Totev v Sfar

REASONS FOR JUDGMENT 1 This is an appeal from orders made by the Federal Magistrates Court on 5 July 2005 dismissing an application for review of a sequestration order made by a Registrar against Mr Totev on 10 May 2005. The Chief Justice has made a direction that the appeal be heard by a single Judge of the Court under s 25(1A) of the Federal Court of Australia Act 1976 (Cth). 2 The amended creditors' petition filed by Mr and Mrs Sfar (the respondents) claimed the amount of $4,684.68 for costs that had been ordered against Mr Totev in the District Court of New South Wales, for which sum judgment had been entered in the Local Court of New South Wales on 15 July 2004. Interest was also claimed for 69 days at 9%, amounting to $79.70. The total sum referred to in the creditors petition unpaid was $4,764.38. 3 The bankruptcy notice had been sought to be set aside by Mr Totev by application filed on 22 September 2004. That application was one contemplated by s 41(7) of the Bankruptcy Act 1966 (Cth) (the "Act"). That application, however, was filed after the commission of the relevant act of bankruptcy. A Federal Magistrate (Raphael FM) dismissed the application on 26 November 2004. There is no appeal before the Court in relation to those orders, though it will be necessary to comment on one aspect of the reasons of the Federal Magistrate in due course. 4 The creditors' petition was served on 19 December 2004. An amended creditors' petition was served on 30 March 2005. 5 On 10 May 2005, a Registrar made a sequestration order against the estate of Mr Totev. 6 The circumstances leading up to the act of bankruptcy arise from a proceeding in the District Court of New South Wales in which Mr Totev and the Sfars were involved. Mr Totev sued the Sfars for damages for misleading conduct and losses in connection with a loan arrangement. 7 For present purposes, it is adequate to begin a closer examination of events from the hearing in the District Court on 2 June 2003 before Rolfe DCJ. On that day, Mr Totev's matter was set down for hearing. The matter was called on. Mr Totev was not ready to proceed. It appears that Mr Totev's solicitors ceased to act for him less than a month before. Mr Totev asked for an adjournment. Rolfe DCJ indicated that he would give an adjournment, but that Mr Totev would have to pay the costs thrown away. He explained to Mr Totev that he would Stand this matter over before another judge in August and you're [Mr Totev] going to have to explain to that judge if you're not ready to proceed why you're not ready to proceed and if the explanation is not satisfactory, your case will be dismissed. 8 The costs order was in terms that Mr Totev should pay costs as agreed or assessed within two months of the date of the order. The matter was stood over to 18 August 2003 with the plaintiff to show cause as to why the proceedings should not be dismissed for want of prosecution. The matter was later before the Court in November 2003. The proceedings were not dismissed on this or any other basis. 9 The costs were assessed. After an earlier Certificate of Determination was lodged with the Local Court, the relevant cost assessor's Certificate of Determination was lodged with Fairfield Local Court and a Certificate of Judgment in the sum of $4,684.68 was issued on 15 July 2004. The bankruptcy notice was issued on the basis of this judgment representing an order for costs in the District Court of New South Wales. 10 The notice of intention to oppose the creditors' petition that was filed by Mr Totev on 8 February 2005 identified six grounds: (a) First, he claimed that he had numerous proceedings in which he claimed more money that the judgment debt. He made reference to the District Court proceedings and some Supreme Court proceedings for the recovery of $7,600. (b) Secondly, he claimed that he was seeking to set aside the judgment in the Local Court. (c) Thirdly, he took issue with how Rolfe DCJ had expressed himself as to the payment of the costs. (d) Fourthly, he referred to a settlement offer made in connection with the District Court proceedings as being greater than the judgment debt. (e) Fifthly, he claimed that there had to be proof that the Sfars had paid their lawyers before they could recover a judgment against him. (f) Sixthly, he referred to a "two-fold malversation" of justice including an assertion that the judgment would somehow abort the District Court proceedings. 11 The Registrar adjourned the hearing of the petition to allow proceedings in the Supreme Court brought by Mr Totev in relation to a decision of the Costs Review Panel which had acceded to the complaints of the Sfars about some aspects of the original assessor's decision to be completed. On 20 April 2005, Master Malpass described the appeal from the Cost Assessment Review Panel as misconceived and hopeless. 12 On 10 May 2005, the Registrar made the sequestration order. 13 On 31 May 2005, Mr Totev filed an application for review. This was heard by the Federal Magistrate (Driver FM) on 5 July 2005. Orders were made on that day dismissing the application for review with costs. 14 The application before the Federal Magistrates Court was supported by an affidavit of Mr Totev of 20 June 2005, being 134 pages long (including annexures). An affidavit of Michael Sfar of 4 July 2005 was also before the Court. 15 Before dealing with the contents of that evidence and the submissions on appeal it is necessary to describe how the Federal Magistrate dealt with the review. 16 The Federal Magistrate received Mr Totev's affidavit over the objection of counsel for the Sfars. His Honour dealt with it and the balance of Mr Totev's evidence as follows: …I received the bulk of the affidavit on the basis that I would treat the submissions in it as submissions and deal with the factual assertions in it to the extent that they are relevant. I also received as submissions a document filed in Court by Mr Totev earlier today headed, "Evidence my Complaint to the Legal Services Commissioner is a Genuine Claim". In the course of argument, Mr Totev tendered a further document, being a letter to the petitioning creditors from their then solicitors dated 9 August 2002, which became exhibit A1. 