FEDERAL COURT OF AUSTRALIA

Mani v Burness [2010] FCA 1132

REASONS FOR JUDGMENT

1                     This is an appeal from a decision of a Federal Magistrate refusing an application to annul the appellant’s bankruptcy.

PROCEDURAL HISTORY

2                     On 4 March 2009 Transcrete Australia Pty Ltd (“Transcrete”) obtained judgment against Ms Reyhan Mani in the Magistrates Court of Victoria at Melbourne.  Judgment was entered in the sum of $35,367.07.  The debt was not paid.  A bankruptcy notice was issued.  It was not complied with.

3                     On 22 October 2009 a Registrar made a sequestration order against Ms Mani’s estate.  Mr Paul Burness and Mr Morgan Lane were appointed trustees of her bankrupt estate.  On 17 May 2010 Ms Mani applied to the Federal Magistrates Court for an order annulling the sequestration order pursuant to s 153B of the Bankruptcy Act 1966 (Cth) (“the Act”). 

THE PROCEEDING IN THE FEDERAL MAGISTRATES COURT

4                     Ms Mani’s application was supported by an affidavit which she swore on 1 April 2010.  In that affidavit she deposed that her estranged husband Mr Cemal Mani conducted a concreting business under the name Jemal Concreting.  The judgment debt ($33,978.02 plus interest) arose because Transcrete alleged that Ms Mani had signed a guarantee, indemnity and charge in relation to goods supplied by Transcrete to Mr Mani on credit.  Mr Mani apparently failed to meet his obligations to Transcrete and letters of demand were sent to Ms Mani.  She claimed no recollection of ever receiving such letters or any later documents relating to the Magistrates Court proceeding.  A default judgment was entered in her absence.

5                     Ms Mani swore that she had never signed any document guaranteeing payment of her husband’s debt to Transcrete or indemnifying Transcrete against any loss arising from default on Mr Mani’s part.  Ms Mani exhibited to her affidavit a draft application to the Magistrates Court of Victoria applying to set aside the judgment obtained by Transcrete.  She said that, if she was successful in her application to have the sequestration order annulled, she planned to “commence [her] application in the Magistrates Court immediately.”  No such application had been filed by the time Ms Mani’s application came on for hearing in the Federal Magistrates Court; nor has such an application since been filed.

6                     In her affidavit Ms Mani explained her delay in seeking annulment of the sequestration order.  She had referred the bankruptcy notice to her husband who had told her that he would fix matters up.  She thought that he had done so.  She had been overseas for six weeks in the middle of 2009 and suffered from various health conditions.  Her legal position had not been explained to her until she saw the family solicitor on 16 December 2009.

7                     Ms Mani said that another distraction which caused her to delay applying for annulment of her bankruptcy was her need to defend a County Court proceeding which had been brought against her by two companies – Economix Concrete Pty Ltd and Economix Building Supplies Pty Ltd.  The County Court proceeding had been commenced by writ dated 20 November 2008.  Pre-trial procedures had required her attention at least until the middle of 2009.  This proceeding, like the proceeding commenced by Transcrete, alleged that Ms Mani was liable to the Economix companies because she had signed a guarantee and indemnity in order that Mr Mani could obtain supplies from these companies on credit.  Again, he had failed to meet his obligations and the companies turned to Ms Mani.  Ms Mani swore that she did not sign any agreement with the Economix companies and had denied doing so “from the beginning”.

8                     Ms Mani also deposed that she was living on Social Security payments and had no money to pay her legal team. 

9                     The hearing of Ms Mani’s application for annulment of the sequestration order commenced in the Federal Magistrates Court on 21 May 2010.  It continued on 28 May and 8 June 2010.  On the first day Ms Mani gave evidence expressly denying that she had signed the indemnity or guarantee documents relied on by Transcrete and Economix.  She also denied that she had visited the Economix premises.

