FEDERAL COURT OF AUSTRALIA

Westpac Banking Corporation v Tsatsoulis [2003] FCA 406

BANKRUPTCY – hearing of creditor’s petition – application to file amended notice to oppose petition - application for adjournment by respondent – whether Court should exercise discretion to grant adjournment – uncertainty as to outcome if adjournment granted – debt outstanding for considerable time – insolvency not likely to be of short duration on any outcome

Bankruptcy Act 1966 (Cth) Part X, s 52

Supreme Court Rules (NSW) Part 52A rule 43

Federal Court Rules O 77 r 19

Ling v Enrobook Pty Ltd (1997) 74 FCR 19 applied

Field v Commercial Banking Company of Sydney Ltd (1978) 37 FLR 341 cited

WESTPAC BANKING CORPORATION v MARY TSATSOULIS AND GEORGE TSATSOULIS

N 7250 of 2002

BRANSON J

5 MAY 2003

SYDNEY

THE COURT ORDERS THAT:

1.      A sequestration order be made against the estate of Mary Tsatsoulis.

2.      The applicant creditor’s costs (including reserved costs) in respect of order 1 to be taxed and paid from the estate of Mary Tsatsoulis in accordance with the Bankruptcy Act 1966 (Cth).

3.      A sequestration order be made against the estate of George Tsatsoulis.

4.      The applicant creditor’s costs (including reserved costs) in respect of order 3 to be taxed and paid from the estate of George Tsatsoulis in accordance with the Bankruptcy Act 1966 (Cth).

5.      Pursuant to s 52(3) of the Bankruptcy Act 1966 all proceedings under the above sequestration orders be stayed for a period of ten days from today’s date.

THE COURT NOTES THAT:

Mr Maxwell Prentice has signed a consent to act as trustee dated 12 August 2002 in respect of the estate of each of Mary Tsatsoulis and George Tsatsoulis.

REASONS FOR JUDGMENT

INTRODUCTION

1                     On 30 April 2003 I dismissed an application made on behalf of the respondents for the hearing of the creditor’s petition in this matter to be adjourned.  The petition was heard on that day and the following orders made:

‘1.        A sequestration order be made against the estate of Mary Tsatsoulis.

2.                  The applicant creditor’s costs (including reserved costs) in respect of order 1 to be taxed and paid from the estate of Mary Tsatsoulis in accordance with the Bankruptcy Act 1966 (Cth).

3.                  A sequestration order be made against the estate of George Tsatsoulis.

4.                  The applicant creditor’s costs (including reserved costs) in respect of order 3 to be taxed and paid from the estate of George Tsatsoulis in accordance with the Bankruptcy Act 1966 (Cth)

5.                  Pursuant to s 52(3) of the Bankruptcy Act 1966 all proceedings under the above sequestration orders be stayed for a period of ten days from today’s date.’

2                     I set out below my reasons for dismissing the adjournment application and making the above orders.

history of proceeding

3                     The creditor’s petition was filed on 16 August 2002.  It relies on acts of bankruptcy committed by the respondents when they failed to comply on or before 25 July 2002 with the requirements of a bankruptcy notice dated 2 July 2002.  The bankruptcy notice was founded on a final order made by the Supreme Court of New South Wales on 30 April 1999 that the respondents pay the applicant its costs associated with Supreme Court proceeding No. 50033 of 1997.

4                     On 13 September 2002 the respondents filed a notice of intention to oppose the petition.  Only one ground of opposition was relied upon.  That ground, omitting the particulars, was:

‘That by reason of an arrangement made between the Applicant and the Respondents each by their respective legal representatives on 30^th April, 1999, the applicant is now estopped from enforcing the costs order sought to be enforced in the Petition.”

5                     As it became apparent that the above ground of opposition would make it necessary for the parties to call their respective legal representatives as at 30 April 1999, it was necessary for this proceeding to be moved from the docket of a judge who knew some or all of the legal practitioners concerned to my docket.  The legal practitioners concerned are not known to me. 

6                     My Associate commenced discussions with the legal representatives of the parties in late February 2003 as to suitable dates for the hearing of the petition.  By letters dated 18 March 2003 the parties were advised by the Court that the petition had been listed for hearing on 30 April 2003 at 10.15am.  By letters dated 31 March 2003 the legal representatives of the parties were provided with draft pre-trial directions.  The letters advised that unless any party contacted my Associate with suggested changes to the draft directions before 7 April 2003 the directions would take effect on that day.  No party contacted my Associate to suggest changes to the draft directions.

