FEDERAL COURT OF AUSTRALIA

Pollak v Lombe, in the matter of Pollak [2004] FCA 362

BANKRUPTCY – application to discharge examination summons – whether oppressive or abuse of process – whether proceeding may expose applicant to a penalty by extending bankruptcy.

Bankruptcy Act 1966 (Cth) ss 50(1) 81(1), 121, 149B, 149D, 149N

Federal Court Rules

Pollak v National Australia Bank Ltd [2002] FCA 237 cited

Pollak v National Australia Bank Ltd [2000] FCA 683 cited

R v Associated Northern Collieries (1910) 11 CLR 738 discussed

Rees v Kratzmann (1965) 114 CLR 63 cited

Re Jonson;  Ex parte Prentice as Trustee of the State of Jonson (unreported, Lockhart J, 1 September 1997) cited

Rich v ASIC (2003) 203 ALR 671 referred to

A Keay, McPherson: The Law of Company Liquidation, 4^th ed, LBC Information Services, Sydney, 1999

JOSEPH POLLAK V DAVID JOHN FRANK LOMBE AS TRUSTEE OF THE BANKRUPT ESTATE OF JOSEPH POLLAK

N 51 OF 2004

BEAUMONT ACJ

30 MARCH 2004

SYDNEY

THE COURT ORDERS THAT:

1.                  The applicant be examined pursuant to s 81 of the Bankruptcy Act 1966 (Cth) before a Judge at a time to be fixed by the Registry.

2.                  It be noted that the trustee now presses for the documents described in pars (a) – (d) only of the summons.

3.                  The applicant’s notice of motion otherwise be dismissed, with costs.

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

REASONS FOR JUDGMENT

Beaumont ACJ:

Introduction

1                     Before the Court is a motion by the applicant for an order to discharge a summons issued under Division 6 of O 77 of the Federal Court Rules in the following circumstances:

2                     On 5 October 2001, an order was made for the sequestration of the estate of the applicant.  The Court then noted that the date of the act of bankruptcy was 29 November 2000.  The respondent was appointed trustee of the applicant’s bankrupt estate.

3                     Prior to October 1994, the applicant was the owner of Unit 4, 1 Wentworth Street, Point Piper.  He and his wife, Anna Pollak, were the joint owners of Units 2 and 3, 1 Wentworth Street, Point Piper.  On 10 October 1994, the applicant transferred a 50 per cent interest in Unit 4 to his wife.  On 23 October 1995, he transferred his remaining interests in Units 2, 3 and 4 to his wife.

4                     By proceedings instituted in this Court on 2 July 2003, the respondent has sought orders against Anna Pollak under s 121 of the Bankruptcy Act 1966 (Cth) (‘the Act’) that these transfers were void, and for consequential orders.

5                     By application dated 15 January 2004, the respondent requested the Registrar to issue a summons under s 81 of the Act to the applicant as a ‘relevant person’ (see below) to give evidence (and also to produce documents – a separate issue to be considered at a later stage) in accordance with the provisions of a draft summons.

6                     The summons, dated 20 January 2004, requires the applicant ‘to be examined ... under [s] 81 of the ... Act ... and to give evidence in relation to [his] examinable affairs’.

7                     Section 81(1) provides that, where a person (the ‘relevant person’) becomes bankrupt, the Court or a Registrar may at any time (whether before or after the end of the bankruptcy) on the application of, inter alia, the trustee, summon, inter alia, the relevant person for examination in relation to the bankruptcy.

8                     Under s 5(1) of the Act, in relation to a person, ‘examinable affairs’ means, inter alia, the person’s dealings, transactions, property and affairs.

9                     As mentioned, the summons was issued under Division 6 of O 77.  Subdivision B thereof deals with summons of a ‘relevant person’ for examination.  By r 28(2), the application must be accompanied by an affidavit identifying the person to be summoned as a relevant person.

10                  By his notice of motion dated 2 March 2004, the applicant moves, pursuant to r 38, for an order to discharge the summons.

Was the summons requiring the applicant to attend for examination oppressive or an abuse of process?

