FEDERAL COURT OF AUSTRALIA

Reid v Hubbard [2003] FCA 1424

BANKRUPTCY – application by third party to set aside bankruptcy notice – whether debt exists – whether bankruptcy notice issued for an improper purpose – whether bankruptcy notice an abuse of process.

PRACTICE AND PROCEDURE – appeal from Federal Magistrate’s decision not to set aside bankruptcy notice - whether leave to appeal required.

Bankruptcy Act 1966 (Cth), ss 30(1), 40(1)(g), 41, 52(2), 303 

Federal Court of Australia Act 1976 (Cth), s 24(1A)

Federal Court Rules, O 62 r 9

A-Pak Plastics Pty Ltd v Merhone Pty Ltd (1995) 120 FLR 277 applied

Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134 referred to

Ling v Enrobook Pty Ltd 1997 74 FCR 19 referred to

Myers v Elman [1940] AC 282 cited

Re Athans; ex parte Athans (1991) 29 FCR 302 followed

Re Bendeich (1994) 53 FCR 422 cited

Re Briggs; ex parte Briggs v Deputy Commissioner of Taxation (WA) (1986) 12 FCR 310 followed

Re: Ousley; ex parte Commissioner of Taxation (1994) 48 FCR 131 referred to

Sandell v Porter (1966) 115 CLR 666 referred to

In Re Tweeds Garages Ltd [1962] Ch 406 cited

White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169 cited

SUSAN REID & MICHAEL JAMES REID V JOHN HAROLD HUBBARD & ESANDCEE PTY LTD

V933 OF 2003

HEEREY J

MELBOURNE

5 DECEMBER 2003

THE COURT ORDERS THAT:

1.             The time for compliance with the bankruptcy notice dated 28 July 2003 be extended until 5.00 pm on 12 December 2003.

2.             The appeal is otherwise dismissed.

3.             The question of costs is adjourned to a date to be fixed for further argument as to whether there should be orders that

(a)    the appellants pay the second respondent’s costs on an indemnity basis and

(b)   such costs be paid personally, in whole or in part, by the appellants’ counsel and solicitors, or some of them.

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

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

REASONS FOR JUDGMENT

1                     The appellants Mrs Susan Reid and her son Michael James Reid appeal against a judgment of Bryant CFM dismissing their application to set aside a bankruptcy notice: Reid v Hubbard & Esandcee Pty [2003] FMCA 407.  The issue of the notice was procured by the second respondent Esandcee Pty Ltd.  That company carries on a legal practice under the name Strongman & Crouch.  I shall refer to it as S & C. 

2                     The bankruptcy notice was directed to the first respondent John Harold Hubbard, the brother of Mrs Reid.  In a proceeding in the Supreme Court of Victoria No 5682 of 2002 Mrs Reid had alleged that Mr Hubbard had breached his duty as executor and trustee of the estate of their late father John Rickett Hubbard.  Up until 26 April 2003 S & C had acted as solicitors for Mr Hubbard in the Supreme Court proceeding.  After a trial on 1, 2 and 3 October 2003 Nettle J, in a judgment delivered on 3 October, upheld the claim and ordered Mr Hubbard to pay $5,408,754.90 to the testamentary fund established for Mrs Reid under the will (in effect, half the residuary estate; Mr Hubbard was the beneficiary of the other half).  Having found Mr Hubbard guilty of gross breach of duty, Nettle J ordered him to pay compound interest and costs on an indemnity basis: Reid & Anor v Hubbard & Anor [2003] VSC 387.

3                     The bankruptcy notice was founded on a default judgment in the County Court of Victoria dated 14 July 2003 on a claim by S & C against Mr Hubbard for legal costs and disbursements incurred in relation to the Supreme Court proceeding. 

4                     The appellants’ case was that the bankruptcy notice should be set aside because there was in truth no debt owing by Mr Hubbard to S & C and, further, that it was an abuse of process.

5                     No point was taken as to the appellants’ standing to bring the application.

Is leave required?

6                     The respondents argued that the judgment of Bryant CFM was interlocutory and that accordingly leave was required under the Federal Court of Australia Act 1976 (Cth), s 24(1A).  They further submitted that leave should not be granted.

7                     In my opinion, this was a final, not interlocutory, judgment.  It determined the validity of the bankruptcy notice, the service of which would result in an act of bankruptcy once the time for compliance had passed thus effecting a substantive change in the rights and obligations of Mr Hubbard and his creditors (and not just S & C).  The judgment is closely analogous to that on an application to set aside a statutory demand against a corporation, which has been held by the New South Wales Court of Appeal to be a final judgment: A-Pak Plastics Pty Ltd v Merhone Pty Ltd (1995) 120 FLR 277.

