FEDERAL COURT OF AUSTRALIA

McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41

THE COURT ORDERS THAT:

1.    The appeal is allowed.

2.    The sequestration order and the order for costs made by the Federal Magistrate on 14 September 2011, are set aside.

3.    The creditor’s petition of 11 August 2011, stands dismissed.

4.    The respondent is to pay the appellant’s costs of the hearing before the Federal Magistrate and on the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

lander J:

1    This is an appeal against a sequestration order made by a Federal Magistrate on 14 September 2012.

2    On 5 July 2006, the respondent, Phoenix Constructions (Queensland) Pty Ltd (Phoenix), brought a proceeding in the Supreme Court of Queensland against two defendants, not including the appellant. On 28 May 2007, the appellant and his wife were joined as defendants to that proceeding. On 21 July 2010, one of the defendants in the proceeding went into administration, and, on 25 August 2010, into liquidation. On 3 March 2011, the appellant’s wife was made a bankrupt.

3    The trial of the proceeding took place on 16 and 17 May 2011. On 15 June 2011, judgment was entered for Phoenix against the appellant in the sum of $2,025,212.17, which included interest of $530,003.46.

4    On 7 July 2011, the Official Receiver, on the application of Phoenix, issued a bankruptcy notice directed to the appellant.

5    On 12 July 2011, the appellant filed a notice of appeal to the Court of Appeal in Queensland against the judgment entered on 15 June 2011.

6    On 13 July 2011, the trial judge ordered the appellant to pay Phoenix’s costs of the proceeding in the Supreme Court. Those costs were never assessed.

7    In Queensland, a party in whose favour a costs order has been made must serve a costs statement in the approved form on the party liable to pay the costs: r 705 Uniform Civil Procedure Rules (1999) (Qld) (UCPR). If the party liable does not object, the party who served the costs statement may apply for a default assessment of costs: r 708 of the UCPR. If the party has objected, an application can be made for a costs assessor to be appointed to conduct an assessment of the costs: r 710 of the UCPR.

8    After a costs assessment, the costs assessor must certify the amount of costs payable and by whom and to whom. The certificate must be filed by the costs assessor in the court within 14 days after the end of the assessment and a copy must be given to each of the parties: r 737 of the UCPR.

9    Rule 740(1), (2) and (3) provide:

(1)    After a certificate of assessment is filed, the registrar of the court must make the appropriate order having regard to the certificate.

(2)    The order takes effect as a judgment of the court.

(3)    However, the order is not enforceable until at least 14 days after it is made and the court may stay enforcement pending review of the assessment on terms the court considers just.

10    No order was ever made by a Registrar as provided in r 740(1).

11    On 18 July 2011, Phoenix issued an Enforcement Hearing Summons out of the Supreme Court of Queensland in respect to the judgment sum returnable on 23 August 2011.

12    On 10 August 2011, the bankruptcy notice was served on the appellant. The bankruptcy notice required the appellant to comply with the notice by paying the judgment debt of $2,025,212.17 within 21 days.

13    On 11 August 2011, the respondent filed a creditor’s petition. The creditor’s petition relied upon a number of acts of bankruptcy, including the appellant absenting himself from Australia and his dwelling house to avoid service of the bankruptcy notice and the Enforcement Hearing Summons and keeping house. The creditor’s petition did not rely upon the appellant’s failure to pay the judgment sum. Nor could it because the bankruptcy notice had only been served the day before and the time for compliance with the bankruptcy notice had not passed.

14    The creditor’s petition was accompanied by an affidavit to which was exhibited the bankruptcy notice and the Enforcement Summons. The deponent deposed to his unsuccessful efforts to serve the appellant with those documents. That evidence was relevant to the other acts of bankruptcy relied upon in the creditor’s petition and, in particular, the claim that the appellant had been attempting to avoid service.

15    On 27 September 2011, the Court of Appeal refused the appellant’s application for a stay of the Supreme Court judgment pending the hearing of the appellant’s appeal.

16    On 5 October 2011, the Federal Magistrates Court refused the appellant’s application for a stay of the bankruptcy proceeding pending the appellant’s appeal. The Federal Magistrate directed that any amended creditor’s petition be filed and served on the appellant by 18 October 2011, and directed that the matter be listed for hearing on 22 November 2011.

17    On 18 October 2011, Phoenix filed an amended creditor’s petition relying upon the appellant’s failure to comply with the bankruptcy notice as a further act of bankruptcy. Paragraphs 4A and 4B of the amended creditor’s petition provided:

4A.    The following act of bankruptcy was committed by the respondent debtor within six (6) months before presentation of this petition, that is to say a failure to comply by 31 August 2011 with a Bankruptcy Notice served 10 August 2011.