17 The Federal Magistrate received Mr Sfar's affidavit which he said was largely submission also. 18 The Federal Magistrate first rejected the assertion that the sequestration order should not have been made on formal grounds. The material presented to the Registrar was sufficient on its face, he said, to support the making of a sequestration order. No argument or ground of appeal was put to me as to any error in this regard. 19 The Federal Magistrate then dealt with the submission that he should go behind the judgment debt. He refused to do so on the basis that it was an order for costs made in the District Court that had been assessed. He said at [6] of his reasons: …On the basis of the available material, there seems to be no real doubt that the costs order was regularly obtained, that a judgment was regularly obtained, a certificate of costs was regularly obtained, and a bankruptcy notice and creditor's petition were subsequently properly issued and served. 20 The Federal Magistrate rejected as irrelevant the assertion of Mr Totev that the petitioning creditors had not paid, or had not shown that they had paid, the costs the subject of the relevant order. The Federal Magistrate said at [7] of his reasons: …Whether that is right or wrong, I see no significance in it. The District Court made a costs order against Mr Totev and it was his liability to pay it, not a liability on the petitioning creditors to pay the solicitors. 21 The Federal Magistrate then dealt with the submission that Mr Totev could challenge the making of the sequestration order on the basis that he had a counter-claim, set off or cross-claim of equal or greater value that could not have been set up in the proceeding leading to the judgment debt. The Federal Magistrate said at [8] and [9] of his reasons: Mr Totev also sought to challenge the sequestration order on the basis that he has a counter-claim, set off or cross-demand of equal or greater value than the amount of the debt due to the petitioning creditors that could not have been set up in the proceedings leading to the judgment debt. There is no substance to that argument essentially because the costs order supporting the bankruptcy notice and the creditor's petition was made in the proceedings instituted by Mr Totev in the District Court, which are the very proceedings which, he says, constitute his counter-claim, set off or cross-demand. Not only could that counter-claim, set off or cross-demand be asserted in the proceedings leading to the costs order. It was those proceedings that led to the costs order. The claim in the District Court proceedings, therefore, could not have been a proper basis of opposition to the bankruptcy notice. Neither could it be a proper basis of opposition to the creditor's petition on the basis of there being a counter-claim, set off or cross-demand of equal or greater value. 22 The Federal Magistrate then turned to the only argument which he perceived to have potential substance: the argument that the bankruptcy proceedings were an abuse of process. The Federal Magistrate dealt with this argument at [10] to [14] of his reasons: … Mr Totev asserts that the bankruptcy proceedings were taken by Mr and Mrs Sfar in order to put an end to his District Court proceedings claiming substantial damages from them. Mr Sfar, in his own affidavit, in paragraph 16, suggests that he and his wife are anxious to see an end to those District Court proceedings and that the bankruptcy proceedings appeared to be the only means open to them to achieve an end. I also have before me evidence of discussion between the parties seeking to resolve the District Court proceedings short of a bankruptcy. Mr Totev believes that there is a malign and ulterior purpose in the bankruptcy proceedings to keep him out of the damages that he believes he is entitled to. However, the motivation of a petitioning creditor is not generally relevant. An act of bankruptcy had been committed. That act of bankruptcy having been committed and a creditor's petition verified by required affidavits having been presented then, prima facie, the petitioning creditors were entitled to the relief they sought. There would be a basis for concern if there was evidence that the District Court proceedings had good prospects of success and if the petitioning creditors were the only creditors to benefit from a sequestration order. In those circumstances, an argument could be raised that the bankruptcy proceedings were an attempt to frustrate the administration of justice. In this case, however, there is no material of a persuasive nature that the District Court proceedings have any prospect of success. The trustee has not yet been able to determine whether those proceedings are worth pursuing. Secondly, the petitioning creditors are not the only creditors. Although proofs of debt have not yet been lodged, the identified creditors include a range of financial institutions, the Australian Taxation Office, solicitors who formerly acted for Mr Totev, the Supreme Court of New South Wales and a Lugo Ventresca, who apparently loaned $25,000 to Mr Totev to support his legal proceedings. If there is any merit in the District Court proceedings, then it is by no means beyond the bounds of possibility that one or other of Mr Totev's creditors will see some benefit in funding the continuation of those proceedings by Mr Totev's trustee in bankruptcy. In these circumstances, the bankruptcy proceedings did not constitute an abuse of process. The bankruptcy operates as an effective stay on the District Court proceedings until the position can be properly assessed by the trustee. That is a normal and natural consequence of the sequestration order, as was pointed out by Mr Potts in his submissions. There is no necessary consequence of concern by reference to any asserted abuse of process. The appeal 23 The jurisdiction of the Federal Court of Australia in matters such as this is appellate. Some cognisable error needs to be identified in the decision appealed from. See Qun Xiong (Kenny) Yu v Todaytech Distribution Pty Ltd [2006] FCA 131 at [30]. 