11                  The applicant has advanced several reasons why the summons ought to be discharged.

12                  The first argument, which is now considered, is that the summons is, in essence, an abuse of process.

13                  Of course, if such an abuse is established, it is plain that no examination can be held.

14                  The general principles in this area have been accurately summarised (in the analogous context of a winding up) in a discussion of the relevant cases in A Keay, McPherson: The Law of Company Liquidation, 4^th ed, at 637 – 638:

‘It has been established that an examination cannot be held if it is an abuse of process.  The safeguards against abuse of this procedure are that no public examination can take place without an order of court;  that the examination may be confined by the order to any one of the matters referred to in the section;  and that the court retains the power and function of ensuring that, in the words of Barwick CJ, the examination “is not made an instrument of oppression, injustice, or of needless injury to the individual”.

It is an abuse of process if:

·        a liquidator seeks to gain a forensic advantage not otherwise available to her or him;

·        questions that are asked are not relevant;

·        the applicant for the examination has an improper object;

·        the examination is vexatious or oppressive.

The last category is very broad and its limitations are not clear.  It must be added that just because a forensic advantage is obtained, that alone is not decisive in determining whether an abuse of process has occurred.  Whether there is an abuse of process will be a question that depends on the purpose motivating the applicant who is seeking the order and the circumstances of the case.  For an abuse it will be necessary that the purpose of the applicant that is offensive is at least the predominant purpose.  In taking action to have a summons set aside on the basis of abuse of process the applicant’s burden of proof is a high one.

The power to examine may be used to conduct a fishing expedition ie beginning an examination without any clear suspicions and conducting an examination to determine if any matters or facts might emerge that may be of interest or assistance.

Whether or not the information sought by the liquidator is relevant to the performing of her or his statutory duty and whether the examinee needs to be safeguarded beyond the normal safeguards of court control of the whole process from the exercise of any oppressive power are matters to be left to the judge or officer presiding over the examination.’

15                  Subject to three issues to which I will return, there is, in my view, nothing on the face of the material in evidence to suggest any impropriety on the part of the trustee in seeking the issue of the summons.  His solicitor swore an affidavit in the matter, but she was not cross-examined by the applicant to suggest any impropriety.  The tenor of her affidavit was to the contrary.

16                  As mentioned, there are three specific issues which should next be addressed.

17                  First, reliance is placed by the applicant upon an observation by Windeyer J in Rees v Kratzmann (1965) 114 CLR 63 (at 79) –

‘The matters on which a person may be examined are, however, not wholly at large.’

18                  In my opinion, this observation does not assist the applicant here.

19                  For one thing, as has been mentioned, s 81(1) does not leave the matter at large.  In its terms, the ‘relevant person’ is summoned, not for any purpose, but ‘for examination in relation to the bankruptcy’.  This would include investigation on matters which could justify the making of a claim under s 121.

20                  Moreover, the context of Windeyer J’s observation explains its meaning as adverse to the applicant’s case.

21                  His Honour said (at 79):

‘The matters on which a person may be examined are, however, not wholly at large.  The court which directs the examination must, I take it, state in its order whether the person summoned is to be examined on matters concerning the promotion or formation, or the conduct of the business of the company, or, in the case of an officer or former officer of the company, as to his own conduct and dealings as such officer.  And the court before which the examination is held has a discretion as to the questions that may be asked.  The boundaries of the discretion are admittedly not defined.  But the purpose of the inquiry is to gain information that may be relevant for the proper conduct of the winding-up of the affairs of a company in relation to which there are prima facie grounds for thinking that some fraud has been committed or some material fact concealed.  Doubtless a court would be guided in the exercise of the discretion that the Act gives by its apparent policy and purpose.’

22                  After noting a remark by Jessel MR that the power conferred by a provision such as s 81 to summon third parties ‘ought to be very carefully exercised’, Windeyer J said (at 79):

‘But I see nothing in the Act that requires the court to limit the examination of a person to particular matters or transactions mentioned in the liquidator’s report.  Something of importance may emerge as the inquiry proceeds.  How far trails may be followed cannot, I think, be laid down in advance, for the purpose of the inquiry is the discovery of facts.’