Mareva injunction

8                     The appellants commenced the Supreme Court proceeding in May 2002.  On 4 June 2002 Beach J granted a Mareva injunction in the following terms:

‘The defendant by himself, his servants or agents or howsoever otherwise be restrained until satisfaction by him of any judgment in favour of the plaintiffs in this proceeding or further order, from assigning, transferring, dealing with, encumbering, securing, disposing of or dissipating any interest of his in

(a)       the JRH Family Trust and its assets;

(b)       the estates of the late John Rickett Hubbard and Minnie Isabel Hubbard;

(c)       the property “Norwood” situated at 52 South Road Brighton in the State of Victoria;

(d)       the property at 1 Seymour Grove Brighton in the State of Victoria;

(e)       shares in Currawong Consultants Pty Ltd;

(f)        shares in Currawong Ski Club Pty Ltd;

(g)       the trust of which Currawong Consultants Pty Ltd is trustee; and

(h)       any trust of which Currawong Ski Club Pty Ltd is the trustee; and

(i)        from removing from the State of Victoria by whatsoever means any of those assets.’

9                     The Mareva injunction was only directed against dealings with the specific assets mentioned.  No provision was made for living expenses or legal costs of the proceeding. 

Costs orders in favour of Mr Hubbard

10                  In May 2002 Mrs Reid bought proceedings in the Supreme Court seeking to remove Mr Hubbard and his co-executor Mr Bruce Sundberg as executors of the estate of the late John Rickett Hubbard and to obtain a grant of letters of administration ad colligendum bona of the estate of Mrs Reid and Mr Hubbard’s late mother Mrs Minnie Hubbard.  Also in the same month Mr Hubbard applied to be discharged as executor of the will and estate of the late Mr Hubbard.  S & C acted for Mr Hubbard in those three proceedings.  The result was that a grant of administration was made in the estate of the late Mrs Hubbard to Mr Charles Gore Brett, an independent solicitor.  Mr Brett was appointed administrator with the will annexed of the estate of the late Mr Hubbard.  Mr Hubbard and Mr Sundberg were discharged as executors of the estate of the late Mr Hubbard.

11                  Orders were made on 9 and 16 May 2002 (“the May 2002 costs orders”) for Mr Hubbard to have his costs of those applications as between solicitor and client paid out of the two estates.

Retainer of S & C

12                  The principal of S & C who primarily acted on Mr Hubbard’s behalf was Mr Andrew Henry Joseph.  Mr Hubbard telephoned Mr Joseph on 26 April 2002 and gave instructions to act for him.  On 30 April S & C wrote to Mr Hubbard giving him various statements in compliance with s 86 of the Legal Practice Act 1996 (Vic) together with proposed terms of engagement.  Those terms included a provision that S & C would render lump sum bills on a periodic basis and that such bills were payable on receipt.

Application to vary Mareva injunction

13                  On 4 December 2002 Mr Hubbard applied to the Supreme Court to vary the Mareva injunction, primarily in order to obtain access to funds for his legal costs.  On 17 December 2002 Beach J gave judgment refusing the application.  In his reasons his Honour noted that since the original order it had become clear that Mr Hubbard had advanced some $6 million out of funds of the JRH Family Trust, a discretionary trust established by his late father.  Mr Hubbard, a director of Hubbard Holdings Pty Ltd, the trustee of the trust, had caused these moneys to be loaned to Billingsby Pty Ltd, a company controlled by his wife from whom he was now separated.  These loans were unsecured and the money had been lost to the trust.  Also, that company had obtained an advance of $600,000 from the ANZ Bank secured by a first mortgage over the property at 1 Seymour Grove Brighton, a matter that had not been disclosed in Mr Hubbard’s affidavit in the original Mareva application.  His Honour said:

“The defendant’s behaviour to date in relation to his financial affairs has been such that I have no confidence that he has made a full disclosure of his assets to the Court; nor do I have any evidentiary material to demonstrate what actually became of the large sums of money advanced to Billingsby.  In that situation I am not persuaded that it is appropriate to make any variation to the order of 4 June 2002 and the defendant’s application in that regard is dismissed.”

It is convenient to note here that the late Mr J R Hubbard had advanced some $9 million to the trust.  Because of the failure of the Billingsby loans, the trust was unable to repay the estate, with a corresponding reduction in the value of the estate.

Costs arrangements after dismissal of Mareva injunction variation application 

14                  On 18 December 2002 S & C wrote to Mr Hubbard pointing out, inter alia, that he had accrued costs exceeding $30,000 and that bills from counsel were awaited.  S & C stated they were not prepared to do further work without security for payment of past bills accrued, unbilled fees and future bills.  They pointed out that under the fee agreement they were entitled to request payment in advance from a third party and now did so.  Mr Hubbard made arrangements for a relative, a Mrs Marjorie McIntyre, to provide $25,000 and requested S & C to endeavour to arrange a mediation of the dispute with Mrs Reid.

15                  By 26 March 2003 a total of $55,560.38 was owing.  In the meantime Mrs McIntyre had paid the sum of $25,000 which S & C held in a trust account in her name.  Also a Mr Vincent Caddy had provided $4,000.  In a letter dated 26 March S & C asked Mr Hubbard to arrange a time to meet and discuss his intentions.  The letter advised that as he had not instructed them to apply again to set aside the Mareva injunction and had not indicated any alternative source for funding they would be ceasing to act as of the next day.  Nevertheless S & C extended some further indulgence.  On 8 April  they requested settlement of their fees within fourteen days.  Finally on 26 April they filed a notice of ceasing to act on Mr Hubbard’s behalf.

