Totev v Sfar

STATUTORY FRAMEWORK 2 Section 52(1) of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act) provides that, at the hearing of a creditor's petition, the Court must require proof of: · the matters stated in the petition; · service of the petition; and · the fact that the debt on which the petitioning creditor relies is still owing. If it is satisfied with the proof of those matters, the Court may make a sequestration order against the estate of the debtor. However, under s 52(2), if the Court is not satisfied with the proof of any of those matters, it may dismiss the petition. In addition, the Court may dismiss the petition if it is satisfied by the debtor that: (a) he or she is able to pay his or her debts; or (b) for any other sufficient cause a sequestration order ought not to be made. The term "Court" in s 52 includes the Federal Magistrates Court. 3 Under s 52(4) of the Bankruptcy Act, a creditor's petition lapses at the expiration of the period of 12 months commencing on the date of presentation of the petition unless, before the expiration of that period, a sequestration order is made or the petition is dismissed or withdrawn. That period of 12 months may be extended at the discretion of the Court for a period expiring no later than 24 months after the date of presentation of the petition. 4 Section 102(2)(i) of the Federal Magistrates Act 1999 (Cth) (the Federal Magistrates Act) relevantly provides that a power of the Federal Magistrates Court prescribed by the Federal Magistrates Court Rules 2001 (Cth) (the General Rules) may, if the Federal Magistrates Court so directs, be exercised by a registrar. Section 103(1) provides that the Rules of Court made by the Federal Magistrates Court may delegate to registrars any of the powers of the Federal Magistrates Court, including all or any of the powers mentioned in s 102(2). Rule 2.02 of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) (the Bankruptcy Rules) relevantly provides that, for the purposes of s 102(2)(i) of the Federal Magistrates Act, a registrar may exercise a power of the Court under s 52 of the Bankruptcy Act. Under s 103(2), a power delegated by the Rules of Court under s 103(1), when exercised by a registrar, is taken, for all purposes, to have been exercised by the Federal Magistrates Court. 5 Rule 4.02 of theBankruptcy Rules specifies the form of a bankruptcy petition and the contents of the affidavit verifying the petition. Rule 4.06(1) specifies the affidavits that must be filed by a creditor before the hearing of a creditor's petition. The affidavits include the following: · an affidavit of a person who has searched in the National Personal Insolvency Index no earlier than the day before the hearing date for the petition; · an affidavit of a person who knows the relevant facts, which was sworn as soon as practicable before the hearing date for the petition and states that each debt on which the applicant creditor relies is still owing; · where the debt stated in the petition is an amount payable under a judgment of a court that ordered the amount to be paid into the court, an affidavit of a person who has searched in the proper office of the court, not earlier than the day before the hearing date for the petition, stating whether the amount of the debt or part of that amount has been made as ordered. 6 Section 104(2) of the Federal Magistrates Act provides that a party to a proceeding in which a registrar has exercised any of the powers of the Federal Magistrates Court under s 102(2), or under a delegation under s 103(1), may apply to the Federal Magistrates Court for a review of that exercise of power. Under s 104(3), the Federal Magistrates Court may, on an application under s 104(2), or on its own initiative, review an exercise of power by a registrar under s 102(2) or under a delegation under s 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. 7 Rule 20.03 of the General Rulesprovides that the review of an exercise of power by a registrar must proceed by way of a hearing de novo. On the review, the Court may receive as evidence any affidavit or exhibit tendered before the registrar and may receive further evidence and may receive, as evidence, any transcript of the proceeding before the registrar. 8 Under r 2.03 of the Bankruptcy Rules, an application under s 104(2) of the Federal Magistrates Act for review of the exercise of a power of the Court by a registrar under s 102(2), or under a delegation under s 103(1), must be made within 21 days after the day on which the power was exercised. Rule 7.06 of the Bankruptcy Rules provides that an application for review of a decision by a registrar to make a sequestration order must be served on the trustee in bankruptcy at least 28 days before the hearing date fixed for the application. Under r 7.06(3), the applicant must give notice of the application to each person known to be a creditor of the bankrupt and must serve the notice on each creditor 14 days before the date fixed for hearing of the application. If directed by the Court, the trustee must prepare a report in relation to the bankrupt.

