FEDERAL COURT OF AUSTRALIA

Francis v Eggleston Mitchell Lawyers Pty Ltd [2013] FCA 564

THE COURT ORDERS THAT:

1.    The proceeding is adjourned to a directions hearing to be held on 8 July 2013 at 10.00 am.

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

REASONS FOR JUDGMENT

Introduction

1    The applicant, Ms Louise Francis, applies pursuant to s 153B(1) of the Bankruptcy Act 1966 (Cth) (“the Act”) for an order annulling her bankruptcy. The order is opposed by the first respondent, Eggleston Mitchell Lawyers Pty Ltd (“EML Pty Ltd”). EML Pty Ltd was the moving party for Ms Francis’s bankruptcy. It filed a bankruptcy notice in reliance on an order made by Master Wood of the Supreme Court of Victoria. It filed a creditor’s petition as a consequence of the failure of Ms Francis to comply with the bankruptcy notice. On 25 July 2011, the creditor’s petition was heard by Caporale R in the Federal Magistrates Court (now the Federal Circuit Court of Australia). The Registrar ordered that “[a] Sequestration Order be made against the estate of LOUISE FRANCIS”. The order was effectively unopposed, as Ms Francis’s then lawyer failed to attend the hearing on time to oppose the creditor’s petition.

2    Ms Francis applied for a de novo review of the sequestration order made by Caporale R. On 6 October 2011, Riley FM (as her Honour then was) dismissed the application for review: see Francis v Eggleston Mitchell Lawyers [2011] FMCA 805. At [6] of her Honour’s reasons for judgment, Riley FM noted that counsel for Ms Francis submitted that Ms Francis was solvent. However, her Honour observed that the affidavits filed on Ms Francis’s behalf did not “…set out in any cogent form the financial position of the applicant bankrupt”. At [15], Riley FM said:

As things stand, I am not able to be satisfied on the evidence before me that the applicant is in fact solvent.

3    Ms Francis appealed to this Court from the order of Riley FM. The failure of Ms Francis to comply with a direction of the callover judge, her failure to comply with the Rules of Court and her failure to prosecute the appeal led to Jessup J dismissing the appeal without an adjudication of its merits; see Francis v Eggleston Mitchell Lawyers Pty Ltd (No 2) [2012] FCA 485.

Principles

4    Section 153B(1) of the Act provides, so far as is material that, if the Court is satisfied that a sequestration order ought not to have been made, the Court may make an order annulling the bankruptcy. As French J (as his Honour then was) said in Rigg v Baker (2006) 155 FCR 531 at [59]:

The power of the Court to annul a bankruptcy derives from s 153B of the Act. In the case of a bankruptcy created by a sequestration order on a creditor’s petition, the power involves two elements:

1.    The Court’s satisfaction that the sequestration order ought not to have been made.

2.    The Court’s exercise of a discretion to make an order annulling the bankruptcy.

5    In Stankiewicz v Plata [2000] FCA 1185, Drummond, Sackville and Dowsett JJ said at [19]:

In Re Williams (1968) 13 FLR 10, Gibbs J explained the approach to be taken to the then equivalent of s 153B of the Bankruptcy Act (at 23):

“In determining the question whether the 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. If the Court is satisfied that the order ought not to have been made, it is not bound to annul the order, but must consider in the light of all the circumstances of the case whether the order ought to be annulled.”

6    A sequestration order ought not to have been made if, at the time of its making, in light of the true facts then existing, the judicial officer making the order was “bound” not to make it; see Rigg v Baker at [62].

Grounds for contending that the Registrar was bound not to make the sequestration order

7    Ms Francis submits that the Registrar was bound not to make the sequestration order because:

1.    EML Pty Ltd was not a creditor of Ms Francis;

2.    The order of Master Wood on which the creditor’s petition was founded is not a final order or judgment;

3.    She was solvent as at 25 July 2011, being able to pay her debts as and when they fell due.

Ground 1: Identity of the creditor

8    Section 40(1)(g) of the Act provides to the effect that a debtor commits an act of bankruptcy if a creditor has obtained a final order or final judgment and a bankruptcy notice has been served on the debtor with which the debtor has not complied.

9    Section 40(3)(d) of the Act provides:

A person who is for the time being entitled to enforce a final judgment or final order for the payment of money shall be deemed to be a creditor who has obtained a final judgment or final order.

10    The bankruptcy notice and creditor’s petition were founded on an order of Master Wood (as his Honour then was) made on 11 May 2006. On that order, the plaintiff is described as “Louise Francis” and the Defendant as “Eggleston Mitchell”. Order 2 of those orders provides:

The bill of costs of the Defendant are assessed in the sum of $11,847.40 such sum to be paid by the Plaintiff to the Defendant [emphasis added].

