FEDERAL COURT OF AUSTRALIA

Cavoli v Etl [2007] FCA 1191

BANKRUPTCY – Creditor served bankruptcy notice on Debtor – Creditor was assignee of a debt from firm of solicitors– no evidence that assignor had security over Debtor’s property – no evidence that bankruptcy notice was issued solely for purpose of securing payment of debt – no evidence of a collateral purpose in a contrived arrangement to avoid assignor giving up security

Held:  

1.        No evidence that Creditor’s bankruptcy notice was issued as an abuse of process

2.        Bankruptcy notice reinstated and time for compliance extended

Bankruptcy Act 1966 (Cth) s 44

Etl v Cavoli [2007] FMCA 356 reversed

Allesch v Maunz (2000) 203 CLR 172 cited

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

CSR Ltd v Della Maddalena (2006) 224 ALR 1 cited

Maxwell-Smith v S & E Hall Pty Ltd [2006] FCA 825 cited

Etl v Settle [2004] FMCA 718 cited

Schellenberg v Tunnel Holdings Pty Ltd (2000) 200 CLR 121 cited

King v Collins [2007] NSWCA 122 cited

TONY CAVOLI v KARL ETL

VID290 OF 2007

HEEREY J

SYDNEY (HEARD IN MELBOURNE)

16 AUGUST 2007

THE COURT ORDERS THAT:

1.                  The appeal is allowed.

2.                  The order of the Federal Magistrate of 22 March 2007 is set aside.

3.                  The time for compliance with the Bankruptcy Notice is extended to 7 September 2007.

4.                  The respondent pay the costs of the appellant of the appeal and at first instance.

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

REASONS FOR JUDGMENT

1                     The appellant Tony Cavoli (the Creditor) appeals against a decision of the Federal Magistrates Court which set aside a bankruptcy notice served on the respondent Karl Etl (the Debtor): Etl v Cavoli [2007] FMCA 356. 

2                     The Creditor was an assignee of debt from a firm of solicitors called Lennon Settle Mazzeo Lawyers (the Assignor).  The learned Magistrate held at [62] that the bankruptcy notice was an abuse of process.  His Honour found at [59] that it had been issued “solely for the purpose of securing payment of the debt”.  The Creditor had failed to take “appropriate action to otherwise recover the debt or even make demand upon the Debtor” (at [59]).  There was, his Honour found at [62], a collateral purpose in that the Creditor and the Assignor had a “contrived arrangement” to circumvent the operation of s 44(3) of the Bankruptcy Act 1966 (Cth).  The Assignor was said to be a secured creditor for a much larger amount.  By “syphoning off” a small debt to the Creditor, the Assignor could bring about the Debtor’s bankruptcy without having to surrender his security, as required by s 44(3) had it been the petitioning creditor (at [61]). 

Evidence

3                     The debt the subject of the bankruptcy notice was $21,638.30 being the amount taxed by Master Bruce of the Supreme Court of Victoria as the costs of the Assignor pursuant to orders made against the Debtor in the Supreme Court in 2004 and 2005.  The Master’s Certificate was issued on 18 January 2006.  The notice of assignment dated 1 May 2006 was in evidence, although not the assignment itself.  The notice of assignment was in these terms:

“To:    Mr Karl Etl (aka Karel Etl)

 Of:      5 Richardson Street, Essendon

NOTICE OF ASSIGNMENT OF DEBT

ASSIGNMENT OF DEBT   Notice is hereby given to you that Lennon Settle Mazzeo Lawyers (formerly Lennon Settle) has assigned to Tony Cavoli all its legal and beneficial rights, title and interest in the Debt in the sum of $21,638.30 plus interest pursuant to statute payable to Lennon Settle Mazzeo Lawyers and arising out of an Order made by Master Bruce of the Supreme Court of Victoria at Melbourne 18 January, 2006.

DIRECTION TO PAY          Accordingly, you are hereby irrevocably directed to pay the Debt to Tony Cavoli or as he may in writing direct.

PAYMENT DETAILS          Please remit the payment in the sum of $21,638.30 plus interest pursuant to statute to:-

                                                Tony Cavoli

                                                Level 9, 179 Queen Street

                                                MELBOURNE  3000

DISCHARGE OF DEBT     You will receive from Tony Cavoli confirmation of the discharge of the Debt upon payment of same in full.

Dated:        1 May 2006.