23                  As mentioned, investigation of circumstances which justify commencement of s 121 proceedings, as this examination apparently has in its contemplation, is, in my view, properly within the scope of s 81(1).

24                  The second issue arises out of some remarks made by Burchett J in bankruptcy proceedings taken against the applicant.  In order to understand these remarks, it should be noted that, although the sequestration order was made in October 2001, on 31 March 2000, Tamberlin J, acting apparently pursuant to s 50(2) of the Act, made certain orders in proceedings in which the National Australia Bank Limited (‘the Bank’) moved the Court for orders to examine the present applicant, the Bank claiming to be a judgment creditor of the present applicant.

25                  (By s 50(1), it is provided that, at any time after a bankruptcy notice is issued, or a creditor’s petition is presented, in relation to a debtor, the Court may give certain directions.  By s 50(2), it is provided that, without limiting the generality of s 50(1), the Court may, at any time after giving a direction under s 50(1), summon, inter alia, the debtor, for examination under s 50 in relation to the debtor.)

26                  The order made by Tamberlin J was as follows:

‘THE COURT ORDERS THAT:

1.                  Joseph Pollak of 1 Wentworth Street, Point Piper shall attend:

(a)               before the Registrar;

(b)               at Federal Court, Queens Square, Sydney:

(c)                on 8 May 2000 at 10.15 am and 10 May 2000 at 2.15 pm and until he be excused from further attending;

(d)               for the purposes of being examined as to the questions:

(i)                 whether any and, if so, what debts are owing to him; and

(ii)               whether he has any and, if so, what other property or means of satisfying the judgment or order by which he is bound.

2.                  Joseph Pollak shall attend and produce all documents and things in his possession, power or custody relating to those questions outlined above.

3.                  The examination of Joseph Pollak be recorded.’

27                  Pursuant to this order, the applicant was examined before a Deputy Registrar by counsel for the Bank on 8 May 2000 (a recorded transcript of 100 pages) and on 31 July 2000 (a recorded transcript of 51 pages).  On these occasions, the applicant was rigorously cross-examined about issues that may be expected to arise for consideration in the s 121 proceedings.

28                  Reverting then to the context of the remark made by Burchett J, on 16 May 2000, the applicant, having been served with a bankruptcy notice issued at the request of the Bank, moved for an extension of time for compliance.  In granting an extension, Burchett J said (Pollak v National Australian Bank Ltd [2000] FCA 683 at [9] – [10]):

‘... The question, then, is whether the possible prejudice to the bank resulting from a delay of some two months in the possible commission of an act of bankruptcy is sufficient to outweigh the obvious prejudice to the debtor of remaining a person against whom it may be said that he has committed an act of bankruptcy, with the effect that that could have on his commercial arrangements, including dealings with banks and with all the array of individuals with whom one has to deal in one’s day-to-day life, from whom payments may be received or to whom payments may have to be made.

I have considered the balance of these issues of prejudice carefully, and I have paid particular attention to evidence indicating that, some five years ago, the debtor did dispose of various apparently substantial assets, in particular to his wife.  The bank says there may be an effect on its ability to set aside transactions.  However, an examination of that evidence shows that if, on 19 June, the bank is successful, and the bankruptcy notice is not further extended, there would be no effect, and it is not suggested there would be any effect, on any transaction which is known.  That is the first step.  The second step is that I am satisfied that very thorough exploration of the debtor’s affairs has already occurred, and that it is extremely unlikely there is any unknown transaction which could be so affected.’

29                  Much reliance is placed by the applicant upon the last sentence of this passage.

30                  His Honour’s judgment was, of course, interlocutory and discretionary in character.  It could not be decisive for present purposes, especially when it is the trustee, not the Bank, which seeks the investigation.

31                  At the same time, two considerations should be weighed here in the applicant’s favour.

32                  First, the trustee already has the benefit, or advantage, of the answers given by the applicant in the recorded examination for the trustee’s information and use.