11    In 2004, Ms Francis retained the services of the firm, Eggleston Mitchell Lawyers. The firm was a partnership between Mr Russell Mitchell and Mr Peter Eggleston. The order of Master Wood on 11 May 2006 followed a dispute between Ms Francis and Eggleston Mitchell Lawyers concerning the fees charged to Ms Francis by the firm.

12    In July 2008, the partnership was dissolved. The first defendant company (referred to in these reasons as “EML Pty Ltd”) was incorporated on 30 June 2008. On 29 January 2009, all of the business, work in progress, debts and liabilities of the partnership were transferred to EML Pty Ltd. Insofar as the partnership had dissolved before 29 January 2009 the former individual members of the firm were nevertheless able to transfer any interests of the partnership to EML Pty Ltd. As at 29 January 2009 and thereafter, EML Pty Ltd became a person entitled to enforce the order of Master Wood for the payment of the money which Master Wood ordered to be paid. That is the effect of s 40(3)(d) of the Act referred to above at [9].

13    The Court rejects the submission of Ms Francis that EML Pty Ltd was not her creditor. Her debt, the subject of the order of Master Wood, did not simply vanish with the dissolution of the partnership.

Ground 2: Final order?

14    An anterior question arises as to whether the order of Master Wood was a final order. Ms Francis submits that it was not a final order and that the defendant in that proceeding was required to take an additional step of suing Ms Francis on the basis of the order. That submission is rejected. It is at odds with the very wording of the order set out at [10] above which requires that the money be paid. Further, the order was made by consent. This suggests that it was the intention of the parties to finalise the dispute between them by the payment of an amount of money in the sum there set out from the plaintiff to the defendant.

15    Ms Francis’s submission that the order of Master Wood was not a final order is rejected. Rule 63.11(1) of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) provided, at the relevant time, as follows:

If costs are taxed otherwise than under a judgment or order for costs, an order of the Taxing Master for payment of any amount found to be due may be enforced in the same manner as a judgment for the payment of money.

See Scott v Evia Pty Ltd [2008] VSC 324 at [13]-[15] per Hansen J, where the effect of that rule is discussed.

16    At [36], Hansen J said (of r 63.11):

The rule is enabling and clarificatory to the extent it provides. It is to be understood as making plain that an order made by the Taxing Master in the circumstances set out in r 63.10(d), (e) and (f) (that is, not pursuant to a curial order) is enforceable in the same manner as a judgment for the payment of money.

Rule 63.10 was headed, “No order for taxation required” and provided:

Where –

(a)    the Court gives judgment, or makes an order, for costs;

(b)    a proceeding is dismissed with costs;

(c)    an application in a proceeding is refused with costs;

(d)    a party is otherwise liable under these Rules to pay the costs of another party;

(e)    a party may tax costs under any of these Rules;

(f)    parties have agreed in writing that costs payable by one party to another may be taxed, and the agreement is filed –

the costs may be taxed without an order for taxation.

17    In Scott, as in the present case, there was no order for costs made by a judge of the Supreme Court of Victoria. The current matter arose out of a summons for taxation initially heard by Master Bruce and then reviewed by Master Wood. These circumstances may be contrasted with those in Commonwealth Bank of Australia v Horvath (Junior) (1999) 161 ALR 441 at [7], where Finkelstein J held that where a taxing master undertakes a taxation in consequence of an order made by a judge of the court, the taxing master’s order is not capable of enforcement as a final judgment.

18    Horvath is distinguishable from the current circumstances, in which the order was made in consequence of a review by a master of a taxation of costs made by another master as a result of the issuing of a summons for taxation.

19    The order of Master Wood made on 11 May 2006 was a consent order which required the payment of a particular sum by one party to another. It was a final order of the Supreme Court of Victoria and was capable of founding a bankruptcy notice.

Ground 3: Solvency

20    Ms Francis contends that as at 25 July 2011 she was solvent. She points to her position, at that time, as the sole registered proprietor of a property in West Melbourne, worth approximately $500,000. The property was unencumbered, save for a City West Water caveat of no great consequence. Ms Francis gave affidavit evidence of her preparedness to use her property as security for a loan to pay her debts should she need to do so. She claims that the income she received from a discretionary trust was usually sufficient for her to pay her debts.

21    There is no evidence before the Court of the ability of Ms Francis to realise her property within a relatively short time. This is a critical issue when considering the question of solvency. A mere surplus of assets over liabilities as at 25 July 2011 does not mean that she was solvent at the time.

