FEDERAL COURT OF AUSTRALIA

George v Deputy Commissioner of Taxation [2004] FCA 1433

BANKRUPTCY – appeal from Federal Magistrate – whether Commissioner’s application to Federal Magistrates Court complied with requirements of s 222 of the Bankruptcy Act 1966 (Cth) – whether application specified grounds on which orders sought should be made – meaning and scope of ‘application’ – whether Federal Magistrate erred in his application of the requisite onus of proof – whether Federal Magistrate erred in exercising his discretion by making a sequestration order against the appellant’s estate

Bankruptcy Act 1966 (Cth) ss 40(1)(m), 64D, 64ZA, 188(1), 188(6), 194, 222

Corporations Act 2001 (Cth) ss 588G, 588M

Federal Court of Australia Act 1976 (Cth) ss 24(1)(d), 25(1A)

Income Tax Assessment Act 1936 (Cth) s 222AOC

Federal Magistrates Court Rules 2001 rr 4.01(1), 4.05(1)

Allesch v Maunz (2000) 203 CLR 172  cited

Cameron v Holt (1980) 142 CLR 342  cited

CDJ v VAJ (1998) 197 CLR 172  cited

Forshaw v Thompson (1992) 35 FCR 329  discussed

Gantry Acquisition Corp v Parker & Parsley Petroleum Australia Pty Ltd (1994) 51 FCR 554  discussed

Low v Commonwealth [2001] FCA 702  cited

Minister for Immigration and Multicultural Affairs v Jia Legeng (2001) 205 CLR 507  cited

Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478  cited

Re McLean; Ex parte Friends’ Provident Life Office (1992) 36 FCR 502  discussed

Telstra Corp Ltd v First Netcom Pty Ltd [2000] FCA 309  cited

Tickner v Chapman (1995) 57 FCR 451  discussed

WAJR v Minister for Immigration and Multicultural and Indigenous Affairs (2004) 204 ALR 624  cited

D Heydon, Cross on Evidence, Seventh Australian Edition, 2004

IAN DOUGLASS GEORGE v DEPUTY COMMISSIONER OF TAXATION & ANOR

N 515 OF 2004

STONE J

5 NOVEMBER 2004

SYDNEY

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1. The appeal be dismissed.

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                     This is an appeal from a decision of a Federal Magistrate made on 31 March 2004.  Pursuant to s 222 of the Bankruptcy Act 1966 (Cth) (‘Bankruptcy Act’), his Honour declared void a deed of assignment executed on 25 July 2003 by the appellant and ordered that the appellant’s estate be sequestrated.  The Chief Justice of this Court has determined that in this appeal it is appropriate for a single judge to exercise the Court’s appellate jurisdiction and has directed accordingly; s 25(1A) Federal Court of Australia Act 1976 (Cth) (‘Federal Court Act’). 

Background

2                     On 18 September 1996 the appellant, a barrister admitted to practise in New South Wales, was appointed an acting Judge of the District Court of New South Wales, a position he held until 30 June 1999.  Between 1995 and 2000, the appellant was a non-executive director of First Netcom Pty Ltd (‘First Netcom’), which sold telecommunication services.  On 12 October 2000 an administrator was appointed to First Netcom and in November 2000 a liquidator was appointed.  The company’s debts include over $14 million owed to Telstra and $3.5 million to other creditors.  First Netcom ceased trading September 1997. 

3                     It appears that First Netcom had also failed to remit group tax deductions and the Deputy Commissioner of Taxation (‘Commissioner’) commenced proceedings in the District Court of New South Wales to recover the amount of those deductions from the appellant.  On 1 February 2002, the Commissioner obtained judgment against the appellant in the sum of $327,007.01 pursuant to s 222AOC of the Income Tax Assessment Act 1936 (Cth). 

4                     To add to the appellant’s troubles, the liquidator of First Netcom claimed that the appellant, as a director of First Netcom, was liable for the company’s insolvent trading and claimed approximately $17 million from the appellant pursuant to ss 588G and 588M of the Corporations Act 2001 (Cth) (‘Corporations Act’). 

5                     On 6 June 2003 the appellantsigned an authority pursuant to s 188(1) of the Bankruptcy Act authorising the second respondent, Mr Clout, to call a meeting of the appellant’s creditors and to take control of his property.  By virtue of that authority Mr Clout became the controlling trustee of the appellant’s estate; s 188(6) Bankruptcy Act. 