Section 188 authority by Mr Hubbard

16                  On 20 May 2003 (i.e. after S & C had ceased to act for him) Mr Hubbard signed an authority appointing Mr Richard Mansell as his controlling trustee under s 188 of the Bankruptcy Act 1966 (Cth) (“the Act”).  Shortly afterwards Mr Mansell informed the appellants’ solicitors that it would be in the interests of creditors generally if some of the assets the subject of the Mareva injunction could be sold so as to enable S & C and certain other creditors to be paid and the Supreme Court proceeding defended since, if it were not defended and the appellants obtained judgment, creditors would be disadvantaged.  It was asserted that the Mareva injunction only operated in personam against Mr Hubbard.

17                  The appellants applied to the Federal Magistrates Court seeking orders that the s 188 authority be set aside as an abuse of process or alternatively that, pursuant to s 208 of the Act, Mr Hubbard’s property be released from the control of Mr Mansell.

18                  This application was also heard by Bryant CFM.  On 3 July 2003 her Honour delivered judgment upholding the application: Reid v Hubbard & Mansell [2003] FMCA 266.  In the course of her reasons her Honour discussed the issue of Mr Hubbard’s solvency.  Mr Mansell had expressed the opinion that, were it not for the legal actions taken by Mrs Reid, Mr Hubbard would be able to pay his debts as and when due and that even if the action taken by Mrs Reid were successful it appeared he would be able to meet his financial obligations. 

19                  However, her Honour pointed out that Mr Mansell had ignored a deed of charge and guarantee by which Mr Hubbard had guaranteed loans owing by Billingsby to Hubbard Holdings amounting to $9.128 million.  Mr Hubbard had claimed he had signed this guarantee under duress, a matter which Mr Mansell did not investigate.  There was also doubt as to the true extent of Mr Hubbard’s interest in Billingsby or the trust of which it was trustee.  Her Honour said (at [75]):

“Leaving aside the uncertain position of Billingsby and the possible interest of Hubbard, the debtor has assets from which he can meet his existing debts, but these assets are the subject of the Mareva injunction.  Whether he can get access to those funds to pay his debts as and when they fall due is a question which in my view is still open.  In a differently presented case by Mr Hubbard to the Supreme Court, if the circumstances were compelling, the Mareva injunction might be varied.  Thus at the time, I am not able to find conclusively that he is insolvent.”

County Court writ and judgment

20                  On 24 June 2003 S & C issued a County Court writ against Mr Hubbard.  The statement of claim alleged an agreement between the plaintiff and the defendant “made on or about 30 April 2003 [sic] by which the defendant engaged the plaintiff to perform on behalf of the defendant work … between 26 April 2002 and 28 April 2003”.  The statement of claim alleged the provision of tax invoices and accounts totalling $75,286.88.  Mr Hubbard now had the firm of Isakow Solicitors acting for him.  After consulting Mr Isakow, Mr Hubbard did not enter an appearance to the writ.  S & C obtained a default judgment on 14 July 2003 for $79,293.80, a sum which took into account interest accrued. 

Bankruptcy notice

21                  The judgment was unsatisfied and on 28 July 2003 S & C procured the issue of a bankruptcy notice.  The amount claimed was $54,293.80 because Mrs McIntyre’s $25,000 had been appropriated to the sum owing under the judgment debt.  The bankruptcy notice was served on Mr Hubbard on 29 July.  He has not made any payment in reduction of the judgment debt.

Application to set aside bankruptcy notice

22                  On 15 August 2003 the appellants filed an application in the Federal Magistrates Court seeking orders

(a)        extending the time for compliance with the bankruptcy notice permanently or until the conclusion of the Supreme Court proceeding; alternatively

(b)        setting aside the bankruptcy notice; or

(c)        adjourning the proceedings until the conclusion of the Supreme Court proceeding; or

(d)        forever staying the bankruptcy notice.

23                  As the learned Chief Federal Magistrate pointed out, the Act does not expressly confer power on a court to set aside a bankruptcy notice but it is well established that such power is derived from at least ss 30(1) and 303 of the Act. 

24                  The application first came on for hearing on 18 August when her Honour granted interlocutory relief and gave directions for the filing of material.  The hearing resumed on the afternoons of 29 August and 11 September and on the morning of 12 September.  In total the hearing lasted some nine hours.  On 1 October 2003 her Honour delivered a detailed judgment dismissing the application. 

Appellants’ case before the FMC

25                  The appellants’ case before her Honour was in substance as follows:

1.         Mr Hubbard was not indebted to S& C because

(a)        after 17 December 2002 there had been a variation of the retainer to the effect that there would be no demand for S & C’s fees until after the determination of the Supreme Court proceeding; and

(b)        on a proper accounting Mr Hubbard owed no more than $17,689.38, or possibly less, or possibly was in credit.

