009) 173 FCR 284 at 294-295 [52]-[55] with whom North J at 287 [8] and Emmett J at 287 [15] agreed. 44 The deficiencies in Mr Walker's evidence, to which the Commissioner took objection, meant that its reception would not assist in either affirming or rejecting the grounds of appeal. For those reasons we reject the application to adduce the further evidence.

Mr Smits' submissions 45 On the appeal, Mr Smits' substantive argument was that he had been denied procedural fairness because the trial judge had proceeded on the adjourned hearing on 20 January 2016 to hear the petition without giving him a fair opportunity to advance material to resist the application for a sequestration order or to obtain evidence that there was a person prepared to act as trustee of the proposed personal insolvency agreement.

Consideration 46 The decision whether to grant or refuse an adjournment lies in the discretion of the trial judge, as Wilson J, with whom Gibbs CJ, Murphy, Aickin and Brennan JJ agreed, said in Bloch v Bloch (1981) 180 CLR 390 at 395 to 396: it is indeed seldom that an appellate court will feel justified in reviewing such a decision. In Maxwell v Keun [[1928] 1 KB 645 at 653]], Atkin L.J. stated the rule in terms which have won general acceptance: I quite agree the Court of Appeal ought to be very slow indeed to interfere with the discretion of the learned judge on such a question as an adjournment of a trial, and it very seldom does do so; but, on the other hand, if it appears that the result of the order made below is to defeat the rights of the parties altogether, and to do what which the Court of Appeal is satisfied would be an injustice to one or other of the parties, then the Court has power to review such an order, and it is, to my mind, its duty to do so. [cf. also, Hayes v Hayes [No. 1] [1934] QSR 219; Myers v Myers [1969] WAR 19; Walker v Walker [1967] 1 WLR 327; [1967] 1 All ER 412.] 47 In our opinion no error appeared from the arguments Mr Smits advanced, lengthy and convoluted as they were, to suggest that his Honour erred in the exercise of his discretion to refuse to adjourn the hearing of the creditor's petition. That hearing had been set down on 25 November 2015 for 20 January 2016. Mr Smits was well aware that the meeting of creditors would take place on 19 January 2016. On his own evidence, subsequently advanced on 25 January 2016, in support of his Honour revisiting his orders to sequestrate Mr Smits' estate and not to allow the personal insolvency agreement to proceed, Mr Smits acknowledged that he knew from discussions with Mr McDonald, "a couple of days before the meeting", that Mr McDonald had foreshadowed his intention to resign. By the time of the meeting, Mr Smits had spoken to "a couple" of other persons to see whether they would be prepared to take on the responsibility of being the trustee, apparently unsuccessfully. 48 In those circumstances Mr Smits was well aware that, although this was not material before his Honour at the time of the hearing on 20 January 2016, there was a real possibility of there being no person at, or identified to, the meeting willing to act as trustee, that the Commissioner and Mr Loel had opposed the resolutions at the meeting and that the creditors' petition might be heard and determined on the day for which it had been fixed, namely 20 January 2016. His Honour explained his reasons for refusing to grant the adjournment. We are not satisfied that his Honour made any error in coming to that conclusion. Indeed, for the reasons his Honour gave he was correct to have refused to adjourn the hearing of the petition. 49 It was manifestly in the interests of justice that a person whose own statement of affairs had disclosed that he owed debts of over $8 million with no substantive assets should be made bankrupt in circumstances where, at the time of his personal insolvency agreement being put to a vote of creditors, no-one was prepared to act as his trustee. The Court had power under s 206(1) to make the order that his Honour made. We are not persuaded, despite Mr Smits' extensive submissions put to us in writing and orally, that the primary judge made any arguable, let alone, actual error. 50 It is not appropriate, in those circumstances, for us to make an order by consent allowing the appeal particularly when we are satisfied that, for the reasons his Honour gave, he was indubitably correct to have refused the adjournment and to have proceeded to make Mr Smits bankrupt. 