6                     By letter dated 24 June 2003, Mr Clout, acting through his representative Mr Morgan Chubb (for convenience referred to as the ‘Trustee’), advised the appellant’s creditors that the appellant proposed that his affairs be dealt with by way of a deed of assignment made under Part X of the Bankruptcy Act and gave notice of a meeting of creditors to be held on 9 July 2003.  In his report to creditors the Trustee advised that, based on the appellant’s statement of affairs, the appellant’s debts at that time were estimated to be about $15,909,750, including approximately $15 million owed to First Netcom in respect of an insolvent trading claim.  The Trustee recommended that the creditors should vote for the debtor to present his own debtor’s petition within 7 days. 

7                     The creditors’ meeting was held on 9 July 2003 under the chairmanship of Mr Chubb.  The Federal Magistrate described it as follows: 

‘The meeting was attended inter alia by a Bruce Dunne who is employed by the [Commissioner].  He had been asked to attend the meeting in place of another officer of the Commissioner who had carriage of the Receivables Management file and who had instructions to oppose the deed of assignment.  As Mr Dunne was not the case officer he was not “fully up to speed” with all the background to Mr George’s proposed assignment. 

At the meeting the Trustee admitted the proof of First Netcom which then proceeded to vote in favour of the assignment together with certain other creditors valued at approximately $80,000 (four creditors).  The votes against were $810,750 (two creditors).  By the time of the meeting the Netcom debt had risen to $17,722,543.35.’ 

For reasons explained in [44] below, it is not at all clear what the outcome of the vote would have been if First Netcom had not been permitted to vote. 

The Federal Magistrate’s decision

8                     Before the Federal Magistrate, the Commissioner claimed that the Trustee should not have admitted First Netcom’s proof of debt.  He claimed that if that proof had not been admitted then the creditors’ decision would have been that the appellant should present his own petition within seven days.  His Honour found in favour of the Commissioner and declared the deed of assignment void and made a sequestration order in respect of the appellant’s estate. 

9                     In his reasons for judgment, the Federal Magistrate stated that ‘the Commissioner must satisfy me’ that the appellant did not owe a provable debt to First Netcom at the time of the meeting.  His Honour decided that the Commissioner had discharged the onus of proof by establishing that the appellant had not breached his duty under s 588G of the Corporations Act to prevent the company trading while insolvent and therefore he was not liable under s 588M(2). 

10                  His Honour’s reasons for this conclusion were, briefly, that: 

(a)                it was not possible to determine precisely when First Netcom became insolvent and therefore whether it was insolvent at the time the Telstra debt was incurred; and, irrespective of (a),

(b)               contrary to the appellant’s statement to the Trustee, the appellant did not warn the other directors of First Netcom as early as 1995 that the company was probably insolvent and trading while insolvent.  His Honour held that this statement should not have been accepted by the Trustee as the basis for a decision that First Netcom’s debt should be admitted for voting purposes. 

appeals from the federal magistrates court

11                  Section 24(1)(d) of the Federal Court Act extends the appellate jurisdiction of this Court to judgments of the Federal Magistrates Court.  As indicated in [1] above, s 25(1A) of the Federal Court Act provides that, at the direction of the Chief Justice, a single judge may exercise the Court’s appellate jurisdiction in such an appeal, but otherwise the Federal Court Act makes no distinction between an appeal from the Federal Magistrates Court and an appeal from a judge of this Court.  It is well settled that an appeal from a single judge of this Court to a Full Court is an appeal by way of rehearing; Minister for Immigration and Multicultural Affairs v Jia Legeng (2001) 205 CLR 507 (‘Jia’) at 533.  It follows that an appeal from a Federal Magistrate is also an appeal by way of rehearing; Low v Commonwealth [2001] FCA 702 at [3]; WAJR v Minister for Immigration and Multicultural and Indigenous Affairs (2004) 204 ALR 624 at 628. 

12                  On an appeal by way of rehearing the appellate court may draw inferences of fact from the evidence before the primary judge and has a discretion to allow the parties to adduce additional evidence; CDJ v VAJ (1998) 197 CLR 172 at 199, 201-2 (McHugh, Gummow and Callinan JJ).  In Allesch v Maunz (2000) 203 CLR 172 at 180-81, the majority of the High Court (Gaudron, McHugh, Gummow and Hayne JJ) held that in an appeal by way of rehearing, 

‘the powers of the appellate court are exercisable only where the appellant can demonstrate that, having regard to all the evidence now before the appellate court, the order that is the subject of the appeal is the result of some legal, factual or discretionary error’

but, where such an error is established, the appellate court,

‘can substitute its own decision based on the facts and the law as they then stand.’ 