2.         The bankruptcy notice was an abuse of process because S & C had colluded with Mr Hubbard to file unmeritorious defences in the Supreme Court proceeding and run up costs so that S & C could obtain judgment for costs and issue the bankruptcy notice.  There was also the somewhat inconsistent allegation that S & C had filed defences on behalf of Mr Hubbard in the Supreme Court proceeding without instructions or contrary to instructions.

3.         The bankruptcy notice was issued for an improper purpose, namely to put pressure on the appellants

            (a)        to settle the Supreme Court proceeding on terms advantageous to Mr Hubbard;

(b)        to settle the proceeding so as to avoid the potential liability of S & C for claims in respect of improper defences on the basis of Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134; and/or

(c)        to put the appellants in the position of having either to pay S & C’s debt or release the Mareva injunction in order to avoid adjournment of the trial of the Supreme Court proceeding which had been fixed for 29 September 2003.

4.         The improper purpose was evidenced by

            (a)        the failure of S & C to recover their debt by

            (i)         executing on 1 Seymour Grove and/or

            (ii)        recovering on the May 1992 costs orders;

(b)               S & C telling the Supreme Court that they would not continue to act for Mr       Hubbard if the Mareva injunction remained in place but nevertheless continuing to act and run up fees, thereby breaching the Mareva injunction itself; and

(c)               bringing improper pressure on the appellants to settle by notifying them of the bankruptcy notice.

Variation of retainer

26                  The appellants led no positive evidence of a variation.  Both Mr Joseph and Mr Hubbard denied there was any variation.  The learned Chief Federal Magistrate correctly held that there was no evidence of any kind to support the contention of variation, or waiver of any right to sue for outstanding fees.  In any event, the appellants’ proposition is inherently improbable.  There is no logical reason why S & C would agree to a major variation of the retainer against their interests.  Faced with the setback of the refusal of the Mareva variation application, Mr Joseph did not immediately abandon his client but rather continued to act while stressing the urgent need to provide further funding.  This was not a variation of the original retainer arrangement.  At most it was a unilateral waiver of S & C’s right to insist on immediate payment on presentation of a bill.  Such a waiver could be withdrawn on reasonable notice which in fact was given before the waiver was finally terminated on 26 April 2003.

Alleged failure to give credit

27                  When senior counsel for the appellants opened their case before her Honour on 29 August 2003 she produced a set of calculations and told the Court that they represented a consolidation of the trust monies known by the appellants to have been held in the trust account of S & C for the purpose of paying Mr Hubbard’s legal costs and expenses.  These calculations show a list of debits and credits with a closing balance of $17,699.38 debit and a summary of fees and disbursements showing total fees of $134,828.58 and total payments received by or on account of Mr Hubbard (including amounts from Mrs McIntyre and Mr Caddy) totalling $117,138.00.

28                  In response Mr Joseph swore an affidavit dated 1 September 2003.  He produced as exhibit AHJ 76 a detailed analysis (“the S & C analysis”) of accounting matters relevant to the claim by S & C against Mr Hubbard.  The introduction to the S & C analysis states that in its trust account in the period 26 April 2002 to 31 August 2003 (“the period”) S & C maintained accounts for each of Mr Hubbard, Currawong Consultants Pty Ltd, Mr Caddy (two accounts) and Mrs McIntyre.  In the period S & C rendered tax invoices to Mr Hubbard and credited and debited amounts to each of the five accounts.  It is stated that the amounts debited were payments or part payments of S & C tax invoices, barristers’ fees and other expenses.  It is also asserted that the analysis of the five accounts readily shows that the writ, judgment and bankruptcy notice include claims for the correct amount of the unpaid balance of the tax invoices rendered by S & C and that the money in the five accounts (save for remaining balances) has been wholly disbursed towards legal costs, fees, and incidental expenses incurred by Mr Hubbard and with his full knowledge.

29                  There are seven schedules to the S & C analysis showing (with supporting documentation):

(a)        a list of tax invoices rendered by S & C to Mr Hubbard;

(b)        a summary of receipts into and payments out of the five accounts and a reconciliation of the amounts held in each account as at 31 August 2003;

(c)        particulars of receipts into the five accounts during the period;

(d)        particulars of payments out of the five accounts during the period;

(e)        a reconciliation of the foregoing with the amounts claimed by S & C as unpaid costs;

(f)         copies of correspondence from S & C to Mr Hubbard enclosing tax invoices, statements and vouchers and copies thereof; and

(g)        a reconciliation of second schedule with the appellants’ calculation of receipts provided to the court on 29 August 2003.

30                 An examination of the S & C analysis clearly bears out their contention as to the amounts owing by Mr Hubbard as at the dates of writ, judgment and bankruptcy notice.  The contrary is not seriously arguable.  However, not only did the appellants persist with their argument, they attributed to S & C an acceptance of it.  In counsel’s written submissions it was said:

“36.  In the Joseph affidavit and in the course of leading evidence from Joseph, S & C did not dispute the applicants’ case that either Hubbard owed S & C no more than a sum of $17,689.38, or that he owed them no money, or that in fact he was in credit.”