33                  Moreover, one must bear in mind the caveat expressed by Lockhart J in Re Jonson;  Ex parte Prentice as Trustee of the Estate of Jonson (unreported, Lockhart J, 1 September 1997) (BC9703993 at 10) as follows:

‘Particular care must be exercised when the power conferred by s77C is used to obtain information and documents about transactions that are impeached in current litigation commenced or continued by the trustee of a bankrupt’s estate against respondents who include a proposed examinee under s77C.  See Pioneer Concrete (Vic) Pty Ltd v Trade Practices Commission (1982) 152 CLR 460, in particular per Gibbs J at 468 and Mason J at 473 concerning s155 of the Trade Practices Act 1974.

In my opinion the purpose of issuing the summonses under s77C to both Mrs Jonson and Mrs MacDonald was essentially to obtain information about the property and affairs of the bankrupt, including his income and assets, and to examine the transfers of the properties and to probe the circumstances in which they were made.

It is true that the two current proceedings in which the trustee seeks to set aside the transfers of the properties relate to events that occurred before the bankrupt was made bankrupt in 1994, and that those proceedings (also the earlier proceeding in this Court (No 7619 of 1997)) concern basically the same subject matter, namely, the setting aside of the property transactions.  The Court must be careful lest the powers conferred by s77C on the Official Receiver are not misused, especially when much of the material to be examined pursuant to the exercise of the s77C powers concerns the two proceedings presently on foot.

It will be important for the Official Receiver and the trustee, when the examinations are being conducted, to ensure that they are not used for any improper purpose, such as examining the witnesses simply for the purpose of destroying their credit or obtaining any other forensic advantage.  It must be used for the purposes of legitimate enquiry to obtain information concerning the assets, liabilities, income and expenditure of the bankrupt and for the purpose of ascertaining information about the property transactions which are impeached in the current proceedings in this Court.’

34                  Taking these two considerations into account, I propose to direct (as s 81(1a) does permit) that the applicant be examined before a Judge rather than a Registrar, with a view to expediting the conclusion of the examination.

35                  The third issue, to be considered next, is whether, as the applicant claims, there has been significant delay in applying for the summons, such that it is now oppressive or vexatious to permit the examination to proceed.

36                  It will be recalled that the trustee was appointed in October 2001.  However, the applicant appealed against this order.  The appeal was dismissed on 14 March 2002 (see Pollak v National Australia Bank Ltd [2002] FCA 237).  The trustee instituted the s 121 proceeding in July 2003.  There is not, given the complexity of the s 121 claim, any delay which should, in my view, be treated as dilatory.  However, another 18 months passed before the summons was applied for.  The inference is clear enough that the trustee is of the opinion that more information from the applicant is required for the purpose of prosecuting the s 121 proceeding.

37                  It will be recalled that s 81(1) specifically provides that the Court or a Registrar may summon a relevant person ‘at any time (whether before or after the end of the bankruptcy)’.  This indicates, in my opinion, a legislative intention that time could elapse before a summons is applied for.  Yet, circumstances could arise where a particular question may be put to a relevant person which, by virtue of substantial delay, is oppressive.  It is difficult to generalise, or to anticipate in this area.  At the moment, I am not persuaded that any such delay has occurred.  At all events, this is a consideration, if it were to arise, within the control of the Judge before whom the examination is to be conducted.

38                  It follows, in my view, that, in requiring the applicant to attend for examination, the summons has not been shown to be oppressive or an abuse of process.

Should the request for documents made in the summons be set aside as oppressive or an abuse of process?

39                  Section 81(1b) provides that a summons to a person under s 81(1) may require the person to produce, at the examination, books that (a) are in the possession of the first-mentioned person;  and (b) relate to the relevant person or to any of the relevant person’s examinable affairs.

40                  The present summons required several books to be produced by the applicant at the examination.  Some are not now pressed by the trustee, but the following documents are sought:

‘(a)      All income tax returns filed by you or on your behalf in the United States of America during the period between 1 January 1991 and 1 January 1997;

(b)               All income taxation assessment notices or similar documents issued by the Internal Revenue Service of the United States of America to you during the period between 1 January 1991 and 1 January 1997;

(c)               Any document identifying the social security number(s) (if any) issued to you in the United States of America;

(d)               Any document identifying you, or any company, partnership or trust in which you had an interest at the relevant time, as the owner or registered proprietor of, or as having any other interests in, real property in the United States of America at any time during the period 1 January 1993 to 31 December 1995;’           

41                  The trustee’s solicitors have previously requested (often more than once) this material from the applicant, but without success.  Ironically, the applicant relies upon the repetition of these requests as a basis for submitting that the request is thus oppressive. 

