Re Rolland, Robert Edward & Anor v Ex Parte Bank of Western Australia Ltd [1997] FCA 183

C A T C H W O R D S

BANKRUPTCY - creditor's petition based on non-compliance with bankruptcy notice - bankruptcy notice founded upon default judgment against debtors in Supreme Court of Western Australia - debtors suing petitioning creditor in subsequent, separate Supreme Court proceedings seeking injunctive relief and damages - whether "for other sufficient cause a sequestration order ought not to be made" - factors relevant to exercise of Court's discretion under s.52(2) of Bankruptcy Act 1966.

Bankruptcy Act 1966 (Cth) s.52(2)(b)

Trade Practices Act 1974 (Cth) ss.52, 80

Re Daley; Ex parte National Australia Bank Ltd (1992) 37 FCR 390

Ahern v. Deputy Commissioner of Taxation (1987) 76 ALR 137

Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111

Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No. 2) (1994) 51 FCR 14

Ling v. The Commonwealth (1996) 139 ALR 159

Paligorov and Richardson; Ex parte Actus Australia Ltd (Lee J, unreported, 26 April 1994, Judgment No. 404 of 1994)

RE: ROBERT EDWARD ROLLAND and ROBYN MARY ROLLAND

EX PARTE: BANK OF WESTERN AUSTRALIA LTD

WP 831 of 1996

CARR J

PERTH

18 MARCH 1997

IN THE FEDERAL COURT )

OF AUSTRALIA )

GENERAL DIVISION )

BANKRUPTCY DISTRICT OF THE) No. WP 831 of 1996

STATE OF WESTERN AUSTRALIA)

RE: ROBERT EDWARD ROLLAND

and ROBYN MARY ROLLAND

Debtors

EX PARTE: BANK OF WESTERN

AUSTRALIA LTD

(ACN 050 494 454)

Petitioner

CORAM: CARR J.

DATE: 18 MARCH 1997

PLACE: PERTH

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1. The hearing of the petition be adjourned until further order, conditional upon:

(a) the debtors prosecuting Action No. CIV 2445 of 1996 in the Supreme Court of Western Australia against the petitioning creditor with all due expedition;

(b) the debtors jointly, within 21 days, filing and serving a statement verified by affidavit of their assets and liabilities as at 30 June 1996 and as at the date of such affidavit.

2. The petitioning creditor have liberty to apply to relist the petition for hearing upon giving seven days written notice to the debtors.

3. Costs to date reserved.

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

IN THE FEDERAL COURT )

OF AUSTRALIA )

GENERAL DIVISION )

BANKRUPTCY DISTRICT OF THE) No. WP 831 of 1996

STATE OF WESTERN AUSTRALIA)

RE: ROBERT EDWARD ROLLAND

and ROBYN MARY ROLLAND

Debtors

EX PARTE: BANK OF WESTERN

AUSTRALIA LTD

(ACN 050 494 454)

Petitioner

CORAM: CARR J.

DATE: 18 MARCH 1997

PLACE: PERTH

REASONS FOR JUDGMENT

Introduction

This is a creditor's petition by Bank of Western Australia Limited that the Court make a sequestration order against the estate of the debtors Mr Robert Edward Rolland and his wife Mrs Robyn Mary Rolland. The act of bankruptcy upon which the petition is based is non-compliance with a bankruptcy notice. The debtors oppose the petition, in summary, on the ground that they have a claim against the petitioning creditor which they are pursuing in the Supreme Court of Western Australia ("the Debtors' Supreme Court Action"). The debtors contend that that claim exceeds the amount owed to the petitioning creditor and was a claim which they have not hitherto reasonably been able to litigate. They ask either that the petition be dismissed under s.52(2)(b) of the Bankruptcy Act 1966 (Cth) ("the Act"), or adjourned until the outcome of the Debtors' Supreme Court Action is known.

