FEDERAL COURT OF AUSTRALIA

Johnston v Challen, trading as Hawthorn Cappaidge and Badgery [2006] FCA 401

PRACTICE AND PROCEDURE – appellate jurisdiction – application for extension of time for leave to appeal from judgment of Federal Magistrates Court - whether special reason exists for extension of time – merits of appeal

Bankruptcy Act 1966 (Cth) s 153B

Federal Court Rules O 52 r 15

Gough v Myall Pty (2001) FCA 1692 applied

Heinrich v Commonwealth Bank of Australia (2003) FCAFC 315 referred to

House v R (1936) 55 CLR 499 referred to

Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344 cited

Jess v Scott (unreported Full Court of the Federal Court, Lockhart, Sheppard and Burchett JJ, 4 November 1986) applied

Kalaba v R (unreported, 13 September 1996, Finn J) applied

Parker v The Queen [2002] FCAFC 133 referred to

Sandell v Porter (1966) 115 CLR 666 cited

Stankiewicz v Plata (2002) FCA 1185 applied

LORIS JOHNSTON v PETER LESLIE CHALLEN, TRADING AS HAWTHORN CAPPAIDGE AND BADGERY

QUD 460 OF 2005

COLLIER J

18 APRIL 2006

BRISBANE

THE COURT ORDERS THAT:

1.                  The application be dismissed.

2.                  The applicant pay the costs of the respondent.

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

REASONS FOR JUDGMENT

1                     This is an application by Ms Loris Johnston (‘the applicant’) for an extension of time to file and serve a Notice of Appeal from the decision of Federal Magistrate Jarrett made on 30 September 2005, wherein the learned Federal Magistrate refused an order that the applicant’s bankruptcy be annulled pursuant to s 153B Bankruptcy Act 1966 (Cth) (‘the Act’).

2                     The respondent to this application is the petitioning creditor to the bankruptcy of the applicant. Another creditor, I & L Securities Pty Ltd (‘I & L Securities’), and the trustee in bankruptcy were also represented at the hearing.

3                     Time limits for filing and serving a notice of appeal from a decision of the Court or the Federal Magistrates Court are determined by O 52 r 15 Federal Court Rules. This rule provides as follows:

‘(1) The notice of appeal shall be filed and served -

(a) within 21 days after -

(i) the date when the judgment appealed from was pronounced;

(ii) the date when leave to appeal was granted; or

(iii) any later date fixed for that purpose by the court appealed from; or

(b) within such further time as is allowed by the Court or a Judge upon application made by motion upon notice filed within the period of 21 days referred to in the last preceding paragraph.

(2) Notwithstanding anything in the preceding sub-rule, the Court of a Judge for special reasons may at any time give leave to file and serve a notice of appeal.’

4                     It is common ground that the applicant did not file and serve a notice of appeal within 21 days after 30 September 2005, nor did she apply to this Court for further time within that 21 days to file and serve a notice of appeal. Accordingly, the application before me is for leave pursuant to O 52 r 15(2) to file and serve a notice of appeal. In considering this application I note that I am exercising the appellate jurisdiction of the Federal Court, not the Court’s original jurisdiction: Hall v Anderson (unreported Full Court of the Federal Court, 18 July 1997), Wati v MIMIA (1997) 78 FCR 543.

PRINCIPLES APPLICABLE TO EXTENDING TIME FOR LODGEMENT OF NOTICES OF APPEAL

5                     Prima facie, time limits set by the Federal Court Rules, including those with respect to notices of appeal, are there to be observed by the parties. However, O 52 r 15(2) vests a discretion in the Court to extend the time during which a notice of appeal may be lodged, in order to avoid injustice where a party has missed a prescribed deadline for lodgement (Parker v The Queen [2002] FCAFC 133 at par 13). ‘Special reasons’ must be demonstrated in order for this rule to be invoked. In considering the  meaning of this term in Jess v Scott (unreported Full Court of the Federal Court, 4 November 1986), the Full Court said:

‘It is that there be shown a special reason why the appeal should be permitted to proceed, though filed after the expiry of twenty-one days. In that context, the expression “special reasons” is intended to distinguish the case from the usual course according to which the time is twenty-one days. But it may be so distinguished (not necessarily will, for the rule gives a discretion) wherever the Court sees a ground which does justify departure from the general rule in the particular case. Such a ground is a special reason because it takes the case out of the ordinary. We do not think the use of the expression “for special reasons” implies something narrower than this.’ (pp 18-19)