This appeal

13                  The amended notice of appeal lists 27 grounds of appeal from the decision of the Federal Magistrate.  Those grounds raise three main issues that together challenge the whole of the proceedings before his Honour.  The appellant claims that: 

(a)                the Commissioner’s application failed to comply with the requirements of s 222 of the Bankruptcy Act in that it did not specify the grounds on which the orders sought should be made;

(b)               the Federal Magistrate failed to apply the correct principles in deciding whether to declare the deed of assignment void; and

(c)                there was a miscarriage of the Federal Magistrate’s discretion in his Honour’s determination that he should make a sequestration order against the appellant’s estate. 

requirement that ground for relief under s 222 be specified in the application

14                  Section 222 of the Bankruptcy Act provides:

‘(1)       Where there is a doubt, on a specific ground, whether a deed of assignment or a deed of arrangement was entered into in accordance with this Part or complies with the requirements of this Part … a creditor or the debtor may apply to the Court for an order under subsection (2).

(2)     Upon the hearing of an application made under subsection (1), the Court may, subject to this section, make an order:

(a)                    declaring that the deed or composition is void, or that it is not void, on the ground specified in the application; or

(b)                    declaring that a provision of the deed is void, or is not void, on the ground specified in the application.

(3)     The Court shall not make an order declaring a deed to be void on the ground that it does not comply with the requirements of this Part if the deed complies substantially with those requirements.

(4)     Where the Court, on the application of the Inspector-General, the trustee or a creditor, is satisfied that the debtor:

(a)                    has given false or misleading information in answer to a question put to him or her with respect to any of his or her conduct or examinable affairs at the meeting of creditors at which the resolution requiring him or her to execute the deed or accepting the composition was passed; or

(b)                    has omitted a material particular from the statement of the debtor’s affairs given under section 188A or included an incorrect and material particular in that statement;

the Court may make an order declaring the deed … to be void or declaring any provision of the deed or composition to be void.

…

(7)     The trustee or a creditor may include in an application under subsection (1) or (4) an application for a sequestration order against the estate of the debtor and if the Court, on the first-mentioned application, makes an order under subsection (2) or (4) declaring the deed … to which it relates to be void, it may, if it thinks fit, forthwith make the sequestration order sought.’ 

15                  In accordance with Part 4 of the Federal Magistrates Court Rules 2001, the proceedings in that Court were commenced on 28 August 2003 by filing an application and accompanying affidavits; rules 4.01(1) and 4.05(1).  The application lists the declarations sought and notes that the grounds of the application are stated ‘in the accompanying affidavits’.  The appellant claims that because the grounds were not specified in the application itself the Court’s power to make a declaration in accordance with s 222(2)(a) that the deed of assignment was void ‘on the ground specified in the application’ was not enlivened.  Accordingly, the Federal Magistrate should have dismissed the application without making any orders. 

16                  The appellant’s submission ascribes a very narrow meaning to the word, ‘application’ as used in s 222.  I am not aware of any authority on the point and the appellant did not refer to any.  In the absence of binding authority I do not regard the interpretation as sustainable.  The requirement that the ground for relief under s 222 be specified appears to be designed to ensure that the argument for and against the claim can be clearly understood and sharply focussed.  In Tickner v Chapman (1995) 57 FCR 451 at 480, Burchett J commented that in considering the meaning of the word, ‘specify’ in a variety of contexts, courts ‘have treated it as a strong word’.  Burchett J referred to his judgment in Gantry Acquisition Corp v Parker & Parsley Petroleum Australia Pty Ltd (1994) 51 FCR 554 at 569-70 where, referring to ‘specify’ as ‘a word which signifies precision’, his Honour said:

‘Judicial attempts to expound the meaning of the word “specify” have repeatedly fixed upon unambiguous clarity as being connoted by it: Re Green’s Will Trusts [1985] 3 All ER 455;  Re Paddle River Construction Ltd (1961) 35 WWR 605 at 618; A v B [1969] NZLR 534 at 536; Bond Corporation Holdings Ltd v Sulan (1990) 3 WAR 49 at 64.  See also Re Karounos; Ex parte Official Trustee in Bankruptcy (1989) 25 FCR 177 at 181,per Sheppard J.  In Jolly v Yorketown District Council (1968) 119 CLR 347 at 351, Barwick CJ and Owen J equated “specify” with “state in explicit terms”, a sense closely corresponding with that adopted by Kitto J in the same case at 352 and by Higgins J in his dissenting judgment in Federated Engine-Drivers and Firemen’s Association of Australasia v Broken Hill Pty Co Ltd (1913) 16 CLR 245 at 284-285.’