This submission is inexplicable.

31                  Mr Joseph deposed, and this was not challenged, that he was ‘always pressing’ Mr Hubbard to provide, or arrange to be provided, monies to be held in trust to meet S & C’s costs, counsel’s fees and other expenses.  Extensive correspondence along these lines was exhibited to Mr Joseph’s affidavit.

32                  On 1 September 2003 S & C wrote to the appellants’ solicitors Marshalls & Dent (“M & D”) enclosing a copy of Mr Joseph’s affidavit of that date, including the S & C analysis.  The letter pointed out that the trust account ledger of Mr Hubbard, a copy of which had been in the possession of M & D since December 2002, showed a credit then held of $6,203.6.  It was said that the preceding entries made it clear that very substantial amounts of money held in that account had been paid and applied not in satisfaction of S & C’s tax invoices but towards counsel’s fees and other expenses incurred on behalf of Mr Hubbard.  A further copy of Mr Hubbard’s ledger was sent to M & D on 29 August 2003.  Payments to those third parties had not been shown in the appellants’ calculations tendered to the court.  In essence the letter alleged that the appellants’ senior counsel must have known that those calculations were incorrect.  The letter asserts S & C’s belief;

“…that the applicants’ calculations misled the court and, insofar as they were sought to be relied upon as supporting allegations of criminality against S & C, they were mischievous and wholly misconceived.  If you say it was not plain to the applicants prior to the receipt of this letter that the applicants’ calculations were insupportable, a view we would not credit, it must now surely be plain to the applicants.”

33                  The letter invited the appellants to desist from the further prosecution of their current application on the basis that it had no reasonable prospect of success.

34                  M & D did not reply to this letter.  Senior counsel continued to assert before her Honour, and on the appeal to this Court, that the maximum sum owing was $17,689.38.  Her Honour noted that the trust account ledgers were produced by Mr Joseph and that he was cross-examined about them.  The appellants’ assertions appear to have been based on the fact that their calculations took no account of the amounts paid out to counsel.  Her Honour concluded that she was satisfied that the ledgers kept by S & C and in particular the ledger sheet which was sent to M & D on 29 August 2003 was an accurate account noting the amounts received and disbursed on behalf of Mr Hubbard.

35                  On the appeal the appellants contended (submissions par 26) that production had been sought by the appellants of the trust account ledgers of S & C and associated documents and that S & C had claimed privilege and further that the trust account ledgers were not relevant and accordingly the appellants’calculations “were correct on the basis of the evidence before the court”.  It was further submitted (par 27) that at the time the appellants closed their case on 29 August “the evidence of the [appellants] was unchallenged and their case as to the debtor-creditor relationship as recorded in paragraph 57 of the Judgment was also unchallenged”.  It was said that by permitting S & C, as the second respondent, to present their case before the first respondent Mr Hubbard and without an opening, the case that would be put by S & C “remained unknown to the Court and to the appellants”.  But as Mr Joseph’s affidavits make clear, Mr Hubbard’s trust account ledgers had been provided to the appellants in response to a notice to produce, as far back as December last year.  Mr Joseph’s affidavit of 1 September and 9 September were before the Court and clearly called for an answer.  The appellants’ case on this issue was no more than an attempt at obfuscation.  Her Honour’s finding was plainly correct.

Unmeritorious defences

36                  Her Honour held (at [53]) that the question of whether the defences to the Supreme Court proceeding were unmeritorious was not for her to determine and therefore irrelevant.  This was because the Supreme Court proceeding had not yet been determined and the question of their merit or otherwise was a matter for the Supreme Court.  This seems self-evidently correct.  In relation to the Flower & Hart issue, as her Honour pointed out, the appellants did not establish as a fact that there were no defences available or that they were advanced without instructions. 

Collusion

37                  The appellants’ written submissions on the appeal included the following:

‘65.      The inescapable inference and the only inference the Court could draw from all the evidence before it was that there was collusion between S & C and Hubbard and that the conduct in question would satisfy their common goal.  The evidence was as follows:

(a)     S & C had a client, Hubbard, who they knew on 17 December 2002 had no monies available to him to pay them;

(b)     S & C were very sympathetic to Hubbard and gave evidence that he had good defences to Proceeding No 5682, yet would not:

(i)      wait until after the trial to seek payment of their costs (if Hubbard were successful the mareva injunction would have been dissolved);

(ii)     collect the amount owing; i.e. $50,000 from the estates; or

(iii)    execute their judgment against Hubbard’s property, Seymour Grove;

(c)     At the time S & C ceased to act for Hubbard (26 April 2003), S & C had concluded that the appellants were not bona fide in their negotiation with Hubbard in proceeding No. 5682 of 2002 and that the appellants would not compromise on any basis whatsoever;

(d)     S & C’s evidence was that it had made no decision as to what step they would take following Hubbard committing an act of bankruptcy [P87T11.9.03];