THE NATURE OF A REVIEW OF A REGISTRAR'S ORDER 9 The rationale for the review regime briefly described above is that the making of a sequestration order involves the exercise of the judicial power of the Commonwealth. Under Chapter III of the Constitution, that power cannot be exercised otherwise than by a justice appointed under Chapter III. A registrar of the Federal Magistrates Court is not a justice. On the other hand, judges of the Federal Magistrates Court are justices appointed under Chapter III. 10 For a delegation of power to a registrar of the Federal Magistrates Court to be valid, the powers and functions of the registrar must be subject to review by a judge of the Federal Magistrates Court on questions of both fact and law. If the review of the exercise of the power by the registrar is by way of hearing de novo, the delegation will be valid (Harris v Caladine (1991) 172 CLR 84 at 95). Indeed, on one view, nothing less than a hearing de novo would be sufficient. That is to say, there must be a complete rehearing of the facts and the law as they exist when the judge reviews the order made by the registrar; otherwise, the registrar, and not the judges of the Court, would be exercising the original jurisdiction of the Court (Harris v Caladine at 164). 11 It may be arguable that subjecting the exercise of powers or functions by a registrar to an appeal would be sufficient (Harris v Caladine at 95). However, that is not the safeguard that has been adopted in relation to the delegation of powers and functions to registrars of the Federal Magistrates Court. It is clear from r 20.03 of the General Rules that the review of a registrar's sequestration order is to be by way of a hearing de novo. 12 A hearing de novo is different from an appeal stricto sensu and is different from an appeal by way of rehearing. In the case of an appeal stricto sensu, the question would be whether, upon the material before the registrar, the conclusion reached by the registrar was correct. In an appeal by way of rehearing, the appellate court would rehear the matter as at the date of the appeal, but on the evidence called before the registrar, subject to a power to receive further evidence where appropriate: the rights of the parties would be determined by reference to the circumstances, including the law, as they existed at the time of rehearing (Harris v Caladine at 125). In each case any question concerning the exercise of discretion would be subject to the restrictions imposed on an appellate court in reviewing the exercise of a discretion (see House v The King (1936) 55 CLR 499). 13 In the case of a hearing de novo, however, the judge reviewing the order begins afresh and exercises for himself or herself any discretion exercised by the registrar. The parties commence the proceeding again, subject to any rules concerning the use of evidence adduced before the registrar. The hearing de novo involves the exercise of the original jurisdiction and the petitioner, in the case of a bankruptcy petition, must start again, call witnesses and make out the petitioner's case (Harris v Caladine at 124). 14 Because the hearing of an application for review of a sequestration order is a hearing de novo, it would not be sufficient for the reviewing judge to be satisfied that the registrar made no error and simply to dismiss the application for review. The judge who hears the review application must hear the petition afresh and must be satisfied as to the matters referred to in s 52 of the Bankruptcy Act. Thus, the reviewing judge must herself or himself be satisfied with the proof of: · the matters stated in the petition; · the service of the petition; and · the fact that the debt or debts on which the petitioning creditor relies is or are still owing. The reviewing judge must also exercise afresh the discretions conferred by s 52(2). 15 In particular, unless the Bankruptcy Rules are waived, the judge must have the affidavits referred to in r 4.06 of the Bankruptcy Rules, which must be sworn shortly before the hearing. Except in the case of a review on the same day as the sequestration order was made, the affidavits relied upon before the registrar would not satisfy r 4.06. In the absence of fresh affidavits, it would be necessary that compliance with the Bankruptcy Rules be waived.

THE EFFECT OF A REGISTRAR'S ORDER 16 In the light of s 103(2) of the Federal Magistrates Act, the effect of a registrar's sequestration order, when an application is made for review, may be unclear in that there may be a question as to when a reviewing judge's sequestration order takes effect. For example, since the proceeding before the reviewing judge would be a hearing de novo, a sequestration order made by the reviewing judge would ordinarily take effect when it was made. It would not normally operate nunc pro tunc, so as to be effective from the date when the registrar's order was made. On the other hand, if the reviewing judge decided not to make a sequestration order, the registrar's order would cease to be of any effect. 17 The date of commencement of the bankruptcy would not be affected, since, under s 115(1) of the Bankruptcy Act, the bankruptcy relates back to, and commences on, the first act of bankruptcy within the period of six months before the date of presentation of the petition. Nevertheless, a sequestration order has an effect on the status of the debtor and on the property of the debtor and any delay in the hearing of an application for review might give rise to practical difficulties. Any practical difficulties could only be completely avoided by a review application being heard on the same day as a sequestration order is made by a registrar or by requiring that any review application must be filed on the day on which the sequestration order is made and by staying the sequestration order from the moment at which the review application is filed. Such considerations emphasise the great importance of bankruptcy matters being dealt with in a highly expeditious fashion. Courts exercising bankruptcy jurisdiction must be assiduous in avoiding delay in dealing with any question concerning the making of a sequestration order. 18 That is not to suggest that there has been any inappropriate delay in the present case. The question of delay has not been raised in the present proceeding. Further, since there is not presently any issue as to effect of the registrar's order in the present case, there is no need for the Full Court to express any further view concerning its effect.

HISTORY OF THE DISPUTE IN THE PRESENT CASE 19 Mr Totev commenced a proceeding in the District Court of New South Wales against Mr and Mrs Sfar claiming damages in respect of alleged contraventions of the Fair Trading Act 1987 (NSW) and fraud. The proceeding was fixed for hearing on 2 June 2003 before Rolfe DCJ. When the matter was called on, Mr Totev was not ready to proceed and he asked for an adjournment. Rolfe DCJ granted the adjournment on terms that Mr Totev pay the costs thrown away by the adjournment. Although the proceeding has been before the District Court on several occasions since 2 June 2003, the proceeding has not yet been disposed of. 20 The costs ordered by Rolfe DCJ on 2 June 2003 were assessed and, in due course, on 15 July 2004, a certificate of judgment was issued by the Fairfield Local Court in the sum of $4,684.68. That certificate formed the basis of a bankruptcy notice, with which Mr Totev did not comply. On 15 December 2004, Mr and Mrs Sfar filed a creditor's petition seeking the bankruptcy of Mr Totev on the basis of his failure to comply with the bankruptcy notice. On 8 February 2005, Mr Totev filed a notice of intention to oppose the petition, in which he identified six grounds of opposition. 21 When the petition came on for hearing, the registrar adjourned the hearing to enable Mr Totev to prosecute a proceeding in the Supreme Court of New South Wales concerning a decision of the Costs Review Panel, which had acceded to complaints by Mr and Mrs Sfar about certain aspects of the original costs assessor's decision. On 20 April 2005, Master Malpass dismissed the appeal from the Costs Review Panel, describing the appeal as misconceived and hopeless. Accordingly, the petition was again listed for hearing before a registrar on 10 May 2005, when the sequestration order was made.