4B.    The Respondent’s acknowledgment of a failure to comply with Bankruptcy Notice BN219 of 2011 which was served on 27 January 2011 therefore creating an act of bankruptcy on 17 February 2011 for failing to comply with the said Notice. (Original emphasis.)

18    The amended creditor’s petition also continued to complain of the other acts of bankruptcy, including that the appellant avoided service and kept house.

19    On 18 May 2012, the Court of Appeal allowed the appellant’s appeal and set aside the orders made by the trial judge on 15 June 2011 and 13 July 2011. The effect of these orders was to set aside the judgment sum and the order for costs made by the trial judge.

20    The Court of Appeal made orders that:

(a)    The plaintiff’s claim against the third defendant [the appellant] is dismissed.

(b)    The third defendant [the appellant] pay the plaintiff’s [Phoenix’s] costs, including reserved costs, of prosecuting the proceedings against the first defendant and of defending the first defendant’s counterclaim, up until 21 July 2010.

(c)    The third defendant [the appellant] pay 70% of the plaintiff’s [Phoenix’s] costs, including reserved costs, of and incidental to the proceedings against the third defendant [the appellant].

21    That order had effect on the day it was made and not earlier: Borthwick v Elderslie Steamship Co Ltd (No 2) [1905] 2 KB 516 at 519; Nicol v Allyacht Spans Pty Ltd (No 2) (1988) 165 CLR 306 at 309-311. The costs ordered to be paid by the appellant in (b) and (c) were never assessed in accordance with the UCPR.

22    On 19 July 2012, the Federal Magistrate heard the creditor’s petition and, on 14 September 2012, made a sequestration order against the appellant.

23    At the time that the Federal Magistrate heard the creditor’s petition, the debt, which was relied on in the bankruptcy notice and in the creditor’s petition, no longer existed, having been discharged by the orders made by the Court of Appeal on 18 May 2012.

24    Although the Court of Appeal on 18 May 2012 made an order that the appellant pay Phoenix’s costs, those costs had not been assessed at the time of the hearing of the creditor’s petition or the date when the sequestration order was made. Thus there was no order of the Court of the kind mentioned in r 740(1) of the UCPR in place. Because the orders for costs made by the Court of Appeal had not been assessed there was therefore no liquidated amount owing by the appellant to Phoenix as at the date of the hearing of the creditor’s petition or the sequestration order.

25    The Federal Magistrate addressed s 52 of the Bankruptcy Act 1966 (Cth) (the Bankruptcy Act), which provides that the Court must require proof of the matters stated in the petition; service of the petition; and that the debt on which the petitioning creditor relies is or are still owing for the making of the sequestration order against the estate of the debtor.

26    The Federal Magistrate said that the first issue which arose was whether the Court could be satisfied that the debt or debts on which the petitioning creditor relies is or are still owing.

27    The Federal Magistrate addressed the history of the proceeding of the Supreme Court and the Court of Appeal.

28    His Honour at [35], referred to a decision of the Full Court in Joseph Francis Emerson and Wilma Lucy Emerson v Wreckair Pty Ltd (1992) 53 FCR 581 (Emerson v Wreckair Pty Ltd) and said that:

Once an act of bankruptcy has been committed by the debtor’s failure within the time specified to comply with the requirements of the bankruptcy notice, it remains an available act of bankruptcy even though subsequently the judgment on which it is based is set aside.

29    The Federal Magistrate then said at [36]-[37]:

It is exactly what is relied upon by the applicant in this proceeding. The judgment was entered and the judgment was obtained in June of 2011. An application was made to stay the judgment, but that was unsuccessful. Payment was, therefore, required to be made in relation to the judgment sum within 21 days of the date of service of the bankruptcy notice and that has not occurred.

It, therefore, constitutes bases upon which a sequestration order can be sought, relying upon the non-compliance with the payment pursuant to the requirements of the bankruptcy notice, even though subsequently the judgment on which it was based was set aside. That occurred when the decision in the appeal was handed down in May 2012, some ten months or so after the original decision and some eight months after the service of the bankruptcy notice.

30     His Honour then said at [40]-[42]:

What clearly is noted there is the understandable acceptance that, whilst a debt may exist at the time of the service of the bankruptcy notice or the filing of a creditor’s petition, it is not necessarily one in the same debt that was relied upon in the creditor’s petition at hearing. Nor is it necessary for it to be the same amount that is relied upon.

To suggest that that is required in relation to the matter, flies in the face of the obviously common occurrence of part payments being made in an attempt to try and stave off the evil day associated with the making of a sequestration order.