Factual Background

On 17 January 1996 the petitioning creditor obtained judgment in the Supreme Court of Western Australia against the debtors in a total sum of $349,349.82. That was a judgment in default of appearance by either of the debtors. On 26 February 1996 a bankruptcy notice for that judgment debt was issued. The bankruptcy notice was served on the debtors on 16 March 1996. It is common ground that the debtor did not comply with the bankruptcy notice and, accordingly, on 7 April 1996 they committed an act of bankruptcy. The petition was filed on 23 May 1996 and served on the debtors on 1 June 1996. The petition was first listed for hearing on 25 June 1996 but was adjourned on that occasion and on at least two further occasions. On 12 July 1996 the debtors, through their solicitors, filed notice of intention to appear at the hearing of the petition. In that notice they stated that they would oppose the petition on the ground that they were able to pay their debts as and when they fall due. On 13 August 1996 (when the matter was before the Court for the third time) the debtors were given leave to amend their notice of intention to appear. On 11 September 1996 their solicitors filed such an amended notice. The ground of opposition in the amended notice was that:

"... by reason of representations made to the debtors in the course of negotiations in relation to the monies owed to the petitioner, the petitioner is estopped from proceeding with the petition."

The debtors acknowledge that it is only in exceptional circumstances that a sequestration order will be refused upon the petitioning creditor (as in this matter) having established the matters referred to in s.52(1) of the Act. Those matters, in these proceedings, are:

. that the debtors were at the date of commission of the act of bankruptcy ordinarily present in Australia;

. that the debtors are justly and truly indebted to the petitioner in the sum of $349,349.82;

. that the petitioner does not, nor does any other person on its behalf, hold any security over the debtors' property; and

. that the debtors within six months before presentation of the petition committed the abovementioned act of bankruptcy, by failing to comply with the bankruptcy notice or to satisfy the Court that they had a counterclaim, set-off or cross-demand equal to or exceeding the abovementioned sum, being a counterclaim, set-off or cross-demand that they could not have set up in the action in which the judgment was obtained;

. that the petition was duly served; and

. that the debt is still owing.

None of the above matters have been put in issue by the debtors. The petitioning creditor has filed the affidavits usually required before a petition is granted. I am satisfied that the matters which the petitioning creditor is required to prove have been established.

Section 52(2) of the Act

Section 52(2) of the Act relevantly provides as follows:

"(2) If the Court is not satisfied with the proof of any of those matters, [the matters referred to immediately above] or is satisfied by the debtor:

(a) that he is able to pay his debts; or

(b) that for other sufficient cause a sequestration order ought not to be made;

it may dismiss the petition."

Have the Debtors Satisfied the Court that for "other

sufficient cause" a Sequestration Order Ought Not to be Made?

The Counterclaim on which the Debtors Rely

The debtors say that they have a counterclaim which they are seeking to enforce in the Debtors' Supreme Court Action which they instituted against the petitioning creditor in the Supreme Court of Western Australia on 19 December 1996. In the statement of claim filed in the Debtors' Supreme Court Action, they plead that until June 1994 they were farmers at Esperance in Western Australia where they had three farming properties, the third property having been acquired in 1985. First, the debtors complain that the judgment creditor (defendant) obtained a mortgage from the debtors over the third property in circumstances which gave rise to an entitlement on their part to have that mortgage set aside, as having been obtained pursuant to unconscionable conduct on the part of the judgment creditor. Next, the debtors plead that in meetings between them and representatives of the judgment creditor in December 1993 and March 1994, the judgment creditor stated that if they made application to the Rural Adjustment and Finance Corporation ("RAFCOR") for assistance under the Farm Sale and Relocation Strategy Scheme ("FSRSS") and Re-establishment Support Scheme ("RSS") then the judgment creditor would not bring any action against them to recover the balance of any debt due to it by them after the sale of their farms and would write off the residual debt. That was pleaded as the "Representation". The debtors plead further that in reliance upon the Representation, and induced thereby, they made application to RAFCOR for FSRSS and RSS, they took no steps to oppose the judgment creditor when it took possession of their farm lands on 4 January 1995, they took no steps to oppose the judgment creditor when it sold their farming properties,
they took no steps to defend the Supreme Court action upon which the bankruptcy notice was based, they abandoned their farming properties, disposed of farm livestock, plant and equipment and "forewent" the opportunity to seek out a source of finance to re-finance their debts and continue farming. The debtors recite the facts that the judgment creditor obtained judgment in the Supreme Court proceedings, issued the bankruptcy notice and filed a creditor's petition in this Court. The debtors plead that, in the circumstances, the judgment creditor's conduct was misleading or deceptive contrary to s.52 of the Trade Practices Act 1974 (Cth) when read with s.51A of that Act. In the alternative, the debtors plead the Representation as being an offer which was accepted and resulted in a contract in accordance with its terms. In the Debtors' Supreme Court Action they seek a permanent injunction restraining the judgment creditor from taking any further step to enforce the Supreme Court judgment or relying upon the bankruptcy notice or from pursuing this petition. They also seek damages and other relief.