First Decision of the Primary Judge 22 On 31 May 2005, Mr Totev filed an application for review of the registrar's decision. That matter came before a judge of the Federal Magistrates Court for hearing on 5 July 2005. The evidence before the primary judge did not satisfy r 4.06(1) of the Bankruptcy Rules and his Honour did not dispense with compliance with that provision. The primary judge considered that the sequestration order was properly made. His Honour found that there was no basis upon which the application for review could succeed and that there was no error made by the registrar in making the sequestration order. Accordingly, his Honour ordered that the application for review be dismissed and that Mr Totev pay the costs of Mr and Mrs Sfar. 23 In the course of his reasons, the primary judge said that Mr Totev was seeking orders setting aside the sequestration order and the dismissal of the creditors' petition. His Honour dealt with Mr Totev's assertion that, by reason of formal aspects of the documents filed in support of the sequestration order, the registrar erred in making the sequestration order. His Honour concluded that there was no substance in that ground and said that, plainly, Mr Totev had committed an act of bankruptcy and that the material presented to the registrar, to which his Honour had regard, was sufficient, on its face, to support the making of a sequestration order. 24 The primary judge noted that Mr Totev had also sought to challenge the sequestration order on the basis that he had a counter claim, set off or cross demand of an amount equal to or greater than the amount of the debt due to Mr and Mrs Sfar that could not have been set up in the proceeding leading to the judgment debt. His Honour considered that there was no substance in that argument because the costs order supporting the bankruptcy notice and the petition was made in the proceeding instituted by Mr Totev in which he asserts his alleged counter claim, set off or cross demand. His Honour considered that the claim in the District Court proceeding could not have been a proper basis of opposition to the bankruptcy notice and could not be a proper basis of opposition to the petition filed by Mr and Mrs Sfar.

The First Appeal 25 Mr Totev appealed to the Federal Court from the orders of the Federal Magistrates Court of 5 July 2005. On 5 May 2006, a judge of the Federal Court, sitting alone at the direction of the Chief Justice, ordered that the appeal be allowed with costs and that the orders of the Federal Magistrates Court made on 5 July 2005 be set aside. The matter was remitted to the Federal Magistrates Court for rehearing. 26 At that stage, more than 12 months had elapsed since the presentation of the petition and there had been no order under s 52(5) extending the currency of the petition. On the other hand, of course, a sequestration order had been made, albeit by the registrar and an application for review had been filed. 27 In his reasons for judgment of 5 May 2006, the appeal judge dealt with several grounds advanced by Mr Totev. Certain of the grounds were rejected by the appeal judge and it is not necessary to examine them. However, his Honour concluded that the primary judge had erred in the way in which the provisions of s 52(2)(b) of the Bankruptcy Act were addressed or, to be specific, because those provisions had not been addressed by the primary judge. 28 Mr Totev did not refer to s 52(2)(b) before the appeal judge. However, he raised the following grounds: · He has a bona fide claim in the District Court of such character and strength, displayed by the material before the Federal Magistrates Court, that a sequestration order ought not to have been made: the connection between the District Court claim and the costs judgment was so close, in that one arose out of the other, that there should be no sequestration order. · The bankruptcy proceeding was an abuse of process, or something akin to an abuse of process, such as to warrant the exercise of a discretion to dismiss the petition. 29 The appeal judge considered that the proposition advanced by the primary judge, that Mr Totev's claim was not a counter claim, set off, or cross demand that could not have been set up in the proceeding in which the judgment order was obtained, since the costs order was obtained in that very proceeding, was debatable. Further, his Honour considered that, even if the claim was not one that could be set up in the action or proceeding, it was a relevant consideration in the assessment of "other sufficient cause" for dismissing the petition, for the purpose of s 52(2)(b) of the Bankruptcy Act. The appeal judge observed that s 52(2)(b) was not addressed before him or before the primary judge and that the possible relevance of the claim in the District Court had not been broached in the context of s 52(2)(b). Thus, the appeal judge concluded, the primary judge approached the matter without directing himself to the correct framework of analysis under s 52(2)(b). 30 The appeal judge said that whether the failure of the primary judge to direct himself correctly to s 52(2)(b) was operative was a different question, in the light of the conclusion of the primary judge that there was no material of a persuasive nature before him that the District Court claim had any prospects of success. That conclusion was reached in the context of discussing Mr Totev's claim that the bankruptcy proceeding was an abuse of process. The appeal judge considered that, if that were a clearly defensible conclusion, the error of the primary judge in failing to advert correctly to s 52(2)(b) might be seen not to be operative. The appeal judge therefore proceeded to enquire whether it was open to the primary judge to conclude that the District Court proceeding did not have any prospect of success. 31 The appeal judge considered that it could not be said that there was no material of a persuasive nature that the District Court proceeding had any prospects of success. His Honour accepted that Mr Totev had "posited the wrong, but at least a relevantly cognate, question" to the primary judge. The submissions that were put against Mr Totev before the primary judge, which the appeal judge assumed had been accepted by the primary judge, were that the task upon which Mr Totev was engaged in trying to show the worth of his claim was irrelevant. The appeal judge considered that that task was not irrelevant. Therefore, his Honour could not conclude that the failure to address the issues of prospects of success of the District Court proceeding in the correct framework of s 52(2)(b) was not an operative error of principle on the part of the primary judge. 32 The appeal judge concluded that the primary judge had drawn a conclusion about the material that was not open to him. Because his Honour considered that it could not be said that there was no material of a persuasive nature before the primary judge that Mr Totev's District Court claim had prospects of success, the exercise by the Federal Magistrates Court of the power under s 52 miscarried, in so far as the primary judge failed to consider the exercise of the discretion conferred by s 52(2)(b).