It is clear in my assessment of this matter that if there is continuity in relation to some part of the debt, stemming from the judgment of June 2011, then it remains a debt upon which the petitioning creditor could rely to obtain a sequestration order, pursuant to a previously filed creditor’s petition.

31    His Honour concluded that, even though the amount may have changed, there was an ongoing debt which was still due and owing. He said that once an act of bankruptcy has been committed, it remains available for the purpose of obtaining a sequestration order.

32    The Federal Magistrate said that failure to pay the monies called upon to be paid pursuant to the judgment of 15 June 2011 was an act of bankruptcy and therefore sequestration can, and should, properly be made.

33    Significantly, his Honour did not rely upon the other acts of bankruptcy relied upon by Phoenix in the amended creditor’s petition, namely, the conduct of the appellant in seeking to avoid service and for keeping house. He said in respect of those matters, that it was not specifically necessary for him to comment upon whether those actions constituted another act of bankruptcy.

34    There are three issues on this appeal; first, whether if a debt is relied upon for the issue of the bankruptcy notice and as an act of bankruptcy, that debt must continue to be owing at the time when the creditor’s petition is heard for the Court to make a sequestration order; secondly, if the debt is no longer owing at that time, whether the petitioning creditor can rely upon a later debt which first arose after the act of bankruptcy and after the filing of a creditor’s petition; and thirdly, if that debt can be relied upon at the hearing of the creditor’s petition and at the time of the making of the sequestration order, must that debt be for a liquidated sum.

35    Two other issues were not raised; first, whether Phoenix was entitled to rely upon the act of bankruptcy in failing to comply with the bankruptcy notice when the time within which the appellant had to comply had not expired when the creditor’s petition was issued, but had expired when the creditor’s petition was amended; and secondly, the consequences when the petitioning creditor did not file the affidavit required by r 4.06(4) of the Federal Court (Bankruptcy) Rules 2005 (Cth) (the Bankruptcy Rules).

36    The appellant contended on the appeal that the debt relied upon in the bankruptcy notice had been totally expunged when the petition was heard and there was no other debt referred to in the bankruptcy notice and the petition which was still owing when the petition was heard. He argued that the Federal Magistrate’s reliance upon Emerson v Wreckair Pty Ltd was misconceived because, in that case, the judgment debt relied upon by the petitioning creditor continued to exist at the time of the hearing of the petition, although, by reason of the Court of Appeal’s decision, the amount of the debt had been reduced.

37    The appellant contended that the Federal Magistrate should have found that the debt on which the petitioning creditor relied was not still owing at the time of the hearing of the creditor’s petition and the petitioning creditor had failed to satisfy the requirements of s 52(1)(c) of the Bankruptcy Act.

38    In the alternative, the appellant contended that if Phoenix was entitled to rely upon the costs order made by the Court of Appeal, which was not relied upon in the creditor’s petition, no order could be made because that costs order was not for a liquidated sum and, in that regard, the appellant relied upon s 44(1)(b)(ii). The appellant in his written submissions contended that the creditor’s petition was “presented” at the time of the hearing of the creditor’s petition and that therefore s 44(1)(b)(ii) was not complied with and, as a result, no sequestration order could be made.

39    Phoenix argued that even though the judgment relied upon in the bankruptcy notice and in the creditor’s petition had been set aside at the time of hearing the creditor’s petition, the appellant was still required to pay the costs ordered to be paid by the Court of Appeal.

40    It was not necessary, so Phoenix contended, that the debt referred to at the time of the hearing of the creditor’s petition need be the same as that set out in the bankruptcy notice or relied upon for the act of bankruptcy.

41    Phoenix contended that the fact that the debt referred to in s 44 and s 52 do not have to be the same debt is illustrated by the decision of the Full Court in O’Farrell v Palicare Pty Ltd (2009) 176 FCR 134 where the original judgment debt had been entirely repaid and the debt upon which the sequestration order was made was not a judgment debt.

42    It was contended that the appellant had an obligation to pay the costs ordered to be paid by the Court of Appeal at the time of the service of the bankruptcy notice and at the date of the act of bankruptcy, and at all times since that time.

43    Phoenix contended that:

In fact all that has happened is that the respondent obtained a more secure order: i.e. one against which there was no prospect of appeal. To obtain a better or further order to the same or better effect has never fallen within the rule in Moss v Smith: see Bryant v Withers (No 2) M&S 123; ex parte Bryant [1813] ER 78; Ambrose v Clendon 2 STR 1042; and Ex parte Marsden 1 Mont 27.