24 The notice of appeal sets out 12 grounds of appeal, as follows: A. His Honour Driver FM erred by not giving sufficient weight if any at all to the relevance of my existent claim against the creditors in the District Court No 14079 of 2001 as a counter-claim, set off or cross demand and which puts in dispute my liability to the creditor. B. His Honour Driver FM erred by not sufficiently investigating the merits of my claim in the District Court against the creditors. That his Honour Driver FM did not sufficiently look into my claim and investigate what it entailed and whether it had any probability of success based on these factors. That his Honour Driver FM did not sufficiently investigate my written arguments (supporting exhibits V7-V20 including the document entitled "Evidence my action is a genuine Claim") and did not ventilate or discuss them during the review hearing despite my oral argument inviting investigation. That subsequently his Honour Driver FM concluded that "there is no material of a persuasive nature" but did not elaborate further and noted that the trustee had not been able to determine whether my claim in the District Court is worth pursing (trustee is waiting for money payment prior to determining whether or not to pursue the action). C. His Honour Driver FM erred dismissing my ground for abuse of process because he found no persuasive material that my district court claim had prospects of success. His Honour Driver FM erred because in determining its prospects of success he did not sufficiently investigate the claim's merits or the written arguments tendered. D. His Honour Driver FM erred by implying that there could be other creditors who benefited from the sequestration orders. None of the other creditors were applying any pressure on me or sought any action against me. E. His Honour Driver FM erred by unreasonably implying another creditor could fund my action when this is not the case. F. His Honour Driver FM erred by concluding that there was no basis upon which the court should look behind the judgement debt. G. His Honour Driver FM erred by dismissing my claim to the Legal Services Commissioner because the written argument tendered (an exhibit to the affidavit) was not the correct form. His Honour Driver FM erred in not using his discretionary powers to investigate the merits of this claim. H. My action in the district court against the creditors has probability of success and is fair to litigate. In these circumstances there is dispute over my liability to the creditors in the bankruptcy proceedings and subsequently the sequestration order of 10th May 2005 against me should not of been made. I. I am filing a claim against the respondents and their legal representatives in the form of a complaint to the Legal Services Commissioner who can award up to $10,000 damages. This claim if successful is greater than the judgement debt and also puts in dispute by liability to the creditor. J. No money was expended and no financial loss was incurred by the creditors on the judgement debt at any point in time. No real debt in truth and reality has been incurred by the creditors. K. The bankruptcy proceedings are an abuse of process. The creditors allegedly have incurred substantial costs in pursuing the bankruptcy proceedings that are far greater than the judgement debt. The predominant purpose of the bankruptcy proceedings were to frustrate and discontinue my claim against the creditors in the District Court where the creditors stand to lose far more money in damages and the bankruptcy proceedings acted as a stalking horse to coerce me into discontinuing my action. L. The sequestration orders is a denial of natural justice and frustrates my litigation against the creditors in the District Court which has not yet been heard. 25 During the argument before me, Mr Totev accepted that his appeal was put on five bases. These provide a convenient framework for analysis. 26 The first argument was that the Federal Magistrate should have gone behind the judgment based on the principle in Wren v Mahoney (1971-72) 126 CLR 212. The Federal Magistrate, it was said, committed an error because on the material before him he should have concluded that in truth there was no costs debt lying behind the costs judgment and, therefore, he should have dismissed the petition on the basis that no debt was truly owed. (See ground F and ground J in the Notice of Appeal.) 27 The second argument was that Mr Totev had, and has, a bona fide claim in the District Court, of a character and strength displayed by the material before the Federal Magistrate such that the Federal Magistrate should have concluded that the claim was sufficiently strong to require him not to make a sequestration order against the estate of Mr Totev for the costs debt. (See grounds A, B and H in the Notice of Appeal.) 28 The third argument was that the connection between the claim and the costs judgment was so close (the one arising out of the other) that there should be no sequestration order. This was really part of the second argument, and I will treat it as such. 29 The fourth argument was that on the material before the Federal Magistrate he should have concluded that the bankruptcy proceeding was an abuse of process or something akin to an abuse of process to warrant the exercise of a discretion to dismiss the petition. (See grounds C and K of the Notice of Appeal.) 30 The fifth argument was that Mr Totev had made a complaint about the conduct of the Sfars' barrister to the Legal Services Commission (the "LSC") which reflected serious underlying misconduct in relation to the case in the District Court and that should have affected the Federal Magistrate's exercise of discretion not to grant the creditor's petition. The LSC can award up to $10,000 in a complaint, if upheld. If an award were made in favour of Mr Totev against the barrister, that would mitigate the costs debt. (See grounds G and I of the Notice of Appeal.) 31 Before dealing with Mr Totev's arguments it is to be noted that no attempt was made by Mr Totev to prove that he was solvent or that he had the means to pay the small judgment debt upon which the order was based.