FEDERAL COURT OF AUSTRALIA

Liew v JNS Technologies (M) Sdn Bhd [1999] FCA 1428

BANKRUPTCY – whether the fact that an appeal is pending is sufficient for an extension of time for compliance with a bankruptcy notice.

Bankruptcy Act 1966 (Cth) s 41(6A)

Garcia v National Australia Bank Limited (1998) 155 ALR 614 referred

Re Taylor; ex parte Deputy Commissioner of Taxation (1983) 74 FLR 377 cited

Bryant v Commonwealth Bank of Australia (unreported, Full Court of the Federal Court, 11 November 1994) cited

Benaharon v Fabric Dyeworks (Aust) Pty Ltd [1998] FCA 1109 cited

Re Baker; ex parte Baker v Staples (unreported, Federal Court, 4 September 1995) referred

Beckwith v Pedler [1999] FCA 1312 cited

Re Geard; ex parte Reid (unreported, Federal Court, 11 February 1999) referred

Re Smith (unreported, Federal Court, 4 May 1994) cited

Agrillo v Codisposto (unreported, Federal Court, 16 December 1994) cited

Bryett v Deputy Commissioner of Taxation (1997) 37 ATR 1411 cited

Wenkart v Abignano (unreported, Federal Court, 28 August 1998) cited

Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264 followed

Re Nguyen; ex parte Commissioner of Taxation (1995) 54 FCR 403 followed

Warner v Frost [1999] FCA 830 followed

PAK SUN LIEW v JNS TECHNOLOGIES (M) SDN BHD

V 7644 of 1999

WAI FONG LIEW v JNS TECHNOLOGIES (M) SDN BHD

V 7645 of 1999

MARY ELLEN STANNARD v JNS TECHNOLOGIES (M) SDN BHD

V 7648 of 1999

JOHN NEIL STANNARD v JNS TECHNOLOGIES (M) SDN BHD

V 7649 of 1999

KENNY J

MELBOURNE

18 OCTOBER 1999

THE COURT ORDERS THAT:

1.      The application under s 41(6A) of the Bankruptcy Act 1966 (Cth) be dismissed.

2.      The applicant pay the respondent’s costs of and incidental to the application, including any reserved costs.

3.      The time for compliance with the bankruptcy notice No. VN 1309 of 1999 by the applicant be extended to 5.00 pm on 19 October 1999.

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

THE COURT ORDERS THAT:

1.      The application under s 41(6A) of the Bankruptcy Act 1966 (Cth) be dismissed.

2.      The applicant pay the respondent’s costs of and incidental to the application, including any reserved costs.

3.      The time for compliance with the bankruptcy notice No. VN 1308 of 1999 by the applicant be extended to 5.00 pm on 19 October 1999.

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

THE COURT ORDERS THAT:

1.      The application under s 41(6A) of the Bankruptcy Act 1966 (Cth) be dismissed.

2.      The applicant pay the respondent’s costs of and incidental to the application, including any reserved costs.

3.      The time for compliance with the bankruptcy notice No. VN 1311 of 1999 by the applicant be extended to 5.00 pm on 19 October 1999.

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

THE COURT ORDERS THAT:

1.      The application under s 41(6A) of the Bankruptcy Act 1966 (Cth) be dismissed.

2.      The applicant pay the respondent’s costs of and incidental to the application, including any reserved costs.

3.      The time for compliance with the bankruptcy notice No. VN 1310 of 1999 by the applicant be extended to 5.00 pm on 19 October 1999.

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

EX TEMPORE REASONS FOR JUDGMENT

1                     These are four applications made pursuant to s 41(6A) of the Bankruptcy Act 1966 (Cth) (“the Act”) for an extension of time in which to comply with a bankruptcy notice directed to each applicant, namely, Mary Ellen Stannard, John Neil Stannard, Pak Sun Liew and Wai Fong Liew. 

2                     Each application is supported by an affidavit sworn by the relevant applicant.  An affidavit sworn by Andre Ho, solicitor for the respondent, is relied on in opposition to each application.