44    Phoenix contended that the word “presented” in s 44(1)(b)(ii) means the handing of the petition to the relevant court officer, not the hearing of the petition, and that, therefore, at the time the petition was presented, s 44(1) was satisfied. Section 44(1) did not need to be continued to be satisfied at the time of the hearing of the petition, but what was required to be satisfied at that time were the three matters in s 52 of the Bankruptcy Act.

Consideration

45    There was some confusion on this appeal as to the manner in which the Bankruptcy Act operates and the inter-relationship of the provisions of the Bankruptcy Act.

46    The appellant claimed that the debt that a creditor could rely upon at the hearing of the petition had to be a liquidated debt that had been owing when the act of bankruptcy occurred and was still owing when the creditor’s petition was heard. Phoenix contended that the debt need not exist when the act of bankruptcy occurred and indeed could have arisen after the creditor’s petition was presented or at any time before the hearing of the petition. Phoenix also contended that the debt need not be for a liquidated sum.

47    The orders made by the Court of Appeal on 18 May 2012 meant that the judgment debt relied upon in the bankruptcy notice and for the act of bankruptcy was no longer owed. The order for costs made by the trial judge on 13 July 2011, which was a judgment debt for an unliquidated amount, was also discharged.

48    The orders made by the Court of Appeal meant that a judgment debt for costs arose on the date that the Court of Appeal made its orders, i.e. 18 May 2012, which was still unsatisfied at the time of the presentation of the creditor’s petition on 19 July 2012 and at the time of the making of the sequestration order on 14 September 2012. That judgment debt, however, was not for a liquidated amount and therefore was not a liquidated debt.

49    The jurisdiction to make a sequestration order is addressed in Division 2 of Part 4 of the Bankruptcy Act.

50    Section 43 provides:

43(1)    Subject to this Act, where:

(a)    a debtor has committed an act of bankruptcy; and

(b)    at the time when the act of bankruptcy was committed, the debtor:

(i)    was personally present or ordinarily resident in Australia;

(ii)    had a dwelling-house or place of business in Australia;

(iii)    was carrying on business in Australia, either personally or by means of an agent or manager; or

(iv)    was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager;

the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.

(2)    Upon the making of a sequestration order against the estate of a debtor, the debtor becomes a bankrupt, and continues to be a bankrupt until:

(a)    he or she is discharged by force of subsection 149(1); or

(b)    his or her bankruptcy is annulled by force of subsection 74(5) or 153A(1) or under section 153B.

51    Where a debtor has committed an act of bankruptcy, and was ordinarily resident in Australia, the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor. A sequestration order may be made if the separate criteria in paragraphs (a) and (b) of s 43(1) are made out. Section 43(2) provides that when a sequestration order is made against the estate of the debtor, the debtor becomes a bankrupt and continues to be a bankrupt in accordance with the Act.

52    The first fact necessary to found the jurisdiction is that the debtor has committed an act of bankruptcy: s 43(1)(a). The second fact necessary is that the debtor comes within one of the descriptions in s 43(1)(b). If both those facts are made out, the Court has jurisdiction to make a sequestration order against the debtor. The second fact was not an issue on the appeal.

53    As to the first fact, s 40 provides a code for when a debtor commits an act of bankruptcy. There are many ways in which a debtor may commit an act of bankruptcy. Generally, an act of bankruptcy is evidence of a debtor’s inability to pay his or her debts as and when they fall due. In this case, Phoenix relied in its amended petition upon s 40(1)(g) for proof of the act of bankruptcy. In the original petition Phoenix did not rely upon s 40(1)(g) and indeed could not have because the bankruptcy notice was not served until the day before the petition was presented. That section and paragraph provides:

(1)    A debtor commits an act of bankruptcy in each of the following cases:

    …

(g)    if a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not:

(i)    where the notice was served in Australia — within the time specified in the notice; or

(ii)    where the notice was served elsewhere — within the time fixed for the purpose by the order giving leave to effect the service;

comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order, as the case may be, being a counter-claim, set-off or cross demand that he or she could not have set up in the action or proceeding in which the judgment or order was obtained.

54    Section 41 provides for the issue of a bankruptcy notice by the Official Receiver in circumstances where the creditor has obtained a final judgment of the kind described in s 40(1)(g). The final judgment or final judgments relied upon must be for a sum of more than $5,000: s 41(1)(a)(ii) and (b)(ii). If the debtor fails to comply with the bankruptcy notice by paying the amount demanded in the notice or does not make an application to set aside the bankruptcy notice within the time prescribed by the notice, the debtor will have been taken to have committed an act of bankruptcy. Once the debtor has been deemed to have committed an act of bankruptcy the jurisdiction given in s 43 is enlivened.

55    Once a debtor has failed to comply with a bankruptcy notice and has therefore committed an act of bankruptcy, the bankruptcy notice which founded the act of bankruptcy plays no further part in the process.