Second Decision of the Primary Judge 33 On 4 June 2007, after a further hearing, the primary judge once again ordered that the review application be dismissed with costs. After citing extensively from the reasons of the appeal judge, the primary judge observed that it was necessary to consider the prospects of success of Mr Totev in the District Court proceeding. His Honour said that, if there is a likelihood of success in that proceeding, it may be that the sequestration order should not have been made. His Honour observed that there was now considerably more material bearing on the question of prospects of success than was available to the registrar. His Honour also observed that, if the sequestration order were set aside, because of the passage of time, the petition would have to be dismissed as having lapsed. 34 The primary judge referred to the view expressed by the appeal judge that the material disclosed a tolerably coherent case that: · representations were made to Mr Totev by or on behalf of Mr and Mrs Sfar that were misleading, deceptive and fraudulent, to the effect that loan funds of a certain character and amount would be available to Mr Totev if he contributed certain funds; · in reliance upon those representations, Mr Totev sold a property in Sydney, out of the proceeds of which he paid a fee to Mr and Mrs Sfar, paid money to Mr and Mrs Sfar to fund the proposed arrangement and funded a trip to Spain in connection with the proposed arrangement; · the loan funds did not eventuate; · Mr Totev lost the use of the sum of $16,500 that he paid to Mr and Mrs Sfar and lost the benefit of any profits from the development of property he sold in reliance on the representations. The primary judge noted that Mr Totev claimed that the profits that he lost amounted to $500,000. 35 The primary judge considered that the significant body of written material bearing on the quality of Mr Totev's claim in the District Court, which Mr Totev had adduced, remained essentially assertions that, to a significant degree, would need to be tested in any hearing of the District Court proceeding. His Honour observed that the proceeding had been commenced in the District Court on 13 December 2001 and had been running for approximately three and a half years when the costs order was made. It was significant that the costs order was made because Mr Totev was, even at that stage, not ready to proceed. 36 The primary judge referred to a divergence of opinion amongst practitioners who had given advice to Mr Totev as to the prospects of success of the claim in the District Court. His Honour referred to the written advice tendered by Mr Totev. His Honour also referred to an assessment of the prospects of success made by Mr Totev's trustee in bankruptcy, in considering whether or not to elect to prosecute or discontinue the District Court proceeding. 37 The primary judge considered that, on the material then available, Mr Totev had a reasonably arguable claim that he was induced to pay $16,500 to Mr and Mrs Sfar on the strength of representations that were misleading or deceptive. That amount was more than twice the amount supporting the petition but substantially less than the debts identified by the trustee in bankruptcy, who found an estimated deficiency of assets over liabilities of $72,466. The primary judge considered that Mr Totev's prospects of success on liability were uncertain, given the state of the evidence and that his prospects of recovering anything more than $16,500, even if he were successful on liability, were entirely speculative. Accordingly, his Honour concluded that the District Court proceeding was not a sufficient cause to prevent a sequestration order being made. Hence, his Honour found that the sequestration order made by the registrar was properly made and, therefore, ordered that the application for review be dismissed with costs.

THE APPEAL 38 In his notice of appeal, Mr Totev contended that the primary judge erred: · by giving insufficient weight to investigating the details and merits of the District Court proceeding and excessive weight to the divergent opinions of various legal advisers; · by misinterpreting some of the written evidence presented that had been filed in the District Court; · in disregarding certain of the evidence filed in the District Court; · in concluding that the District Court case would doubtfully recover more than $16,500; · by concluding that the money to be awarded in the District Court case would be insufficient to cover the trustee's estimation of Mr Totev's liabilities of $72,466; · in concluding that nothing much had changed with respect to the evidence filed in the District Court proceeding since 24 April 2003; · by giving insufficient weight to the importance of public interest with respect to the misleading, deceptive and fraudulent conduct that is the crux of the District Court proceeding. 39 Thus, Mr Totev took issue with the manner in which the primary judge purported to exercise the discretion conferred by s 52(2)(b). If the appeal were limited to the grounds stated in the notice of appeal of 5 April 2007, I would dismiss the appeal, generally for the reasons given by Cowdroy J, which I have had the opportunity of reading in draft form. 40 However, in the course of the hearing, the Full Court raised with the parties the question of whether or not the primary judge had conducted a hearing de novo of the petition, either at the first hearing or at the second hearing. The parties were given the opportunity to file further written submissions on that question having regard to the Full Court's decision in Martin v Commonwealth Bank of Australia [2001] FCA 87. Mr Totev and Mr and Mrs Sfar subsequently filed supplementary written submissions on the question of whether or not there had been a hearing de novo.