6                     The Full Court in Jess v Scott emphasised that, given the discretionary nature of the Court’s power in O 52 r 15(2) to relax the requirement of the general rules, the power should not itself ‘become entangled in a web of rules spun out of the Court’s discretionary decisions’. (p 20) However, there are a number of guiding principles which may assist the court in exercising its discretion. These were described by Wilcox J in Hunter Valley Developments Pty Ltd v Cohen (1984) 3 FCR 344 at 348-349, and adopted by the Full Court in Parker v The Queen at par 6, as follows:

1.                  applications for an extension of time are not to be granted unless it is proper to do so; the legislated time limits are not to be ignored. The applicant must show an ‘acceptable explanation for the delay’; it must be ‘fair and equitable in the circumstances’ to extend time;

2.                  action taken by the applicant, other than by way of making an application for review, is relevant to the consideration of the question whether an acceptable explanation for the delay has been furnished;

3.                  any prejudice to the respondent in defending the proceedings that is caused by the delay is a material factor militating against the grant of an extension;

4.                  however, the mere absence of prejudice is not enough to justify the grant of an extension; and

5.                  the merits of the substantial application are to be taken into account in considering whether an extension of time should be granted.

7                     It is useful to examine the background to this case, and then return to these principles.

BACKGROUND

8                     The relevant facts of this case are set out in the judgment of Jarrett FM, delivered 30 September 2005.

9                     As noted earlier in this judgment, the proceeding before the learned Federal Magistrate was an application, brought by the applicant in the case before me, for her bankruptcy to be annulled pursuant to s 153B of the Act. Section 153B provides as follows:

‘(1)      If the Court is satisfied that a sequestration order ought not to have been made or, in the case of a debtor’s petition, that the petition ought not to have been presented or ought not to have been accepted by the Official Receiver, the Court may make an order annulling the bankruptcy.

(2)       In the case of a debtor’s petition, the order may be made whether or not the bankrupt was insolvent when the petition was presented.’

10                  The applicant became bankrupt following an order for the sequestration of her estate in accordance with s 43(2). Therefore only s 153B(1) is relevant. Section 153B(2) is irrelevant for the purposes of this application.

11                  The debt which eventually formed the basis of the sequestration order related to monies claimed by the respondent, who was at one point the applicant’s solicitor. The debt was incurred for professional costs and outlays of the respondent in relation to litigation between the applicant and I & L Securities, and also in relation to a dispute between the applicant and a third party involving a storm water drain.

12                  The litigation between the applicant and I & L Securities, which is described in some detail in the judgment of Jarrett FM, commenced in 1997, and included a successful default judgment obtained by I & L Securities in the District Court of Queensland in April 1999. This default judgment was subsequently set aside. I & L Securities applied for judgment again in June 2003 but I am unaware whether any orders have been made.

13                  On 18 December 2002 the respondent issued proceedings out of the Magistrates Court of Queensland in Brisbane in relation to monies owed by the applicant, claiming $13 362.75 and interest. The applicant did not file a defence to the respondent’s claim, and default judgment was entered against her on 5 February 2004.

14                  Relying on the default judgment of the Magistrates Court, the respondent issued a bankruptcy notice, which was served on the applicant.

15                  It appears that on 19 May 2004, which was the same date as the hearing of the creditor’s petition, the applicant filed an application to set aside the Magistrates Court judgment. The applicant and the respondent agreed to compromise the respondent’s claim by the applicant paying $6000, by instalments, in full and final satisfaction of the claim made by the respondent.

16                  The agreement of the applicant and the respondent was formalised by a deed. However, the applicant apparently did not pay any of the instalments agreed. Consequently, the respondent sought to enforce the deed of settlement, and was successful in obtaining a second judgment against the applicant in the Magistrates Court of Queensland on the basis of the applicant’s failure to comply with the deed. A second bankruptcy notice (‘the second bankruptcy notice’) was issued by the respondent, based on this second judgment, and served on the applicant on 24 March 2005.

17                  The respondent issued another creditor’s petition (‘the second creditor’s petition’) based on the applicant’s failure to comply with the second bankruptcy notice. A sequestration order was made against the applicant, based on this creditor’s petition, on 18 May 2005.