7                     Although the respondents sought and obtained leave on 23 April 2003 to issue subpoenas directed to their previous legal representatives, it appears that their present legal representatives took no steps to comply with the pre‑trial directions of the Court or to seek dispensation from their duty to do so.  On 29 April 2003 (i.e. the day before the listed hearing date) at approximately 4.30pm a document headed ‘Respondents List of Authorities: Application for Adjournment’ was faxed to my chambers.  This was the first indication given to the Court that the respondents proposed to seek an adjournment of the hearing of the petition.

8                     When the petition was called for hearing on 30 April 2003 the respondents, by their counsel Mr Huntington, confirmed that they proposed to seek an adjournment of the hearing.  They sought and were granted a short adjournment to allow documents to be brought to Court and subsequently a further adjournment to allow them to provide instructions to their legal representatives.

9                     At 2.15pm on 30 April 2003 the respondents, by their counsel, advised the Court that reliance was no longer placed by them on the ground of opposition set out in their notice of intention to oppose the petition.  Leave was sought to file in Court an amended notice of intention to oppose the petition.  The proposed amended notice included, after the ground included in the earlier notice (which ground was now abandoned), the following additional ground:

‘2.        In the alternative the respondents oppose the making of a sequestration order and seek adjournment of the petition to:

(a)               Initially properly evaluate the prospects of recovery against some or all of the legal advisors, orders that costs not be charged for some or all of the legal work undertaken by those advisors and for indemnity in respect of some or all of the costs orders made against the respondents in favour of the applicant and other parties with whom the respondents have been involved in litigation particularly in equity proceedings number 50037 of 1997;

(b)               To seek formally or informally the support of their creditors to the bringing of proceedings foreshadowed in sub paragraph little (a) above;

(c)                Thereafter, to enable the bringing of such proceedings by notice of motion particularly in the equity proceedings mentioned above, or as otherwise advised;

(d)               Alternatively, to enable the respondents to execute an authority pursuant to Part X of the Bankruptcy Act.’

10                  Mr Foster SC, who appeared with Mr Dimitriadis for the applicant, opposed the grant of leave to file the proposed amended notice.  He argued that the proposed additional ground was not a ground of opposition to the petition but rather the basis upon which the respondents proposed to seek an adjournment of the hearing of the petition.  Mr Huntington, as I understood him, agreed that the proposed ground 2 was only a ground of opposition to the making of sequestration orders on that day (i.e. 30 April 2003).  I declined leave to file the proposed amended notice of intention to oppose the petition.  However, I received evidence and heard full argument from the parties on the respondents’ application for an adjournment of the hearing of the petition to enable them to do the things identified in ground 2 of the proposed amended notice.

ADJOURNMENT APPLICATION

11                  Brett William Hurley (‘Mr Hurley’) of McDermott & Associates, the respondents’ solicitors on the record in this proceeding, gave affidavit and oral evidence concerning, amongst other things, his retaining of counsel in respect of the hearing of the creditors petition.  There seems to be some uncertainty as to whether the person initially retained by Mr Hurley as counsel holds a current practicing certificate.  In any event, by some time during the week commencing 7 April 2003 Mr Hurley received advice that that person would not be available to conduct the hearing of the petition on the day for which it was listed.  It was not until 14 April 2003 that Mr Hurley briefed Mr Huntington and Mr Huntington, Mr Hurley said, took the brief on the basis that he would be interstate and unavailable between 16-29 April 2003.  Mr Hurley conferred with Mr Huntington on 15 April 2003.  As a result of that conference Mr Hurley became concerned that the respondents might be entitled to relief from payment of the costs of some or all of their previous legal advisors and might be able to look to some or all of their previous legal advisors to indemnify them in respect of their liability to the applicant.  As a result of the conference Mr Hurley also turned his mind for the first time to whether it might be in the interests of the respondent to execute an authority under Part X of the Bankruptcy Act 1966 (Cth) (‘the Act’) to allow a trustee to administer their affairs.

12                  Mr Hurley acknowledged that he holds no instructions from the respondents to take any steps, whether under Part 52A rule 43 of the Supreme Court Rules (NSW) or otherwise, to obtain an indemnity in respect of the respondents’ indebtedness to the applicant.  He further acknowledged that he holds no instructions from the respondents that they desire their affairs to be dealt with under Part X of the Act.  Neither of the respondents gave evidence of an intention to instruct Mr Hurley, or any person, with respect to these matters.  The respondents respectively gave affidavit evidence which discloses that their liabilities significantly exceed their assets.  The evidence before the Court is insufficient for me to draw any conclusion as to whether the respondents have any realistic prospect of obtaining relief from payment of the costs of some or all of their previous legal advisors, or, if they do, what the impact of any relief that they might obtain would be on their financial status.