10                  The hearing was adjourned because counsel for Transcrete indicated that the company wished to call a witness who saw Ms Mani execute the Economix guarantee.

11                  On 26 May 2010, an affidavit sworn by the general manager of Economix was filed.  He deposed that Ms Mani could speak fluent English and that he had seen her deliver sandwiches to her husband on a construction site.  He also deposed that Mr Mani had, in March 2006, requested credit but that this request had not been granted because Economix had discovered that Mr Mani was not the registered owner of the family home.  The home was in Ms Mani’s name.  Economix therefore required her to be a co-guarantor before any credit was extended.  The general manager said that, at some point between late April and the end of June 2006, both Mr and Ms Mani attended the Economix offices to sign the necessary documents.  He was adamant that Ms Mani had attended and remembered the occasion well because she had a white parrot on her shoulder while in the office.  He had not, however, witnessed her place her signature on the document.  That had been done by Economix’s credit and finance manager in the presence of another Economix employee.  A further adjournment was granted so that these employees could swear affidavits.

12                  The credit and finance manager confirmed that Ms Mani had come to her office with Mr Mani.  The manager had completed the form and explained its contents to Ms Mani.  Ms Mani signed the document in the presence of the manager who then witnessed the signature.  The manager also observed the parrot on Ms Mani’s shoulder.   The other employee of Economix who was present confirmed this evidence. 

THE FEDERAL MAGISTRATE’S DECISION

13                  This evidence was accepted by the learned Federal Magistrate.  Although there was some doubt as to the precise date on which the guarantee had been signed the Federal Magistrate found that Ms Mani had gone to the Economix offices and had signed the document.  The Federal Magistrate also took into account evidence that Ms Mani had delivered sandwiches to her husband and son at a construction site and had been identified in a bank document which she had signed as the “office manager” in her husband’s business as confirming that she was far more familiar with her husband’s business activities than she was prepared to admit.  The Federal Magistrate considered that the case before him fell into the rare category, described by Finkelstein J in SZDGC v Minister for Immigration and Citizenship [2008] FCA 1638 at [23] “where a witness’ credit has been so badly destroyed in cross-examination that it is possible to make findings of fact based on that evidence alone and simply disregard any corroborative evidence.”  His Honour said (at [27]) that:

“… I am afraid I just do not believe the applicant.  It is not just the fact that she visited Economix with a parrot on her shoulder, which after all the witnesses were most unlikely to forget, but the Westpac documentation and the evidence of Mr Dimech about sandwiches all point to the same conclusion.  Because of the way the applicant has herself run her case, denying both guarantees, and I find she signed one of them for a certainty, it seems to me that the finding I make regarding the Economix guarantee properly founds a conclusion that she signed the Transcrete one as well.”

14                  His Honour dismissed Ms Mani’s application with costs.

APPEAL GROUNDS

15                  Ms Mani appealed to this Court on two broad grounds.  The first ground was that the Magistrate had erred by dealing with the disputed issue of whether Ms Mani had, in fact, signed the relevant guarantee and indemnity.  She contended that the disputed factual issue should have been resolved in the Magistrates Court of Victoria on an application by her to set aside the default judgment and that the proceeding in the Federal Magistrates Court should have been adjourned pending the hearing and determination of such an application to the Magistrates Court of Victoria.

16                  The second broad ground related to Ms Mani’s solvency at the time at which the sequestration order was made by the Registrar.  She submitted that the creditor’s petition should have been dismissed or adjourned in order to afford her an opportunity to pay off her debts or otherwise allow Transcrete to pursue other remedies such as execution or enforcement of an equitable charge secured against Ms Mani’s real property.

CONSIDERATION

17                  Before turning in more detail to the arguments developed in support of the grounds it is desirable to refer to the power which Ms Mani sought to have the Federal Magistrate exercise.  That power is contained in s 153B of the Act.  Subsection 153B(1) reads:

“(1)      If the Court is satisfied that a sequestration order ought not to have been made … the Court may make an order annulling the bankruptcy.”