(e)     Hubbard was a director of five companies and wished to continue as a director and not be made a bankrupt;

(f)      Hubbard was the sole registered proprietor of a property, Seymour Grove, which he did not want sold;

(g)     Hubbard knew that by committing an act of bankruptcy, a sequestration order could be obtained and upon being obtained, he could no longer hold the office of company director and there would be a sale of his home at Seymour Grove;

(h)     When Hubbard had good defences to the County Court Writ, he would take no step to defend the claim or set aside the bankruptcy notice;

(i)      Hubbard voluntarily attended at S & C’s office for service of the County Court documents and bankruptcy notice;

(j)      Hubbard wrote to the appellants purporting to make an offer of settlement of proceeding No. 5682 of 2002;

(k)     That upon settlement of 5682 of 2002, Hubbard would be able to arrive at a settlement with S & C of the Bankruptcy Notice [P107-8T 12.9.03];

(l)      The timing of the issuing of the County Court proceedings and bankruptcy notice and the sending of the bankruptcy notice to the applicants in the lead up to the trial of proceeding No. 5682;

(m)    The fact that S & C still acts for Hubbard and retains over $3,000.00 in its trust account on Hubbard’s behalf in relation to a taxation of a $40,000 costs order in favour of the applicants in proceeding No. 5682; and

(n)     S & C’s and Hubbard’s joint desire to avoid a trial of Proceeding No. 5682 and instead to come to a favourable settlement (for Hubbard) of that proceeding with the applicants.

66.     The only conclusion a Court could arrive at which would reconcile the contradictory positions adopted by each of S & C and Hubbard was that the Bankruptcy Notice had been devised as a means of placing pressure on the appellants to settle with Hubbard or pay the S & C debt in order to preserve their trial date.’

38                  Not only was that a serious allegation not put to Mr Joseph but it was abandoned on the hearing of the appeal, as the following excerpt shows.

‘His Honour:  Was it your case before the Magistrate that the issue of the bankruptcy notice was obtained as a result of collusion between Mr Hubbard and Strongman and Crouch or Mr Joseph?

Ms Molyneaux:     Your Honour, it wasn’t at the commencement of the case.  Certainly as a result of the cross-examination of Mr Hubbard – it was put to Mr Hubbard, I should say, in the course of cross-examination that the fact that he would take no step to avoid bankruptcy, had he discussed this with Mr Joseph.  His conduct appeared in our submission to be – the only way it could be explained was that he had some knowledge that a petition for a sequestration order would not be sought by Strongman and Crouch.

His Honour:    But was this put to Mr Joseph?

Ms Molyneux:     It was not put to Mr Joseph.  The cross-examination was concluded.  This is by the court under section 62 of the Act.  The cross-examination had not concluded.  That is, your Honour, that what occurs – and we’re mindful that in the summary of arguments that have been filed and served on us by the second respondents they actually quantify the amount of time the court dealt with this application below and attribute somehow 90 per

cent of the time to cross-examination.  Your Honour, only a reading of the transcript will show the constant interruptions, the constant submissions made in cross-examination.  The fact of the matter is that there was a pattern to the – the cross-examination was commenced when there – it would get to a certain stage and then there would be what we would say was an interruption and eventually, your Honour ---

His Honour:    I’d like to get back to this central issue because collusion is a serious allegation to make.

Ms Molyneux:       It certainly is, your Honour.  It certainly is.

His Honour:    It’s one thing to say that a creditor had initiated a certain process, in this case a bankruptcy notice for a collateral purpose and therefore has engaged in an abuse of process.  But that’s a unilateral act.  It seems to be quite a different thing to say that the creditor and a particular solicitor have entered into a collusive agreement with the debtor to issue process for some collateral or improper purpose.  Now, is that second situation a case that you put to the magistrate?

Ms Molyneux:      Your Honour, it was not part of our case when the matter commenced in the course of ---

His Honour:    By the time the case finished, did you put it to the magistrate that this was a case of collusion between Joseph and Hubbard?

Ms Molyneux:       No, your Honour. No, what we submitted to the magistrate was that on 6 September in the – this matter having commenced on the 29^th – on 6 September, Mr Hubbard wrote to Mrs Reid a letter wherein he expressed great confidence that if she were to settle on these terms he was proposing, he would be able to deal with Strongman and Crouch and bring – the inference being the bankruptcy notice would be brought to an end.  Specifically he said he would be able to approach Strongman and Crouch and deal with them.  Now, that document at that stage was produced.  That is Mr Hubbard wrote to Mrs Reid and that emanated at that stage, so it was never part of the applicant’s case.

His Honour:    All right, it’s not part of the appeal case then?  You’re not asking me to, in appeal ---

Ms Molyneux:       No.

His Honour:    --- that there was collusion, all right.”

39                  The conduct of the appellants’ case in relation to this particular issue is symptomatic of a great deal of the way in which senior counsel’s conduct fell below the standard  that the Court and litigants are entitled to expect.  I shall return to this aspect later. 