[sgd]………………………………         [sgd]…………………………………

LENNON SETTLE MAZZEO             TONY CAVOLI”

4                     On 8 May 2006 the Debtor was served with a bankruptcy notice in respect of the assigned debt.  As required by the statutory form, the notice included the statement:

“You are required, within 21 days after service on you of this Bankruptcy Notice:

            (a) to pay to the creditor the amount of the debt; or

(b) to make an arrangement to the creditor’s satisfaction for settlement of the debt.”

The notice also stated that payment could be made to the Creditor at Level 9, 179 Queen Street, Melbourne 3000.

5                     The Debtor swore an affidavit in support of his application. Leaving aside some grounds which were dismissed by the learned Magistrate and not raised on appeal, the Debtor deposed that he was solvent and that any creditor’s petition against him would amount to an abuse of process in view of the fact that any such sequestration orders would be “foredoomed to failure based upon my solvency”.  He deposed that he had “assets which exceed $1 million in value and my liabilities are far less than that figure”.  The affidavit continued:

“11.     Further I believe that the Bankruptcy Notice also amounts to an abuse of process by reason of the fact that the assignor of the relevant debt previously filed another Bankruptcy Notice against me in this Court arising out of another proceeding filed in the County Court and has not pursued any bankruptcy proceedings against me on the basis of that principal judgment debt.  I believe it has not done so because it knows that I am a solvent person.

12.       The appeal proceedings brought against the assignor arose out of that principal County Court proceeding.  The purported assignor of the debt was my previous solicitor in Family law proceedings, Messrs. Lennon Settle, and they know full well that I am a solvent person with ample assets.  I believe that the Bankruptcy Notice has been filed as an illegitimate attempt to cause me stress and vexation, knowing full well that I am a solvent person.  It smacks of an abuse of process designed to persecute me and designed to ulitise this Court s a debt collector when there are ample alternative remedies available to any judgment credit or assignee thereof to collect any judgment debt owed by me.”

The Debtor’s speculation about the beliefs and motives of the Assignor and the Creditor would seem to be inadmissible.  No objection was taken.  However, as this is an appeal by way of rehearing, the judgment appealed from can be set aside where there is legal, factual or discretionary error: Allesch v Maunz (2000) 203 CLR 172 at [23] (a case which concerned the Family Court but is equally applicable to appeals in the Federal Court: Minister for Immigration and Multicultural Affairs v Jia Legeng (2001) 205 CLR 507 at [75]).  It is not clear whether his Honour relied on this evidence, but if and to the extent that he did there would be an error of fact-finding: CSR Ltd v Della Maddalena (2006) 224 ALR 1 at [16].  Unsupported speculation of this kind has no probative value.

6                     In an affidavit in opposition the Creditor set out the history of the Supreme Court proceedings.  He deposed that the Debtor had not paid or offered to pay the claim in the bankruptcy notice or any part thereof.  He further deposed:

“6.       I deny that the bankruptcy notice has been filed to cause Etl stress and vexation knowing that he is solvent.  I issued the Bankruptcy Notice in the hope that the Debt would be paid.  If payment is not made, I intend to issue a bankruptcy petition.

7.         Based on Etl’s failure to pay the amount set out in the bankruptcy notice, or even offer to pay what he admits to be the amount outstanding (approximately $15,500), I believe that he may be insolvent.”

7                     The Debtor swore an affidavit in reply stating that he was aware that the Creditor was a solicitor who practised from the same office floor building as was previously occupied by the Assignor.  He believed that the Creditor was a personal friend of Mr Mazzeo, a partner of the Assignor who had the carriage of his (the Debtor’s) matrimonial proceeding in the Family Court.  He produced what was said to be a true copy of a statement of assets and liabilities prepared by his present accountant in relation to his personal position and that of his company, Millhouse General and Mercantile Pty Ltd. 

8                     The Debtor further deposed that on 1 August 2006 the Assignor procured the attendance of a Sheriff’s officer to execute a warrant of apprehension.  On 30 June 2006 Mr Mazzeo swore an affidavit in support of the issue of a warrant of seizure and sale out of the County Court of Victoria.  The Assignor’s debt sought to be recovered by this execution exceeded $235,000.  If that warrant were executed the Assignor would recover all of their judgment debt. 

9                     He further deposed:

“7.      I believe that the Assignor and the Assignee know full well that I am a solvent person.  I believe that the Bankruptcy Notice has been filed against me in order to cause me to suffer vexation and distress.  Mr Mazzeo knows full well that a sale of the real estate in which I have an interest would give rise to more than sufficient funds to discharge the entire debt which I owe to his firm.  However, I am very angry with Mr Mazzeo and I refuse to pay out the debt as I intend to file legal proceedings against his firm seeking substantial damages for negligence and conspiracy to cause me personal injury and loss and damage.”

