FEDERAL COURT OF AUSTRALIA

McCracken v Phoenix Constructions (Queensland) Pty Ltd [2012] FCA 1410

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT

THE COURT ORDERS THAT:

1.    The interlocutory application filed 7 November 2012 be dismissed.

2.    Phoenix Constructions (Queensland) Pty Ltd pay Mr Jarrod McCracken’s costs on the interlocutory application.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ON APPEAL FROM THE FEDERAL MAGISTRATES COURT

REASONS FOR JUDGMENT

1    On 14 September 2012, a Federal Magistrate made a sequestration order against the estate of Jarrod McCracken. He made an order that Phoenix Constructions (Queensland) Pty Ltd’s (Phoenix) costs be taxed and paid from the estate of the respondent debtor, Mr McCracken, in accordance with the Bankruptcy Act 1966 (Cth) (Bankruptcy Act).

2    On 5 October 2012, Mr McCracken filed a notice of appeal identifying two separate grounds of appeal and seeking orders that the appeal be allowed, Phoenix’s creditor’s petition filed on 11 August 2011 be dismissed, and Phoenix pay Mr McCracken’s costs of and incidental to the hearing of the creditor’s petition and that appeal.

3    On 7 November 2012, Phoenix filed an interlocutory application seeking the following orders:

1.    An order, pursuant to Section 23 of the Federal Court of Australia Act 1976, that the proceeding be struck out as being an abuse of the process of the Court.

2.    An order, pursuant to Rule 26.01(1) of the Federal Court Rules 2011, that there be summary judgment for the Respondent on the following bases:-

(a)    Pursuant to Rule 26.01(1)(a), that the Appellant has no reasonable prospect of successfully prosecuting the proceeding;

(b)    Pursuant to Rule 26.01(1)(b), that the proceeding is frivolous or vexatious;

(c)    Pursuant to Rule 26.01(1)(c), that no reasonable cause of action is disclosed;

(d)    Pursuant to Rule 26.01(1)(d), that the proceeding is an abuse of the process of the Court.

3.    Further and/or in the alternative, an order, pursuant to Rule 36.09 of the Federal Court Rules 2011 that:-

(a)    The Appellant give security for the cost of the appeal in the amount of $50,000.00;

(b)    Such security be given by the Appellant by payment into Court, not later than ten (10) days of the date of order;

(c)    The appeal be stayed until such security is given;

(d)    In the event that the Appellant fails to comply with the order to provide such security within the time specified, the proceeding is dismissed.

4.    An order that the Appellant pay the Respondent’s costs of and incidental to this application.

5.    Such further or other order as this Honourable Court deem (sic) meet.

4    The interlocutory application was supported by an affidavit of Gregory Noel Humphries affirmed on 31 October 2012, a member of the firm of solicitors acting for Phoenix. Mr McCracken relied upon an affidavit of his solicitor.

5    Phoenix’s solicitor has exhibited to his affidavit Mr McCracken’s Statement of Affairs dated 28 September 2012 in which Mr McCracken has declared only one creditor, being the National Australia Bank, to which he says he is indebted in the sum of $10,000.

6    Mr Humphries says that the Statement of Affairs is deficient and that the evidence in the Federal Magistrates Court shows that Mr McCracken was indebted to the following creditors in the amount stated:

7    Mr Humphries has also deposed that Mr McCracken was an office holder in eight companies prior to the sequestration order. He has exhibited documents which show that Mr McCracken was removed as a director and transferred shares in the companies on 19, 21 and 24 September 2012, after the sequestration order was made.

8    He has deposed that Mr McCracken’s son has replaced Mr McCracken as the office holder in those companies.

9    Mr Humphries has also exhibited a copy of an article which appeared on page 9 of the “Townsville Bulletin” on Saturday, 15 September 2012 in which Mr McCracken is quoted as saying:

McCracken last night claimed he owned nothing.

‘I have never owned anything and I don’t own one thing in this world’ he said.

‘I’ve got some personal things and that’s all I own. I might be associated with quite substantial companies in Townsville and overseas that hold considerable assets.’

10    Mr Humphries further states that Phoenix remains a creditor of Mr McCracken as a result of a costs order made in the Court of Appeal in Queensland.

11    Although those costs have not been taxed, he says that Phoenix has obtained a sworn affidavit of a registered cost assessor who has examined the relevant file and who swears that the value of the various costs orders in favour of Phoenix against Mr McCracken are not less than $400,000.00. That affidavit is exhibited to Mr Humphries’ affidavit.