18                  In applying to Jarrett FM to have her bankruptcy annulled, the applicant’s first ground was that she had never been served with the second creditor’s petition. This was contradicted by evidence of Mr Garry Robert Brian, a process server, who swore that he had served the applicant with the second creditor’s petition at her premises. At the hearing before Jarrett FM, both the applicant and the process server were extensively cross-examined in relation to this issue. As between the two witnesses, the learned Federal Magistrate preferred the evidence of Mr Brian, for a number of reasons:

·                    The view of the learned Federal Magistrate that the evidence of Mr Brian was ‘left untarnished’ by the cross-examination (par 35)

·                    What his Honour described as ‘great misgivings’ about the credit-worthiness of the applicant, particularly as she admitted under cross-examination that she had lied in an affidavit filed with the Federal Magistrates Court on 15 August 2005 in relation to lodgement of taxation returns (pars 40-42)

·                    The identification of the applicant by Mr Brian. From the transcript of the hearing in the Federal Magistrates Court, it appears that the applicant had suggested that Mr Brian had served the creditor’s petition on one of the residents of the boarding house operated by the applicant, and that the applicant would have been having breakfast and coffee at New Farm at the time the creditor’s petition was served. As his Honour noted,

‘I am not satisfied that Mr Brian made a mistake in terms of his identification of the bankrupt. He identified her in Court as the person he served with the creditor’s petition, and as the same person he served with the bankruptcy notice that founded the petition.’ (par 45)

19                  The second basis for the application before the learned Federal Magistrate was that the applicant was solvent at the time the sequestration order was made. His Honour dealt with this point briefly at par 49 of the judgment as follows:

‘That affidavit, however, does not purport to prove solvency as at the date the sequestration order was made. At best it purports to prove solvency at the time the affidavit was filed. Although it might be said that only a couple of months exist between those two dates, that is the making of the sequestration order and the filing of the affidavit. Nonetheless, the affidavit does not purport to deal with solvency at the time the sequestration order was made.’

20                  On this basis, his Honour rejected the claim of the applicant that she was solvent, as a basis for annulment of the sequestration order.

21                  In addition to these grounds however, his Honour was of the view that even if the applicant were solvent, as a matter of discretion he was minded to refuse the annulment because he was satisfied that the bankrupt’s affairs were deserving of further investigation. In particular, she had failed to disclose assets to the trustees, failed to comply with her obligations under the Act, and there was uncertainty with respect to ownership of assets.

22                  The learned Federal Magistrate therefore refused to annul the applicant’s bankruptcy.

LODGEMENT OF NOTICE TO EXTEND TIME TO APPEAL, AND NOTICE OF APPEAL

23                  It appears that the applicant attempted to file a notice of appeal from the decision of Jarrett FM within time. The applicant has submitted that she waited until 21 October 2005 – the last possible day for filing a notice of appeal from the decision of Jarrett FM in compliance with the terms of O 52 r 15(1)(a) – because she was hoping to receive her Centrelink payments to pay the filing fee. The Registry rejected the notice the applicant attempted to file on form grounds. Both in written submissions and in evidence before the Court, the applicant said she had spoken with ‘a Registrar’ of the Court. The applicant claims ‘the Registrar’ said it would not be a problem if the notice of appeal was filed with the court the following Monday, namely 24 October 2005. The applicant states that she returned to the Brisbane registry on 24 October 2005 to file the documents, however the notice she attempted to file on that day was again rejected on form grounds. On 26 October 2005 the applicant filed an application for leave to file and serve a notice of appeal out of time, with a supporting affidavit.

24                  The applicant filed a notice of appeal on 17 November 2005, claiming as grounds of appeal:

1.                  That she was solvent on 18 May 2005, the date of the sequestration order.

2.                  That she was not served with the creditor’s petition.

3.                  That she is not bankrupt, and is able to pay her creditors.

4.                  That she can be refinanced to clear all debts.

5.                  That the proof of debt of her major creditor, I & L Securities, is false.

25                  A supporting affidavit, also filed by the applicant on 17 November 2005, elaborates slightly on each of these grounds, however supplements them with additional evidence namely:

·                     A claim by the applicant that she had $6756 in her bank account as of 18 May 2006, with all rates and accounts paid to that date;

·                     Claims by the applicant that she had receipts ‘for most of the china’ and in respect of boats and motor vehicles, which indicate that these assets were not hers;

·                     A statement that she was waiting for a report from a barrister in relation to the debt claimed by I & L Securities;

·                     A statement that she has obtained approval to be refinanced for her other creditors; and

·                     A statement that she has ‘statutory declarations from tenants at the boarding house that (she) was not there on 2.5.05’;

·                     A request that evidence be produced from a third party that ‘at approx 7.15 am on 2^nd May, 2005 on my way from home in Slacks Creek to the Boarding House in Wooloowin I stopped at her home at 77 Kneale Street, Holland Park West to drop off plant cuttings’.