56    The jurisdiction to make a sequestration order is given by s 43. However, s 44(1) limits the circumstances in which a creditor’s petition may be presented against a debtor. It provides:

(1)    A creditor’s petition shall not be presented against a debtor unless:

(a)    there is owing by the debtor to the petitioning creditor a debt that amounts to $5,000 or 2 or more debts that amount in the aggregate to $5,000, or, where 2 or more creditors join in the petition, there is owing by the debtor to the several petitioning creditors debts that amount in the aggregate to $5,000;

(b)    that debt, or each of those debts, as the case may be:

(i)    is a liquidated sum due at law or in equity or partly at law and partly in equity; and

(ii)    is payable either immediately or at a certain future time; and

(c)    the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition.

57    It was accepted at the hearing by the appellant, notwithstanding the appellant’s written submissions, that a creditor’s petition is presented when it is handed to a Court officer and accepted by the officer for filing. The act of filing is an administrative act of the Court which follows the presentation: Purden Pty Ltd v Registrar in Bankruptcy (1982) 64 FLR 306. The understanding of the presenting of a creditor’s petition would be consistent with s 52(5).

58    Section 44 requires the three separate criteria in the three paragraphs of subsection (1) to be satisfied before the creditor’s petition is presented against the debtor. It is important to note that s 44(1)(c) requires the relevant act of bankruptcy upon which the Court’s jurisdiction to make a sequestration order is founded to have occurred within six months prior to the presentation of the petition. Therefore, an act of bankruptcy ceases to have any contingent adverse effects upon a debtor if no creditor’s petition is filed within six months of the act of bankruptcy.

59    Section 44(1)(a) requires there to be a debt or debts “owing” to the petitioner that amount to $5,000. That paragraph suggests that the debt relied upon must be presently owing.

60    Section 44(1)(b) further defines the debt mentioned in s 44(1)(a) as a “liquidated sum due at law or in equity or partly due at law or in equity” and “payable either immediately or at a certain future time”. The word “certain” is important. It means that the debt must be payable immediately or on a known future date. There is no tension in that description of the debt if it is assumed that the debt which is owing and is payable at a certain future time is a debt that has become payable when the creditor’s petition is presented.

61    The debt or debts which is or are described in s 44 do not have to be the debt or debts relied upon for the issue of the bankruptcy notice.

62    There are at least three reasons why that is so; first, a creditor’s petition may be issued relying upon an act of bankruptcy which is not founded on a bankruptcy notice; secondly, s 44 does not require that the debt which was relied upon for the issue of a bankruptcy notice be the same debt upon which the creditor’s petition relies; and thirdly, because a creditor’s petition can be brought at any time within six months after an act of bankruptcy.

63    Whilst the debt need not be the same debt as was relied upon for the act of bankruptcy, it must be a debt which existed at the time of the act of bankruptcy: Re Mendonca; Ex parte Commissioner of Taxation (1969) 15 FLR 256 per Gibbs J at 257 (Re Mendonca), Australia and New Zealand Banking Group Ltd v Coutts (2003) 201 ALR 728, Re Tait; Ex parte Commissioner of Taxation (1996) 65 FCR 592 (Re Tait). In the last mentioned case, Lockhart J said at 595:

It is well established that the debt, upon which a petition and a sequestration order are based, must be a debt which existed at the date of the relevant act of bankruptcy: Moss v Smith (1808) 1 Camp 489; 170 ER 1031; Ex parte Hayward; Re Hayward (1871) LR 6 Ch App 546; Re Payten; Ex parte D’Arcy & Co (1890) 1 BC (NSW) 53; Re Debtors [1927] 1 Ch 19; McNamara v Langford (1931) 45 CLR 267; Re a Debtor; Ex parte Debtor v Scott [1954] 1 WLR 1190; [1954] 3 All ER 74; Re Mendonca; Ex parte Commissioner of Taxation (1969) 15 FLR 256 per Gibbs J; Hyams v Elder Smith Goldsbrough Mort Ltd (1976) 133 CLR 637 at 639; Dean v QUF Industries Ltd (1981) 51 FLR 317 at 323.

64    His Honour’s short and succinct statement of the law is undoubtedly correct. The debt relied upon in the petition must have been owing at the date of the act of bankruptcy. His Honour’s dicta, of course, goes further and I shall return to this statement when I address the hearing of the petition.

65    The debt must also be a debt of the kind mentioned in s 44 and therefore be for a liquidated sum payable immediately or at a certain future time: Re Mendonca at 259.