3                     The facts can be briefly stated.  On 2 July 1999, a judge of the Supreme Court of Victoria gave judgment for the plaintiff, JNS Technologies (M) Sdn Bhd (“JNST”) against JNS Electronic Industries (Vic) Pty Ltd (“JNSV”) and the applicants.  By further order on 6 August 1999, the amount of the judgment was fixed at $300,000 with interest of $83,476.92. 

4                     The proceedings in the Supreme Court arose out of a proposal to manufacture modems in Malaysia by means of a joint venture between JNSV and a Malaysian company called Galgo Sdn Bhd (“Galgo”).  Mr and Mrs Stannard, who are applicants in this Court, were the sole directors and shareholders of JNSV.  A Mr Kam Yee Kong controlled Galgo.  Mr Kam’s evidence is, in one respect, relied on in the present applications.

5                     The vehicle for the joint venture was to be the respondent, JNST, which was also a Malaysian company.  Pursuant to a shareholders’ agreement between JNSV and Galgo, JNSV undertook to grant to JNST an exclusive licence to manufacture the modems in Malaysia.  The shareholders’ agreement also provided that the affairs of JNST were to be managed by a board of directors consisting of five persons, two to be appointed by JNSV and three to be appointed by Galgo. 

6                     The trial judge found that, pursuant to a loan agreement between JNSV and JNST, JNST lent the sum of $300,000 to JNSV to fund the manufacture of the modems.  Mr and Mrs Stannard and Mr and Mrs Liew (also applicants in this Court) guaranteed the performance by JNSV of its obligations under the loan agreement.  Her Honour found that the sum of $300,000 had not been repaid in accordance with the loan agreement, nor pursuant to the guarantees given by the applicants.  In the Supreme Court, part of the case for Mrs Stannard and Mrs Liew was that, according to the principle in Garcia v National Australia Bank Limited (1998) 155 ALR 614 (“Garcia”), it would be unconscionable to enforce the guarantees against them.  At par 26 of her reasons for judgment, the trial judge summarised the principle in Garcia as follows:

At paragraph 31 of the majority judgment of Gaudron, McHugh, Gummow and Hayne JJ, their Honours said that what made it unconscionable to enforce a guarantee in a case such as that and the earlier case of Yerkey v Jones (1939) 63 CLR 649 was the combination of circumstances that:

(a)      in fact the surety did not understand the purport and effect of the transaction;

(b)      the transaction was voluntary (in the sense that the surety obtained no gain from the contract the performance of which was guaranteed);

(c)       the lender is to be taken to have understood that, as a wife, the surety may repose trust and confidence in her husband in matters of business and therefore to have understood that the husband may not fully and accurately explain the purport and effect of the transaction to his wife; and yet

(d)      the lender did not itself take steps to explain the transaction to the wife or find out that a stranger had explained it to her.

Clearly, for the principle to operate, all of those circumstances must be present. 

Her Honour rejected the submission that the Garcia principle applied to the situation of either Mrs Stannard or Mrs Liew, but, for present purposes, only her findings in relation to Mrs Liew are relevant.  As to Mrs Liew, her Honour said (at pars 43-4 of her reasons for judgment):

It is not in issue that, in terms of item (d) [of the above summary], no steps were taken by the lender, JNST, to explain the transaction to Mrs Liew or to find out that a stranger had explained it to her. 

As to items (a) and (c), Mrs Liew said that her husband brought the guarantees to her at home, and explained the financial benefits which he expected to flow to him from the joint venture.  She was not aware of the legal effect of a guarantee, and he did not explain that to her.  She had never signed a guarantee before.  He did not explain to her anything about his business dealings.  In cross-examination, she said that she was aware of the Liew loan of at least $100,000, but that she did not appreciate that the signing of the guarantee might mean that that loan would be repaid.  She had worked as a cook in the takeaway food shop, but had not been involved in the business side of it.  She had been married for thirty years.  On the basis of that evidence, I would have difficulty in finding that Mrs Liew understood the purport and effect of the transaction effected by her signing the guarantee.  I would accept that she had trust and confidence in her husband in matters of business, and that he did not fully explain the transaction to her.