17                  In my view it is required that the basis of any claim for relief under s 222(1) be particular rather than general, explicit rather than implied and precise rather than indeterminate.  I do not, however, see that it is required that a narrow, technical meaning be ascribed to the term, ‘application’ such that it applies only to one of the documents that are required under the Federal Magistrates Court Rules to commence proceeding in that Court. 

18                  In my view, the reference in subsection (2)(b) to ‘the ground specified in the application’ relates to the opening words of the subsection, ‘Upon the hearing of an application made under subsection (1)’, namely the application before the Court.  As the respondent pointed out that is also consistent with the use of the words, ‘may apply’ in subsection (1).  The appellant submitted that on this interpretation the ‘specified ground’ could be identified at any time in the proceedings, a result clearly not contemplated by the section.  Because s 222(1) refers to a doubt existing on a specific ground as the circumstance that gives rise to the right to apply to the Court for review, it may be that the specific ground must be identified at the outset of the proceedings, perhaps in the originating process which, in this case is the application and accompanying affidavits.  As I am satisfied, for reasons explained at [19] below that in this case the specific ground on which the Commissioner relied was identified in the affidavit of Ms Kalliani Sreedharan filed with the application to the Federal Magistrates Court, it is not necessary for me to decide this point. 

19                  In her affidavit sworn on 28 August 2003, Ms Sreedharan refers to First Netcom’s ‘potential insolvent trading claim’, to the proof of debt lodged by First Netcom and to the minutes of the creditors meeting held on 9 July 2003.  She states: 

‘These documents indicate that First Netcom was permitted to vote at the creditors’ meeting in the sum of $17,722,543.35.  I believe that as the validity of First Netcom’s claim had not yet been determined, First Netcom should only have been permitted to vote for a nominal sum such as $1.  If First Netcom had only been permitted to vote for $1, the resolution to execute a deed of assignment would not have been carried.’ 

20                  To my mind, this and other statements made by Ms Sreedharan make the ground of the application before Raphael FM quite clear and sufficiently specific.  Moreover, although the transcript of the proceedings before Federal Magistrate Raphael shows that the alleged failure to comply with s 222 was raised before his Honour, it has not been suggested that the challenge to First Netcom’s right to vote at the meeting of creditors took the appellant by surprise.  This ground of appeal must be rejected. 

onus of proof

21                  The second main ground of appeal is whether, in exercising his power under s 222 of the Bankruptcy Act, the Federal Magistrate erred by imposing the onus of proof on the appellant rather than on the Commissioner.  Before discussing this issue it is necessary to consider the elements of the claim made before his Honour and his Honour’s findings on those claims.  Before his Honour the Commissioner claimed that First Netcom was not entitled to vote at the meeting of creditors on 9 July 2003 because it was not a creditor of the appellant.  Consequently the Trustee erred in permitting the First Netcom to vote at that meeting. 

Entitlement to vote at a meeting of creditors

22                  A person who is authorised to call a meeting of creditors under s 188(1) of the Bankruptcy Act and, pursuant to s 188(6), becomes the controlling trustee of the debtor’s estate must do so within 35 days (or 42 days if the authority is signed in December); s 194.  At the meeting all creditors who have provided the controlling trustee with a statement under s 64D are entitled to vote, the only restriction being that secured creditors are only entitled if the total debts owed to them exceed the value of the security; ss 64ZA (4).  The term ‘creditor’ is not defined other than to limit its application for the purposes of s 64ZA to creditors who participate in the meeting of creditors in accordance with s 64ZA(2). 

23                  Section 64ZA(8) provides that the controlling trustee may determine ‘any question that arises as to the entitlement of a person to vote’ at the meeting.  If the controlling trustee needs time to determine questions of entitlement to vote, the meeting may be adjourned in accordance with s 64ZA(9).  Despite the power given to the controlling trustee it is accepted that the trustee’s decision is not conclusive and does not exclude the court’s jurisdiction to determine the right of persons to vote at a meeting of creditors; Forshaw v Thompson (1992) 35 FCR 329 (‘Forshaw’) at 339 per Lockhart J (with whom Black CJ and Sweeney J agreed).  Note that in Forshaw Lockhart J was considering s 201 of the Bankruptcy Act, now replaced by ss 64ZA(8) and (9) which, together, do not materially differ from the earlier section. 