22    The authorities stemming from Sandell v Porter (1966) 115 CLR 666 reveal that solvency is to be adjudged by the ability of the debtor to realise assets “within a relatively short time” and by reference to the broader question as to whether the debtor can pay debts as and when they become due and payable. There is no evidence of Ms Francis’s ability to pay the debt arising out of the order of Master Wood or the not insignificant sums payable to other solicitors she has engaged to act on her behalf. In this regard, I do not take into account the alleged debt to a Mr Christopher Bunnett which relates to cost orders post-dating the sequestration order.

23    As at 25 July 2011, it is not clear that Ms Francis would have been in a position to realise her West Melbourne property within a relatively short time. Consequently, I am not satisfied that, had he been apprised of the true facts as to Ms Francis’s liabilities and assets, Caporale R would have been bound not to make the sequestration order.

Summary on the first issue under s 153B(1)

24    The Court is not satisfied that the sequestration order ought not to have been made. The application will be dismissed. However, I will now consider whether, had the Court been of a contrary view, it would have exercised the discretion under s 153B(1) of the Act to annul the bankruptcy.

Discretion

25    As Tracey J observed in Bulic v Commonwealth Bank of Australia Limited [2007] FCA 307 at [12]:

(7)    The power conferred on the Court by s 153B(1) is discretionary in nature. Even if persuaded that the sequestration order ought not to have been made, the Court can, in appropriate circumstances, decline to annul the bankruptcy: Boles v Official Trustee in Bankruptcy (2001) 183 ALR 239 at 243.

26    Matters guiding the exercise of the discretion include the following:

    delay in making the application, especially if unexplained;

    whether or not the applicant is solvent;

    whether the applicant has made full disclosure regarding her financial affairs;

    lack of opposition to the creditor’s petition;

    lack of preparedness to pay the costs thrown away by the annulment proceedings;

    the time that has elapsed since the making of the sequestration order;

    the rights and interests of the creditors;

    the conduct of the bankrupt, particularly with respect to bankruptcy offences;

    the steps taken by the trustees;

    the degree of co-operation with the trustees;

    the nature of any proposed arrangement alternative to bankruptcy;

    considerations of fairness and justice to the bankrupt; and

    above all, the public interest.

See Bulic at [12] sub-para (8); Rigg at [75]-[80] per French J; and D. A. Hassall, “Annulment of Bankruptcy and Review of Sequestration Orders” (1993) 67 Australian Law Journal 761 at 764-766.

27    Starting with the primary factor of the public interest, its consideration points against annulment. There is a public interest in compliance with Court orders, especially those made by consent. Ms Francis’s opposition to the bankruptcy proceeding brought by EML Pty Ltd was designed to avoid her obligation to comply with the order of Master Wood.

28    There is no consideration of fairness or justice to the bankrupt relevant to the exercise of the discretion not to annul her bankruptcy. Fairness and justice dictates that Ms Francis comply with the consent order of 11 May 2006.

29    No arrangement alternative to bankruptcy has been proposed.

30    Ms Francis has failed to co-operate with the trustees. She was served with a copy of a building order by Melbourne City Council for work on the West Melbourne property. She did not advise the trustees of her receipt of the building order or provide them with a copy of it.

31    Ms Francis failed to comply with a request from the trustees for her to deliver the duplicate certificate of title in respect of the West Melbourne property. The request resulted from the trustees’ view that considerable funds were required to be spent to make the property safe for access by potential purchasers. The request was met by solicitors acting on behalf of Ms Francis (not her current solicitors). These solicitors asserted falsely, although perhaps on instructions, that Ms Francis resided at the property. The solicitors declined to provide the duplicate certificate of title. The trustees were required to apply to the Supreme Court of Victoria for an order that Ms Francis deliver up a duplicate certificate of title and to undertake the payment of legal fees to do so.

32    The trustees have taken steps to bring about urgent repair works on the property. Ms Francis has not responded to a request to deposit sufficient funds to conduct the urgent repair works. The trustees have had no alternative but to expend those funds themselves.

33    Ms Francis’s creditors have an interest in the orderly and prompt disposition of her property at West Melbourne so that they can be paid what is owed to them. The Court can have no confidence that Ms Francis, on her own account, will realise that property in the reasonably foreseeable future.

34    Almost two years has elapsed since the making of the sequestration order. This supports the continuation of its effect rather than the annulment of the bankruptcy. The trustees have spent considerable time and money dealing with this bankrupt estate and should be allowed to finish the task.