WHETHER A HEARING DE NOVO 41 Mr Totev was entitled to a hearing of the petition by a justice appointed in accordance with Chapter III of the Constitution. Mr and Mrs Sfar contend that the primary judge conducted his review of the registrar's sequestration order of 10 May 2005 by way of a hearing de novo. They rely on the fact that fresh evidence was tendered on the first review hearing. Thus, the application for review was supported by an affidavit of Mr Totev sworn on 20 June 2005, which exhibited some 134 pages of material. The primary judge accepted the bulk of that affidavit as submissions. His Honour also accepted an additional document filed in Court by Mr Totev regarding his complaint to the Legal Services Commission. The primary judge also referred, in his reasons for the first decision, to the notice to creditors filed by Mr Totev's trustee in bankruptcy, together with a statement of affairs completed by Mr Totev on 15 June 2005. Finally, Mr and Mrs Sfar point to the observation by the primary judge that he had regard to the material relied upon by the registrar in making the sequestration order. 42 Further, the primary judge referred to the formal aspects of the documents relied on in support of the sequestration order and made a finding that Mr Totev had committed an act of bankruptcy and that the material presented to the registrar was sufficient, on its face, to support the making of a sequestration order. His Honour found that the alleged act of bankruptcy had been committed, that a creditor's petition verified by the required affidavits had been presented and that, prima facie, Mr and Mrs Sfar, as petitioning creditors, were entitled to the relief they sought. 43 Mr and Mrs Sfar contend that it is implicit in the approach adopted by the primary judge that his Honour focussed on the task that he was required to perform in a hearing de novo. Thus, his Honour referred to the fact that Mr Totev invited him, as he had invited the registrar, to go behind the judgment debt, but concluded that there was no basis upon which he should do so. Thus, they contend, the primary judge considered, on a de novo basis, the question of whether the Court should be going behind the judgment debt, although his Honour eventually declined to do so. They say that there was sufficient overt consideration of the question of whether a sequestration order ought to have been made for the Court to infer that the primary judge considered de novo whether he was satisfied with the proof of the matters of which s 52(1) requires proof. 44 Mr and Mrs Sfar say that, if the Full Court is of the view that the primary judge erred in his exercise of his power of review, then the matter should be remitted to him for further consideration. Alternatively, they say, the Court could stand in the shoes of the primary judge and decide whether or not to affirm the registrar's decision. Mr and Mrs Sfar say that, if the Court considers it appropriate to exercise the function of the primary judge, the parties would need to be provided with time to adduce further evidence for the purposes of the review. 45 The appeal judge did not refer to the question of whether the primary judge had conducted a hearing de novo. Further, the primary judge did not say expressly that he was making an order under s 52(1) of the Bankruptcy Act. Thus, there is no indication in his Honour's reasons of 5 July 2005 that his Honour was satisfied as to the matters referred to in s 52, except implicitly, in so far as his Honour concluded that the sequestration order had been properly made by the registrar. More specifically, there was no indication that his Honour waived compliance with the Bankruptcy Rules concerning affidavits. His Honour did not purport to make a sequestration order. Rather, his Honour simply dismissed the application for review. 46 In any event, the orders made by the primary judge on 5 July 2005 were set aside by the Federal Court on 5 May 2006. The matter was then remitted for further hearing by the Federal Magistrates Court. In the light of the conclusions reached by the appeal judge, there had been no proper hearing up to 5 July 2005, whether or not the hearing was a hearing de novo. 47 However, s 52(4) of the Bankruptcy Act provides that a petition lapses at the expiration of the relevant period unless, before the expiration of the relevant period, a sequestration is made on the petition or the petition is dismissed or withdrawn. In the present case a sequestration order was made on 10 May 2005. The exercise of delegated power by the registrar in making the sequestration order is to be taken for all purposes to have been an exercise of power by the Federal Magistrates Court. That is the effect of s 103(2) of the Federal Magistrates Act. Until such time as the registrar's order is set aside, therefore, it must be taken to operate as a sequestration order. 48 Nevertheless, the review hearing before the primary judge was a hearing de novo. That is to say, it must be regarded as a hearing of the petition on the basis that no sequestration order has been made. Otherwise, it could not be a hearing de novo. There had been no order extending the currency of the petition under s 52(5) prior to 15 December 2005, when the period of 12 months from the presentation of the petition had elapsed. Further, by the time that the petition had come before the primary judge for the second time, considerably more than 24 months had elapsed since the presentation of the petition. Thus, even if the primary judge embarked on a hearing of the petition de novo, following remitter by the Federal Court, his Honour could not have made a sequestration order. Accordingly, the second hearing could only have had one result, namely, that the petition be dismissed, since, by that time, the petition had lapsed. That was the only order that was open to the primary judge. 49 It is unfortunate that the course of the litigation of Mr and Mrs Sfar's petition has been drawn out in the way that it has. Nevertheless, Mr Totev was entitled to have a hearing de novo by a justice appointed in accordance with Chapter III of the Constitution. He did not have such a hearing prior to the petition lapsing and it is now no longer possible for a sequestration order to be made on the petition.

CONCLUSION 50 The appeal should be upheld, but not on any of the grounds raised by Mr Totev. The orders made by the primary judge should be set aside. In lieu thereof, there should be an order that the petition be dismissed. There should be no order as to the costs of the petition. Further, since Mr Totev's grounds have failed, there should be no order as to the costs of the appeal. Any question as to the costs and expenses of the trustee in bankruptcy would be a matter for the Federal Magistrates Court. I certify that the preceding fifty (50) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett.

Dated: 12 March 2008 IN THE FEDERAL COURT OF AUSTRALIA

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

BENNETT J 51 I have had the advantage of reading, in draft, the reasons for decision of both Emmett and Cowdroy JJ. I gratefully adopt their Honours' description of the course of the proceedings in the Federal Magistrates Court and in this Court. I agree that, to the extent that the appeal is based on the grounds in the notice of appeal, it should be dismissed for the reasons given by Cowdroy J. 52 I agree with Cowdroy J for the reasons given by his Honour that, other than the following matter, the Federal Magistrate correctly exercised his review powers and considered for himself whether a sequestration order should be made. However, the Federal Magistrate did not satisfy himself of all of the matters necessary for the making of a sequestration order by him on a de novo hearing, namely verification of the matters stated in the petition, service of the petition and the currency of the debt owing as at the de novo hearing (s 52(1) of the Bankruptcy Act 1966 (Cth) ('the Bankruptcy Act')); ('the necessary affidavits'). Nor did his Honour waive compliance with the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) (Pt 4 r 4.06) concerning the necessary affidavits. 53 I agree with Emmett J at [47] that the effect of s 103(2) of the Federal Magistrates Act 1999 (Cth) is that until such time as the sequestration order made by the registrar is set aside, it must be taken to operate as a sequestration order. 54 Justice Emmett, at [48], identified a problem arising from the fact that no order extending the currency of the petition under s 52(5) of the Bankruptcy Act had been made prior to the period of 12 months from the presentation of the petition. On his Honour's view, by reason of s 52(4), the petition had lapsed. 55 There are two opposite approaches which might be taken to the resulting problem. 56 The first is to start with s 52(4) of the Bankruptcy Act which provides: A creditor's petition lapses at the expiration of: (a) subject to paragraph (b), the period of 12 months commencing on the date of presentation of the petition; or (b) if the Court makes an order under subsection (5) in relation to the petition - the period fixed by the order; unless, before the expiration of whichever of those periods is applicable, a sequestration order is made on the petition or the petition is dismissed or withdrawn. [emphasis added] 57 On this approach, a sequestration order was made before the expiration of the relevant period. The subsection is therefore no bar to the application of the law at the hearing de novo which may proceed to the making of a fresh sequestration order. 58 The second approach is to start, as did Emmett J, with r 20.03 of the Federal Magistrates Court Rules 2001 (Cth) ('the Federal Magistrates Court Rules') which provides that the review of an exercise of power by a registrar must proceed by way of a hearing de novo. As the hearing is de novo, it must proceed on the basis that no sequestration order has been made. As Emmett J pointed out at [48], the result is that the petition is "stale". It lapsed as more than 12 months had expired since the presentation of the petition. 59 The question is which of these approaches is correct. 60 It is apparent that the second approach gives rise to an anomaly. It is unlikely that the Legislature or the rule-making authority intended the result that an appeal from the correct making of a valid sequestration order within time would necessarily have to result in a decision to make no sequestration order, merely because the time between hearing and appeal was such as to render the appellate hearing more than 12 months after the date of the petition. The anomaly is well illustrated by the facts of this case. 61 One way of reading the provisions to avoid the anomaly is to read r 20.03 of the Federal Magistrates Court Rules as meaning that one proceeds as if no sequestration order had been made for all purposes except the application of s 52(4) of the Bankruptcy Act. The distinction between a de novo hearing and other forms of appeal concerns evidence and the relevance of the correctness of the order below. It is not concerned with time limits. Bearing in mind the possibility of reading the two provisions together in this manner and bearing in mind the anomalous result produced by the other construction, it appears to me that the first approach is to be preferred. 62 It follows that a sequestration order can be made on the de novo hearing of an appeal from a sequestration order notwithstanding that more than 24 months have elapsed since the filing of the petition. 63 I would set aside the order disposing the application for review and remit the matter to Driver FM to enable his Honour to receive additional evidence in support of the making of a sequestration order. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Bennett.