18                  As French J observed in Rigg v Baker [2006] FCAFC 179 at [59], the power conferred by s 153B involves two elements, namely, the Court’s satisfaction that the sequestration order ought not to have been made and the exercise, by the Court, of a discretion to make an order annulling the bankruptcy.  His Honour (at [63]) also quoted with approval five propositions which emerged from earlier decisions relating to applications for annulment of bankruptcy.  They were: 

“1.        It is for the applicant for annulment who alleges, and it is therefore for him to bring himself within the section and satisfy the Court, that the sequestration order ought not to have been made.

2.         The Court to whom the application is made seeks to ascertain the actual state of affairs at the time when the sequestration order is made.

3.         In order to ascertain that actual state of affairs the Court hearing the application for annulment looks at the facts that were before the Court which made the sequestration order and at any other facts that were not before that Court but are shown on the hearing of the application for annulment to have been in existence when the sequestration order was made.

4.         Having considered all the facts so looked at, the Court determines whether on those facts the applicant has satisfied it that the sequestration order ought not to have been made.

5.         If it is so satisfied, the Court is not bound to annul the sequestration order but must consider in all the circumstances of the case whether it ought to be annulled.”

19                  The word “ought” bears an imperative meaning.  In the context of s 153B it requires the applicant for annulment to establish that the Judge or Registrar who made the original order was “bound” not to do so:  see Re Frank; Ex parte Piliszky (1987) 16 FCR 396 at 403 (per Fisher J). 

20                  Ms Mani contended that the Federal Magistrate should have accepted that the sequestration order should not have been made by the Registrar unless and until she had had the opportunity of prosecuting an application in the Magistrates Court of Victoria to have the default judgment obtained by Transcrete set aside.  Her related argument was that the Magistrates Court of Victoria and not the Federal Magistrates Court was the appropriate forum in which the issue of whether or not she had signed the guarantee and indemnity agreement with Transcrete should be determined.

21                  It was put, in the alternative, that the proper course for the Registrar and the Federal Magistrate, on review, was to adjourn the applications which had come before them pending the determination of the disputed factual question in the Magistrates Court of Victoria.

22                  Counsel for Ms Mani relied on a series of cases in which emphasis had been placed on the need for Courts to be satisfied that a “real debt” existed before making a sequestration order even if this involved going behind a judgment on which the allegation of debt was founded.  Counsel referred to the decision of the Full Court in Ahern v Deputy Commissioner of Taxation (unreported, Beaumont J, 18 October 1984) in which the following observations were made (at [38]-[40]):

“38.      It is well established that a court exercising bankruptcy jurisdiction has undoubted discretion to go behind a judgment, particular one obtained by default or compromise or where fraud or collusion is involved and inquire whether the judgment is founded on real debt:  Corney v. Brien (1951) 84 CLR 343.  Where the judgment is by default the court will go behind the judgment if there is a bona fide allegation that no real debt underlies the judgment:  Corney v. Brien (supra).  Even where the judgment was obtained following a hearing on merits where both parties appeared, if there are substantial reasons for questioning whether behind the judgment there is in truth and reality a debt due to the petitioning creditor, the court will go behind the judgment and inquire into the consideration for it:  Wren v. Mahony (1972) 126 CLR 212 per Barwick C.J., with whose reasons Windeyer and Owen JJ. agreed; Menzies and Walsh JJ. dissenting.  Barwick C.J. said at 224:

‘The judgment is never conclusive in bankruptcy.  It does not always represent itself as the relevant debt of the petitioning creditor, even though under the general law, the prior existing debt has merged in a judgment.  But the Bankruptcy Court may accept the judgment as satisfactory proof of the petitioning creditor’s debt.  In that sense that court has a discretion.  It may or may not so accept the judgment.  But it has been made quite clear by the decisions of the past that where reason is shown for questioning whether behind the judgment or as it is said, as the consideration for it, there was in truth and reality a debt due to the petitioning creditor, the Court of Bankruptcy can no longer accept the judgment as such satisfactory proof.  It must then exercise its power, or if you will, its discretion to look at what is behind the judgment:  to what is its consideration.’