CONSIDERATION OF RELEVANT PRINCIPLES

26                  I note that the applicant actually lodged the notice to extend time to file the notice of appeal within a week of the expiry of the prescribed time period. In my view, the delay is not substantial, or such that, in itself, it is likely to prejudice the respondent.

27                  In my view the applicant’s explanation for her delay in lodging a notice of appeal is prima facie plausible. No evidence has been produced to this court in relation to the claimed conversation between the applicant and ‘the Registrar’, other than evidence of the applicant. For the purposes of this application, I am prepared however to find that, through misunderstanding or otherwise, the applicant genuinely believed that she could file her notice of appeal from the decision of the learned Federal Magistrate the week after the expiry of the 21 days prescribed by O 52 r 15(1)(a). I am also prepared to accept the claim of the applicant that she believed that she needed the funds from her Centrelink payment to pay the filing fee for lodgement of the notice.

28                  In my view, the key question is whether, prima facie, the merit of the applicant’s case is such that the Court should exercise its discretion to allow additional time to file a notice of appeal. To paraphrase Finn J in Kalaba v R (unreported, 13 September 1996 at p 6, quoting in turn the Full Court in Jones v The Queen (unreported) Federal Court, 17 August 1984), has the applicant demonstrated that her appeal may have sufficient prospect of success to make it just that she should not be allowed to proceed with it? The other side of this coin is clearly that it is potentially unjust to all parties to this matter to allow the applicant to proceed with a case, where there are not sufficient prospects of success, but which would cause all parties to perhaps futilely incur costs, and introduce improper delay into the affairs of the parties.

29                  It is appropriate that I should then consider the prima facie merit of the applicant’s appeal case should she be granted leave to now file her notice of appeal.

30                  At the same time, it is vital to constantly keep in mind that the power exercised by the learned Federal Magistrate at first instance under s 153B(1), is discretionary. As pointed out by Dixon, Evatt and McTiernan JJ in the well-known case House v R (1936) 55 CLR 499 at 504-505, in the case of an appeal against an exercise of discretion, the appellate court must not attempt to simply substitute its opinion for that of the court at first instance. It must appear that some error has been made by the judge at first instance in exercising discretion, before the appellate court can and should interfere in that decision.

31                  The merits of the applicant’s proposed appeal case were argued in detail and at length during the hearing before me. The key matters upon which the case prospectively appears to turn are:

·                    Whether the applicant was actually solvent at the date of the sequestration order, and therefore whether the order should not have been made;

·                    Whether the applicant was actually served with the second creditor’s petition; and

·                    The applicant’s claim that she now has additional resources, in the form of refinancing from other creditors.

MERITS OF THE APPEAL

Making of the sequestration order

32                  As pointed out by the Full Court in Heinrich v Commonwealth Bank of Australia (2003) FCAFC 315 at par 20,

‘The Court must first consider whether the sequestration order ought not to have been made. If it so finds, then the Court must consider whether, in the exercise of its discretion, the bankruptcy should be annulled... Later evidence of previously unknown facts may disclose matters which show that the sequestration order ought not to have been made. That is, the court is entitled to consider not only the case as disclosed at the time when the sequestration order was made, but also those facts now known then to have existed. The Court excludes those facts which have occurred since the order was made.’

33                  On the facts of this case, the applicant has committed an act of bankruptcy. There appears to be no dispute that the applicant was indebted to the respondent, that the respondent obtained a final judgment for the sum in question, and that this final judgment formed the basis of the bankruptcy notice. That debt, and that judgment are not in any way being impugned in this matter.  Failure to comply with the bankruptcy notice in turn resulted in a sequestration order being made against the applicant. I have already recounted in some detail the background to this debt.

34                  The applicant has submitted before me that, notwithstanding that she did not pay the debt, she was nonetheless solvent – that is, able to pay all of her debts as and when they became due and payable. The applicant has also sought to demonstrate that her income exceeded her expenditure during the period when the sequestration order was made, and indeed the applicant has claimed that she had estimated gross annual earnings net of expenses of $90 000 (TS p 23 ll 35-38). However it became clear during cross-examination before me that the applicant has little or no income, and had little or no income at the date of the sequestration order (for example, TS p 15 l 3). Further, under cross-examination by counsel for I & L Securities it became apparent that the applicant’s expenses far exceeded any earnings during this time (TS pp 25-32).