There is evidence that on 13 February 1997 the Acting Principal Registrar of the Supreme Court of Western Australia heard the petitioning creditor's application to strike out the debtors' statement of claim on the grounds that it was an abuse of process. That application was successful and the statement of claim has been struck out. The learned Acting Principal Registrar published reasons for taking that course. In essence, those reasons were based on the application of the principles outlined by the High Court of Australia in Port of Melbourne Authority v. Anshun Pty Ltd (1981) 147 CLR 589. There is also in evidence in the present proceedings a copy of a notice of appeal to the Master of the Supreme Court from the Acting Principal Registrar's
decision, together with a copy of the judgment debtors' outline of submissions before the learned Acting Principal Registrar. At the start of the hearing of this matter, Mr P.F.Fletcher, counsel for the judgment debtors, applied for an adjournment of the hearing until the Master's decision in respect of the appeal was known. Mr C.G. Colvin, counsel for the petitioning creditor opposed that adjournment. For reasons which I then gave, I refused the application for an adjournment. In summary, I formed the view that if the judgment debtors were successful in that appeal they would return to this Court a month or six weeks later arguing that the petition be further adjourned or dismissed on the basis that they have a reasonably arguable case in the Debtors' Supreme Court Action. Given the history of this matter, I did not consider that it would be in the interests of justice for it to be postponed simply to await the outcome of the appeal to the Master. If the Master were to allow the appeal that would not, in my view, decide the question whether the petition should be further adjourned or dismissed. There was no suggestion of any prejudice to the debtors in having the issue of whether they have a reasonably arguable case (and all other issues related to the exercise of the Court's discretion) decided earlier rather than later. I return below to the question whether "a reasonably arguable case" is an appropriate test when considering the weight to be given to a counterclaim put forward by a debtor as the basis for the exercise of the Court's discretion under s.52(2)(b) of the Act.

In accordance with directions to that effect, the debtors had, before the hearing, filed affidavits opposing the petition. The judgment creditor served a notice on the debtors under rule 135(1) of the Bankruptcy Rules requiring the debtors to be produced for cross-examination. When I refused the adjournment referred to above, Mr Fletcher
informed me that the debtors were not available for cross-examination. He gave some reasons from the bar table why this was so. The reasons included the fact that both debtors were employed at a considerable distance from the Court and had expected the abovementioned adjournment application to be granted. Mr Fletcher sought special leave under rule 135(2) of the Bankruptcy Rules to use the debtors' affidavits, notwithstanding the fact that the debtors had not been produced for cross-examination. For reasons then given, I refused to grant that special leave. I granted an overnight adjournment of the matter to enable the debtors to travel to Perth and attend Court, should they so wish. I considered that if the debtors availed themselves of that opportunity, then their affidavit evidence together with cross-examination would assist me to make an assessment of the strength or weakness of their case in the Supreme Court. In the course of giving those short reasons I referred to the following passage from the Full Court's reasons for judgment in Ahern v. Deputy Commissioner of Taxation (1987) 76 ALR 137 at p.150:

"It is plainly not desirable that there be a mini trial of the Supreme Court tax proceedings in this court on the hearing of an application to adjourn a bankruptcy petition with all the attendant cost and delay to both parties. Plainly some evidence is necessary but it cannot be beyond the wit of counsel to devise, with the assistance of the court on a directions hearing, an appropriate formula to deal sensibly with this preliminary question."

