Ground one
16 The first ground of appeal raises the same issue pleaded in the first ground of opposition to the creditor's petition before the Federal Magistrates Court.
17 Section 44(1)(c) of the Bankruptcy Act provides that a creditor's petition shall not be presented against a debtor unless "the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition."
18 In order to assess this ground of appeal, it is necessary to set out further detail about the sequence of events which lead to this appeal.
19 The source of the applicants indebtedness to the respondents was summarised in the FMC reasons as follows:
5 In short, the Bank lent money to BMG Poseidon Corp Pty Ltd ("BMG") under two loan agreements entered into in 2004. Mr and Mrs Watts were the principals and controllers of BMG at all relevant times, and gave guarantees for the obligations of BMG under the loan agreements. They also provided security over a residential house property at Lyons Road, Drummoyne, whose value never exceeded the amount of BMG's indebtedness.
6 Default by BMG occurred in 2005, and a statutory demand was served in relation to the mortgaged property. The Bank obtained orders for possession of the property on 3 April 2006, and took possession of it on 1 November 2006. There were then exchanges between Mr and Mrs Watts and the Bank concerning realisation of the security, and a summary of their exchanges appears in the judgment of Foster J. Eventually, the Bank ended the efforts of Mr and Mrs Watts themselves to find a purchaser, and itself entered into a contract to sell the property on 2 April 2007 for $1,000,000, with a purchaser, Mr Campbell, with whom Mr and Mrs Watts had previously been negotiating.
7 The Bank also obtained a default monetary judgment against BMG and Mr and Mrs Watts on 3 April 2006, in the sum of $1,028,725.29. As a result of the Bank's sale of the Drummoyne property, it realised a substantial part of that indebtedness, but a significant debt remained owing, and the Bank proceeded to take further recovery measures against BMG and Mr and Mrs Watts. The indebtedness relied upon under the petition is $64,561.19, and additional liabilities may be owed to the Bank, including under costs orders.
8 A statutory demand was served on BMG on 27 August 2007, and bankruptcy notices were issued against Mr and Mrs Watts. A series of bankruptcy notices were set aside in circumstances which it is unnecessary to explore. The bankruptcy notice which is now relied upon was issued on 21 November 2008, and was served personally on Mr Watts on 5 December 2008 and on Mrs Watts on 26 November 2008.
9 BMG disputed the statutory demand by commencing proceedings in the Federal Court in its corporation's jurisdiction on 11 September 2007. These proceedings were adjourned pending the outcome of litigation which was also commenced by Mr and Mrs Watts and BMG in the Supreme Court, seeking to set aside the default judgment.
10 The application to set aside the default judgment was dismissed by McCallum J on 12 February 2008 (see Adelaide Bank Limited v BMG Poseidon Corp Pty Limited [2008] NSWSC 68). An application for leave to appeal to the NSW Court of Appeal was refused on 6 August 2008. An application for special leave to appeal to the High Court, requiring an extension of time, was refused on 11 February 2009.
20 The application to set aside the statutory demand on BMG, referred to in the FMC reasons at [9], was heard in this Court by Foster J who declined to set aside the statutory demand in a judgment delivered on 24 April 2009: BMG Poseidon Corp Pty Ltd v Adelaide Bank Limited; In the Matter of BMG Poseidon Corp Pty Ltd (No 2) [2009] FCA 404. In that proceeding, BMG and Mr and Mrs Watts contended, amongst other things, that they had offsetting claims against the respondent exceeding the amount claimed in the statutory demand, based on an allegation that the respondent had sold the Drummoyne property at an undervalue. Foster J considered this contention in his reasons for judgment at [85]-[90] and concluded that it was without merit.
21 Meanwhile, on 16 December 2008, the applicants applied to the Federal Court to have the bankruptcy notice issued on 21 November 2008 set aside. Several orders were made extending time for compliance with the bankruptcy notice while those proceedings were on foot. On 29 April 2009, Buchanan J delivered a judgment dismissing the application to set aside the bankruptcy notice: Watts v Adelaide Bank Limited [2009] FCA 420. His Honour made the following orders:
1. The application to set aside bankruptcy notice No NN 4517/08 is dismissed with costs.
2. Time to comply with the bankruptcy notice is extended to 8 May 2009.
22 On 8 May 2009, Jagot J made the following order, apparently on the ex parte application of Mr and Mrs Watts:
1. Pending further or other order:
(a) Extend the time to comply with Bankruptcy Notice NN4517/08 until 19 May 2009 and, if a notice of appeal against the decision in Watts v Adelaide Bank Ltd [2009] FCA 420 is filed on or before that date, extend the time for compliance with the said bankruptcy notice until the first return date of the notice of appeal at which time a further application for an extension of time may be made;
(b) Otherwise, if a notice of appeal is not filed on or before 19 May 2009, extend the time to comply with the said Bankruptcy Notice until 26 May 2009.
2. Direct the applicant to give notice of the making of these orders to the respondent by 5.00 pm on 11 May 2009.
3. Grant liberty to both parties to restore the application on 24 hours notice.
4. Leave to enter these orders forthwith.
23 The effect of this order was a matter of contention before the Federal Magistrates Court. The issue was summarised in the FMC reasons as follows:
20 In the event, a notice of appeal was filed on 13 May 2009. The effect of her Honour's order was therefore to "extend the time for compliance with the said bankruptcy notice until the first return date of the notice of appeal at which time a further application for an extension of time may be made". The correct identification of that date in the light of subsequent events is now in issue.