35                  The applicant has also claimed that her apparent excess of assets over liabilities means that she was solvent at the relevant time: Sandell v Porter (1966) 115 CLR 666 at 670. I note that, to some extent, it is difficult to know exactly what assets the applicant owns, as there appears to be disputes about, for example, various vehicles and boats. Further, I note, as did his Honour, that the applicant has apparently concealed property, including a china collection, for fear that it would be removed from her.

36                  In my view, the applicant has not established a prima facie case that she was solvent at the date of the sequestration order upon which her bankruptcy is founded.

37                  In Stankiewicz v Plata (2002) FCA 1185 at par 19 the Court held that in determining whether a sequestration order ought not to have been made, the court is entitled to consider not only the case as disclosed at the time the order was made, but as it would have been disclosed had all the true facts been before the court on the making of the order. In my view in the case before me, no new facts of substance, relevant to the making of the sequestration order, have emerged since the hearing before the learned Federal Magistrate. In my view the evidence before me shows that it is likely the applicant was not solvent at the date of the sequestration order. I note that his Honour also considered evidence in relation to solvency of the applicant during the relevant period. His Honour, in light of evidence before him, exercised his discretion and refused to annul the applicant’s bankruptcy. There appeared on the case before me to be little or no variation in the financial position of the applicant over the period before and after the making of the sequestration order.

38                  No evidence has been brought before me which would prima facie incline me to disturb his Honour’s findings on appeal in relation to whether the sequestration order ought to have been made.

Service of the Second Creditor’s Petition

39                  The applicant sought to introduce fresh evidence before me providing an alternative version of events, from the applicant’s perspective, on the morning of 2 May 2005 when she was putatively served with the petition. However, the whereabouts of the applicant on that morning have already been exhaustively argued before his Honour. The applicant has already, it seems, given one version of events on that morning which has been dismissed by the learned Federal Magistrate, and is now seeking to put forward another version. In my view comments of Gray J in Gough v Myall Pty (2001) FCA 1692 at par 14 are pertinent to this case, namely,

‘the appeal system does not allow a party to make repeated attempts to change findings of fact by introducing evidence that could have been introduced at an earlier stage.’

40                  In my view, it is prima facie unlikely, for the reasons given by his Honour, that the Court would make any finding other than that the applicant was served with the second creditor’s petition at her premises at Wooloowin on the morning of 2 May 2005. His Honour was satisfied on the evidence of the process server that the applicant had been served with the second creditor’s petition. On the evidence before me I would not disturb the finding of the learned Federal Magistrate on the issue of whether the applicant was actually served with the second creditor’s petition.

Additional resources

41                  The applicant has also claimed that she now has additional resources, in the form of refinancing from other creditors. It is difficult to know how to view this evidence. While it may be evidence of solvency, the fact of the matter is that, if the applicant has recently managed to obtain additional credit while she has been a bankrupt (TS p 57 ll 24-28), her actions are likely to have been in breach of s 269 of the Act and hence unlawful. I make no finding in relation to this issue.

CONCLUSION

42                  In my view the case put to me by the applicant does not on its face disclose any basis upon which I would disturb the findings of the learned Federal Magistrate on appeal. His Honour heard the evidence before him, and refused to annul the bankruptcy of the applicant under s 153B(1) of the Act. The applicant has made submissions concerning comments of his Honour in refusing to exercise his discretion in the applicant’s favour, including the view of his Honour that the applicant’s affairs were deserving of further investigation, as she failed to disclose assets to the trustees, failed to comply with her obligations under the Act, and there was uncertainty with respect to ownership of assets. In view of the nature of the case, I am not prepared to hold that his Honour was in error in so finding. As stated succinctly by the learned authors of McDonald Henry and Meek Australian Bankruptcy Law and Practice at par 153B.0.07:

‘The discretionary consideration is an important factor and is often overlooked by applicants. Despite an applicant demonstrating that the sequestration order ought not to have been made or the debtor’s petition ought not to have been presented the discretionary factors may result in the application being refused.’

43                  On review of the case and the evidence before me, in my view an appeal from the decision of the learned Federal Magistrate would be bound to fail. I find there are no special reasons within the meaning of O 52 r 15(2) to extend time to the applicant to file her notice of appeal from the decision of Jarrett FM.

44                  Accordingly, I dismiss the application with costs.

Associate:

Dated:              18 April 2006