However, as to paragraph (b), on the basis of the evidence set out [earlier in the reasons], I am unable to find that Mrs Liew, in respect of the Liew guarantee, was a volunteer in the relevant sense.  The proposal for the Liew guarantee, whether it originated with Mr Kam or Mr Liew, was one of the elements in Mr Liew’s persuading Mr Kam to proceed with the initial loan, despite his concerns about the licence.  One reason for Mr Liew’s anxiety that the initial loan should proceed was the prospect that if it did not proceed, JNSV would be unable to repay the amount of $120,000 lent to it by Mr and Mrs Liew jointly.  That amount was repaid to Mr and Mrs Liew jointly after the advance of the initial loan.  In that way, Mrs Liew benefited from the loan agreement which she guaranteed.  Accordingly, I cannot find that it would be unconscionable to enforce the Liew guarantee against her.

The evidence upon which her Honour’s finding depended was:  (a) an amount of $100,000 was lent to JNSV on 20 December 1996 from a joint account of Mr and Mrs Liew with the National Australia Bank; (b) a second amount of $20,000 was lent to JNSV out of the same account on 11 March 1997; (c) the sums advanced to JNSV by Mr and Mrs Liew were unlikely to be repaid unless JNSV received the loan of $300,000 from JNST; and (d) the amount of $120,000 plus interest was repaid on 7 July 1997 (i.e. after the provision of the loan of $300,000) into a joint account of Mr and Mrs Liew with the National Australia Bank. 

7                     It was a further part of the case for the defendants in the Supreme Court (the applicants in this Court) that the proceeding was a nullity because it was not issued with the proper authority of the plaintiff, JNST.  The trial judge dealt with the issue in the following way (at par 33 of her reasons for judgment):

This submission relied on the evidence of Mr Kam that a Board of five directors had not been appointed to JNST, as required by article 11.1 of the shareholders’ agreement referred to … above, and as a consequence there had never been any meeting of the board and it had never passed any resolutions.  However, asked if that meant that the company had no directors, Mr Kam said “All companies have board of directors”.  The point of that evidence was that the five member board required by the shareholders’ agreement as representing the two parties to that agreement had not been appointed, not that no directors had been appointed.

It was not put to Mr Kam that the proceeding had been initiated without the authority of the plaintiff [JNST].  That being so, Mr Houghton [counsel for JNST] relying on breach of the rule in Browne v Dunn (1893) 6 R 67, sought to tender an affidavit of Mr Kam sworn on 1 April 1998 in the context of the application for summary judgment, and permission was given for that tender.  In that affidavit Mr Kam swears that he is a director of the plaintiff.  The exhibits to that affidavit indicate that JNST was incorporated on 31 July 1981 under the name of Sedaria Sdn Bhd, changing its name on 4 March 1997 to the name of JNST.  Also before the Court were the Articles of Association of Sedaria Sdn Bhd, providing that the number of directors of that company shall be not less than two nor more than ten, and naming the first two directors.  There is no evidence to support the submission that JNST had no authority to issue the proceeding.

On the morning of 2 July 1999, after her Honour had delivered judgment, counsel for the applicants in this Court (the defendants in the Supreme Court) made application for a stay of execution of the judgment.  Her Honour stood the matter down until 4.00 pm the same day.  The applications for a stay of execution were renewed later that day.  Her Honour refused the applications. 

8                     The applicants (in this Court) have appealed to the Court of Appeal against the decision of the trial judge.  The grounds of appeal relied upon by all of them assert that her Honour erred in finding that the proceeding had been issued with JNST’s proper authority.  In addition, Mrs Liew claims that her Honour erred in holding that she was a volunteer in respect of the guarantee given by her to JNST, and that the principle in Garcia did not apply.

9                     The contents of the appeal books were to have been settled before a Master on 28 September 1999.  On that date, however, the Master was not satisfied with what was proposed, and the hearing before him was adjourned to 26 October 1999.  The applicants claim that the appeal will be heard sometime next year.  JNST states that the Master has indicated to its counsel that the likely hearing date is a date after February 2001. 

10                  Bankruptcy notices dated 9 September 1999 were served on each of the applicants on 10 September 1999. 

11                  Section 41(6A) of the Act provides:

Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

(a)      proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or

(b)      an application has been made to the Court to set aside the bankruptcy notice;

the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.