21 Mr and Mrs Watts' first contention in opposition to the petition is that the date specified by Jagot J first occurred on 10 June 2009, which was the date when a Registrar of the Federal Court held a conference to settle the appeal index. If so identified, it is common ground that the petition was filed outside the six month period under s.44(1)(c) of the Bankruptcy Act, and was therefore incompetent.
22 However, the Bank contends that the date specified by Jagot J occurred on 29 July 2009, which was the date of the call‑over of the appealheld before Moore J. If that contention is correct, then the petition was brought within the necessary six month period, and is competent.
24 After setting out some further procedural history, the Federal Magistrates Court reached the following conclusion on this issue:
56 However, in my opinion, the language of Jagot J's order is clear, when understood in the context in which it was made. The context was an urgent application by a debtor after the delivery of an adverse judgment at first instance refusing to set aside a bankruptcy notice, where the first instance Judge had allowed only a very short extension to allow consideration of an appeal.
57 In this context, the words used by Jagot J to qualify her reference to "the first return date of the notice of appeal" acquire significance. The qualifying words describe such a listing as one "at which time a further application for an extension of time may be made". In my opinion, it is clear from these words that her Honour envisaged that the "first return date" identified by her would be an event when the parties were first appearing before a judicial officer with power, time, and inclination to entertain an application for an order extending the time for compliance with the bankruptcy notice.
58 Jagot J referred to that event as a "first return date" in circumstances where that phrase had no technical meaning, whether in practice or under the Federal Court Rules or other legislation. This perhaps explains why she added the additional qualifying words, to explain the type of listing which she had in mind. Moreover, in common parlance in legal circles, a "first return date" is a reference to a listing before a judicial officer, rather than some administrative appointment with a Registrar or other court official.
59 Both wings of the description of the extended date for compliance specified in her order therefore point against the interpretation contended by Mr and Mrs Watts.
60 Moreover, the Federal Court Rules and practices which I have discussed above in relation to appeal index conferences, in my opinion, do not meet the usual description of a "first return date" in common legal parlance, nor a date at which "a further application for an extension of time may be made".
61 If there were doubts about the effect of Jagot J's order, of which I entertain few, the orders should be construed in favour of the debtors, by adopting a construction which gave them the longest extension of time. This is because at the time it was made the order was manifestly obtained by Mr and Mrs Watts for the purpose, and was intended to give them the benefit, of an extension of time to bring an appeal and have it listed before a Judge with power to extend time for a further period, so as to avoid the necessity for them to elect between paying the debt or incurring an act of bankruptcy during the pendency of their appeal.
62 For all these reasons, in my opinion, the construction relied upon by the Bank should be accepted, and the contention that the date identified by her Honour occurred when the Registrar held the index settlement conference should not be accepted.
63 On the evidence before me, in my opinion, the first time when the appeal proceeding was listed on an occasion when "a further application for an extension of time may be made", was at the call‑over before Moore J on 29 July 2009. In my opinion, that was an occasion at which Mr Watts could have applied to Moore J for an extension of time, and perhaps this possibility was obliquely raised by Moore J with Mr Watts. For whatever reasons, Mr Watts did not apply for a further extension of time at any time, and in my opinion an act of bankruptcy occurred at the end of that day.
64 I am therefore satisfied that the act of bankruptcy relied upon by the petition occurred on the date asserted in the petition, and that it occurred within the time period required by s.44(1)(c) of the Bankruptcy Act. The petition was therefore not incompetent under that section.
25 The applicants did not seek to advance submissions to explicate their grounds of appeal. I have nevertheless considered the FMC reasons in conjunction with each ground of appeal.
26 In my view it cannot be said that the first ground of appeal is devoid of any reasonable prospect of success. Although the Federal Magistrates Court provided a number of reasons supporting the conclusion which it favoured concerning the construction of the orders made on 8 May 2009, the identification in those orders of "the first return date of the notice of appeal" is not uncontroversial. After all, the relevant notice of appeal itself identified when the appeal proceeding was to first come before the Court. That date was 10 June 2009, when the appeal papers were to be settled. No other date was specified in the notice of appeal for bringing the parties to the appeal before the Court.
27 The Federal Magistrates Court placed controlling significance on the further statement in the orders that, at the relevant time, "a further application for an extension of time may be made". The Federal Magistrates Court reasoned that such an application could only be made before a Judge of the Court. It followed, on that reasoning, that the date in the notice of appeal requiring attendance to settle the appeal index was not "the first return date" within the meaning of the orders.
28 I am not required to express any final view on the correctness of the construction favoured by the Federal Magistrates Court. It is sufficient for me to form the view that, in relation to that matter, there exists an arguable ground of appeal. I am satisfied that ground 1 of the notice of appeal raises an arguable ground of appeal. In my view, it does not necessarily follow that the further words in the orders made on 8 May 2009 have the controlling significance that the Federal Magistrates Court placed on them.
29 In my view a stay should be granted pending the determination of the applicants' appeal. I am conscious of the fact that significant time has already elapsed since the relevant bankruptcy notice was served on the applicants in November 2008 and that the granting of the stay will occasion further delay in payment of the applicants' indebtedness. By the same token, as I have already noted, the respondent does not actively oppose the granting of a stay. Furthermore, it is clear that, if the Federal Magistrates Court was wrong in the construction it favoured, the petition on which the sequestration order was made was presented outside the time prescribed by s 44(1)(c) of the Bankruptcy Act with the result that the sequestration order should not have been made on that petition.