Stedman v Commissioner of Taxation

Federal Court of Australia|1999-04-20|Before: Katz J, O'Connor J, Sackville J

EX TEMPORE REASONS FOR JUDGMENT 1 This is an application for an extension of a stay order made by Katz J on 16 April 1999. On 26 March 1999, O'Connor J, pursuant to s 52(3) of the Bankruptcy Act 1966 (Cth) ("Bankruptcy Act"), stayed the sequestration orders made by her Honour on that day. The orders made by Katz J provided that all proceedings under the sequestration orders should be stayed up to and including 20 April 1999. 2 The sequestration orders made by O'Connor J were against the estates, respectively, of Mr Mare and Ms Stedman ("the debtors"), who are husband and wife. On 16 April 1999, each debtor filed a notice of appeal in substantially the same terms, appealing from the orders made by O'Connor J. They each now apply for an extension of the stay granted by Katz J up to and including delivery of the judgment of the Full Court in respect of the appeals.

Background to the Application 3 The proceedings before O'Connor J comprised two applications by the Deputy Commissioner of Taxation ("the Commissioner"). The Commissioner sought orders setting aside or declaring void compositions entered into by each of the debtors under Part 10 of the Bankruptcy Act. The Commissioner's applications were heard together, by consent, over a number of days. Her Honour reserved her decision in the applications and gave a single judgment on 26 March 1999. 4 O'Connor J made orders declaring the composition in each case to be void and setting aside the composition: Deputy Commissioner of Taxation v Wily [1999] FCA 307. Her Honour also made orders sequestrating the estates of each of the debtors pursuant to s 43 of the Bankruptcy Act, and appointed Max Christopher Donnelly as trustee of the estate of each of the debtors. Her Honour stayed the orders for a period of twenty-one days, pursuant to s 52(3) of the Bankruptcy Act, subject to continuation of certain undertakings given by each of the debtors. In substance, the undertakings given by the debtors were to the effect that neither of them would seek to dispose of any of his or her property during the currency of the stay. 5 The stay granted by her Honour expired on 16 April 1999. On that day, each of the debtors filed a notice of appeal seeking to appeal from the whole of the judgment of O'Connor J (save for the question of costs, which her Honour has not yet determined). The notice of appeal in each case contains a large number of grounds and seeks orders allowing the appeal and setting aside the orders made by O'Connor J. 6 On 16 April 1999, the matter came before Katz J as the duty judge. His Honour gave leave to each of the debtors to file in Court a motion seeking a continuation of the stay of proceedings. His Honour made the motions returnable today, 20 April 1999. Upon each of the debtors renewing to the Court the undertakings given to O'Connor J, and giving a further undertaking to pursue the appeal as promptly as possible and to apply for an expedited hearing, Katz J ordered that all proceedings under the sequestration orders made on 26 March 1999 be stayed up to and including 20 April 1999. The Evidence 7 Mr Chippindall, who appeared on behalf of the debtors, read affidavits in support of their respective applications, which proceeded on the basis that evidence in one case was to be evidence in the other. 8 The affidavit of Mr Mare filed 16 April 1999 states that he is currently employed as the Managing Director of Australian Diatomite Mining Pty Limited ("ADM") and that, if he were to become bankrupt, he could no longer hold this position with the company. Mr Mare says that the income he receives from his position with ADM is utilised to meet his family's day to day living expenses, school fees and mortgage payments on a property at Collaroy of which his wife is the registered proprietor ("the Property"). Mr Mare also says that, apart from this income, he has no other financial means or resources to meet the family's commitments. Mr Mare says that if he were to become bankrupt, his standing and reputation, particularly within the Dutch community in Australia, would be irrevocably damaged. 9 Ms Stedman, in her affidavit filed 16 April 1999, says that if she were to become bankrupt, she would immediately default under both the first and second mortgages over the Property. She further states that she has no independent income of her own, nor any assets other than those disclosed in her statement of affairs. In substance, her assets consist of the equity in the Property. 10 One of the issues debated before O'Connor J was whether a second mortgage over the Property in favour of a company incorporated in the Netherlands Antilles, known as South Island Investments NV ("South Island"), was a sham. O'Connor J did not find it necessary to resolve this issue. Her Honour did, however, find that the evidence given by Ms Stedman on this issue was not credible. Her Honour did not explicitly make such a finding in relation to Mr Mare, but it is a clear inference from her Honour's judgment that she had reservations about his evidence. She also was very critical of the evidence of a Mr Kourtland, a Dutch lawyer, who gave evidence concerning the shareholding of South Island. 11 Her Honour held, on the evidence before her, that there was undoubtedly "cause for suspicion" that there might be further assets which would benefit genuine creditors of the debtors. She considered that it was sufficient that there be a "possibility" of advantage to creditors flowing from further inquiries and investigation. As a result of this and a number of other reasons set out in the judgment, her Honour exercised the discretion under s 239 of the Bankruptcy Act to set aside or declare void the composition.