12    Of the amount owing in costs, $98,000.00 has been paid by Coastline Constructions (Aust) Pty Limited by way of security for costs of the original Supreme Court proceeding and of the Court of Appeal hearing.

13    Mr Humphries says in his affidavit that Mr McCracken is involved in litigation with four other parties including the Deputy Commissioner of Taxation.

14    Mr Humphries says that he estimates Phoenix’s costs of defending Mr McCracken’s appeal, assuming that Phoenix engage both senior and junior counsel, as $53,000.00 made up as:

(a)    Preliminary costs – consideration of appeal and

    associated matters (plus GST)    $   2,500.00

(a)(sic)    Senior counsel settling Outline of Argument (2 days)

    (plus GST)    $  18,000.00

(b)    Senior counsel, junior counsel and instructing solicitor

    preparation for appeal hearing – 1 day (plus GST)    $  15,000.00

(c)    Senior counsel, junior counsel and instructing solicitor

    hearing of appeal – 1 day (plus GST)    $  15,000.00

(d)    Miscellaneous – travel, accommodation etc    $   2,500.00

        ___________

        $  53,00.00

        ___________

15    Phoenix also relied upon a second affidavit affirmed by Mr Humphries on 6 December 2012 and filed the same day. Mr de Jersey, who appeared for Mr McCracken, did not object to Phoenix’s counsel, Mr Coulsen, reading the affidavit except for paragraph 5 of that affidavit. In those circumstances, I allowed the affidavit to be read, except for paragraph 5.

16    In that second affidavit, Mr Humphries exhibited the creditor’s petition and the amended creditor’s petition, and an affidavit which he had affirmed in the Federal Magistrates Court on 16 July 2012 for the hearing on 19 July 2012. That exhibited affidavit contains material which I would have thought was inadmissible.

17    Mr McCracken’s solicitor has deposed that his firm was engaged by DFM Installations Pty Ltd (DFM) to act for Mr McCracken in the appeal against the orders of the Federal Magistrate. He has exhibited a copy of the client agreement and litigation schedule which shows that the solicitors required DFM to pay into the solicitors’ trust account the sum of $58,000.00, which has been done. He says, however, that DFM is currently in arrears of fees in the sum of $4,755.79.

18    He said he has spoken to Mr McCracken’s son, who is the sole director of DFM, and has been informed by him that DFM does not have the capacity to make any large lump sum payments in satisfaction of any order for security for costs.

19    Section 24 of the Federal Court of Australia Act 1976 (Cth) (FCA) provides that this Court has jurisdiction to hear and determine appeals from judgments of the Federal Magistrates Court exercising original jurisdiction under a law of the Commonwealth other than the laws identified in s 24(1)(d). The Bankruptcy Act is not one of those exceptions.

20    Section 25 of the FCA provides that the appellate jurisdiction of the Court shall, subject to the section and to the provisions of any other Act, be exercised by a Full Court.

21    Section 25(1AA) provides that the appellate jurisdiction of the Court, in relation to an appeal from a judgment of the Federal Magistrates Court, is to be exercised by a single judge or, if a judge considers it is appropriate, for the appellate jurisdiction of the Court in relation to the appeal to be exercised by a Full Court, the Full Court.

22    Mr McCracken’s appeal is presently listed for hearing before the Full Court of the Federal Court on Friday, 8 March 2013. The Full Court is to be constituted by Lander, Siopis and Gilmour JJ.

23    Section 25(2B) provides that a single judge or a Full Court may give summary judgment (s 25(2B)(aa)), or make an interlocutory order pending determination of the appeal to the Court (s 25(2B)(ab)).

24    The orders sought in the interlocutory application may be heard, and should be heard in my opinion, by a single judge of the Court.

25    After the filing of the interlocutory application I held a directions hearing on 26 November 2012, when I made the following orders:

1.    The respondent, and applicant to the interlocutory application filed 7 November 2012, file any affidavits upon which it intends to rely for the purposes of that interlocutory application by 4:30pm on Tuesday, 27 November 2012.

2.    The appellant, and respondent to the interlocutory application filed 7 November 2012, file any affidavits upon which he intends to rely for the purposes of that interlocutory application by 4:30pm on Tuesday, 4 December 2012.

3.    The respondent file written submissions on its interlocutory application filed 7 November 2012, not exceeding 10 pages, by 4:30pm on Thursday, 6 December 2012.