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

COWDROY J 64 I have considered the judgments of Emmett and Bennett JJ. I respectfully adopt the reasons of Bennett J and her finding relating to the question of whether the petition expired before the making of the sequestration order. The petition was presented on 15 December 2004 and the sequestration order was made on 10 May 2005 namely within the 12 month period prescribed by s 52(4) of the Bankruptcy Act 1966 (Cth) ('the Act'), which provides, inter alia, that a creditor's petition lapses at the expiration of a period of 12 months commencing on the date of presentation of the petition unless a sequestration order is made on the petition or the petition is dismissed or withdrawn. 65 Accordingly, the requirements of s 52(4) of the Act have been satisfied and the petition has not lapsed. The petition is therefore available to support the making of a further sequestration order. 66 In relation to the issues contained in the notice of appeal dated 5 April 2007 and raised during the hearing, such grounds do not succeed for the reasons set out hereunder.

Proceedings in the District Court 67 Between March 2000 and July 2000 the appellant ('Mr Totev') and the respondents had certain business dealings related to the borrowing of money from a Spanish-based corporation for Mr Totev's proposed development project. The loan to Mr Totev did not eventuate, and Mr Totev commenced proceedings by ordinary statement of claim in the District Court of New South Wales on 13 December 2001 against the respondents alleging, inter alia, a breach of s 53 of the Fair Trading Act 1987 (NSW). The claim for damages included Mr Totev's travel expenses in respect of his travel to Spain in the sum of $16,500 and loss of profit on a development at 114-116 Hartington Street, Rooty Hill in the amount of $564,258. 68 The hearing in the District Court was listed on 2 June 2003 but Mr Totev was not ready to proceed. An adjournment was granted, but costs were awarded against Mr Totev. Such costs were later assessed and judgment was awarded in favour of the respondents against Mr Totev in the sum of $4,684.68. Such judgment debt was the foundation for the bankruptcy notice which was issued against Mr Totev. 69 On 3 December 2004 Mr Totev filed an amended ordinary statement of claim in his District Court proceedings and a further amended ordinary statement of claim was prepared on 5 September 2006, but not filed. The proceedings have never been heard.

Proceedings in the Federal Magistrates Court of Australia 70 On 10 May 2005 a sequestration order was made by Registrar Hedge in the Federal Magistrates Court against Mr Totev. The sequestration order was made upon the petition of Mr Michael Sfar and Ms Enayet Sfar. 71 Mr Totev sought judicial review of the making of the sequestration order. The application for review was heard by Federal Magistrate Driver on 5 July 2005 and dismissed on the same day ('the first decision'). However, his Honour's decision was set aside on appeal by a judge of this Court in a judgment delivered on 5 May 2006 (see Totev v Sfar [2006] FCA 470) because of the Federal Magistrate's finding that the District Court proceedings had no prospects of success. Accordingly, the proceedings were remitted to Driver FM for re-determination. 72 The remitted hearing came before Driver FM on 2 March 2007. His Honour was informed that the District Court proceedings had been placed in that Court's dormant list in consequence of the operation of s 60(3) of the Act, and that Mr Totev wished to file a further amended statement of claim for which no leave had been given by the District Court. It was submitted by the respondents that Mr Totev's claim for damages for loss of profits was highly speculative and that, even if successful, it would not be sufficient to pay the debts disclosed in the statement of affairs. Accordingly, the respondents submitted that the proceedings had limited prospects of success and that the claim was not ready to proceed to a hearing. 73 Mr Totev contended that the District Court proceedings would be ready for hearing within six to eight weeks. He claimed that he still needed time to prepare for his litigation. 74 In his decision of 19 March 2007 ('the second decision') Driver FM concluded that the District Court proceedings did not constitute 'other sufficient cause' within the meaning of s 52(2)(b) of the Act to prevent the sequestration order having been made. Section 52(1) and (2) of the 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.

75 Accordingly, his Honour dismissed the application for review. The second decision is the subject of this appeal.

GROUNDS OF APPEAL 76 The grounds relied upon in this application raise the question whether a claim instituted by Mr Totev in the District Court of New South Wales on 13 December 2001 ('the District Court proceedings') constituted 'other sufficient cause' for the purpose of s 52(2)(b) of the Act. If upheld it would follow that the sequestration order should not have been made. 77 Mr Totev provided written submissions addressing Driver FM's finding relating to the prospects of the District Court proceedings. The submissions also emphasised the disparity between Mr Totev's alleged debts and the significant damages claimed in his District Court proceedings.