10                  The Creditor was cross-examined by counsel for the Debtor.  He said that he had practised as a solicitor for about 19 years as a general practitioner with some experience in commercial litigation including the collection and recovery of debts.  He was familiar with the summons for oral examination procedure.  He said the assignment was offered to him by Mr Mazzeo in April.  He had known Mr Mazzeo for about six or seven years.  They had practised on the same floor at 179 Queen Street.  He had never before taken assignments of debts owed to fellow practitioners.  He was asked:

“What discussions, if any, did you have with Mr Mazzeo in regards to why it was that he was offering to assign the debt to you? --- We didn’t have a discussion as to why he was assigning the debt.  He simply asked me whether I was interested in taking an assignment of a debt, on commercially favourable terms to me.  He described the debt, how much it was for, and we proceeded to the assignment on that basis.”

11                  The cross-examiner did not explore details of the “commercially favourable terms”.  In answer to further questions the Creditor said was not aware that Mr Mazzeo’s firm had previously on 22 July 2004 issued a bankruptcy notice against the Debtor.  He admitted he was curious as to why Mr Mazzeo was offering to assign the debt, but assumed he had his reasons for doing that, but “we didn’t go into them”.  He had no knowledge of the family law background.  He was asked about his knowledge of bankruptcy law in the following terms:

“Now, it would be quite wrong, would it not, do you accept, to issue a bankruptcy notice merely for the purpose of seeking a judgment debtor to pay a debt?  Do you accept that? --- No, I don’t.

So you think it’s a proper purpose, do you, if the sole purpose of your bankruptcy notice – the sole purpose – is to put pressure on an individual to pay a debt?  You think that would be a proper purpose, do you? --- What I say is that it’s - - -

No, just answer my question.  Would it be a proper purpose if your sole purpose for filing a bankruptcy notice was to put pressure on the individual to pay the debt?  Would that be a proper purpose, yes or no? --- No.

So you think it’s a proper purpose, do you, if the sole purpose of your bankruptcy notice – the sole purpose – is to put pressure on an individual to pay a debt?  You think that would be a proper purpose, do you? --- What is say is that it’s - - -

No, just answer my question.  Would it be a proper purpose if your sole purpose in filing a bankruptcy notice was to put pressure on the individual to pay the debt?  Would that be a proper purpose, yes or no? --- No.”

12                  He agreed that he had made no enquiries as to what if any assets the Debtor owned.  He had made no direct request of the Debtor for payment but relied on the notice of assignment and the bankruptcy notice itself.  He was not aware that the Assignor had issued a Warrant for Seizure and Sale out of the County Court seeking recovery of $235,000.  He had a “general understanding” of the operation of s 44(3) of the Bankruptcy Act 1966 (Cth) and that there was a danger of a creditor losing its security.  He had no discussions with Mr Mazzeo at all in regards to the security over the Debtor’s property.  It was put to him:

“Now I suggest that indeed you issued this particular bankruptcy notice.  One of the purposes for issuing it was indeed to seek to put pressure upon him to pay the debt.  Isn’t that correct? --- I issued it in the hope that I would get paid.  There was no intention to put any undue or improper pressure on him; just simply that we get paid.” 

He agreed that he made no attempt to exhaust other forms of debt recovery before issuing the notice.

Magistrate’s judgment

13                  His Honour referred to ss 44(2), (3) and (5) of the Act which provide as follows:

“(2)     Subject to subsection (3), a secured creditor shall, for the purposes of paragraph (1)(a), be deemed to be a creditor only to the extent, if any, by which the amount of the debt owing to him or her exceeds the value of his or her security.

(3)       A secured creditor may present, or join in presenting, a creditor’s petition as if he or she were an unsecured creditor if he or she includes in the petition a statement that he or she is willing to surrender his or her security for the benefit of creditors generally in the event of a sequestration order being made against the debtor.

…

(5)       Where a secured creditor has presented, or joined in presenting, a creditor’s petition as if he or she were an unsecured creditor, he or she shall, upon request in writing by the trustee within 3 months after the making of a sequestration order, surrender his or her security to the trustee for the benefit of the creditors generally.”

14                  His Honour referred to statements of principle including those in Maxwell-Smith v S & E Hall Pty Ltd [2006] FCA 825 when Jacobson J cited a number of propositions including at [43]:

“If it is apparent to the Court that the purpose of a bankruptcy notice is to put pressure on a debtor to pay a debt, rather than to invoke the Court’s insolvency jurisdiction, the issue of the bankruptcy notice will be an abuse of process.” [Authorities cited]

15                  The learned Magistrate at [56] found the evidence of the Debtor’s solvency “clearly deficient”.  This aspect has not been pursued on the appeal. 