Improper purpose

40                  Before going to the particular matters relied on to support the allegation of improper purpose, it might be observed that the appellants’ case was beset not only with improbability but also internal inconsistency.  One object allegedly sought to be achieved by the pressure of the bankruptcy notice was that the appellants, in order to avoid losing their trial date of 29 September, would be forced either to pay S & C’s costs or release the Mareva injunction.  But in this event the trial would proceed and S & C would, on one of the appellants’ other arguments, be at risk of a Flower & Hart claim.

1 Seymour Grove

41                  Order 69 of the County Court Rules provide for seizure and sale of the assets of a judgment debtor.  Included in Mr Hubbard’s assets the subject of the Mareva injunction was the property at 1 Seymour Grove, Brighton of which he was the sole registered proprietor.  It was common ground that he had a substantial equity in the property.  Her Honour noted that the Mareva injunction presented no impediment to execution on the assets by any creditor, including S & C, as it operates in personam against the debtor and not in rem against his assets:  Re: Ousley; ex parte Commissioner of Taxation (1994) 48 FCR 131 at 138-9, Ling v Enrobook Pty Ltd 1997 74 FCR 19 at 28-9.  Her Honour observed that it is not incumbent upon the creditor to execute against any particular asset if he forms the view that the debtor is otherwise insolvent and not able to pay his debts.  Moreover the property would need to be capable of realisation in the reasonably near future.  It is not quite clear whether the appellants in putting their case before his Honour argued that S & C should have waited until the conclusion of the Supreme Court proceeding, in which case, if Mr Hubbard were successful, the Mareva injunction would “fall away” or even if unsuccessful he would still have enough assets, or whether the appellants were saying that he should have proceeded immediately to recover against Seymour Grove.  In any event, her Honour thought (at [79]) that there was no satisfactory answer provided by Mr Joseph as to why he did not use the Order 69 procedure given that the injunction operated against the debtor and not against a creditor and in any event S & C were not acting for Mr Hubbard when judgment was obtained and in no sense his agents.

42                  Mr Joseph’s explanation seemed to rest upon the fact that he formed the view that on the opinion of Mr Mansell that Mr Hubbard would be insolvent in any event.  However Mr Mansell’s report was to the effect that even if the Supreme Court proceeding by Mrs Reid was successful, Mr Hubbard would be able to meet his financial obligations.  Her Honour said (at [82]):

‘Mr Mansell’s opinion does not support the basis claimed by Mr Joseph for concluding that the debtor was in fact insolvent.  However in my reasons for judgment in Reid v Hubbard and Mansell 2003 FMCA 266 (paragraph 40) I expressed the view that Mr Mansell’s report had a number of “curious aspects” to it.  Because of these omissions from Mr Mansell’s report, I left open the question of the debtor’s solvency.  But the whole of the issue of the debtor’s solvency is attenuated by such doubt that I would need to be satisfied to the relevant standard that Mr Joseph believed him to be solvent, or alternatively that there were reasonable grounds upon which he should have concluded that he was solvent before a finding could be made that the creditor had issued a bankruptcy notice for an improper purpose.  I am not so satisfied.’

43                  Her Honour noted that it was clear from Mr Joseph’s evidence there was no discussion between him and Mr Hubbard about the possibility of the seizure and sale of the property.  Her Honour also noted that the onus remains on the party seeking to set aside the bankruptcy notice on the ground of abuse and it is a “heavy onus”.  The criterion for abuse of process was whether the improper process was the predominant purpose of the party using the process and that had not been established. 

44                  Her Honour’s conclusion has not been shown to be in error.  As her Honour said arguendo:

‘Mr Joseph is perfectly entitled to take whatever commercial decisions he wishes to take.  He is a creditor and I don’t see that he has to answer as to why he might take what steps are available to a creditor.’

45                  Moreover, the position of Mr Hubbard vis-a-vis S & C was not that of a trader suffering from a temporary lack of liquidity; cf Sandell v Porter (1966) 115 CLR 666 at 670.  He was a judgment debtor for a substantial amount.  Non-payment for a considerable time of an undisputed debt is usually good evidence of insolvency (see In Re Tweeds Garages Ltd [1962] Ch 406) and was so in these circumstances.  By the time the bankruptcy notice was issued S & C had been unsuccessfully pressing for payment for some seven months.  Mr Hubbard’s financial position was highly problematic, especially having regard to his dealings with Hubbard Holdings, Billingsby and the estate of his late father.  Any recovery might be at risk of challenge as a preference.  All in all I would to this extent differ marginally from her Honour.  I would be prepared to find affirmatively that a creditor in the position of S & C in late July 2003 would have reasonable grounds for believing Mr Hubbard to be insolvent.  In my opinion, it was a reasonable and proper step for S & C to procure the issue of the bankruptcy notice. 