35    Ms Francis has given no undertaking to pay the costs thrown away by the annulment proceedings. Ms Francis’s counsel indicated her preparedness to pay the costs of an adjournment caused by the need for her to put on proper evidence going to her alleged solvency as at the time of the making of the sequestration order, but the indication went no further.

36    Ms Francis failed to oppose the creditor’s petition, but only because her then solicitor failed to attend the hearing before Caporale R on time. This is a neutral factor.

37    Ms Francis did not file a statement of affairs in proper form when first requested to do so. Information about her financial affairs has been slow to be transmitted to the trustees and was only provided after persistent requests by them for full disclosure.

38    The solvency of Ms Francis today is no better explained than her solvency as at 25 July 2011. She has not demonstrated any current ability to realise her property asset at West Melbourne within a relevantly short period.

39    Ms Francis says she has not delayed in making the application. However, the possibility of it being made was raised in proceedings before Riley FM on review from the order of Caporale R. It seems that Ms Francis made a deliberate choice to challenge the order of Caporale R, through to the High Court of Australia if necessary, rather than commence an application for annulment with expedition.

Conclusion on discretion

40    All relevant factors which may be considered in the exercise of the Court’s discretion in this matter are either neutral or point strongly against the exercise of the discretion to annul the bankruptcy of Ms Francis. The Court would not have exercised its discretion to annul the bankruptcy, had it been satisfied that the Registrar would have been bound not to make the sequestration order.

Order

41    At the conclusion of the hearing on 16 April 2013, the Court discussed with counsel the range of orders appropriate to be made, depending on the result of the proceeding. Counsel agreed that the most appropriate course would be for the Court to make no order, other than to adjourn the matter to a directions hearing to enable the parties to bring in draft minutes of orders beforehand to reflect the reasons of the Court. As is apparent from the content of these reasons for judgment, the first such order should be that the proceeding is dismissed. The parties should formulate such other orders they consider appropriate to be made, including orders dealing with the position of the respondent trustees and orders dealing with costs.

Addendum

42    On 7 May 2013, my Associate notified the parties that the Court intended to publish reasons for judgment in this matter on 9 May 2013. The above reasons at [1] to [41] are those which were ready for publication on 9 May 2013. They are now supplemented by the portion of this judgment which follows. The Court delayed publication of the reasons for judgment as a result of the first respondent’s request to re-open its case to adduce further evidence. Ms Francis did not oppose the application to re-open. The Court permits it.

43    The further evidence consisted of an affidavit of Mr Russell George Mitchell which exhibited a document called “Dissolution Deed” (“the Deed”). Mr Mitchell located the Deed after the Court reserved its judgment. The evidence deals with issues other than the content of the Deed. To the extent that the evidence deals other than with the content of the Deed and the circumstances of its making, the Court has had no regard to it.

44    On 18 July 2008, Mr Mitchell, Mr Eggleston (the former partners of EML) and their associated entities entered into the Deed. The Deed provided for the dissolution of the partnership between Mr Mitchell and Mr Eggleston and for Mr Mitchell to be authorised to conduct the business of the partnership as Mr Eggleston’s agent. The Deed otherwise gave Mr Mitchell the right to conduct the ongoing business of the partnership with effect from 30 June 2008. Mr Mitchell also purchased Mr Eggleston’s interest in any partnership assets, including any book debts.

45    The Deed reinforces the Court’s conclusion expressed at [12] above that EML Pty Ltd became a person entitled to enforce the order of Master Wood. The assets of the partnership as at 29 January 2009 were (as a consequence of the Deed) the assets of Mr Mitchell. Mr Mitchell transferred those assets to EML Pty Ltd on 29 January 2009. Those assets (including an entitlement to the benefit of Master Wood’s order) became the property of EML Pty Ltd.

46    There is no reason why the Court should not, in the interests of justice, admit the new affidavit of Mr Mitchell and the Deed which is exhibited to it, insofar as it exhibits the Deed and deals with the circumstances of its making. Such evidence is admissible pursuant to s 64 of the Evidence Act 1995 (Cth). It is not reasonably practicable to call Mr Mitchell simply to admit a document and explain how it came into existence. So much would lead to unnecessary further expense in a matter which, no doubt, has already involved expenditure of considerable funds. To the extent that leave is required under s 64(4) of the Evidence Act for the extra evidence to be adduced, such leave is given. In the alternative, I would admit the additional evidence under s 69 of the Evidence Act as a business record of the first respondent, being the entity which has succeeded to the assets, debts and liabilities of the partnership.

47    The additional evidence confirms the Court’s view that the order which it intended to make on 9 May 2013 (which is set out above at [41]) was and remains appropriate.

Associate:

Dated:    7 June 2013