4.    The appellant file written submissions on the respondent’s interlocutory application filed 7 November 2012, not exceeding 10 pages, by 4:30pm on Friday, 7 December 2012.

5.    The interlocutory application be adjourned for hearing on 9:45am on Monday, 10 December 2012.

26    The effect of those orders was to require Phoenix to file the affidavits upon which Phoenix intended to rely by the close of business the next day.

27    That order was made in the light of Phoenix’s counsel’s statement that any further affidavit material could be filed by Wednesday, 28 November 2012.

28    Phoenix did not comply with the order. It did not file its further affidavit upon which it relied until 6 December 2012 and then without any explanation. Parties who have been ordered to take a step in a proceeding within a particular time must comply with those directions. Compliance is not optional.

29    Phoenix also did not comply with the order for the provision of submissions by Thursday, 6 November 2012.

30    Mr McCracken complied with the order in relation to the provision of his affidavit and with the provision of the written submissions.

31    On 12 July 2011, Phoenix issued a bankruptcy notice relying upon a judgment of the Supreme Court of Queensland made on 15 June 2011 against Mr McCracken in the sum of $1,495,208.71 together with interest of $530,003.46. Although Phoenix had also obtained an order for costs against Mr McCracken in respect of that judgment, Phoenix did not rely upon that “liability” in the bankruptcy notice or later in the creditor’s petition.

32    Mr McCracken did not comply with the bankruptcy notice and Phoenix relied upon his non-compliance as being an act of bankruptcy pursuant to s 40(1)(g) of the Bankruptcy Act.

33    On 11 August 2011, Phoenix filed a creditor’s petition.

34    On 18 May 2012, and before the hearing of the creditor’s petition, the Court of Appeal in Queensland made the following orders:

(1)    Allow the appeal with costs;

(2)    To set aside the orders in the trial division on 15 June 2011 and 13 July 2011.

(3)    Order instead that:-

(a)    the Plaintiff’s claim against the Third Defendant is dismissed;

(b)    the Third Defendant pay the Plaintiff’s costs including reserve costs of prosecuting and proceeding against the First Defendant and of defending the First Defendant’s counterclaim up until 21 July 2010;

(c)    the Third Defendant pay 70% of the Plaintiff’s costs, including reserve costs, of and incidental to the proceedings against the Third Defendant.

35    Thus it was that the judgment upon which the bankruptcy notice relied was set aside prior to the hearing of Phoenix’s creditor’s petition. Phoenix’s claim for damages against Mr McCracken was dismissed.

36    The orders show that the third defendant in the proceeding was ordered to pay the plaintiff’s costs, including reserved costs of prosecuting the proceeding against the first defendant and of defending the first defendant’s counterclaim up until 21 July 2010 and 70% of the plaintiff’s costs against the third defendant.

37    I have been asked to assume that the third defendant is Mr McCracken.

38    As at the date that the creditor’s petition was considered by the Federal Magistrate, and as at the date the sequestration order was made, there was no judgment against Mr McCracken, nor had Phoenix’s costs been assessed in terms of Part 3 of Chapter 17A of the Uniform Civil Procedure Rules (Qld). Thus, the amount of the costs had not crystallised.

39    Phoenix’s interlocutory application seeks the dismissal of the appeal on the ground that it is an abuse of process. No evidence has been put forward to support that contention, nor any submissions made in support of that allegation, except that Mr McCracken’s appeal is unarguable.

40    In the alternative, Phoenix has relied on rule 26.01(1) for an order that Phoenix have summary judgment because Mr McCracken has no reasonable prospects of successfully prosecuting the appeal, and because the appeal is frivolous or vexatious, and because no reasonable cause of action is disclosed and, again, because the appeal is an abuse of process of the Court.

41    Although Phoenix relies upon the alternative grounds, the whole thrust of Phoenix’s application has been that Mr McCracken has no reasonable prospect of successfully prosecuting the appeal.

42    Mr McCracken argues that at the date the Federal Magistrate heard the creditor’s petition, and as at the date the Federal Magistrate made the sequestration order, the judgment which had been relied on by Phoenix for the issue of the bankruptcy notice had been set aside by the Court of Appeal in Queensland.

43    Mr McCracken accepts that the effect of the Court of Appeal of Queensland’s order made on 18 May 2012 was to substitute a different judgment against Mr McCracken, but for an indeterminate amount.