39.       It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds:  Re Rhodes; ex parte Heyworth (1884) 15 QBD 49; Bayne v. Baillieu (1907) 5 CLR 64 and Re Verma:  Ex parte Deputy Commissioner of Taxation (1985) 4 FCR 181.

40.       These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt.  Bankruptcy is not mere inter partes litigation.  It involves change of status and has quasi-penal consequences.”

23                  If the Court is satisfied that a genuine dispute exists as to the liability of the debtor, that would, ordinarily, warrant the Court in which the sequestration order was sought or in which it is sought to have an existing sequestration order annulled adjourning the hearing for such time as is reasonably necessary for the alleged debtor to establish in an appropriate forum that no relevant debt exists:  see Re James; Ex parte Carter Holt Harvey Roofing (Aust) Pty Ltd (No 2) (1994) 51 FCR 14 at 22 (per Olney J); Govedarica v Jovanovich [1998] FCA 463.

24                  The Court administering the Act will not, normally, be the appropriate forum to resolve the underlying dispute between the petitioning creditor and the alleged debtor:  see Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 116 (per Gibbs J).

25                  Counsel also drew attention to two decisions of single judges of the Court in which they dealt with applications to set aside or stay the operation of bankruptcy notices pending the outcome of applications to State civil courts in which the debtor was applying to set aside default judgments.  In Re Sterling; Ex parte Esanda Limited (1980) 44 FLR 125 Lockhart J adjourned applications to set aside a bankruptcy notice until the New South Wales District Court had dealt with an application to set aside a default judgment and extended time for compliance with the bankruptcy notice.

26                  In Re Sleiman; Ex parte Sleiman; Dojif Pty Ltd [1984] (unreported, Davies, Lockhart and Neaves JJ, 15 September 1987) referred to Re Sterling and noted (at [12]-[13]) that, in that case, Lockhart J, in dealing with a similar application had said:

“… that, although each case must depend upon its own facts there may be cases where the application to set aside a bankruptcy notice should be adjourned pending the outcome of an application by the debtor to a court of competent jurisdiction to set aside the judgment on which the bankruptcy notice is founded.  In my opinion where the judgment has been obtained by default or where, for other reasons, there has been no real hearing on the merits (see Wren v. Mahoney (1972) 126 CLR 212 at 225), then, prima facie, the application to set aside the bankruptcy notice should stand over until the application to set aside the judgment has been disposed of.  The reason for this approach is that this is a court of insolvency which is not an appropriate forum for the resolution of civil disputes, and in particular, the recovery of debts, except where the insolvency of the debtor is apprehended.  In the latter event, this Court will readily intervene for the protection of the general body of creditors.  But where, as here, the debtor’s solvency is not questioned, the primary forum for the resolution of the dispute between the parties should be the Court of Petty Sessions.

In the result, whilst, on the evidence presently available, the debtor’s application to set aside the bankruptcy notice cannot succeed, I think that the debtor should be given the opportunity to pursue his application in the Court of Petty Sessions …”

27                  Counsel submitted that the Federal Magistrate should have adopted the course of adjourning the hearing of Ms Mani’s application until her foreshadowed application to the Magistrates Court of Victoria to set aside the default judgment obtained by Transcrete was determined.  He submitted that the Federal Magistrate should not have done more than satisfy himself that Ms Mani would have had an arguable case on such an application: he should not have gone on and determined, finally and adversely to Ms Mani, the legal and factual question which she wished to agitate in the Magistrates Court of Victoria.

