FEDERAL COURT OF AUSTRALIA

Klinger v Nicholl [2005] FCAFC 153

BANKRUPTCY - appeal from Magistrates Court - installment order made by registrar - creditor's petition - sequestration order made by registrar - sequestration order affirmed by Magistrates Court - whether primary Judge should have gone behind the judgment debt - whether non-service of the trustee's consent was a sufficient cause to set aside the sequestration order - whether debt owed to the respondent was payable immediately or at a certain future time - whether the installment order was a sufficient cause to decline to make the sequestration order

Bankruptcy Act 1966 (Cth), ss 43, 44(1), 52, 156A

Rules of the Federal Magistrates Court, r 31.05(1)(e)

Cain v Whyte (1933) 48 CLR 639 referred to

ERWIN KLINGER v JOHN DAVID NICHOLL trading as NICHOLL & CO

ACD 41 OF 2004

MOORE, TAMBERLIN AND EMMETT JJ

10 AUGUST 2005

SYDNEY (HEARD IN CANBERRA)

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.                  The appeal be dismissed.

2.                  The appellant pay the respondent’s costs of the appeal.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

REASONS FOR JUDGMENT

MOORE J:

1                     I have gratefully read the reasons for judgment of Emmett J in a draft form.  Subject to the observations which follow, I agree with his Honour’s reasons and conclusions.  I agree with the orders he proposes.

2                     At [22] and following, Emmett J considers whether the instalment order had been breached and concluded it had been.  Accordingly, the entire judgment debt became due and payable.  The order required the first monthly instalment payment to be paid on 6 March 2004.  The order was made by a Deputy Registrar of the Magistrates Court on 11 February 2004.  As his Honour indicates, the evidence suggests that the first instalment payment may have been tendered shortly after 9 March 2004 and, accordingly, the order was not complied with.  On the evidence before this Court, this is probably the correct analysis.  However, it was on 9 March 2004 that a Magistrate confirmed the order of the Deputy Registrar.  We do not have in evidence either the order of the Magistrate or any evidence as to what precisely the Magistrate did other than evidence indicating he confirmed the earlier order.  It is conceivable that the order made by the Magistrate relieved the appellant of the obligation he had earlier had to pay the first instalment by 6 March 2004.  However, it is also conceivable that in confirming the order, the Magistrate was confirming all aspects of it including the default mechanism operating if an instalment was not made on the due date.  On that latter approach, the confirmation meant very little, because the appellant was by then obliged to pay the balance of the judgment debt because he had not paid the first instalment by 6 March 2004.  But the evidence does not enable any conclusion to be reached about these matters.

3                     I should, when discussing this matter, indicate I agree with Emmett J that the language of the primary judge in the Federal Magistrates Court of Australia in the judgment to which this appeal relates, was intemperate.  The primary judge said (at [37] and [38]):

The instalment order made by the deputy registrar of the ACT Magistrates Court and confirmed by a magistrate is ludicrous.  It does not even come near meeting the interest.…

…It is bizarre that such an instalment order was made in these circumstances and then upheld by an ACT Magistrate.

To have described an order made in another court as “ludicrous” and the process as “bizarre” is unnecessary and possibly offensive.  Almost certainly the primary judge did not have before him all the material that had been before the ACT Magistrates Court.  His Honour certainly did not hear the submissions made to that Court.  It was inappropriate for his Honour, in my opinion, to gainsay the exercise of the discretionary power by the ACT Magistrates Court and particularly to do so in the terms he did.

4                     Lastly I should say something about circumstances where a sequestration order is made, based on a judgment debt, in the face of an earlier order that the judgment debt could be paid by instalments. One could imagine many cases where the fact that a person had to apply to pay a judgment debt by instalments might manifest that person’s inability, more generally, to pay debts as and when they fall due.  However, there may be cases where the judgment debtor has no other debts, might well be solvent and is able to obtain an instalment payment order because, for example, he or she had a modest income stream from, say, a pension.  In the latter case, the judgment debtor may be able to establish, for the purposes of s 52(2)(a)of the Bankruptcy Act 1966 (Cth), that he or she was able to pay his or her debts.  That would be because, in relation to the judgment debt, the judgment debtor had the benefit of an order permitting the debt to be satisfied by instalments.  But the appellant’s case was not conducted on that basis before the primary judge or on appeal.

Associate:

Dated:              10 August 2005

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

REASONS FOR JUDGMENT

TAMBERLIN J:

5                     I have read the reasons of Emmett J and I agree with the reasons and orders that his Honour proposes.