42                  I cannot accept the applicant’s submission.

43                  The applicant further submits that the trustee ‘has failed to demonstrate any utility in the issuing of the summons ...’.  The documents sought may assist the trustee in the prosecution of his s 121 claim.  The remarks of Windeyer J in Kratzmann, cited above, effectively dispose of this submission.

44                  It follows that the applicant has not demonstrated that the documentary request (even as now framed) was improper.

Should the summons be discharged on the ground that answers relating to the s 121 proceeding may expose the applicant to a penalty by extending his bankruptcy?

45                  As an independent argument, the applicant draws attention to the basal authority (see R v Associated Northern Collieries (1910) 11 CLR 738 per Isaacs J at 747 and the cases there cited) that when the real issue is of a penal nature, neither discovery nor interrogatories will be allowed;  and, the argument goes, that the loss of status was a penal consequence, to which the Northern Collieries rule applied.

46                  The applicant then drew attention to the objection provisions of the Act as follows:

·                    Subject to the following provisions (of Subdivision B of Division 2 of Part VII), at any time before a bankrupt is discharged from bankruptcy under s 149 (effectively, at the end of the period of three years from the date of filing a statement of affairs) the trustee may file with the Official Trustee a written notice of objection to the discharge (s 149B(1)).

·                    The grounds of objection that may be set out in a notice of objection include (s 149D(1)):

‘(ab)    any transfer is void against the trustee ... because of [s] 121;’

·                    The Inspector-General may review a decision of the trustee to file a notice of objection on the Inspector-General’s own initiative, or, if requested to do so by the bankrupt, for reasons that appear to the Inspector-General to be sufficient to justify such a review (s 149K(1)).

·                    On a review of a decision, if the Inspector-General is satisfied (inter alia) that there is insufficient evidence to support the existence of the ground of objection;  or that the reasons given for objecting on that ground do no justify the making of the objection – the Inspector-General must cancel the objection (s 149N(1)).

·                    However, an objection must not be cancelled under s 149N(1) if the objection specifies one ‘special’ ground (defined so as to include a ground specified in s 149D(1)(ab) (i.e. the s 121 ground));  and there is sufficient evidence to support the existence of that ground;  and the bankrupt fails to establish that the bankrupt had a reasonable excuse for the conduct or failure that constituted the special ground (s 149N(1A)).

47                  The applicant next refers to the circumstance that the trustee has filed a notice of objection under s 149D(1)(d) relating to alleged failure to file tax returns of an associated company.

48                  The applicant then submits that there is a real and appreciable risk of s 149N(1a) applying if, by virtue of answers given in his s 81(1) examination, a ‘special’ objection, picking up s 121 is filed; an objection which, as noted, cannot, by virtue of the statutory scheme, be cancelled.  This, the applicant argues, amounts to the loss of civil status constituting a penal consequence (cf. Rich v ASIC (2003) 203 ALR 671 at [84] – [85]).

49                  I cannot accept the applicant’s argument.

50                  The rule explained in Northern Collieries is, of course, a rule of the common law which, as such, may be abrogated by statute.  Section 81(1) cannot, in my opinion, be read down in the way suggested by the applicant.  Section 81(1) and the objection provisions mentioned, operate in accordance with their own terms, which do not include any qualifications of the kind contemplated under the common law rule explained by Isaacs J.

Orders

51                  Accordingly, I order that:

1.         The applicant be examined pursuant to s 81 of the Bankruptcy Act 1966 (Cth) before a Judge at a time to be fixed by the Registry.

2.         It be noted that the trustee now presses for the documents described in pars (a) – (d) only of the summons.

3.         The applicant’s notice of motion otherwise be dismissed, with costs.

Associate:

Dated:              30 March 2004