28                  These submissions confront a number of difficulties.  Ms Mani had applied to the Federal Magistrates Court for an order annulling the sequestration order which had been made by the Registrar.  The affidavit on which she relied in support of the application denied her indebtedness to Transcrete on a single ground, namely, that she had not signed any agreement to guarantee her husband’s debts.  This assertion, if accepted by the Magistrates Court of Victoria, would have justified the setting aside of the default judgment.  Ms Mani had not, however, at the time at which she made her application to the Federal Magistrates Court or by the time the application came on for hearing, made any application to set aside the default judgment which had been entered on 4 March 2009.  She did not undertake to make such an application.  She did not seek an adjournment to enable her to do so.  On the contrary, she made the commencement of any such application contingent on the success of her application under s 153B of the Act.

29                  In these circumstances, the Federal Magistrate was in a very difficult position.  There was, potentially, another, more appropriate, forum in which Ms Mani’s claim not to have signed the guarantee agreement, could have been resolved.  Ms Mani was the only person who could enliven the jurisdiction of the Magistrates Court of Victoria and she had not done so.  Nor did she propose to do so unless she was successful in her annulment application.  For practical purposes, then, there was no alternative forum.  The Federal Magistrate could not, therefore, adjourn the application and await the outcome of a pending application in a State Court. 

30                  Ms Mani wanted the Federal Magistrate to act on her evidence that she had not signed any guarantee agreement.  He heard that evidence tested and he heard conflicting evidence, albeit relating to a different creditor, and concluded that Ms Mani had, in fact, signed the relevant agreement.  Such a finding was open on the evidence and it is not challenged on this appeal.

31                  Even if an alternative forum had been available or Ms Mani had been prepared to undertake promptly to commence a proceeding in such a forum, that finding would, consistently with the authorities to which counsel referred, not have supported an adjournment of the s 153B application.  This is because the Federal Magistrate could only have concluded that any application to the Magistrates Court of Victoria which was based on the same evidence that had been advanced before him would be bound to fail.  It is notable, in this context, that, despite having the opportunity of doing so, Ms Mani called no evidence from her husband or from a handwriting expert to support her claim not to have signed the documents.

32                  The Federal Magistrate did, as he was required to do, satisfy himself that the debt on which Transcrete relied was due by Ms Mani. 

33                  The Federal Magistrate did not err by proceeding in the manner in which he did.  This was not a case in which it was appropriate to follow the ordinary course and await the outcome of a challenge to the default judgment, in a civil court of a State.  The Federal Magistrate had to decide the case presented to him for annulment of the sequestration order.  To do so it was necessary for him to do more than merely determine whether arguable grounds for a hypothetical challenge existed.  He was forced, by the position adopted by Ms Mani, to go further and determine whether she had established that the sequestration order ought not to have been made because the alleged debt was not owed to Transcrete.  This he did. 

34                  The second basis on which it is said that the Federal Magistrate should have found that the sequestration order should not have been made was that Ms Mani was clearly solvent at the time at which the Registrar made the sequestration order.

35                  Counsel for Ms Mani conceded that there was no evidence before the Registrar, at the time at which he made his order, to support her claim to have been solvent at that time.  He did not dispute that the only passage in Ms Mani’s affidavit supporting her application to the Federal Magistrates Court which touched on her solvency was her statement that, in April 2010, she was living on Social Security benefits and was unable to pay her lawyers.  Counsel, however, sought to rely on a report prepared by her trustees which was said to have been tendered by a respondent in the course of the hearing in the Federal Magistrates Court.  The report is dated 12 May 2010.

36                  I have examined the transcript of each of the three days of hearing before the Federal Magistrate.  At the outset of the hearing the Federal Magistrate said that he had “noted” the trustee’s report.  In the course of cross-examining Ms Mani, counsel for Transcrete, drew her attention to some parts of the report.  Those parts did not relate to the issue of her solvency.  The report was not tendered in evidence.  I have not been able to find any oral evidence which was called relating to Ms Mani’s financial position at the time at which the sequestration order was made. 