66    It follows, therefore, that the creditor’s petition must identify a debt of the kind mentioned in s 44 that was a debt of the same kind when the debtor committed the act of bankruptcy. However, s 44 of course assumes that the debt is owing at the time of the creditor’s petition, even if it is payable at a certain future time.

67    Section 49 provides:

Where a creditor’s petition is not prosecuted with due diligence or where for any other reason the Court considers it proper to do so, the Court may permit to be substituted as petitioner or petitioners another creditor or other creditors to whom the debtor is indebted in the amount required by this Act in the case of a petitioning creditor, and the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor.

68    Section 49 allows for the substitution of another creditor to whom the debtor is indebted for at least $5,000 in substitution for the petitioning creditor. The petition proceeds as if the substituted creditor or creditors had been the petitioning creditor. A creditor seeking to be substituted pursuant to s 49 can rely upon any debt provided it is for the amount of $5,000 and is otherwise a debt of the kind mentioned in s 44, which means it must have been a debt owing as at the date of the act of bankruptcy: McNamara v Langford (1931) 45 CLR 267 at 269. A person who seeks to be substituted as petitioner must prove that the debt upon which that person relies existed at the date of the act of bankruptcy. However, that person does not need to prove that fact when that person seeks to be substituted, but, in order to obtain a sequestration order, must prove that fact at the hearing of the petition: Hyams v Elder Smith Goldsborough Mort Ltd (1976) 133 CLR 637. For those reasons, s 49 is consistent with s 44 and s 43 as they apply to the petitioning creditor. A substituted creditor could not rely upon a debt upon which the petitioning creditor was not entitled to rely.

69    A creditor’s petition must be in accordance with Form 6: r 4.02 of the Bankruptcy Rules. Form 6 requires the petitioning creditor to identify the amount of the debt, including details of any judgment debt: Paragraph 1 Petition. The petitioning creditor must also identify the act of bankruptcy relied upon.

70    The creditor’s petition must be verified on affidavit by a person who knows the relevant facts: s 47(1). The affidavit is Part 2 of Form 6.

71    If the act of bankruptcy relied upon is a failure to comply with a bankruptcy notice, the petition must be accompanied by an affidavit that complies with r 4.04 which requires the petitioner to advise the Court whether an application in relation to the bankruptcy notice has been made and whether the application has been finally decided, and an affidavit of service of the bankruptcy notice: r 4.02.

72    The creditor’s petition must, of course, be served on the debtor: r 4.05. When it is served, it must be accompanied by the documents mentioned in r 4.05.

73    Before the hearing of the creditor’s petition, the creditor must comply with the Bankruptcy Rules. The Bankruptcy Rules provide that, before the hearing of a creditor’s petition, the creditor must file an affidavit that the documents numbered in r 4.05 have been served: r 4.06(2); an affidavit that a person has searched the National Personal Insolvency index that satisfies r 4.06(3); and an affidavit that accords with r 4.06(4), which provides:

(4)    the applicant creditor must file an affidavit of a person who knows the relevant facts that:

(a)    was sworn as soon as practicable before the hearing date for the petition; and

(b)    states that each debt on which the applicant creditor relies is still owing.

74    Lastly, if the petitioner relies upon a judgment debt, an affidavit of search in the Court that made the order must be filed: r 4.06(5).

75    The purpose of r 4.06 is clear. The Court needs to be satisfied by admissible evidence that the debt is still owing immediately before the hearing of the petition. As will be seen, s 52 also requires the Court to be so satisfied. For the reasons already mentioned, the petitioning creditor can only rely upon a debt that existed at the time of the act of bankruptcy and was a debt of the kind mentioned in s 44 and was then due and owing in the sense that it was payable immediately or at a certain future time.

76    Section 52 addresses the Court’s obligations at the hearing of a creditor’s petition. Section 52(1) 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.

77    Section 52(1)(c) explains why rule 4.06(4) requires the petitioning creditor to file an affidavit of the kind referred to in the rule. Section 52(1) is concerned with the creditor’s petition which was presented pursuant to s 44. The creditor must prove either by affidavit or viva voce evidence the matters stated in the petition: s 52(1)(a). That requires proof that an act of bankruptcy occurred as alleged and proof of the debt or debts relied upon in the creditor’s petition. They can only be debts that existed at the time the act of bankruptcy occurred and when the creditor’s petition was presented: s 44(1).