Associate:

Dated:              10 August 2005

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

REASONS FOR JUDGMENT

EMMETT J:

6                     On 30 September 2004, a registrar of the Federal Magistrates Court made a sequestration order against the estate of the appellant.  Mr William Balfour Rangott (‘the Trustee’) became trustee of the appellant’s estate pursuant to s 156A of Bankruptcy Act 1966 (Cth) (‘the Act’).  Following an application by the appellant for review of the sequestration order, the sequestration order was confirmed by an order of a Federal Magistrate made on 5 November 2004.  The appellant now appeals to the Federal Court from the order of 5 November 2004.

THE LITIGIOUS BACKGROUND

7                     On 22 October 2002, the respondent, Mr John David Nicholl (‘the Creditor’), who is a solicitor, filed a special claim against the appellant in the ACT Magistrates Court.  The special claim alleged the following:

• The Creditor accepted instructions from the appellant to act on his behalf in relation to estate matters. 
• By a costs agreement signed by the appellant, the appellant agreed to meet the Creditor’s professional fees and disbursements on the completion of the estate matters. 

·        On 6 September 2001, the appellant terminated the retainer of the Creditor, but in breach of the agreement has refused to pay outstanding fees and disbursements to the Creditor. 

A fee note attached to the special claim showed fees for professional costs and disbursements in the sum of $12,982.70.  An itemised statement was also attached to the special claim.

8                     According to a certificate of judgment, signed by a deputy registrar of the Small Claims Court in Canberra on 28 March 2003, the Creditor recovered judgment against the appellant in that Court on 4 March 2003 for $14,834.39, including interest and $567.40 for costs.  The certificate says that interest is payable at 8.45 per cent per annum on so much of the judgment debt as from time to time remains unpaid. 

9                     On 29 December 2003, the appellant was served with a bankruptcy notice issued at the behest of the Creditor, requiring payment, within 21 days after service, of the sum of $16,382.34.  The bankruptcy notice was based on the judgment in the Small Claims Court of 4 March 2003 and included interest on the judgment.  The appellant failed to comply with the bankruptcy notice and, accordingly, an act of bankruptcy was committed on 20 January 2004.  An application to the Federal Magistrates Court to set aside the bankruptcy notice, which was filed on 28 January 2004, was dismissed on 26 February 2004.

10                  However, in the meantime, on 11 February 2004, the appellant applied to the ACT Magistrates Court for an instalment order.  In the printed application, the appellant completed the blank spaces as follows:

(a)        amount of each instalment to be paid:    $40

(b)        time when instalments are to be paid:                 monthly

(c)        date of first instalment:                           6 March 2004

On 11 February 2004, a deputy registrar of the ACT Magistrates Court ordered that the appellant be directed to pay the judgment debt by instalments of $40 per month and that the first payment be made on 6 March 2004.  The order provided that, in default of any payment, the balance of the debt would become due.   An objection by the Creditor to the instalment payment order was dismissed on 9 March 2004, when the order made by the deputy registrar was confirmed by a magistrate of the ACT Magistrates Court.

11                  The Creditor’s petition, pursuant to which the sequestration order was made and confirmed, was filed on 29 April 2004.  In an amended Notice of Intention to Oppose the Petition, filed on 10 September 2004, the appellant stated the following grounds of opposition:

‘(1)      The only substantial asset owned by the Respondent is a share of a house at 9 Dixon Drive, Duffy.  This property is shared with other people who are not indebted to John Nicholl.  To bankrupt the Respondent would force the sale of this property and violate their rights.

 (2)      The Respondent obtained an instalment order from the ACT Magistrates Court in relation to the debt owed to the Applicant on 11 February 2004.  The Respondent has attempted to make monthly payments to the Applicant in accordance with the terms of that order but the Applicant has refused to accept them.  The Applicant is using thee bankruptcy proceedings as an alternative means of enforcement which is an abuse of process.’

The only substantial asset owned by the appellant is a share of a house which is shared with other people who are not indebted to the Creditor and to bankrupt the appellant would force the sale of the property and violate their rights.

(2)        The appellant obtained an instalment order from the ACT Magistrates Court in relation to the debt owed to the Creditor and has attempted to make monthly payments to the Creditor in accordance with the terms of that order, but the Creditor has refused to accept them.

(3)        The Creditor is using bankruptcy proceedings as an alternative means of enforcement, which is an abuse of process.