37                  So far as I can see the issue of solvency was not dealt with until the very end of the submissions, made on the final day of hearing, by counsel for Ms Mani.  The transcript (at pages 29-30) records him as having submitted that:

“I’ll just finish, your Honour, by saying that the financial position, and the sort of general issues of the trustee’s costs and the position of the parties, and the solvency of Ms Mani is something that’s quite interesting and relevant in this case.  When Transcrete brought its creditor’s petition, it achieved, or managed to bankrupt Ms Mani on the basis that she simply failed to do anything about it, which has been explained to you.  She was quite solvent at that point in time.

Before the trustee became involved – even if we take account of the Economix debt, had that been settled, plus the Transcrete debt – the other debts listed in the financial report, to my knowledge, are just fees owed to lawyers that are, at this time, very much, you know, in doubt as to whether they’ll even be paid.  The significant debts here do not, in my submission, necessarily lead to a finding of solvency at the time the petition was lodged, and nor, even in the face of subsequent events, does it necessarily follow that this person is solvent, which is enormously critical, because, my understanding of these cases is that the vast majority of them are technicalities to try and stem or lock the inevitable insolvency or the inevitable bankruptcy of the person by attacking the language of the notice or something along those lines.

We have here a different case, and what’s more, we have two creditors that are protected by caveats on the property and by securities by way of charge, which exist outside the regime of bankruptcy, and which, from my knowledge, contain conditions about costs.  So that if they succeed in their actions against Ms Mani, then there will be nothing left in the estate anyway, perhaps including for the trustee.  So it’s not one of those situations where the trustee’s position and the creditors’ petition is necessarily something which should be in the forefront.  Here we have someone that could walk away with some of their money, still, at the end of this, which is highly relevant, in my submission.”

38                  These submissions provided the Federal Magistrate with a good deal of evidence from the bar table, presumably based on counsel’s instructions as to what appeared in the trustee’s report.  The submissions were pitched at a high level of generality.  No attempt was made by counsel to compare the monetary value of assets held by Ms Mani with the liabilities disclosed in the report.  Reference was made to some of these figures during argument on the appeal and, the figures are, at best for Ms Mani, equivocal as to her solvency in October 2009. 

39                  More importantly, for present purposes, no evidence was called by Ms Mani before the Federal Magistrate with a view to establishing that she had been and was in a position to pay the judgment debt.  She had not done so for over 12 months since it was incurred and her evidence was that, at the time of the hearing, she was being supported by welfare payments.  In the absence of any such evidence, it was not possible for the Federal Magistrate to determine that Ms Mani was solvent when the sequestration order was made.  No submission was made to him that the sequestration order ought not to have been made because Ms Mani had been solvent at that time.  Had such a submission been made it could not have succeeded because there was no evidence to support it.  The Federal Magistrate plainly did not consider that the annulment application was being pressed on this ground; he made no reference to it in his reasons for decision.  This is hardly surprising given that, at the outset of his final submissions, counsel for Ms Mani agreed with the Federal Magistrate that the issue of whether or not Ms Mani signed the documentation was “the sole point we put in issue.”  (emphasis added).

40                  In these circumstances, Ms Mani cannot, on this appeal, make good a ground that the Federal Magistrate erred by failing to find that the sequestration order ought not to have been made because Ms Mani was able to pay her debts.

dISPOSITION

41                  The appeal should be dismissed with costs.

42                  For the sake of completeness I should record that, out of an abundance of caution, Ms Mani applied for leave to appeal should that be necessary because the decision of the Federal Magistrates Court was interlocutory in nature.  No party was disposed to submit that the decision under appeal was an interlocutory decision.  I was referred to no authority which suggested that a decision to refuse an application to annul a bankruptcy was an interlocutory decision.  Had it been necessary I would have granted leave to appeal.

Associate:

Dated:         21  October 2010