Did 'other sufficient cause'exist? 78 The judgment of Federal Magistrate Driver records his consideration of the authorities which judicially consider the words'other sufficient cause', such as Dowling v The Colonial Mutual Life Assurance Society Limited (1915) 20 CLR 509; Rozenbes and Others v Kronhill and Another (1956) 95 CLR 407 at 414; and Ling v Enrobook Pty Ltd (1997) 74 FCR 19. His Honour said: If there is a likelihood of success in those proceedings it may be that the sequestration order made by the registrar should not have been made. On the other hand, if the likelihood of success is unpredictable but there is a sufficient justification to dismiss the petition or adjourn it then that course probably should have been taken by the registrar.

79 His Honour then observed that there were additional considerations, stating: However, there is now considerably more material bearing on the question of prospects of success than was available to the registrar. Further, because of the passage of time, the petition has now become stale and could not be revived. It follows that an adjournment of the petition is no longer an option. As I advised the parties during argument, the Court is faced with an all or nothing outcome. If the sequestration order is set aside, the petition should be dismissed as stale.

80 His Honour noted that while much material had been provided by Mr Totev in support of his District Court claim, such material comprised assertions which would need to be tested in evidence and the trial would take three to four days. Driver FM said: The proceedings in the District Court were commenced on 13 December 2001 and had been running for approximately three and a half years when the costs order was made by the District Court which led to the bankruptcy notice and, ultimately, to the sequestration order. The costs order was made because Mr Totev was unready to proceed, despite having been put on notice by earlier orders of the District Court that he would need to be ready to proceed. Mr Totev was, at times, unrepresented but was at other times assisted and represented by legal practitioners. The fact that after several years he was unable to get the case ready for trial indicates to me that the case was (and remains) far from simple.

81 Thereafter his Honour discussed the competing opinions concerning the prospects of Mr Totev's claim in the District Court. His Honour referred to the withdrawal of Mr Totev's counsel from the proceedings in 2003 on the basis that the claim was a 'difficult commercial cause'. His Honour also referred to the advice obtained from Mr Totev's new solicitor in September 2005 and observed that the new solicitor gave an 'extremely positive view about the prospects of success' in the District Court. However, his Honour observed that such opinion did not deal with the concerns expressed by Mr Totev's counsel in 2003. Further, even Mr Totev's new solicitor could not estimate the quantum of damages which might be awarded. Driver FM considered the opinion of Mr Totev's former counsel to be more objective and persuasive. 82 Driver FM also took note of the fact that the trustee had elected, on legal advice, not to pursue the District Court claim. That advice concluded that the prospects of success were 'not particularly good'. Driver FM concluded: The prospects of him obtaining sufficient funds to pay his debts from the District Court proceedings, even if he were to be successful on liability, is, at best, uncertain.

83 For these reasons Driver FM decided that the District Court proceedings were not a sufficient cause to prevent the sequestration order being made. 84 Although the proceedings were commenced in 2001, no hearing has taken place even though Mr Totev had hearing dates made available to him after the original date for hearing (2 June 2003) was vacated. Those dates were 22 October 2003 and 21 November 2003. Whilst Mr Totev claimed that he was hindered by an order of the District Court relating to the filing of further evidence, any such difficulties were resolved on 15 June 2004 by an order of the Supreme Court of New South Wales. From that date until 10 May 2005 Mr Totev has taken no action to have the District Court proceedings heard. 85 The Federal Magistrate's second decision demonstrates his careful consideration of the prospects of success of Mr Totev's District Court proceedings. His Honour's conclusion that an 'arguable' claim does not constitute 'other sufficient cause' is supported by recent authority. In Rigg v Baker (2006) 155 FCR 531 the Full Court considered the question whether a sequestration order should have been made when there was evidence before the Court that at the date of bankruptcy the debtor had an appeal pending in the New South Wales Court of Appeal against, inter alia, the petitioning creditor. There was no question of delay or prevarication by the appellant in pursuing her appeal. Nevertheless, the Full Court upheld the Registrar's making of a sequestration order, finding that the appeal did not constitute 'other sufficient cause'. 86 The existence of a counterclaim by a debtor against a petitioning creditor has been held not to constitute sufficient reason for the Court to decline to make a sequestration order, even though it has been recognised that, in an appropriate case, such a claim might constitute 'other sufficient cause': see Ling v Enrobook (1997) 74 FCR 19 at 25-26 and Re Schmidt; Ex parte Anglewood Pty Ltd (1967) 13 FLR 111 at 115-117. The determination of such question will depend upon an assessment of the particular facts in each case, considered in conjunction with the interests of the petitioning creditor. 87 The discretion provided by s 52(2)(b) of the Act is a broad one, and his Honour's finding that the prospects of the District Court claim were 'arguable' was reached after a thorough consideration of the relevant facts. I am unable to find any error in his Honour's reasons, nor in his finding. In the exercise of his discretion he was entitled to conclude that the District Court proceedings did not constitute 'other sufficient cause' within the meaning of s 52(2)(b) of the Act. The appeal does not succeed on this ground.