I appreciate that the circumstances of the present case are not identical to those in Ahern, but I thought that they were sufficiently analogous for a similar course to be adopted in this matter.

Both Mr and Mrs Rolland attended when the hearing was resumed on the next day.
Their affidavits were tendered. Objections had previously been taken, in writing, to some portions of their affidavits. Mr Fletcher conceded in respect of some of the objections and I made rulings in respect of the others. Subject to the striking out of certain portions in each document, those affidavits were admitted into evidence. As a consequence of some of the deletions, I gave limited leave to Mr Fletcher to adduce oral evidence in chief from his clients. Mr Rolland gave some evidence in chief and both he and his wife were cross-examined.

The essence of Mr Rolland's evidence was that a Mr Braid, an officer of the petitioning creditor, had told the debtors that if they applied to RAFCOR for assistance then the judgment creditor would not bring an action against them to recover the debt. It was put very strongly to Mr Rolland in cross-examination that any such representation was conditional upon that application being successful. Mr Rolland's evidence was that there was never any discussion about the application to RAFCOR being unsuccessful. Both Mr and Mrs Rolland gave evidence that they were told by the petitioning creditor that if they made application to RAFCOR they would not be "bankrupted". Mr Braid, in his affidavit says that the matter of bankruptcy was not in issue or discussed at his meeting with the debtors on 29 March 1994 (which appears to be the more crucial of the various meetings). Mr Braid's affidavit included the following paragraphs:

"10.7 I deny ever insisting that the debtors apply to RAFCOR, rather I encouraged the debtors to apply and discussed the possibility of the debtors applying to RAFCOR. I also told them that the petitioner would not commence recovery action provided they were genuine in attempts by them to apply for the FSRS grant and the Re-establishment Scheme. The debtors didn't believe that they were eligible under the FSRS grant. Furthermore, they indicated that they weren't willing to leave farming
altogether.

10.8 On 11 April 1994 I sent a letter confirming my discussions with the debtors. In that letter I advised the debtors that they were eligible to apply for the FSRS grant and further advised that the petitioner would defer taking any action under its mortgages if the debtors applied for the FSRS grant by 30 April 1994 and were successful. Exhibit "GB4" to this affidavit is the copy of a letter dated 11 April 1994."

When one turns to the letter of 11 April 1994, as Mr Fletcher pointed out, there is no reference in it to a condition that the application to RAFCOR be successful. At this stage, the petitioning creditor has not made any point of the fact that the debtors' application to RAFCOR was made on 23 May 1994.

I bear in mind, as Mr Colvin asked, that Mr Braid was not cross-examined, although the debtors had filed and served a notice that his production was required for that purpose.