51 Mr Smits made other arguments such as that the Commissioner had to act as a model litigant but had not done so by seeking to pursue the hearing of the creditor's petition and that this was a breach of his obligations as a model litigant. That argument is hopeless. It has been rejected at least twice by Full Courts of this Court in Croker v Commonwealth [2011] FCAFC 25 at [19] where Siopis, Tracey and Gilmour JJ said that by force of s 55ZG of the Judiciary Act 1903 (Cth) the model litigant obligations were not enforceable at the suit of a private litigant and could not be raised in any proceeding other than by or on behalf of the Commonwealth: see also Croker v Minister for Finance [2013] FCAFC 154 at [13] per Rares, Jagot and Wigney JJ. 52 There was no evidence before us that the petitioning creditor's debt was not owed, as his Honour found. Mr Smits argued that, because the trustee had only admitted Lillas & Loel, the petitioning creditor, to proof for the purposes of voting in the sum of $69,404, his Honour should have found that was the amount of the petitioning creditor's debt. The problem with that argument is that his Honour had before him an affidavit of Mr Loel on behalf of the petitioning creditor affirmed 19 January 2016 in which Mr Loel said that, "Each debt on which the applicant creditor relies in this proceeding is still owing." His Honour was entitled to accept that evidence. Mr Smits was in a position to contradict it but did not. 53 We see no error in his Honour finding that he was satisfied for the purposes of s 52(1)(c) of the Bankruptcy Act that the debt, or debts, on which the petitioning creditor relied were owing at the time of making the sequestration order. 54 There are no other grounds on which his Honour should have refused to grant the sequestration order. The grounds of appeal argued that, among others, for some reason his Honour could not make the order because of s 43(1) of the Bankruptcy Act. That section provides that, subject to the Act, the Court can on a petition presented by a creditor make a sequestration order against the debtor where first, the debtor had committed an act of bankruptcy, and, secondly, that at the time when the act of bankruptcy was committed he was, relevantly, personally present or ordinarily resident in Australia. Mr Smits indubitably had committed not one, but three acts of bankruptcy, first, by failing to comply with the bankruptcy notice, secondly, by signing the personal insolvency agreement and, thirdly, by having a meeting of creditors (s 40(1)(g)(i)(j)). This is an example of how incomprehensible and vexatious the prolix notice of appeal was. 55 The notice of appeal then argued that s 47 of the Bankruptcy Act was not complied with, without any elaboration as to how, first, the creditor's petition was not verified by an affidavit of a person who knew the relevant facts (s 47(1)) despite Mr Loel having done so or, secondly, the other requirements of s 47(1A) had not been adhered to. The particulars to those allegations included an assertion that the correct position was that, as at 20 January 2016, Mr Smits' financial position was such that the dividend to creditors from the personal insolvency agreement should be based on debts of $957,156. 56 None of those assertions was proved before his Honour. Moreover, Mr Smits' assertion at that point of his notice of appeal was manifestly inconsistent with the subsequent allegation in the particulars on page 24 of the document that the trustee should have admitted to vote creditors with another $5.5 million of debts. 57 During the course of submissions Mr Smits also argued that the primary judge erred in failing to go behind the bankruptcy notice or the judgment of the Federal Circuit Court refusing to set aside the bankruptcy notice. There was no evidence put before us to demonstrate how, or on what basis the primary judge could have gone behind that notice. Moreover, Mr Smits put to us no submission or evidence as to what material was before his Honour or in the appeal papers to justify going behind the notice. In those circumstances the submission had no evidentiary foundation and must be rejected.

Conclusion 58 For these reasons we are of opinion that the appeal must be dismissed. The application to allow it by consent must be refused. 59 The Commissioner has applied for his costs of appearing on the hearing of the appeal today. That application is not opposed. 60 Mr Smits argued that we should continue the stay granted on 3 March 2016 that all proceedings under the sequestration order made by the primary judge should be stayed for a further 21 days so that Mr Smits can consider his position in relation to seeking special leave to appeal to the High Court. 61 In our opinion the grounds of appeal before us were entirely without merit. For those reasons no stay should be granted and the order for sequestration should take immediate effect. We make the following orders: (1) The appeal be dismissed. (2) The appellant pay the second respondent's costs of and incidental to his appearance on the argument of the appeal today. (3) Order 1 made on 3 March 2016 be discharged. I certify that the preceding sixty-one (61) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares, Collier and Markovic.