Requirements on Review 88 During the course of the hearing of this appeal, the Court raised the question whether Driver FM had properly directed himself in relation to the specific requirements of his review function. In answering this question it is necessary to consider the statutory provisions investing power in the Registrar to make a sequestration order and to consider the nature of the power of review of that order. 89 Section 102(2) of the Federal Magistrates Act 1999 (Cth) ('the FMA') permits the delegation of certain powers of a Federal Magistrate to a Registrar (see also s 103(1)). Section 103(2) of the FMA provides that where a Registrar exercises a power delegated pursuant s 103(1) it is deemed to have been exercised by the Federal Magistrates Court or by a Federal Magistrate. 90 Rule 2.02 of the Federal Magistrates Court (Bankruptcy) Rules 2006 ('the Bankruptcy Rules') provides that for the purpose of s 102(2)(i) of the FMA, if the Court so directs a Registrar may exercise a power of the Federal Magistrates Court under a provision of the Act mentioned in Schedule 2 of the Bankruptcy Rules. Item 5 of Schedule 2 of the Bankruptcy Rules gives power to a Registrar to make a sequestration order. Section 104(2) of the FMA makes provision for a party to apply to the Federal Magistrates Court for review of the exercise of any power by a Registrar conferred under subs 102(2) or subs 103(1) of the FMA. 91 The obligation upon Driver FM was to conduct a hearing de novo: Harris v Caladine (1991) 172 CLR 84 per McHugh J at 164. In that case McHugh J said at 164: It follows, in my opinion, that this Court or a federal court created under s. 71 of the Constitution may be authorised to delegate the exercise of its judicial powers to an officer of that court provided that the exercise of the power is subject to review by way of a de novo hearing by a Justice or judge of that court who has been appointed in accordance with s. 72 of the Constitution… Nor, in my opinion, will anything less than a hearing de novo to review the exercise of the power by the officer be sufficient. That is to say, appellate review is an insufficient condition of the delegation of the exercise of the power; there must be a complete rehearing of the facts and the law as they exist when the Justice or judge reviews the order made by the officer. Otherwise, the officer and not the Justices or judges of the court would be exercising the original jurisdiction of the court. See also Jageev Pty Limited v Francis Mervyn Deane(FCA: Davies J, 15 May 1998, unreported) at 3-4: followed in New Era Installations Pty Ltd v Don Mathieson & Staff Glass Pty Ltd (1999) 31 ACSR 53 at 54-55 and in Meehan v Alfaro and Another (1999) 93 FCR 201 at 202. 92 Although McHugh J's observations were directed to a review of a Registrar's decision by the Federal Court, by analogy the same principle must apply to a review of a Registrar's decision by the Federal Magistrates Court since both courts were created under Chapter III of the Constitution. The power of review of a Registrar's decision is provided for in both courts: see s 35A(6) of the Federal Court of Australia Act 1976 (Cth) and s 104(2) of the FMA. 93 Upon a hearing of a bankruptcy petition the requirements of s 52(1) of the Act must be satisfied. Rule 4.06(1) of the Bankruptcy Rules prescribes the requirements for the affidavits referred to in s 52(1) of the Act. Rule 4.06(3) of the Bankruptcy Rules requires an affidavit of search of the National Personal Insolvency Index be made no earlier than the day before the hearing of the petition. Rule 4.06(4) requires that an affidavit of debt be 'sworn as soon as practicable before the hearing date for the petition' and r 4.06(5) requires the provision of an affidavit of payment into Court if the debt arises out of a judgment requiring the debtor to pay money to the Court. By virtue of r 4.06(6) such affidavit must be sworn 'not earlier than the day before the hearing date for the petition' and must state whether the amount of the debt or part has been paid. 94 In Martin and Another v Commonwealth Bank of Australia (2001) 217 ALR 634 the Full Court found that the primary Judge, in dismissing an application for review of a sequestration order made by a Registrar, did not approach such review as a hearing de novo. No fresh affidavits had been filed on the hearing before the primary Judge on the review as required by the extant Bankruptcy Rules (now Pt 4 r 4.06(1) of the Bankruptcy Rules 2005). The Full Court determined that as the review required a hearing de novo, it was essential to comply with the requirements of s 52(1) of the Act. 95 At the second hearing Driver FM accepted fresh evidence from Mr Totev, being an affidavit filed on 31 October 2006 together with the appeal book prepared by Mr Totev for the Federal Court hearing. Also before him was the original evidence relied upon by the Registrar for the purposes of the hearing of the petition and of the first review application. In addition, an affidavit of Michael Sfar made on 7 February 2006 in the Federal Court proceedings and the proof of debt provided by the petitioning creditors to the trustee of Mr Totev's estate was before his Honour. The respondents submit that since the Federal Magistrate took into account fresh evidence in the second review, his Honour correctly conducted a hearing de novo. 96 The respondents also submit that whilst his Honour did not use the term 'hearing de novo' and refers to there being 'no error made by the Registrar' in making a sequestration order, his Honour approached the review as a hearing de novo as evidenced by the tender of fresh evidence. The respondents contend that Driver FM was satisfied that the requirements of s 52(1) of the Act had been met. The respondents distinguish Martin 217 ALR 634 on the ground that the primary judge in those proceedings did not refer to the requirements of s 52(1) of the Act. 97 Despite the provision of fresh evidence, it is apparent that no affidavits were provided which satisfied the requirements of r 4.06 of the Bankruptcy Rules. It follows that the requirements of s 52(1) of the Act, which are essential for the making of a sequestration order, were not satisfied. 98 In concluding the review his Honour said 'I will order that the application for review be dismissed with costs'. His Honour had to be satisfied of the matters to be adduced in the affidavits prescribed by s 52(1) of the Act in order to effectively conclude the application for review. His Honour instead appeared to merely dismiss the application. 99 In Re Kwiatek and Kwiatek; Ex parte Big J Ltd v Pattison (1989) 21 FCR 374 Northrop J observed at 381: The review is based upon the affidavits relied upon at the hearing of the application before the Registrar. If oral evidence was given at that hearing, the parties could agree that the transcript of that evidence be used on review, otherwise oral evidence would need to be led at the review itself. The hearing of the review by the court is in reality a hearing de novo and the Court relies upon the facts properly brought before it by the parties to the review.

However, the issue which this Court has now raised was not considered in those proceedings. 100 The second hearing before Driver FM has miscarried because the requirements of s 52(1) of the Act, and of Pt 4 r 4.06(1) of the Bankruptcy Rules 2005 concerning the provision of up to date evidence of indebtedness, were not satisfied. It follows that his Honour's decision must be set aside. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cowdroy.

Associate: Dated: 12 March 2008 The Appellant appeared in person.

Solicitor for the Respondents: Employment Lawyers

Date of Hearing: 14 November 2007