RELEVANT SCHEME OF THE BANKRUPTCY ACT

12                  Division 2 of Part IV of the Act deals with creditors’ petitions.  Under s 43(1), where a debtor has committed an act of bankruptcy and, relevantly, was personally present in Australia, the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.  However, s 44(1) relevantly provides that a creditor’s petition must not be presented against a debtor unless:

• there is owing by the debtor to the petitioning creditor a debt that amounts to $2,000; and
• that debt is a liquidated sum and is payable either immediately or at a certain future time.

13                  Section 52(1) of the Act provides that, at the hearing of a creditor’s petition, the Court must require proof of:

• the matters stated in the petition, for which purpose the Court may accept the affidavit verifying the petition as sufficient;
• service of the petition; and

·        the fact that the debt on which the petitioning creditor relies is still owing.

If the Court is satisfied with the proof of those matters, it may make a sequestration order against the estate of the debtor.  However, under s 52(2), the Court may dismiss the petition if it is not satisfied with the proof of any of those matters, or is satisfied by the debtor:

• that he or she is able to pay his or her debts (s 52(2)(a)); or
• that for some other sufficient cause a sequestration order ought not to be made (s 52(2)(b)).

THE APPEAL

14                  The appellant’s grounds of appeal are as follows:

• the primary judge erred in failing to go behind the judgment debt, which contained an erroneous and excessive amount of interest;
• the primary judge erred in finding that the non service of the trustee’s consent to act did not provide sufficient cause to set aside the sequestration order;
• the debt owed to the respondent on which the sequestration order was founded did not meet the requirements of s 44(1)(b)(ii) of the Bankruptcy Act 1966 (Cth) in that it was not payable either immediately or at a certain future time;

·        the primary judge erred in finding that an instalment order granted in favour of the appellant by the ACT Magistrates Court did not provide sufficient cause to set aside the sequestration order.

Those grounds were ventilated before the primary judge and no objection was raised by the Creditor to the fact that the first three of those grounds found no mention in the Notice of Intention to Oppose the Petition. 

EXCESSIVE INTEREST

15                  The appellant contended that the primary judge erred in failing to accept the appellant’s invitation to go behind the judgment debt.  The appellant claimed that an error was made in the calculation of interest in the judgment debt, such that it was more than it should have been.  There is an undoubted discretion vested in the Court to go behind a judgment debt in order to determine whether there is, in fact, an underlying debt still owing to a petitioning creditor.  If there were no such debt, s 44(1) may not be satisfied and s 52(1) may not be satisfied.  However, it was accepted on behalf of the appellant that, at the date of the sequestration order, even without the excessive interest, there was owing by him to the Creditor a debt amounting to more than $2,000.  The first ground has no substance.

TRUSTEE’S CONSENT

16                  Under s 156A(1) of the Act, a registered trustee may consent to act as the trustee of the estate of a debtor in the event that the debtor becomes a bankrupt.  Under s 156A(3), where, at the time when the debtor becomes a bankrupt, a registered trustee has consented to act as the trustee of the estate of a debtor and the consent has not been revoked, the registered trustee becomes, at that time, the trustee of the estate of the bankrupt.  Provision is made in s 156A(4) for any creditor to apply for removal of a trustee appointed pursuant to s 156A(3).  There is no equivalent provision for the bankrupt to apply for removal.  Further, there is no requirement in s 156A for a debtor to be informed that a registered trustee has given consent pursuant to s 156A(1).  However, r 31.05(1)(e) of the Rules of the Federal Magistrates Court requires that a consent of a trustee to act as trustee in bankruptcy must be served on the debtor. 

17                  While the Trustee had consented to act as trustee, the appellant gave oral evidence that the Trustee’s consent had not been served on him.  On the other hand, an affidavit filed on behalf of the Creditor contained an assertion by a licensed commercial agent that the agent had served a copy of the Trustee’s consent on the debtor personally in accordance with the Rules.  The primary judge considered that it was not necessary to make a finding on that disputed question. 

18                  Service of a registered trustee’s consent is not a prerequisite to a registered trustee becoming trustee of a debtor’s estate pursuant to s 156A.  Further, the Rules of the Federal Magistrates Court can be dispensed with under r 1.06.  The primary judge did not consider that a failure to comply with r 31.05(1)(e) was a sufficient cause for dismissing the Creditor’s petition. 