The Power to Extend the Stay 12 Sections 37 and 52(3) of the Bankruptcy Act provide as follows: "37(1) Subject to subsection (2), the Court may rescind, vary or discharge an order made by it under this Act or may suspend the operation of such an order. (2) The Court does not have power to rescind or discharge, or to suspend the operation of: (a) a sequestration order; or (b) an order for the administration of the estate of a deceased person under Part XI. ... 52(3) The Court may, if it thinks fit, upon such terms and conditions as it thinks proper, stay all proceedings under a sequestration order for a period not exceeding 21 days." 13 Federal Court Rules ("FCR"), O 52, r 17(1) provides that an appeal to the Court does not operate as a stay of execution or of proceedings under the judgment appealed from, except so far as the Court or a Judge may direct. 14 The reconciliation of FCR O 52, r 17 with ss 37(2) and 52(3) of the Bankruptcy Act presents obvious questions. The parties accepted, however, that Pincus J in Evans v Heather Thiedeke Group Pty Ltd (1990) 95 ALR 424, at 425, was correct when he held that: "the general power to grant a stay (not limited to a stay pending appeal) given by s 52(3) does not nullify the court's jurisdiction to order a stay under O 52, r 17 of the Federal Court Rules which relates to appeals." The parties also accepted that Carr J correctly held in Coleman v Lazy Days Investments Pty Ltd (1995) 55 FCR 297, at 302, that s 37(2) does not stand in the way of a stay order being made, pursuant to FCR, O 52, r 17, pending an appeal. The reason given by his Honour was that s 37 is concerned with rescission, discharge or suspension of a sequestration order and not with a stay of proceedings. 15 The difference between a stay and a suspension of a sequestration order was stated by Neaves J in Re Wardle; Ex parte Widin v Australia and New Zealand Banking Group Ltd (1987) 70 ALR 633. His Honour pointed out that, upon the making of a sequestration order, the debtor becomes a bankrupt by virtue of s 43(2) of the Bankruptcy Act. Further, subject to the Bankruptcy Act, the property of the bankrupt vests in the trustee of the estate (s 58(1)) and other consequences flow from the making of the order (ss 58(3), 60(2)). Neaves J continued (at 635): "A study of those provisions reveals that the sequestration order does not itself operate to change the debtor's status or to vest his property in the trustee. The making of the sequestration order is but the factum upon which the statute operates to bring about the consequences upon the debtor's status and property. Section 37(1) of the Act may be contrasted with s 52(3) which enables the court, if it thinks fit, upon such terms and conditions as it thinks proper, to 'stay all proceedings under a sequestration order for a period not exceeding 21 days'. It has been held that a stay granted under that sub-section does not have the effect of preventing the change of status and the vesting of property which is effective upon the making of the sequestration order: Re Deriu (1970) 16 FLR 420. It follows from what is said above that the operation which a sequestration order has is to trigger the statutory provisions which bring about the consequences of bankruptcy. The legislature, in conferring power on the court to suspend the operation of a sequestration order, must, in my opinion, have intended to enable the court to prevent those statutory consequences ensuing during the period of suspension. Otherwise, suspension of the sequestration order would have no practical effect. That intention will be defeated unless the order of suspension is regarded as having the effect that the sequestration order is not made until the expiration of the period of suspension." 16 It should be said that it is not entirely clear that Re Deriu stands for the proposition identified by Neaves J. Nevertheless, I think that that proposition is correct as a matter of principle. 17 Section 37 of the Bankruptcy Act, prior to its amendment, empowered the Court to suspend the operation of a sequestration order at least prior to the time it became signed and sealed as provided for in the Bankruptcy Rules. (The earlier form of s 37 appears in the judgment in Re Wardle, at 634.) However, s 37(2) of the Bankruptcy Act now deprives the Court of power to suspend the operation of a sequestration order pursuant to the general powers conferred by s 37(1). It is not necessary, for the purposes of this case, to consider whether there is some alternative source of power that would enable a sequestration order to be suspended, as distinct from being subject to a stay. 18 The present applications seek extensions of the stays already in place (as distinct from orders suspending the operation of the sequestration orders). There is no suggestion that a stay granted under FCR, O 52, r 17, operates differently from a stay granted pursuant to s 52(3) of the Bankruptcy Act. It follows that any extension of the stay orders will not prevent the debtors' change of status or the vesting of the property in the trustee which occurs by virtue of s 58(1) of the Bankruptcy Act.