44    Mr McCracken contends that, in those circumstances, the Federal Magistrate was wrong to conclude, as he did, that there was a continuity in relation to the debt, especially in circumstances where the judgment now relied upon, being the costs order, did not exist at the time that the creditor’s petition was filed on 11 August 2011.

45    Mr McCracken also says that the creditor’s petition should be dismissed because the debt relied on at the hearing did not exist at the time of the act of bankruptcy: Australia & New Zealand Banking Group v Coutts [2003] FCA 968.

46    Phoenix argued that Mr McCracken’s contentions are unarguable. It says that regard has to be had to s 52 of the Bankruptcy Act and in particular paragraph (1)(c) because at the hearing of the creditor’s petition one of the questions to be determined is whether the debt on which the petitioning creditor relies is still owing.

47    Phoenix argued that because “debt” is defined in s 5 to include liability, the only inquiry in s 52 is whether the liability is still owing. A liability would include, so it is argued, an unascertained amount of costs that had not been owing at the time the creditor’s petition was presented.

48    Phoenix accepted that there was no authority for that proposition, but that it was unarguably right.

49    Mr McCracken argued in reply that Phoenix’s argument was inconsistent with s 44 of the Bankruptcy Act, because s 44 requires, at the time of the presentment of the creditor’s petition, a debt that is a liquidated sum that is payable either immediately or at a certain future time.

50    Mr McCracken argued that in those circumstances the debt referred to in s 52(1)(c) could not be a debt which is unliquidated and not payable either immediately or at a certain future time.

51    Phoenix argued that s 44 was spent immediately after the creditor’s petition was presented and therefore did not govern s 52.

52    It cannot be said that Mr McCracken’s appeal is unarguable for the reasons advanced by Phoenix.

53    Because the issue raised by Mr McCracken is the issue to be determined on the appeal, and because I am a member of the Full Court, it would be inappropriate for me to pass a final or concluded opinion as to whether that issue would succeed on appeal.

54    It is enough for me to say that it cannot be said that the issue raised by Mr McCracken is unarguable and that there is no reasonable prospect of Mr McCracken prosecuting the appeal.

55    For those reasons, I will dismiss grounds 1 and 2 of the interlocutory application.

56    I note in passing that the argument foreshadowed by Phoenix in the directions hearing that Mr McCracken was abusing the Court’s processes because of the representations made in the statement of affairs in relation to his creditors and for his failure to profess that he was solvent was not put on this application, although I was told at the directions hearing it was the reason for the claim of abuse.

57    The alternative order sought is for security for costs. Phoenix contends that Mr McCracken has not put forward any material, good or bad, to demonstrate that he has any ability to meet a costs order in the event that the appeal is unsuccessful. Nor, Phoenix contends, has Mr McCracken said that the appeal could not proceed if security were required.

58    Mr McCracken is currently a bankrupt and will remain so unless his appeal is successful. Clearly, in those circumstances, he could not put forward any amount by way of security for costs. He no longer has control of his own estate.

59    As Phoenix has established, Mr McCracken has been removed from a number of companies both as a shareholder and as a director. Whatever resources he had prior to the sequestration order have been taken from him by the effect of the order.

60    A sequestration order affects the status of a person and has significant repercussions. Such an order should only ever be made where the petitioning creditor is able to establish all of the matters required in the Bankruptcy Act.

61    Mr McCracken cannot give and he cannot compel anyone else to give security for costs on his behalf.

62    Phoenix argued that Mr McCracken could, with his trustee’s permission, borrow $50,000.00 for the purpose of giving security. That submission should be rejected, because no lender would lend to a bankrupt without security a sum of that kind.

63    Phoenix also contended that Mr McCracken had not said that if he were to have to give security of the amount claimed that the appeal would be stultified. It might have been better if he had deposed to that, but I think that because he has no assets that can be inferred.

64    It is true that DFM has financed the cost of this appeal so far, but Mr McCracken is not in a position to compel DFM to give security for costs because he is no longer an office holder of that company, as Mr Humphries’ affidavit discloses.

65    The evidence rather suggests that Mr McCracken has no access to funds from DFM that would allow him to meet an order for security.

66    In due course, if the appeal is unsuccessful, Phoenix may look to DFM for its costs, but that is in the future.

67    The issue which has been raised by Mr McCracken is a serious one and deserves the attention of the Full Court. This is not a case for security for costs and that part of the interlocutory application is also dismissed.

68    The interlocutory application is dismissed. I will hear the parties as to the costs of the interlocutory application.

Associate:

Dated:    19 December 2012