19                  There was no suggestion by the appellant to the primary judge that the Trustee is in some way unfit or has some connection with the Creditor, that would make his appointment inappropriate.  Nor did the appellant suggest to the primary judge that there was some action that he would have taken had the Trustee’s consent been served upon him.  In the circumstances, there was no error on the part of the primary judge in concluding that the failure to comply with Rule 31.05(1)(e) was not a sufficient cause under s 52(2) for dismissing the petition.  This ground has no substance. 

SECTION 44(1)(b)(ii)

20                  Under s 44(1)(b)(ii) of the Act, the debt on which a petition is founded must be payable either immediately or at a certain future time.  The appellant says that the effect of the instalment order of 11 February 2004, as confirmed on 9 March 2004, was to make the judgment debt repayable at the rate of $40 per month and that, at that rate, the repayments would not cover the interest payable on the judgment debt.  The appellant says that, in those circumstances, the debt will never be repaid and therefore cannot be said to be repayable at a certain future time. 

21                  The submission indicates a misconception.  Whether or not interest is payable on the balance of the judgment debt outstanding and, notwithstanding that the judgment debt, if all instalments were paid on time, will not be paid in full until several decades have passed, the date when the final instalment is due, is a certain future time.  Further, while interest is payable on the balance outstanding from time to time, that is not the judgment debt.  Again, even if it might be many more decades before the interest is paid, the date when it is paid is a certain future time.

22                  In any event, the submission is without substance, in the light of the circumstances of this case.  As indicated above, on the basis of the certificate from the deputy registrar of the ACT Magistrates Court, the balance of the judgment debt was to become due on default in payment of any instalment.  The evidence before the primary judge demonstrated clearly enough that the whole of the judgment debt was due and payable at the date of the presentation of the petition, notwithstanding the instalment order, because there had been default. 

23                  In an affidavit sworn on 9 September 2004, the appellant said:

‘I have attempted to make monthly payments to [the Creditor] in accordance with the terms of [the instalment order] but he has refused to accept them.’

That affidavit was apparently read without objection.

24                  In an affidavit sworn on 17 September 2004, the solicitor for the Creditor said:

‘…we have never received any payments from [the appellant] as ordered.  [The appellant] has never attended on our office subsequent to the order being made nor has he made any attempt to pay the $40 per month instalment as ordered.’

25                  In an affidavit sworn on 3 November 2004, the appellant said:

‘The day that I tried to pay [the Creditor] the $40 instalment was shortly after I was last at the ACT Magistrates Court with my solicitor… .  It would have been no more than a couple of days after that.  [My solicitor] had reminded me to pay the instalment.  [My solicitor] has informed me that the last occasion we were at the court together was 9 March 2004.

On the day that I tried to pay [the Creditor] my $40, I saw there was an office being fitted out on the same floor… After I left the building I sat down on a bench for a few moments before heading towards the ACT Magistrates Court.  While seated on the bench I saw [the Creditor] leave the building and walk in the direction of the courts.

…

I am willing to pay the $40 per month to [the Creditor].  [The Creditor] has not tried to collect the $40 per month from me since initially refusing my payment in March 2004.’

26                  While the transcript of oral evidence was not before the Full Court, the primary judge referred to oral evidence given by the appellant about his attempt to make payment of the first instalment of $40 in March 2004.  The primary judge said:

‘33.      [The appellant] gave evidence that he attempted to make payment of the first instalment of $40 in March 2004.  He went to [the Creditor’s] office.  He told a young lady, who he described as “young and skinny” that he wanted to pay.  She went away and came back and said [the Creditor] wanted all the debt or nothing.  [The Creditor] denies this.  He says, he has never instructed his staff not to accept payment from [the appellant].  He made enquiries of his staff and none recalls [the appellant] attending the office at that time, nor did [a woman] who is no longer in his employ, but was a receptionist at the time, and whom he accepted might meet the description of “young and skinny”.

34.       [The appellant] said that he then went to the ACT Magistrates Court and spoke to a lady there, and a registrar, and attempted to pay there.  He was told that he had to make payment to [the Creditor].’

27                  The primary judge observed that the evidence was somewhat unsatisfactory and that both the Creditor and the appellant were vague.  However, his Honour concluded that it was not necessary to make a finding on whether or not the appellant had tendered payment.  Rather, his Honour assumed, for the purposes of his decision, that the appellant did seek to tender $40 and that that was refused by the Creditor.

28                  The evidence summarised above demonstrates that, on the appellant’s best case, he attempted to make a payment of an instalment a couple of days after 9 March 2004.  By that time, because there had been default, the judgment debt had become payable in full, notwithstanding the instalment order, which was confirmed on that day.  The argument advanced in support of the third ground, therefore, is untenable. 