The Principles Governing Grant of a Stay 19 The general principles relating to the grant or extension of a stay are well known. In Powerflex Services Pty Ltd v Data Access Corporation (1996) 67 FCR 65, (FC), at 66, it was said that the decision in Alexander v Cambridge Credit Corporation Ltd (Receivers Appointed) (1985) 2 NSWLR 685 (CA) should be followed in this Court. In Cambridge Credit, the Court of Appeal said this (at 694): "The onus is upon the applicant to demonstrate a proper basis for a stay that will be fair to all parties. The mere filing of an appeal will not, of itself, provide a reason or demonstrate an appropriate case, nor will it discharge the onus which the applicant bears. The Court has a discretion whether or not to grant the stay and, if so, as to the terms that would be fair. In the exercise of its discretion, the Court will weigh considerations such as the balance of convenience and the competing rights of the parties before it. Where there is a risk that if a stay is granted, the assets of the applicant will be disposed of, the Court may, in the exercise of its discretion, refuse to grant a stay." [Citations omitted.] The Court of Appeal also observed (at 695) that, where there is a risk that the appeal will prove abortive if the appellant succeeds and a stay is not granted, courts will normally exercise their discretion in favour of granting a stay. Further, although courts approaching an application for a stay will generally not speculate about the appellant's prospects of success, this does not prevent some preliminary assessment about whether the appellant has an arguable case. 20 In Powerflex, the Court (at 499) emphasised that "special" circumstances do not have to be shown for a stay to be granted. It also pointed out that in this Court, the word "special" (in a comparable context) has not been thought to raise a significant barrier to the exercise of a broad general discretion: Jess v Scott (1986) 12 FCR 187. The Commissioner's Submissions 21 In this case, Mr McGovern, who appeared on behalf of the Commissioner, argued that there is a serious question as to whether the second mortgage over the Property is a sham. He identified as a possible source of prejudice to the Commissioner, that action might be taken by the putative second mortgagee to enforce its apparent security, in circumstances that might deprive the trustee of the opportunity to intervene to preserve the position. 22 Mr McGovern also identified as a possible source of prejudice the fact that, if a stay is granted, the trustee will not be able to institute investigations into the affairs of the debtors. This may result in prejudice to creditors, since delay almost inevitably makes it more difficult to identify assets that might otherwise be available for distribution to creditors. He further pointed out that any prejudice to the debtors flowing from a refusal to extend the stays, seemed to be predicated on the basis that the fact of bankruptcy would result in Mr Mare losing his job and other opportunities to earn income. Mr McGovern relied on the fact that the effect of a stay is not to disturb the sequestration orders, as distinct from enforcement action pursuant to those orders. He contended that, on the evidence, Mr Mare might well lose his job even if a stay were granted in his case. 23 Mr McGovern also submitted that the notice of appeal in each case suggested that the debtors' prospects of success on the appeals were very slight. I did not understand Mr McGovern to suggest that the appeals had not been filed in good faith, although his submissions perhaps came close to suggesting that. Should the Stay be Further Extended? 24 I think that there is some force in Mr McGovern's contention that prejudice may occur to creditors if the second mortgagee were free to enforce its mortgage, without the trustee having an opportunity to intervene pending the determination of the appeals by the Full Court. However, it seems to me that this difficulty can be addressed. Mr Chippindall proffered on behalf of each of the debtors an undertaking to the Court that, in the event that either debtor receives notice of any application by South Island (the second mortgagee) to sell the Property, he or she will forthwith notify the Commissioner's solicitor in writing. That undertaking, which I propose to accept, seems to me to go part of the way at least to ameliorating any prejudice that might flow from the possibility that the second mortgage is indeed a sham transaction. 25 As I have explained, the parties accepted that a stay does not have the effect of preventing s 58 of the Bankruptcy Act from vesting in the trustee Ms Stedman's interest as registered proprietor of the Property (subject perhaps to administrative steps to ensure that that interest is recorded). If that is correct, it would seem (and Mr Chippindall did not dispute the proposition) that the trustee would have a caveatable interest that could be protected by the lodging of a caveat under the Real Property Act 1900 (NSW) ("Real Property Act"). 