78    The creditor must also prove service: s 52(1)(b).

79    Lastly, the creditor must prove that the debt or debts upon which the petitioning creditor relies is or are still owing: s 52(1)(c). The use of the definitive article “the” before “debt” in s 52(1)(c) suggests that the debt there referred to is a debt earlier described. That is even more likely to be so because of the word “still” in the same paragraph. The reference to the debt still owing is, in my opinion, a reference to the debt described as owing in s 44(1)(c). Section 52(1)(c) requires the petitioning creditor to prove that the debt or debts claimed by the petitioning creditor in the creditor’s petition as owing and having the character of the debts described in s 44(1)(b), are still owing at the date of the hearing of the petition and when the sequestration order is to be made. For the reasons already mentioned, the debts relied upon must have been owing at the time when the act of bankruptcy occurred. That is why Lockhart J said in Re Tait that the debt upon which the sequestration order is made must have existed at the date of the act of bankruptcy relied upon. That is also why Conti J said in Australia and New Zealand Banking Group Ltd v Coutts at [24]:

It is settled law that the debt relied upon by a petitioning creditor must exist at the time of the act of bankruptcy relied upon.

80    Section 52(1)(c) requires the petitioning creditor to prove that the debt or debts relied on in the creditor’s petition are still owing. Therefore, the petitioning creditor must prove that the debt or debts amount to $5,000 and are still owing. Because s 52(1)(c) refers back to s 44(1) necessarily, the debts relied upon must have the character of the debts in s 44(1)(b). Therefore, they must be a liquidated sum. However, they cannot be at the hearing of the petition payable at a date certain after the hearing. They must have become payable at the time of the hearing.

81    If the debt is not still owing a creditor simply cannot comply with the procedural obligations in r 4.04(4) and cannot satisfy s 52(1)(c).

82    The decision of the Full Court in Emerson v Wreckair Pty Ltd relied upon by Phoenix and the Federal Magistrate is not inconsistent with my analysis. In that case, the bankruptcy notice was founded upon a final judgment in the District Court of Queensland for the sum of $29,081.65 plus interest of $4,560.64. The bankruptcy notice required payment of $33,642.29 which was the sum of those two amounts. The debtors applied to set aside the bankruptcy notice on the ground that the District Court Judge had failed to give credit to the debtors for the sum of $5,400 and judgment should have been entered for a lesser amount which reflected that credit. The debtors therefore claimed the bankruptcy notice should be set aside. That was not pressed before the Deputy District Registrar. However, the Deputy District Registrar extended the time for compliance with payment of the sum of $5,400 until after the debtors’ appeal to the Full Court of the Supreme Court of Queensland from the District Court Judge’s orders and extended compliance with the balance of the amount until 21 days after his orders.

83    The debtors sought an order pursuant to s 14(5) of the Bankruptcy Act to set aside those orders. That application was heard by Pincus J, who entertained the argument not put to the Deputy District Registrar that the bankruptcy notice should be set aside. Pincus J dismissed the application. It was from that order that the appeal came to the Full Court of this Court. After the Full Court had heard argument, but before it had given its decision the Full Court of the Supreme Court of Queensland allowed the debtor’s appeal and reduced the judgment sum entered by the District Court Judge by $5,400.

84    Further submissions were then put to the Full Court of the Federal Court in relation to the effect of the Full Court of Queensland’s orders. The Full Court of this Court held that a bankruptcy notice may be invalid if the amount specified in the notice exceeds the amount due. That question is answered by reference to the date of the bankruptcy notice. A payment by the debtor in reduction of a judgment debt after the issue of the bankruptcy notice will not invalidate the bankruptcy notice. Once an act of bankruptcy has been committed by a debtor failing to comply with the bankruptcy notice, the act of bankruptcy remains available even if the judgment debt upon which the bankruptcy notice relied is set aside.

85    In Emerson v Wreckair Pty Ltd, the bankruptcy notice, when issued, was for the correct amount, being the amount of the judgment. It is irrelevant that the amount relied upon was subsequently reduced.

86    The decision is not relevant to this appeal and was not relevant for the argument put to the Federal Magistrate. The appellant did not contend on this appeal that the act of bankruptcy relied upon by Phoenix had somehow ceased to exist when the Court of Appeal made its orders. The argument before the Federal Magistrate was that because of the orders made by the Court of Appeal there was no debt owing at the date of the act of bankruptcy relied upon in the petition which could have founded a sequestration order.

87    The Court was pressed with the following passage from Emerson v Wreckair Pty Ltd at 588:

To found the presentation of a creditor’s petition it is necessary that there be owing by the debtor to the petitioning creditor a debt that amounts to $1,500 or two or more debts that amount in the aggregate to $1,500; Bankruptcy Act, s.44(1)(a). There is, however, no requirement for the issue of a bankruptcy notice that the creditor have a judgment for any minimum amount. Nor is there a requirement that a creditor who petitions for a sequestration order based upon an act of bankruptcy of the kind for which s.40(1)(g) of the Bankruptcy Act provides rely, wholly or at all, upon the debt upon which the bankruptcy notice was founded.