THE INSTALMENT ORDER

29                  The fourth ground seems to be that the primary judge failed to have regard to the instalment order as constituting sufficient cause for the purposes of s 52(2)(b) of the Act.  The primary judge dealt with the issue in the following terms:

‘Do the instalment order and the related matters amount to an “other” sufficient cause?  The High Court has endorsed the view that the cause must be of such significance that it overrides the interests of creditors to have their debts paid.  This is a matter of important public concern.  The test involves the weighing of the various considerations.  Here [the appellant] has an interest in a residential property of some value from which his debts can be met.  The instalment order made by a deputy registrar of the ACT Magistrates Court and confirmed by a magistrate is ludicrous.  It does not even come near meeting the interest.

[The appellant] is not a person with no assets, as both the deputy registrar and the magistrate must have been aware.  It was in the material before their Court.  It is bizarre that such an instalment order was made in these circumstances and then upheld by an ACT magistrate.

There is a public policy imperative that bankruptcy and related proceedings are concluded speedily.  This is in both the creditor’s and debtor’s interests…  The authorities do not suggest that bankruptcy petitions should not be upheld in these circumstances.  Rather they make the point that the issue of a bankruptcy notice is a ministerial, not a judicial act.

Weighing up all these considerations, [the appellant] has not satisfied me that the instalment order, and the related matters, amount to “other sufficient cause”.’

30                  The language of the primary judge is somewhat intemperate in its reference to the exercise of discretion by the ACT Magistrates Court.  However, putting that aside, the question is whether the primary judge erred in the exercise of his discretion to decline to confirm the sequestration order made on 30 September 2004.

31                  It was not suggested on behalf of the appellant that he was able to pay his debts within the meaning of s 52(2)(a) of the Act.  It appears that the only evidence before the primary judge as to the financial position of the appellant was contained in his application to the ACT Magistrates Court for an instalment order.  That application showed he had assets having a total value of $110,000, consisting of a half interest in a house jointly owned by him and the estate of his late partner.  There was no evidence before the primary judge of any other assets or property of the appellant.  The application also disclosed that the appellant was not employed and that his weekly income came from a pension, although the amount of his pension was not specified.  The amount of the pension income may have been known to the ACT Magistrates Court but there was apparently no evidence before the primary judge as to the amount.  The application also disclosed that the weekly expenses of the appellant were $205.  There was no evidence as to whether or not the appellant had any debts other than that owed to the Creditor. 

32                  The exercise of discretion under s 52(2) entails a balancing exercise.  While the fact of an instalment order may be a relevant consideration for a bankruptcy court to take into account (see Cain v Whyte (1933) 48 CLR 639), it is but one of the considerations that might be taken into account.  For a matter to constitute sufficient cause to decline to make a sequestration order, when the prerequisites of ss 52, 43 and 44 of the Act have otherwise been satisfied, the matter must be one of significant weight to displace the interest of the community in avoiding insolvent trading. 

33                  By the time that the sequestration order was made on 30 September 2004, seven instalments were in arrears.  Accordingly, the whole of the judgment debt had become due and payable by reason of the appellant’s default in the payment of any instalments. 

34                  In different circumstances, it may have been appropriate for the Court to decline to make the sequestration order.  On the assumption that the instalment order continued to operate, that the appellant had paid the instalments that were due under the terms of the instalment order up to the date of the hearing and that the appellant had demonstrated that he had no other creditors, or had the means to meet any other debts as and when they fell due, there could have been a case for exercising the discretion in his favour.  Alternatively, if he had tendered payment of the first instalment on or prior to the due date and payment had been refused, and the other matters just outlined were satisfactorily covered, there may have been a case for exercise of the discretion in his favour.  However, in circumstances where the appellant, on his own case, failed to make any payment in accordance with the instalment order and made no attempt to do so until after the time for the first payment had passed, it is difficult to see how the exercise of the discretion miscarried.  This fourth ground is not made out.

CONCLUSION

35                  The appeal should be dismissed with costs.

36                  The Trustee sought leave to appear on the hearing of the appeal.  However, the Trustee made no submissions either in support of or against the appeal.  Rather, the Trustee said that he may wish to make submissions as to his costs of the administration to date, if the appeal were upheld.  In the circumstances, it is not appropriate to make any order as to the costs of the Trustee.  Whether the Trustee’s costs of appearing on the appeal would be costs properly incurred in the administration of the appellant’s estate is not a matter presently before the Court.

Associate:

Dated:              10 August 2005