16                  His Honour at [57] thought that the Creditor had been “less than frank” with the Court in divulging the true circumstances leading up to the execution of the assignment.  He noted that the assignment itself had not been produced and there might have been formal defects in it.  His Honour continued:

“58.     In any event, applying the authorities to which reference has been made, I am satisfied that the bankruptcy notice has been issued as a means to secure payment of the debt and further that it has a collateral purpose.  On that basis, I am satisfied it is an abuse of process and should be set aside.

59.       It is clear on the evidence before me that the Creditor has issued the bankruptcy notice solely for the purpose of securing payment of the debt and has failed to take any appropriate action to otherwise recover the debt or even make demand upon the Debtor for payment of the debt.  The demand made on the Debtor was a demand made by the assignor prior to the assignment of the debt.

60.       The collateral purpose in my view having regard to the history set out in the court’s earlier decision in Etl v Settle [[2004] FMCA 718] was to circumvent the operation of s.44 of the Bankruptcy Act.  I am satisfied that the close relationship between the Creditor and the assignor illustrates that this procedure undertaken for the first time by the Creditor was a procedure which had as its collateral purpose a benefit to the Creditor’s friend and professional colleague of avoiding the operation against the assignor of s.44 of the Bankruptcy Act. 

61.       I am satisfied on the material before me, including the history set out in the Court’s earlier judgment to which I have already referred, that there was a benefit to the assignor of ‘syphoning off’ a small part of the total debt allegedly owed by the Debtor to the assignor in a manner that would enable the current Creditor to pursue a sequestration order after the issue of a bankruptcy notice in a manner which would not attract the operation of s.44 of the Bankruptcy Act to the detriment of the assignor.

62.       The use of bankruptcy proceedings in this contrived manner in my view is an abuse of process, as it has clearly been undertaken at least in part to satisfy [the] collateral purpose of obtaining a benefit to the assignor of becoming a Creditor without sacrificing security.  This contrived arrangement is an inappropriate use of bankruptcy proceedings and a blatant attempt to avoid the consequences of the operation of s.44 of the Bankruptcy Act.”

Conclusion on appeal

17                  There was no evidence to base the finding in [59] that the Creditor issued the notice “solely” for the purpose of securing payment of the debt.  Even if the Magistrate did not find him a credible witness, disbelief of him could not found a positive conclusion as to the existence of the relevant purpose, proof whereof lay on the Debtor: Schellenberg v Tunnel Holdings Pty Ltd (2000) 200 CLR 121 at [53], King v Collins [2007] NSWCA 122 at [42].

18                  To the extent that the finding was based on an alleged failure to take “appropriate” action or “even make demand”, the notice of assignment to the Debtor demanded payment to then Creditor, as did the bankruptcy notice itself.  In any event, a prior demand is not a statutory precondition for the issue of a valid bankruptcy notice.  Before a bankruptcy notice is issued there must be a judgment of a court in favour of a creditor, which is sufficient to put the debtor on notice that he or she is legally obliged to pay the debt claimed.

19                  An essential element of the judgment was a finding of a collateral purpose in the “contrived arrangement” to avoid the operation of s 44.  The object sought to be achieved by the alleged arrangement was that the Debtor would be made bankrupt but the Assignor would avoid having to give up its security, which is required of a petitioning creditor under s 44(3).

20                  However, as is now accepted, there was no evidence before the Federal Magistrate that the Assignor held any security over property of the Debtor, still less that the Creditor was aware of such a fact, if it was a fact.

21                  It was not permissible to rely on evidence in the earlier proceeding.

22                  Moreover, the collateral purpose found by his Honour at [60]-[62] was a common purpose to have the Debtor made bankrupt.  Yet the learned Magistrate found the sole purpose held by the Creditor was to obtain payment of his debt, as distinct from invoking the bankruptcy jurisdiction of the Federal Magistrates Court.  In other words, the finding was that the Creditor did not intend to issue a petition, so there would never be a bankruptcy.  There is a fundamental inconsistency here.

23                  The appeal will be allowed and the order of the Federal Magistrate made on 22 March 2007 set aside.  Time for compliance with the bankruptcy notice will be extended to 7 September 2007.  There will be an order that the Debtor pay the costs of the Creditor of the appeal and at first instance.

Associate:

Dated: 16 August 2007