The alleged debt to First Netcom

24                  The only issue in contention as to First Netcom’s right to vote is whether the appellant is indebted to the company.  The source of the alleged debt is said to be the appellant’s contravention of s 588G(2) of the Corporations Act, which gave First Netcom’s liquidator the right to recover from the appellant the resultant losses as a debt due to the company pursuant to s 588M(2) of that Act.  That is the issue the Federal Magistrate addressed and, in doing so, his Honour considered not only the evidence on which the Trustee made his decision, but also the additional evidence adduced in the proceedings before his Honour.  On appeal neither party sought to adduce any further evidence. 

25                  Section 588G(2) applies where a company incurs a debt while insolvent or by which it becomes insolvent.  In conjunction with s 588G(1), it provides that, by failing to prevent the company incurring that debt, a director of the company contravenes the section if: 

(a)                he or she is aware that there are reasonable grounds for suspecting that the company is insolvent or would become insolvent; or

(b)               a reasonable person in that director’s position would be so aware. 

26                  The debt relevant to the appellant’s liability under s 588M is owed to Telstra and was incurred sometime between Mr George being appointed a non-executive director of First Netcom in 1995 and September 1997, when the company ceased trading.  However, an essential element of the claim against the appellant under s 588M is that at the time the Telstra debt was incurred First Netcom was insolvent or would become so by virtue of that debt.  In proceedings before Einfeld J in 1999 Telstra had submitted that First Netcom was insolvent from as early as June 1997.  Although his Honour rejected the contentions made by First Netcom opposing this submission and accepted that the company was insolvent at the time of the proceedings before him, his Honour did not make a finding as to the time when the company first became insolvent; Telstra Corp Ltd v First Netcom Pty Ltd [2000] FCA 309. 

27                  While the Federal Magistrate considered the question of when First Netcom became insolvent his Honour clearly felt that there was not sufficient evidence for him to determine that point.  His Honour stated, at [19]: 

‘The need to be clear about a date upon which it can be said the company was insolvent impacts upon the calculation of the alleged debt itself.  If, as I have suggested, it is strongly arguable that the company did not become insolvent until after Telstra ceased trading with it (because any ability the company might have had to trade out of its difficulties, raise additional capital, renegotiate the Telstra terms of trade etc have then effectively vanished) the Telstra debt could not form part of the total amount of any claim against the directors.  If it was considered that insolvency occurred on or around a particular date before trading ceased then it would be necessary to calculate the amount of the Telstra debt from that date for the purposes of such a claim.  The actual claim against Mr George was for the whole of the Telstra debt plus every other debt that the company had incurred which remained outstanding as at the date it went into administration.’

28                  The Federal Magistrate’s uncertainty is understandable.  The proof of debt lodged by First Netcom does not state when the debt was incurred, although it is not in contention that the appellant was a director of First Netcom at all material times.  Similarly the Telstra proof of debt lodged with the (then) administrator of First Netcom does not assist as it simply asserts that the debt was incurred in the period from 1995 to 1997.  Indeed, the comment quoted in the previous paragraph suggests that his Honour was inclined to the view that First Netcom did not become insolvent until after Telstra ceased trading with First Netcom.  Senior counsel for the appellant, Mr Einfeld QC, described this suggestion as ‘utterly illogical’ and said that whether or not a company is able to trade out of its difficulties has nothing to do with whether it is insolvent.  Be that as it may, his Honour’s comment is clear evidence that he was not satisfied that the company was insolvent at any time during the relevant period.  If that were the case, there could be no question of the appellant (or a reasonable person in his position) having knowledge of insolvent trading by First Netcom and therefore no question of the appellant being indebted to the company on that basis.  Despite this his Honour went on to consider, presumably on the assumption that First Netcom was insolvent at a relevant time, whether there were grounds for the appellant to suspect that the company was insolvent or would become insolvent at the time of contracting the relevant debts. 

29                  In his affidavit, the Trustee reported a conversation that he had with the appellant concerning the insolvent trading claim.  In response to the appellant’s enquiry as to what the Trustee had decided to do about First Netcom’s claim, the Trustee replied that he had no proof that the appellant had knowledge of the company’s insolvency.  He said that the appellant had responded, 

‘Look, I warned the other directors back in 1995 at a meeting that the company was likely to be insolvent and was likely trading insolvently.’ 

The Trustee said that, once the appellant had confirmed that he had this knowledge, he formed the view that First Netcom’s debt should be admitted ‘for voting purposes only.’ 

30                  In discussing this issue his Honour referred to an affidavit that the appellant made in the District Court proceedings referred to in [3] above.  In that affidavit the appellant made statements that were inconsistent with the position he put to the Trustee.  He said that before accepting appointment as a non-executive director of First Netcom he made enquiries of other directors of the company and investigated the company’s financial position.  He stated that from the time of his appointment he relied on the chief executive officer who, at all material times, was Neil Allan Macdonald, a person in whom he had a high level of trust and confidence.  The appellant referred to his appointment as an acting Judge of the District Court of New South Wales and described how he believed that from that time he was not at liberty to be involved in the day-to-day activities of the company.  He said that he explained this to Mr Macdonald, ‘a person in whom I had a high level of trust and confidence’, and that Mr Macdonald had assured him that everything was under control. 

31                  The appellant also said that he was taken completely by surprise when he learned in early 1999 that First Netcom had not been remitting to the Australian Taxation Office the group tax it had collected from its employees, and that he relied on the assurances of Mr Macdonald that the matter was receiving proper attention. 

32                  The Federal Magistrate found the appellant’s evidence in the District Court proceedings was inconsistent with the warning about first Netcom’s solvency that the appellant claimed to have given in 1995.  His Honour accepted the Commissioner’s submission that Mr George was aware of the obligations he was taking on in joining the Board of First Netcom and that a barrister of the appellant’s experience would not have remained on the Board after he believed that it was insolvent.  His Honour held that the Commissioner’s prima facie case was not countered by any evidence given by Mr George and, for that reason, held that the prima facie case was established.  Because the appellant relied on statements of his Honour’s reasons taken out of context (see [28] above) it is appropriate to set out in full the conclusion that his Honour expressed in [27] of his reasons:

‘The authorities are clear that … Mr Aldridge must prove that the liquidator was not a creditor at that time.  I believe that he has succeeded in doing this.  I do not believe that the liquidator had, as at the date of the meeting, made out the constituents of the claim as required by s 588G(1) and s 588G(2).  The liquidator had never made a determination of the date of insolvency and therefore it was impossible to work out exactly how much of the debt may have been incurred whilst the company was trading insolvently to the knowledge of Mr George or a reasonable person in his position.  Most importantly the liquidator had not established that second element of the claim.  He had not established it because I have found on the evidence before me today that Mr George’s warning to his fellow directors that the company was trading whilst insolvent in 1995 had, on the balance of probabilities, not been given. The trustee had made it clear in his evidence that he required proof of Mr George’s knowledge and that he was not satisfied from the documents that were before him without it.  In the events that have occurred it must be taken that such evidence does not exist.  The trustee gave evidence before me that with the exception of what is known as the “Zip files” all the material pertaining to the claims that he had received either then or since was before me.  The zip files may have provided some particulars of the dates upon which debts to Telstra were incurred.  They would not have given any assistance in assessing a date upon which the company could be said to have been insolvent.  On the status of the evidence I could not be satisfied that a claim against Mr George for insolvent trading could be made out.  In those circumstances the trustee should not have admitted First Netcom to vote.  The trustee had an alternative.  He could have put the matter off for a period of 14 days for further investigations but he did not take that alternative.  He decided the matter there and then and I believe he decided it wrongly.  I do not blame him for this.  He acted on the assurances from Mr George which I have found not to be correct.  Based on those assurances an amount of many millions of dollars would have been incurred in debts while the company was insolvent.’

33                  Although, in the passage quoted above, his Honour referred to the position of a reasonable person in the appellant’s position, he did not directly address the question raised by s 588G(2) of whether a reasonable person in the appellant’s position would have thought there were reasonable grounds for suspecting the company to be insolvent.  The omission is largely explained by his Honour not being able to make a finding that First Netcom was insolvent at the relevant time.  A finding that a reasonable person would suspect insolvency in the absence of evidence that demonstrates insolvency at the relevant time is unlikely.  In the circumstances I am not disposed to find that his Honour overlooked this issue; rather his Honour did not pursue the point because, in view of his assessment of the evidence, it was not relevant. 

34                  On the evidence before me I am satisfied that his Honour was correct in the findings he made.  For the appellant to be indebted to First Netcom as a consequence of insolvent trading, there must be a connection between the loss occasioned by the debt to Telstra and the company’s insolvency.  This finding does not, however, deal with the appellant’s claim that the Federal Magistrate’s finding was a consequence of his Honour wrongly imposing the burden of proof on the appellant rather than the Commissioner.

Onus of proof

35                  In Re McLean; Ex parte Friends’ Provident Life Office (1992) 36 FCR 502 (‘Re McLean’) Heerey J held that a person claiming to have been wrongly denied the right to vote at a meeting of creditors has the burden of proving this claim.  His Honour commented, at 512, 

‘This is simply an application of the ordinary principle that he who alleges must prove.  In the converse case, when the applicant under s 222(1) contends that the chairman wrongly admitted a creditor to vote … the onus would lie the other way.’ 

36                  As mentioned in [9] above, the Federal Magistrate, following Re McLean, held that the Commissioner had the onus of establishing that the appellant did not owe a provable debt to First Netcom at the time of the meeting.  His Honour was clearly correct and neither the appellant nor the Commissioner contends otherwise.  The appellant submits, however, that the Federal Magistrate failed to apply the rule he had identified and, instead, placed the onus on the appellant.  This claim requires close attention to his Honour’s reasons. 

37                  The question of onus of proof was discussed before Raphael FM in some detail.  Having considered the evidence adduced by the parties, his Honour observed, at [26]: 

‘There was considerable argument before me by counsel concerning what was required in order for me to make a finding in this case.  Mr George’s submission is that the complaining creditor must prove that there was no debt.  He argues that it is not for him to prove that there was one.  [Counsel for the Commissioner] argues that he believes that he has proved that there was no debt because the essential elements of that debt could not be established, but that in any event he has provided a prima facie case as to that situation and the evidentiary onus then shifts to Mr George.  Mr George has provided no evidence to counter the prima facie case, he has not gone into the witness box himself and therefore I must accept that the prima facie case becomes an established one.

The authorities are clear that an arguable case is not sufficient and that  [Counsel for the Commissioner] must prove that the liquidator was not a creditor at that time.  I believe that he has succeeded in doing this.’ 

38                  It would appear from this comment that, in stating his conclusion, his Honour was mindful of the correct rule as to burden of proof.  His statement that the ‘evidentiary onus’ had shifted to the appellant does not indicate that his Honour had reversed the burden of proof.  Barwick CJ emphasised in Cameron v Holt (1980) 142 CLR 342 at 347 that a shift in the evidentiary burden does not mean that the legal burden of proof has shifted.  In Cross on Evidence, Seventh Australian Edition, 2004 at [7210] Heydon J (writing extra-judicially) pointed out that such a statement merely means that the person to whom the evidentiary onus has shifted ‘should adduce some evidence as a matter of common prudence’.  In commenting that Mr George had not provided any evidence to counter the prima facie case made by the Commissioner the Federal Magistrate was explaining why he regarded the Commissioner’s case as proven; in other words why he had concluded that the Commissioner had discharged the burden of proof. 

39                  Mr Einfeld submitted that the way in which the Federal Magistrate formulated the issue before him, analysed the evidence and expressed his conclusions showed that his Honour had reversed the onus of proof.  He claimed that his Honour had asked the wrong question by asking, at [17]: 

‘Had First Netcom established the elements of insolvent trading as at 9 July 2003?

Mr Einfeld argued that the way in which his Honour stated his conclusions (at [27] of his reasons) showed the Federal Magistrate was focussed on whether the appellant had been able to demonstrate that First Netcom had a provable debt not on whether the Commissioner had been able to discharge the burden of proof.  Mr Einfeld referred in particular to the following statements made by his Honour: 

‘I do not believe that the liquidator had, as at the date of the meeting, made out the constituents of the claim … Most importantly the liquidator had not established that second element of the claim. 

…

On the status of the evidence I could not be satisfied that a claim against Mr George for insolvent trading could be made out.  In those circumstances the trustee should not have admitted First Netcom to vote.’ 

40                  However, when read in context, those comments do not support the appellant’s case.  As senior counsel for the Commissioner, Mr Aldridge SC pointed out, the Commissioner had the difficult task of proving a negative, namely that First Netcom did not have a provable debt.  One way to approach the question of whether the Commissioner had discharged that burden was for his Honour to analyse the evidence before him to see if it could support a finding that First Netcom had a provable debt.  In considering the issue the Federal Magistrate was aware that he was not limited to the evidence available at the creditors’ meeting at which the decision to allow First Netcom to vote was made.  His Honour referred to the views expressed on this point in McLean at 503-13 and in Forshaw at 338-40.  The position was summarised by the Full Court in Re Dingle; Westpac Banking Corporation v Worrell (1993) 47 FCR 478 at 486: 

‘[W]hen the Court is called upon to determine whether a person is entitled to vote as a creditor, it must act on the material before it; it is not limited to the material before the trustee or chairman.’ 

41                  The Commissioner submitted that the material before the Federal Magistrate included all relevant documents known to it.  These documents were annexed to affidavits made by Mr Bruce Dunne, Mr Peter Mackintosh and Ms Kalliani Sreedharan, all of the Australian Taxation Office, Ms Emma Whan of the Australian Government Solicitor and Mr Chubb.  These documents included a report to creditors of First Netcom made by the administrator of that company, information provided by the liquidator of First Netcom in relation to the Telstra debt, the proof of debt submitted by First Netcom with supporting documentation.  In addition an affidavit made by Mr George in the District Court proceedings and a transcript of Mr George’s evidence before that court were tendered. 

42                  As mentioned above, for the appellant to be indebted to First Netcom as a consequence of insolvent trading the loss occasioned by the debt to Telstra must be ‘because of’ the company’s insolvency; s 588M(1)(b) Corporations Act.  The Commissioner made a prima facie case that this connection did not exist and the appellant adduced no evidence capable of rebutting this prima facie case. In addition, evidence adduced by the Commissioner was sufficient to negate the only evidence that supported a claim that the appellant had grounds to believe that the company was trading while insolvent.  In my view his Honour’s declaration that the deed of assignment executed on 25 July 2003 was void and of no effect was properly made.

The sequestration order

43                  Having determined that the deed of assignment should be declared void, the Federal Magistrate also ordered, pursuant to s 222(7) of the Bankruptcy Act, that the appellant’s estate be sequestrated.  His Honour stated that he was satisfied that the majority of creditors by value wished this to occur and noted that the trustee recommended it.  His Honour commented that he was ‘unable to understand’ why the other creditors, including the liquidator of First Netcom, accepted such a low offer as was made in the deed. 

44                  At the meeting of creditors on 9 July 2003 the creditors had to choose between the appellant being required to execute a deed of assignment or to present his own debtor’s petition.  A summary of the votes cast on the motion for a deed of assignment is set out in the affidavit of Mr Chubb.  Disregarding the vote cast by First Network, it shows that two creditors (for a total debt of $810,750.69) voted against the deed and five creditors (for a total amount of $80,708.43) voted in favour of the deed.  A motion for a deed of assignment or for the presentation of a debtor’s petition must be passed by a special resolution being 75% of the creditors by value and 50% by number.  As Mr Einfeld pointed out, even assuming that, in the absence of First Netcom the other creditors would have voted in the same way then the Trustee’s recommendation in favour of a debtor’s petition would still not be passed. 

45                  Ultimately, however, what the creditors may have done had First Netcom not been permitted to vote or their reasons for voting as they did is purely speculative.  It is for the Court in the exercise of its discretion under s 222(7) to decide what, in all the circumstances, is in the best interest of creditors.  Having found that the Federal Magistrate’s declaration that the deed of assignment is void should stand, I do not think that it would be in the best interest of creditors to set aside the sequestration order.  By virtue of the application made in the Federal Magistrates Court, the only creditor whose wishes in these circumstances are known is the Commissioner whose debt accounts for almost two-thirds of the total debts represented at the creditors’ meeting.  While this does not make the Commissioner’s wishes determinative it does give weight to them. 

46                  However, the most important factor in my view is that s 40(1)(m) of the Bankruptcy Act provides that it is an act of bankruptcy if a deed of assignment executed by a debtor under Part X is declared void by the Court.  That being so, were I to set aside the sequestration order, the Commissioner could immediately file a creditor’s petition and would have a prima facie right to a sequestration order.  In the circumstances I am convinced that it would not be in the best interest of creditors to set aside his Honour’s order. 

47                  For these reasons the appeal must be dismissed. 

Associate:        

Dated:              5 November 2004