Mr Colvin submitted that even if the judgment creditor did make the Representation, the debtors could not succeed in their Supreme Court action. The claim under s.52 of the Trade Practices Act could not succeed, so it was put, because the debtors had not suffered any damage. They were already in what Mr Colvin described as "a hopeless situation". For similar reasons no estoppel arose because, so it was submitted, there was no significant detriment. Finally, so far as the contract claim was concerned, Mr Colvin relied upon a concession, made by Mr Rolland in cross-examination, that there was no agreement that he could call upon the petitioning creditor to perform. For reasons which I will expand upon below, I do not think that it is appropriate for me to express a firm view upon the likely outcome of the Debtors' Supreme Court Action.
However, I think it is necessary to express some provisional views in response to Mr Colvin's primary submission (made on the basis of accepting, for the purposes of argument only, that the petitioning creditor made the Representation). My provisional view is that Mr Colvin's submissions are not correct. So far as the claims are based on s.52 of the Trade Practices Act, the primary relief sought by the debtors in the Supreme Court is a permanent injunction restraining the petitioning creditor from, among other things, taking any further step to pursue sequestration orders against the debtors pursuant to its petition. On the assumption referred to above, (and subject to the debtors' appeal to the Master being successful) my provisional assessment is that the Supreme Court might well grant an injunction in those terms, even if no loss or damage were proved. I should say that there exists an evidentiary dispute on the question of damages, which extends to the matter of estoppel. On the question whether Mr Rolland had conceded that there had been no agreement of the type pleaded in the Debtors' Supreme Court Action, I noted at least two references in Mr Rolland's evidence to what he described as "the deal" with the judgment creditor. On the second occasion there was shortly thereafter, as Mr Colvin submitted, a concession by Mr Rolland that there had been no "agreement". However, I consider that the evidence, at this stage, is inconclusive on this point. Whether there was an enforceable agreement is, of course, a matter of law and will depend upon the facts as found in the Debtors' Supreme Court Action. Accordingly, I do not accept Mr Colvin's primary argument to the effect that even if his client had made the Representation, the debtors' case is hopeless. I now turn to the question of what assessment this Court should make of the debtors' counterclaim, in the context of the application of s.52(2)(b) of the Act. Mr Colvin conceded that it is the function of this
Court, sitting in bankruptcy, to weigh up the apparent merits of the debtors' counterclaim and then decide whether to adjourn or dismiss his client's petition. At another stage (see for example page 70 of the transcript) Mr Colvin seemed to acknowledge that the test applicable was whether the debtors had an arguable case. However, in final address, Mr Colvin submitted that my task was not "... to simply ask whether there is a reasonably arguable case but actually go into an assessment of the merit of the alleged cross-claim."

There seems to be some variation, in the decided cases, on the level of satisfaction required.

In Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at p.116 Gibbs J referred to:

"... deciding only whether it is probable that the debtor has against the petitioning creditor a claim which is likely to succeed."

Olney J in Re James; Ex parte Carter Holt Harvey Roofing (Australia) Pty Ltd (No. 2) (1994) 51 FCR 14 at p.22 specifically adopted that test. His Honour said that he was unable to say that it was probable that the debtor had against the petitioning creditor a claim which was likely to succeed. That being the case, his Honour concluded that there was not "other sufficient cause" to justify the exercise of the Court's discretion under s.52(2)(b) of the Act. In Ling v. The Commonwealth (1996) 139 ALR 159, a slightly different approach appears to have been taken by the Full Court of this Court. The genesis of that approach can be found in the following passage in Re Schmidt, slightly earlier (on page 116):

"Where, however, the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor the position seems to me to be different. As a general rule this Court is not an appropriate forum to decide such a claim and is limited to forming a view as to whether it appears that there is sufficient validity in the debtor's claims to justify a dismissal or adjournment of the petition."

In Ling (at p.172) Sundberg J (with whom the other members of the Court agreed) said:

"The viability of the appellant's negligence action appears not to have been explored before Lehane J, and was not explored on the appeal. In those circumstances I propose to say no more than that, although his claim has its difficulties, as his counsel conceded, it has in my view sufficient validity to justify a dismissal or adjournment of the petition: [citing Re Schmidt and Re James]."

In Re Schmidt it can be seen that a very considerable amount of evidence was given, occupying possibly as much as nine days of hearing. In those circumstances Gibbs J in that case was in a far better position (compared to my situation in these proceedings) to make an assessment of whether it was probable that Mr Schmidt would succeed in his claims against the petitioning creditor and, indeed, to quantify the amount likely to be recovered. Gibbs J (again at p.116) acknowledged that the situation in other cases might be different:

"In many cases it would be more convenient, assuming that the debtor showed that he had a real claim to litigate, to adjourn the proceedings to enable his claim to be tried in the ordinary courts, but that course was not taken in the present case ..."

In this matter I cannot say whether it is probable that the debtors' claim against the petitioning creditor is likely to succeed. The first hurdle will be the appeal to the Master. It is true that I have read the affidavits on both sides. But I have seen only Mr and Mrs Rolland. Matters of credibility may well need to be resolved in the
Debtors' Supreme Court Proceedings, if the Master allows the appeal and the matter proceeds to a hearing.

However, I have come to the conclusion that the debtors' claims have sufficient validity to fall within s.52(2)(b) at this stage. In other words, I am satisfied that a sequestration order ought not to be made at this time.

In reaching that conclusion, I have had particular regard to two matters. The first is the extent to which the debt upon which the petitioning creditor relies is intertwined or related to the relief which the debtors seek in the Debtors' Supreme Court Action. Their very claim is based on an allegation that the judgment creditor told them that if they applied to RAFCOR for assistance then it would not pursue them for the debt. The second aspect is the public interest in the administration and enforcement of the Trade Practices Act - a matter referred to (in a similar context) by Lee J in Paligorov and Richardson; Ex parte Actus Australia Ltd (unreported, 26 April 1994, Judgment No. 404 of 1994) at pp.8-9. I do not consider that the debtors' complaints about the procurement by the petitioning creditor of the mortgage over the third farming property fall into the same category as that part of their case which is based on the Representation. On the state of the evidence to date I would not regard the former claim as having sufficient validity to justify a dismissal or adjournment of the petition. I now turn to certain other discretionary matters relied upon by the judgment creditor.

Delay

Mr Colvin submitted that there are broader matters to the exercise of the discretion
under s.52(2)(b) of the Act than simply an assessment of the merit of the cross-claim itself. I accept that submission. In an ordinary case, a debtor who had allowed judgment to be entered by default, who had ignored service of a copy of the default judgment upon him, who had done nothing in response to service of a bankruptcy notice and who only sought to enforce a cross-claim virtually on the eve of the hearing of the bankruptcy petition, might have considerable difficulty in persuading a Court to exercise its discretion against making a sequestration order. But this is not an ordinary case. Mr Rolland gave evidence that he thought that when the petitioning creditor took the proceedings in the Supreme Court and obtained judgment, it was doing so to quantify the debt for the purposes of writing it off for income tax purposes. He acknowledged that when the bankruptcy notice was served, "... this was getting pretty serious." It was then that he contacted an organisation known as "Rural Action Movement". From the evidence to date, it would appear that the debtors were not given legal advice until after the petition had been served upon them. In those circumstances, I do not consider that the debtors' omissions and delay were sufficiently serious to tilt the balance against them in respect of the exercise of the discretion under s.52(2)(b) of the Act.

At the same time, I do not consider that the circumstances warrant dismissal of the petition - a course taken by Heerey J in Re Daley; Ex parte National Australia Bank Ltd (1992) 37 FCR 390. There are substantial factual differences between this case and Re Daley. In my view, the appropriate course is to adjourn the petition subject to certain conditions. The first condition will be that the debtors prosecute the Debtors' Supreme Court Action (initially by pursuing the appeal to the Master) with all due
expedition. Secondly, I consider that this Court, in the exercise of its bankruptcy jurisdiction, should have more information about the financial position of the debtors. The only documentary evidence of this appears to be Exhibit RER2 to Mr Rolland's affidavit which is a statement of assets and liabilities and average weekly income and expenditure of the debtors as at 7 July 1995. At the hearing before me, Mr Fletcher acknowledged that the debtors cannot pay their debts and said that they were "in a parlous financial position". In my view, the debtors should be obliged, within 21 days, to file a statement of their assets and liabilities as at 30 June 1996 and as at the date of swearing their affidavit. There will be liberty to the petitioning creditor to apply to relist the petition for hearing. Without limiting the possible circumstances in which such an application might be made, I have in mind any non-compliance with the abovementioned conditions or the possibility (foreshadowed by Mr Fletcher in argument) that the Debtors' Supreme Court Action may be brought to an end by the Master's decision.

I certify that this and the preceding fourteen

(14) pages are a true copy of the Reasons for

Judgment of Justice Carr.

A/g Associate:

Date: 18 March 1996

Counsel for the petitioning creditor: Mr C.G. Colvin

Solicitors for the petitioning creditor: Garth Berg

Counsel for the debtors: Mr P.F. Fletcher

Solicitors for the debtors: Solomon Brothers

Date of Hearing: 25-26 February 1997

Date of Judgment: 18 March 1997

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