26 I think it appropriate to impose a condition on the grant of any stay that will ensure that the stay itself does not prevent the trustee from lodging such caveat as he may be entitled to under the Real Property Act. This would protect his position against actions of the second mortgagee pursuant to the mortgage (should the Commissioner's contentions ultimately prove to be correct). Mr Chippindall did not argue against the inclusion of a further condition for the grant of a stay in the following form: "Nothing in this stay shall prevent Max Christopher Donnelly, the trustee of the estates of Frederik Antonius Mare and Jacqueline Anne Stedman, from lodging a caveat to protect any interest he may have in the property known as 2b Lancaster Crescent, Collaroy." 27 It is also appropriate that the undertakings proffered to the Court by the debtors, which prevent each of them from selling, transferring or disposing of any of his or her assets (including the Property), should be accepted, as should the proffered undertakings relating to prosecuting the appeal with due diligence and applying for an expedited hearing of the appeal. 28 I appreciate that these undertakings will not eliminate all possibility of prejudice to the creditors, since the trustee will be unable to carry out investigations pending the determination of the appeals. However, I need to take into account that, if no stay were granted, the effect would be to render the appeals, if not abortive, then at least of limited value. It is true that, if the appeals were successful, the sequestration orders could be set aside. Nonetheless, if no stay were granted, the trustee could take steps pursuant to the sequestration orders that would occasion significant prejudice to each of the debtors. 29 I have taken into account that, on the face of the notices of appeal, it is very difficult to say other than that the prospects of success of the appeals are not strong. However, I do not think I can conclude on the material available to me that the appeals have not been instituted in good faith; nor can I conclude that they are without prospects of success. It seems to me that I should approach the application on the basis that, although the prospects of success are not strong, nonetheless the appeals have been instituted bona fide and there is some chance, albeit relatively slight, that they will succeed. 30 I have also taken into account that the affidavit of Mr Mare, in particular, relies on prejudice which he says will flow from the fact of bankruptcy. It is true that the effect of a stay is merely to prevent implementation of the usual consequences of the sequestration order. There is therefore some uncertainty as to whether a stay would avoid the prejudice that Mr Mare would otherwise experience. Nonetheless, I am prepared to infer that Mr Mare is at risk of losing his employment if the stay is not granted and that there is a risk of consequential irremediable prejudice to Ms Stedman. There is clearly a difference between the position of the debtors if a stay is granted, and their position if the trustee is free to administer their estates in bankruptcy in the usual way pending the determination of the appeals. 31 On balance, therefore, I think that the proper course is to order a continuation of the stay in each case, subject to the undertakings and qualifications to which I have referred. I make the following orders: 1. Upon the basis of the undertakings given by Ms Stedman to the Court in the form of exhibits C and D, the stay granted by Katz J on 16 April 1999 in relation to matter number N 320 of 1999, is to be continued up to and including the delivery of judgment of the Full Court on the appeal in this matter, subject to the qualification that nothing in this stay shall prevent Max Christopher Donnelly, the trustee of the estate of Jacqueline Anne Stedman, from lodging a caveat to protect any interest he may have in the Property. 2. Upon the basis of the undertakings given by Mr Mare to the Court in the form of exhibits B and D, the stay granted by Katz J on 16 April 1999 in relation to matter number N 321 of 1999, is to be continued up to and including the delivery of judgment of the Full Court on the appeal in this matter, subject to the qualification that nothing in this stay shall prevent Max Christopher Donnelly, the trustee of the estate of Frederik Antonius Mare, from lodging a caveat to protect any interest he may have in the Property. 3. Costs in each case be costs in the appeal. I certify that the preceding thirty-one (31) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Sackville.

Solicitor for the Respondent: Australian Government Solicitor

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