46                  Moreover, the position of a court faced with an application to set aside a bankruptcy notice is to be contrasted with that when the court hears a petition for sequestration and the provisions of s 52(2) and the discretion thereby conferred are applicable.  In the former case the court is constrained to look only at the irregularity of the notice itself (including service) and otherwise at the circumstances surrounding the existence of the judgment debt and any demand which the debtor may have against the creditor for a comparable amount:  Re Briggs; ex parte Briggs v Deputy Commissioner of Taxation (WA) (1986) 12 FCR 310 at 312, Re Athans; ex parte Athans (1991) 29 FCR 302 at 310.

The May 1992 costs orders

47                  In evidence Mr Joseph said in effect that he had no instructions to recover the costs and that the Mareva injunction granted by Beach J on 4 June 1992 covered those moneys.

48                  In one of the many inaccurate submissions made on behalf of the appellants, it was asserted in their written submissions (at par 98):

“At no time did Mr Joseph give evidence that it was his belief that Mr Hubbard was prevented from obtaining costs because of the Mareva injunction.  The Court incorrectly adopted as evidence submissions made on behalf of senior counsel in the course of cross-examination of Joseph and in the course of cross-examination of Hubbard.”

49                  In fact Mr Joseph in cross-examination on 11 September (see transcript 70) was asked:

“Question:      Mr Joseph, at that stage, why did you not write to Mr Charles Brett and seek to recover the costs of the four proceedings on 9 and 16 May 2002?

Answer:           On 27 June? 

Question:        Yes?

Answer:           Are you putting that question to me seriously?

Question:        Yes?

Answer:           Your Honour, the orders in relation to the two estates were made, I think - and I’ll be corrected if I am wrong - on 5 and 17 May or 5 and 15 May.  On 6 June Beach J made his order, which clearly in my opinion restrained Mr Hubbard from seeking any interest in the estates against which those orders had been made.”

50                  Mr Joseph pointed out that it would be impossible to prepare and tax bills of costs in the two or three weeks between the date of the orders and the grant of the Mareva injunction.  Her Honour observed that Mr Joseph was not challenged about his belief that Mr Hubbard was prevented from obtaining costs because of the Mareva injunction.  In any event, as her Honour noted, a solicitor is entitled to seek costs without waiting for previous costs orders to be satisfied by a third party.  This seems obviously correct.  Moreover after 26 April 2003 Mr Hubbard was represented by another solicitor and the question of whether or not Mr Hubbard, who apparently genuinely did not want to become bankrupt, could pursue the May 1992 costs orders was out of Mr Joseph’s hands. 

Continuing to act in Supreme Court proceeding

51                  There was no evidence that S & C represented to the Supreme Court that if the Court did not vary the Mareva injunction they would cease to act for Mr Hubbard.  In fact, as has been seen, they continued to act for him up until the end of April 2003, while continuing to press for payment of their costs.  Insofar as this involved the incurring of further costs, I fail to see how there was any breach of the Mareva injunction.

Bringing bankruptcy notice to attention of appellants

52                  There was no evidence that Mr Joseph had a discussion with Mr Hubbard after the issue of the County Court writ.  From the point of view of Mr Hubbard’s subsequent solicitors, the receipt of a client’s bankruptcy notice is a material matter of which to inform an opponent in litigation.

Other matters

53                  The appellants complained of her Honour’s ruling that Mr Joseph be cross-examined before Mr Hubbard, and her ruling on some claims to legal professional privilege by Mr Joseph.  There is no substance in these matters and there was in any event no attempt to show that they affected the result.

Conclusion

54                  The appeal will be dismissed.  Throughout this litigation the time for compliance with the bankruptcy notice has been extended from time to time.  The order currently operating would effectively terminate that extension immediately on the delivery of judgment.  That would seem unfair to Mr Hubbard.  I will therefore extend the time for compliance for a further short period.  This is simply a question of practicality and is not based on any conclusion that the appellants have any reasonable prospects of further appeal.

55                  There remains the question of costs.  It will be apparent from the foregoing that I have concluded that this appeal, like the original application, was entirely without merit and should never have been brought.  I shall adjourn the proceeding to a date to be fixed for further argument as to whether S & C’s costs (i) should be awarded on an indemnity basis and (ii) should be paid personally, in whole or in part, by the appellants’ counsel and solicitors, or some of them, pursuant to O 62 r 9 of the Federal Court Rules.

56                  In relation to the latter question, considerations which prima facie suggest that such a course might be taken include the criticisms I have already made and also the following:

·                    Serious allegations of professional misconduct, such as colluding to effect an abuse of process, were made without any proper basis.

·                    The nature of the appellants’ case suggests that it was a lawyers’ construct rather than a presentation of factual allegations of the client.

·                    The comprehensive rejection of the case at first instance made the unthinking repetition of allegations on an appeal all the more reprehensible.

57                  Authorities relevant to the question of when it is appropriate for the Court to order costs against a legal representative include White Industries (Qld) Pty Ltd v Flower & Hart (1998) 156 ALR 169 and the cases therein mentioned, Myers v Elman [1940] AC 282 and Re Bendeich (1994) 53 FCR 422.

Associate:

Dated:              5 December 2003