Subsection (6C) applies when extension of time is sought on the ground that proceedings to set aside the judgment or order on which the bankruptcy notice was based have been instituted, and the Court is of the opinion that the proceedings either have not been instituted bona fide or are not being prosecuted with due diligence.  In those circumstances, the Court is not to extend the time for compliance.  JNST submits that the Court should be of the opinion that the proceedings by way of appeal have not been instituted bona fide. 

12                  The authorities establish that an appeal is in the nature of “proceedings to set aside the judgment … in respect of which the bankruptcy notice was issued”:  see, e.g., Re Taylor; ex parte Deputy Commissioner of Taxation (1983) 74 FLR 377; Bryant v Commonwealth Bank of Australia (unreported, Full Court of the Federal Court, 11 November 1994); Benaharon v Fabric Dyeworks (Aust) Pty Ltd [1998] FCA 1109. 

13                  There have been differences in the cases about the principles which are to govern applications such as the present.  In Re Baker; ex parte Baker v Staples (unreported, Federal Court, 4 September 1995), Keifel J held that an extension of time should ordinarily be granted where there is a “genuine and arguable” appeal being diligently prosecuted against a judgment founding a bankruptcy notice.  A not dissimilar approach was adopted by Weinberg J in Benaharon and by Ryan J in Beckwith v Pedler [1999] FCA 1312.  A different approach has been adopted in other cases.  In Re Geard; ex parte Reid (unreported, Federal Court, 11 February 1999) Sheppard J refused an application to extend time, stating as follows:

The critical question then is how the discretion should be exercised.  As earlier stated, the parties have made, both orally and in writing, detailed submissions concerning the issues which will arise for determination on the appeal and have invited the Court in effect to express a view, provisional though it may be, on the likely outcome of the appeal.  To a degree I have felt obliged to look at the matter for myself, but I think it most undesirable that a judge of this Court should in effect undertake some provisional review to determine the correctness or otherwise of a judgment of another court especially where that judgment is under appeal to the Court of Appeal which has jurisdiction to hear appeals in the normal course.  I prefer to approach the matter in a different way.

The debtor has not made any application for a stay of proceedings pending the outcome of the appeal.  Why he has not done so is not clear to me but the judgment which has been recovered against him is a final judgment and execution upon it has not been stayed.  It would seem to me to require quite special circumstances before a court exercising jurisdiction in bankruptcy would, in effect, do what has not been done in the court in which the judgment has been obtained by extending the time for compliance with the bankruptcy notice when no application to stay the judgment has been made.  …

A further factor is that this is an application to extend time for compliance with a bankruptcy notice; it is not the hearing of a bankruptcy petition.  The refusal of the application will not affect the status of the debtor but it will mean that he, in all probability, will commit an act of bankruptcy.  That act of bankruptcy will be available to the petitioning creditors or to any other creditor upon which to base a bankruptcy petition at any time in the period of six months after the act of bankruptcy has been committed.  Otherwise the debtor’s position will remain unaffected by what the Court does. 

If the appeal is ultimately dismissed and the judgment stands with the consequence that the bankruptcy proceedings go on, it may be quite important to the petitioning creditor, whoever he or she may be, to the general body of creditors and to the trustee in bankruptcy, that there be, for the purposes of the administration of the bankrupt estate, an act of bankruptcy committed at an earlier time than would be case if this application were acceded to. 

Sheppard J’s approach has been followed in Re Smith (unreported, Federal Court, 4 May 1994), Agrillo v Codisposto (unreported, Federal Court, 16 December 1994), Bryett v Deputy Commissioner of Taxation (1997) 37 ATR 1411, and Wenkart v Abignano (unreported, Federal Court, 28 August 1998). 

14                  In Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264, Lehane J made it clear, at 270-271, that whilst a failure to apply for a stay was a relevant factor to which weight would be attached, it was not necessarily conclusive on the question whether an extension of time should be granted.  This point was emphasised in Warner v Frost [1999] FCA 830 in which Hely J said:

For myself, I think with respect, that the view of Lehane J is to be preferred and I propose to follow it but the problem is that really the only matters which were relied upon in support of a stay were these:  first, the existence of an arguable appeal.  Second, the application for a stay was made but at least inferentially a reason for its refusal was the inability on the part of the applicant to put up security in sufficient sums.  Thirdly, the impact of a change in status consequential upon the refusal of the stay.  Fourthly, no showing of any prejudice to the respondent should an extension be granted and, finally, the appeal is likely to be heard and decided in a period of eight months or less.