88    Each of those propositions is sound and not inconsistent with my analysis. The debt relied upon must be for the amount specified in the Bankruptcy Act; then $1,500, now $5,000. The creditor, on the presentation of the creditor’s petition, does not need to have a judgment for any amount provided that the debt relied upon is more than the statutory minimum. The creditor who petitions for bankruptcy need not rely upon the debt that was relied upon by the bankruptcy notice for the act of bankruptcy.

89    What was not said by that Full Court is that that debt must be owing at the date of the act of bankruptcy. The Full Court in Emerson v Wreckair Pty Ltd did not need to address that question because the issue before that Court was whether the bankruptcy notice should be set aside. No petition had been issued. The debtor was trying to avoid the consequences that he had thereby committed an act of bankruptcy.

90    For those reasons, that decision did not address the issues which were before the Federal Magistrate or on appeal.

91    At the time of the hearing of this creditor’s petition, the debt which was created by the judgment of the Supreme Court of Queensland for the sum of $2,025,212.17 and which was relied upon for the act of bankruptcy and in the petition no longer existed. Phoenix could not rely upon it and therefore Phoenix could not satisfy s 52(1)(a) because it had no other debt that was owing at the date of bankruptcy upon which it could rely. No sequestration order could have been made upon the debt relied on for the act of bankruptcy and in the creditor’s petition.

92    Phoenix was not entitled to rely upon the judgment debt that arose when the Court of Appeal made an order for costs, because that judgment debt did not exist when the act of bankruptcy relied upon occurred or when the creditor’s petition was filed. It came into existence when the Court of Appeal made its order on 18 May 2012.

93    Phoenix contended that the Court of Appeal’s order was for the same debt as the trial judge’s order, but that contention cannot be accepted. Whilst both were orders for costs against the appellant, they were not for the same debt. Indeed, the Court of Appeal set aside the trial judge’s order for costs as a result of which any indebtedness, contingent or otherwise, was discharged. The Court of Appeal made its own order for costs.

94    Because s 52(1) refers back to the debts in s 44, it follows that a sequestration order cannot be made against a debtor without there being owing a debt for a liquidated sum of more than $5,000 which existed at the time of the act of bankruptcy. Phoenix could not rely upon the Court of Appeal’s order in any event because it was not a debt for a liquidated sum. The debt could not become a debt for a liquidated sum until the procedures in the UCPR had been finalised and the Registrar had, pursuant to r 740 of the UCPR, made an order reflecting the assessor’s certificate.

95    Phoenix said that it has not engaged in the “expensive costs assessment process, for the simple reason that McCracken is insolvent and Phoenix would not have recovered the costs of the assessment…” That explains why Phoenix has not had its costs assessed, but its reasons for not doing so are irrelevant. Phoenix also contended that the appellant has not relied upon r 709A of the UCPR and required Phoenix to serve a costs statement. Rule 709A of the UCPR allows a party against whom a costs order is made the right to require the party in whose favour the costs order has been made to serve a costs statement. But that is a right, not an obligation. It is no answer for Phoenix to say that the appellant could have required Phoenix to assess its costs. The fact remains, Phoenix has not assessed the costs ordered to be paid by the Court of Appeal.

96    Lastly, Phoenix contended that the evidence of Mr Lance Ensor, who is an approved costs assessor, who expressed the opinion that the costs would be assessed at an amount not less than $400,000 could be relied upon, but that contention must be rejected. That evidence did not and could not convert an order of the Court for costs into a debt for a liquidated sum. Nothing less than an order under r 740(1) of the UCPR was sufficient to make the Court of Appeal’s order a liquidated sum.

97    In those circumstances, no sequestration order could have been made, because it is a pre-requisite for the making of a sequestration order that at the time the order is made the creditor is able to prove a liquidated sum for a sum in excess of $5,000: s 41(1)(b)(i) of the Bankruptcy Act.

98    I would allow the appeal. I would set aside the sequestration order and the order for costs made by the Federal Magistrate on 14 September 2011, and, in lieu thereof, make an order that the creditor’s petition stands dismissed.

99    The appellant should be entitled to the costs of the hearing before the Federal Magistrate and on the appeal.

Associate:

Dated:    18 April 2013

REASONS FOR JUDGMENT

siopis j:

100    I agree with the reasons for judgment given by Lander J and the orders which he proposes.

Associate:

Dated:    18 April 2013

REASONS FOR JUDGMENT

gilmour j:

101    For the reasons given by Lander J, I agree that the appeal should be allowed and that the orders he proposes should be made.

Associate:

Dated:    18 April 2013