13                  It is in the discretion of the Court whether an adjournment of the hearing of the petition should be granted or not.  In this case the debt upon which the petition is based has been outstanding since the making of the order of the Supreme Court of New South Wales on 30 April 1999.  The petition was filed more than eight months ago.  It appears that the respondents have had access to legal advice throughout the life of the petition.  It is acknowledged that the respondents are presently insolvent.  These continue to be involved in the management of a private company through which they carry on a cleaning business.

14                  It is quite uncertain whether, even if a lengthy adjournment of the petition were granted, steps would be taken in an endeavour to obtain relief from the respondents’ former legal advisors in respect of the respondents’ indebtedness to the applicant and their other creditors.  It is even more uncertain whether, if such steps were taken, they would be successful.  It is not suggested that a trustee in bankruptcy would be unable to take steps to enforce any liabilities that the respondents’ former legal advisors might have to the respondents should the trustee be so advised and should a creditor prove willing to fund the necessary action.

15                  In Ling v Enrobook Pty Ltd (1997) 74 FCR 19 at 26 the Full Court gave consideration to a contention that the courts recognise a public interest in allowing a debtor to prosecute litigation commenced by the debtor.  The Court said:

‘The above authorities do not, in our view, support the appellant's contention that the courts recognise a public interest in allowing a debtor to prosecute litigation commenced by the debtor. The public interest recognised by such authorities is that which, in broad terms, is reflected also in s 40(1)(g) of the Act; that is, that a sequestration order ought only to be made on the basis of an indebtedness which is not counterbalanced by a claim by the debtor against the petitioning creditor. Such authorities provide no comfort to a debtor who asserts a claim, not against his or her creditor, but against a third party.

The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts may well provide a basis for a finding that there is a “sufficient cause” for a sequestration order not to be made (see, for example, Maddestra v Penfolds Wines Pty Ltd[(1993) 44 FCR 303]). But the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally. They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of only short duration.’

16                  In this case, of course, the respondents have not, and may never, commence any action against their former legal advisors.  If they do commence such action, there is no reason to conclude that their insolvency would be likely to be of only short duration.  The estimate made by Mr Hurley that a motion for relief could obtain a hearing date within eleven weeks of the filing of the necessary notice of motion takes no account of the time needed to explore the factual circumstances surrounding the litigation that gave rise to the costs order against the respondents, to formulate and give consideration to legal advice and to explore funding options in respect of any proposed action.  Moreover, as is mentioned above, it cannot be assumed that the outcome of the motion for relief envisaged by Mr Hurley would be the return of the respondents to solvency.

17                  Similarly it is quite uncertain whether, if an adjournment of the petition were granted, the respondents would instruct their solicitor that they desire their affairs to be dealt with under Part X of the Act.  It is also quite uncertain whether, if the respondents were to give their solicitor such instructions, a trustee could be found who would consent to exercise the powers given by an authority under s 188 of the Act or, if a trustee could be found, the respondents’ creditors would support the respondents’ desire to avoid bankruptcy.

18                  Even if it were the case that the respondents had signed an authority under s 188 of the Act and that a meeting of creditors had passed a special resolution requiring the respondents to execute a deed of assignment or a deed of arrangement under Part X of the Act, the Court would have a discretion not to adjourn the hearing of the petition (Field v Commercial Banking Company of Sydney Ltd (1978) 37 FLR 341).

19                  In my view, the history of this matter and the uncertainty as to what might eventuate were an adjournment to be granted suggests strongly against the Court exercising its discretion to adjourn the hearing of the petition. 

20                  It was for the above reasons that on 30 April 2003 the respondents’ application for an adjournment of the hearing of the creditor’s petition was dismissed.

hearing of the petition

21                  On the hearing of the petition I was satisfied that the applicant had provided proof of:

(a)                the matters stated in the petition;

(b)               the service of the petition; and

(c)                the fact that the debt on which the petitioning creditor relied was still owing;

as required by s 52(1) of the Act.  The respondents did not suggest to the contrary.  I was also satisfied that the applicant had complied with rule 19 of Order 77 of the Federal Court Rules.  Again the respondents did not suggest to the contrary.

22                  I was not satisfied by either of the respondents that he or she was able to pay his or her debts or that for other sufficient cause a sequestration order ought not to be made.  The only bases on which it was suggested by the respondents that sequestration orders ought not to be made were those which I canvassed above under the heading ‘Adjournment Application’.  I was not satisfied, for the reasons there given, that they provided a sufficient cause for a sequestration order not to be made.  I formed the view that the appropriate order was that sequestration orders should be made against the estate of each of the respondents.

23                  However, out of deference to the plea made on their behalf that they be given a final opportunity to seek assistance from a wealthy relative, I stayed all proceedings under the sequestration orders for a period of ten days.

24                  It was for the above reasons that I made the orders set out in [1] above.

Associate:

Dated:              5 May 2003