In my view, these factors are insufficient to outweigh the proposition that the Court in which this judgment was obtained has declined to stay its execution and something more than an arguable appeal needs to be shown before the Bankruptcy Court would grant an extension of time for compliance with the bankruptcy notice, which would produce a similar effect to the granting of a stay.  Really nothing has been shown in this case other than that there is an arguable appeal and that the consequence of refusing an extension will be the commission of an act of bankruptcy … .

On the hearing of these applications, both counsel for the applicants and for JNST submitted that, in Warner v Frost, Hely J had correctly stated the principles which ought to govern the exercise of discretion on these applications. 

15                  The sole basis for these applications is, so counsel for the applicants said, that there is an appeal on foot.  It was in this context that counsel for the applicants and counsel for JNST invited me to express a provisional view on the likely prospects of success of the appeal.  It is, it seems to me, highly undesirable that I should do so.  It is inappropriate that a judge of this Court should express a view, one way or the other, on the correctness of the judgment of another court, particularly when that judgment is under appeal, as of right, to the Court of Appeal.  Subject to the following observations, I do not propose to do so.  Counsel for the applicants took the Court to the shareholders’ agreement, the memorandum and articles of Sedaria Sdn Bhd and pages of the transcript of the evidence of Mr Kam.  It is plain enough that the trial judge also referred to and considered this evidence in deciding as she did.  It is inappropriate for this Court to review her Honour’s findings, even provisionally, particularly in light of the extant appeal.  In relation to the principle in Garcia, the applicants’ counsel invited me to compare the circumstances considered by the High Court in Garcia with the situation presented to the trial judge in the Supreme Court proceedings.  That task, amongst others, was undertaken by the trial judge in making her findings of fact and law in relation to the application of the Garcia principle to Mrs Liew.  Again, I think it is inappropriate for this Court to review her Honour’s findings on that issue.  It suffices for me to say that the prospects of success on the appeal, as they appear to me on these applications, are not such that, standing alone, they would persuade me to exercise my discretion in favour of the applicants. 

16                  Further, there are a number of factors which tell against the exercise of discretion in favour of the applicants.  Those factors are: 

(a)        an application for a stay of the judgment has been made in the Supreme Court and refused;

(b)       the appeal will not be heard in the immediate future and, on one account, not until after February 2001;

(c)        a lengthy extension of time for compliance with the relevant bankruptcy notices may ultimately prejudice JNST as the judgment creditor; and

(d)       the commission of acts of bankruptcy which may occur in the event that these applications are refused is not comparable to the consequences of sequestration orders.

17                  As we have seen, in Warner v Frost, Hely J placed some weight upon the former factor.  The fact is that, the application for a stay of judgment having failed in the Supreme Court, the judgment is enforceable against the applicants.  The period for which an extension is sought is also relevant.  The applicants seek an extension until 21 days after delivery of judgment by the Court of Appeal.  That date is, on any view, likely to be well into the future.  Further, as Heerey J said in Re Nguyen; ex parte Commissioner of Taxation (1995) 54 FCR 403 at 407:

Extension of time for compliance with the bankruptcy notice may have important adverse consequences for the judgment creditor.  For example, if a sequestration order is subsequently made the commencement of the bankruptcy may be later than would otherwise have been the case, which in turn may affect rights of recovery by the trustee in relation to property.

See also Byron at 270 per Lehane J.  Finally, the commission of an act of bankruptcy, although a serious matter, does not carry with it the grave consequences brought about by the making of a sequestration order:  cf Byron at 270 per Lehane J and Warner v Frost at par 8.  It remains open to the Court on the hearing of any petition for sequestration to adjourn the hearing pending the resolution of the appeal by the Court of Appeal. 

18                  For the reasons stated, I would dismiss each of these applications with costs.

Associate:

Dated:              18 October 1999

V 7644 of 1999:

V 7645 of 1999:

V 7648 of 1999:

V 7649 of 1999: