FEDERAL COURT OF AUSTRALIA

McKinnon v Commonwealth Bank of Australia [2005] FCA 576

BANKRUPTCY – bankruptcy notice – whether should be set aside – undertaking given to High Court not to execute judgment until application for special leave to appeal determined – whether High Court determined application – whether judgment of High Court can be treated as null and void – composition of High Court for hearing of application for special leave – whether bankruptcy notice became null and void by service of it on two judgment debtors named in it on separate occasions or by filing of creditor’s petition against one debtor – whether solvency of debtors relevant to validity of bankruptcy notice – whether judgment creditor obliged to show that it had exhausted all its securities – whether Court should go behind judgment on which bankruptcy notice based

COURTS AND JUDGES – High Court of Australia – composition for hearing application for special leave to appeal – whether judgment of High Court can be treated as null and void because of presence of justice alleged to hold shares in respondent

COSTS – appeal – whether successful respondent should have order for all its costs – failure of respondent to serve its written submissions on appellants – adjournment of hearing of appeal – respondent filing additional, unnecessary appeal book

Crimes Act 1914 (Cth) s 34(1)(b)

Judiciary Act 1903 (Cth) ss 19, 21(1), 21(2)

Bankruptcy Act 1966 (Cth) s 109

McKinnon v Commonwealth Bank (No 2) [2004] FMCA 209 affirmed

Warramunda Village Inc v Pryde [2002] FCA 250 (2002) 116 FCR 58 cited

JEANETTE BEVERLY DAWN McKINNON AND DONALD NIEL McKINNON v COMMONWEALTH BANK OF AUSTRALIA (ACN 123 123 124)

V 481 of 2004

GRAY J

7 APRIL 2005

MELBOURNE

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.         The appeal be dismissed.

2.           The appellants pay the respondent’s costs of the appeal, except for the costs of the appeal book filed on 22 October 2004 and the costs of the adjournment of the hearing on 1 April 2005.

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 appeal is from a judgment of the Federal Magistrates Court given on 29 March 2004.  See McKinnon v Commonwealth Bank (No 2) [2004] FMCA 209.  The learned federal magistrate ordered that an application by the appellants to set aside a bankruptcy notice be dismissed and ordered the appellants to pay the respondent’s costs of the application.  The notice of appeal contains what are specified to be three grounds, but argument has been directed to four identifiable points.

2                     The appellants named in the notice of appeal are Jeanette Beverly Dawn McKinnon, and Donald Niel McKinnon.  At the outset of the hearing of the appeal, only the first appellant indicated that she proposed to appear.  I asked her about the second appellant, her husband.  Eventually, the second appellant spoke to me from within the courtroom.  At that point, he indicated that he wished to be an appellant but did not wish to be heard separately from the first appellant.  He assumed that the first appellant had the capacity to appear on his behalf, but I indicated to him that she did not have that capacity, as she is not a legal practitioner.  After the hearing of the appeal had been completed, the question of the second appellant’s status was raised again, and an application was made that he be removed from the proceeding.  I declined to make such an order at that stage of the proceeding.  The application for removal was made on the false assumption that what had been served on each appellant was a separate bankruptcy notice.  In truth, there was only one bankruptcy notice, based on a judgment against both of the appellants, and in which both of the appellants were named as debtors.  That bankruptcy notice was served on the appellants on separate occasions.  It appears, therefore, that the second appellant was not only a proper party, but was probably a necessary party, to any appeal in which it was sought to set aside the bankruptcy notice.  The documents before the Court show that he was certainly named as an applicant in the application to set aside the bankruptcy notice, which was heard by the Federal Magistrates Court.  He was certainly named as an applicant in the order made by the Federal Magistrates Court, and as I have said, he is certainly named as an appellant in the notice of appeal to this Court.

3                     I turn then to the grounds of the appeal.  The first point argued was that the bankruptcy notice was issued during a period when the judgment creditor, the respondent to this appeal, was subject to an undertaking it gave to the High Court of Australia not to execute the judgment on which the bankruptcy notice is based until the hearing and determination of an application for special leave to appeal.  The argument is that the application for special leave to appeal had not been completed, and that therefore the judgment creditor could not issue a bankruptcy notice without breach of its undertaking.  Counsel for the respondent accepts that the bankruptcy notice ought to be set aside if the application for special leave has not been dealt with.  It is therefore necessary to determine whether the application for special leave has been completed. 

4                     The judgment on which the bankruptcy notice is based was a judgment of the Supreme Court of Victoria, given on 27 June 2001.  An appeal to the Court of Appeal in respect of that judgment was unsuccessful.  The appellants then made an application for special leave to appeal to the High Court.  That application became proceeding no M 115 of 2001 in the High Court.  The appellants made an application to the High Court for a stay of the judgment of the Supreme Court of Victoria.  In response to that application, by letter dated 10 December 2001, the solicitors for the respondent wrote to the registrar of the High Court, giving the undertaking not to execute the judgment of the Supreme Court of Victoria
until the determination of the application for special leave to appeal to the High Court in proceeding no M 115 of 2001.

5                     It appears that the application for special leave to appeal first came on before the High Court on 20 June 2003.  On that day, two of the three judges who were designated to sit were found to hold shares in the respondent.  It was therefore determined that the application for special leave to appeal could not proceed on that day.  It came on again before the High Court on 3 October 2003.  The transcript of that hearing records that the proceeding was dealt with by Gleeson CJ and Gummow J.  The appellants allege that Hayne J, who had previously been said to hold shares in the respondent, also sat. 

6                     The first appellant indicated that either she or the two appellants had taken action to have Hayne J charged with an offence pursuant to s 34(1)(b) of the Crimes Act 1914 (Cth).  The contention of the first appellant is that the order of the High Court on 3 October 2003, dismissing the application for special leave, is null and void, because they allege that one of the judges who made the order committed an offence under that section. 

7                     In response to this, there are a number of points that can be made.  The first is that, pursuant to s 19 of the Judiciary Act 1903 (Cth) (‘the Judiciary Act’), a Full Court of the High Court of Australia may be constituted by any two or more justices of the High Court sitting together, unless some subsequent provision of the Judiciary Act provides otherwise.  Section 21(1) of the Judiciary Act provides that applications for special leave to appeal to the High Court from a judgment of another court may be heard and determined by a single justice or by a Full Court.  Section 21(2) provides that the jurisdiction of the High Court to hear and determine appeals from judgments of the Supreme Court of a State sitting as a Full Court shall be exercised by a Full Court consisting of not less than three justices.  The first appellant contends that, because there were two judges of the Court of Appeal who dealt with the appeal from the original judgment of the Supreme Court, and because the application for special leave to appeal to the High Court was brought from the Court of Appeal’s judgment, the jurisdiction of the High Court to hear and determine it fell within s 21(2).  It is clear, however, that s 21(2) relates to the jurisdiction to hear and determine appeals, and that s 21(1) relates to applications for special leave to appeal.  There is no right to appeal to the High Court of Australia.  An appeal is only by special leave.  Unless and until the High Court grants special leave there is no appeal in existence.  When it exercised the jurisdiction to deal with the application for special leave, therefore, the High Court could legitimately be constituted by only two justices, in accordance with ss 19 and 21(1) of the Judiciary Act.  The fact that Hayne J may have also been sitting on the bench at the time does not necessarily mean that his Honour was engaged in hearing this application for special leave.  It is common knowledge that applications for special leave to appeal to the High Court are heard in a list, and the applicants are given limited time.  It is quite possible that his Honour, whilst remaining on the bench, was taking no part in the hearing of this application for special leave.  Indeed, the transcript of the hearing does not indicate that his Honour said anything.

8                     Even if it were the case that Hayne J sat on the application for special leave, and even if it were the case that his Honour thereby committed a criminal offence, it is clear that the order of the High Court dismissing the application for special leave would not be null and void as a consequence, and could not be treated as null and void.  It is a fundamental principle that an order of a superior court is not a nullity and cannot be treated as of no effect.  See Warramunda Village Inc v Pryde [2002] FCA 250 (2002) 116 FCR 58 at [71], where Finkelstein J stated the proposition and set out a number of authorities which stood for it. 

9                     It is apparent that, whatever defect might appear to attach to an order of the High Court of Australia, the order cannot be ignored.  Neither the Federal Magistrates Court nor this Court has any power to say that an order of the High Court of Australia should be set aside.  Neither court has any more capacity than anyone else to ignore such an order.  Even a conviction of Hayne J, if that were to result from the charge that has been laid, could not result in the automatic conclusion that the order of the High Court should be treated as of no effect.  The order must be treated as effective in its terms unless and until some successful application is made to set it aside.  No such application to the High Court of Australia has been made, although there has been ample opportunity to make it.  I do not accept the submission, made by the first appellant, that the refusal of the Federal Magistrates Court to adjourn the application to set aside the bankruptcy notice caused the appellants to lose their only opportunity to make such an application to the High Court.

10                  It follows that the argument that the application to the High Court of Australia for special leave to appeal has not been completed, cannot be accepted.  The application for special leave was completed on 3 October 2003.  The bankruptcy notice was not issued until
10 October 2003.  The undertaking which the appellants seek to invoke was no longer operative in the light of the order of the High Court.

11                  The second matter to which attention was directed relates to the service of the bankruptcy notice.  It appears that service of the bankruptcy notice was effected on the second appellant on 23 October 2003, but was not effected on the first appellant until 24 February 2004.  There is nothing unusual about service of a bankruptcy notice on judgment debtors, named in the same notice, on different days.  Indeed, it must occur often, because in many cases it would be unlikely to find the judgment debtors in or near the same place on the same day.  The appellants complained that, in the time between those two dates of service, a creditor’s petition was served on the second appellant.  The complaint seems to be that, in some way, the intervention of the creditor’s petition rendered the bankruptcy notice invalid, or liable to be set aside.

12                  I cannot see how this could be so.  Indeed, I find it difficult to see how any defect in service could lead to the setting aside of a bankruptcy notice.  It may of course lead to the non-commission of an act of bankruptcy, because a failure to effect service properly might not start the time running, within which the notice must be complied with, to avoid the commission of an act of bankruptcy.  I can see that the filing of a creditor’s petition against one debtor named in a bankruptcy notice, prior to service of the bankruptcy notice on another debtor, might be a ground for adjourning the hearing of the creditor’s petition.  It would seem in principle to be wrong that a court should make a sequestration order against the estate of one debtor named in a bankruptcy notice when the other debtor had had no opportunity to satisfy the debt, because the bankruptcy notice has not been served on both.  That is not a point that is before me today, however. 

13                  It is clear to me that there can be no rule that a bankruptcy notice must be served on both debtors named in it at the same time.  Different debtors can obviously be served at different times, as and when they can be located, or even as and when the judgment creditor chooses to serve them.  It is also clear to me that a bankruptcy notice cannot be null and void, or liable to be set aside, because it is served on different persons named in it at different times.  It is abundantly clear to me that the fact that a creditor’s petition may have been filed against, and served on, one of two debtors named in a bankruptcy notice, before service of
the bankruptcy notice on the other, cannot be a ground for regarding the bankruptcy notice as liable to be set aside.  This argument must also fail.

14                  Both before the Federal Magistrates Court and before this Court, the appellants have attempted to argue that they are not insolvent, and that that in some way affects the validity of the bankruptcy notice.  There is no requirement that a bankruptcy notice only be used in relation to judgment debtors who are insolvent.  The question of insolvency becomes relevant only upon the presentation of a creditor’s petition, once an act of bankruptcy has been committed by the failure to comply with the bankruptcy notice within the time allowed.  The question of the solvency of the appellants is irrelevant to the validity of the bankruptcy notice.

15                  Other matters that the appellants attempted to raise are not altogether clear.  The first appellant argued that the respondent has not proved that it has sold all properties over which it held security.  I cannot see how this is relevant to the issue of the validity of a bankruptcy notice.  There seems to be no rule, and no authority to which I was referred, suggesting that a judgment creditor who happens to have some form of security over property of the judgment debtor is obliged to have resort to that security before relying on a bankruptcy notice.  Again, that may be something that goes to the question of whether a sequestration order ought to be made, if a creditor’s petition is filed in reliance on a failure to comply with a bankruptcy notice.

16                  Other submissions made were clearly attempts to challenge the correctness of the judgment of Byrne J in the Supreme Court of Victoria.  That judgment now must be regarded as beyond challenge.  It has been the subject of an unsuccessful appeal to the Court of Appeal and an unsuccessful application for special leave to appeal to the High Court.  This Court, dealing with an application relating to a bankruptcy notice based on that judgment, plainly does not have power to inquire into the correctness of that judgment.  It follows that the appellants must fail in their appeal and it must be dismissed. 

17                  Questions arose as to orders for costs.  It is clear that costs should follow the event and that the appellants, having appealed unsuccessfully, should be required to pay the costs of the appeal.  The respondent sought an order for costs in two stages.  The first was a simple order for costs.  The second was an order that, should the appellants be made bankrupt on creditor’s petitions, the costs of this appeal be paid out of their bankrupt estates with priority under s 109 of the Bankruptcy Act 1966 (Cth).  Counsel for the respondent informed me that such a two-stage order had been made frequently, but was unable to draw my attention to any authority in which the propriety of making an order in those terms has been discussed by a court.  It seems to me that it would not be appropriate to make such an order.  In particular, it is not appropriate for the Court, dealing with a proceeding of this kind, to anticipate that there will be sequestration orders made on creditor’s petitions resulting from the failure of the appellants to comply with the bankruptcy notice.  I do not know whether such orders will be made or will not be made.  As I have said, the question of the solvency of the appellants will be relevant to that question.

18                  It seems to me to be appropriate to make a costs order in the usual way, simply ordering the appellants to pay the respondent’s costs.  There are two exceptions to that.  Reluctantly, on Friday of last week, 1 April 2005, I adjourned the hearing of the appeal on the application of the first appellant, because she claimed that the appellants had not received the written outline of submissions filed on behalf of the respondent on 15 November 2004, in accordance with a direction of the Court.  Given that it appeared that the appellants had made no attempt to inform the Court of the failure of the respondent to provide those written submissions, I was reluctant to adjourn the appeal.  I was also reluctant on the ground that the outline of submissions itself merely responded to the grounds of appeal and the arguments that had been raised by the appellants.  Counsel for the respondent did inform me that the respondent was unable to establish that it had made any attempt to serve the written outline of submissions on the appellants, and on that basis I adjourned the proceeding.  It seems to me, therefore, that the respondent ought not to have its costs of that adjournment.

19                  The first appellant did suggest that the appellants ought to have their costs of that adjournment.  I do not think they should.  My view remains that they ought to have been in a position to proceed last week, especially as I stood the matter down to allow the first appellant to read the written submissions of the respondent, which are not lengthy.  In my view it will be sufficient simply to exclude from an order for costs the respondent’s costs of the adjournment of the hearing on 1 April 2005. 

20                  I also exclude from it the costs of the appeal book filed on 22 October 2004.  It was at all times clearly the appellants’ responsibility to file an appeal book.  They did so on 16 September 2004.  The respondent’s representatives were dissatisfied with the state of that appeal book.  My associate clearly indicated to them that, if there were documents missing, the respondent’s representatives would be entitled to hand them up at the hearing of the appeal, if they sought to rely on such documents.  Notwithstanding this encouragement, the respondent’s representatives went ahead and filed an appeal book of significant size.  I do not think the appellants should have to pay the respondent’s costs of that exercise, which was unnecessary.

21                  The orders I make, therefore, are as follows:

1.         The appeal be dismissed.

2.           The appellants pay the respondent’s costs of the appeal, except for the costs of the appeal book filed on 22 October 2004 and the costs of the adjournment of the hearing on 1 April 2005.

Associate:

Dated:              18 May 2005