FEDERAL COURT OF AUSTRALIA

McMahon v Permanent Custodians Limited [2014] FCA 1238

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The respondent’s reasonable costs of and incidental to the appeal are to be treated as costs in the appellant’s bankruptcy in accordance with s 109(1)(a) of the Bankruptcy Act 1966 (Cth).

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

THE COURT ORDERS THAT:

1.    The appeal be dismissed.

2.    The respondent’s reasonable costs of and incidental to the appeal are to be treated as costs in the appellant’s bankruptcy in accordance with s 109(1)(a) of the Bankruptcy Act 1966 (Cth).

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

REASONS FOR JUDGMENT

1    On 1 November 2013, a registrar of the Federal Circuit Court (“FCC”) made orders sequestrating the estates of the appellants pursuant to s 43 of the Bankruptcy Act 1966 (Cth) (“Bankruptcy Act”).

2    The appellants now appeal from a decision of a judge of the FCC (“primary judge”), dismissing an application for review of the registrar’s decision: McMahon v Permanent Custodians Ltd [2014] FCCA 216.

3    The orders were made following the presentation of creditors’ petitions on 10 December 2012 which identified the relevant acts of bankruptcy as non-compliance with bankruptcy notices served in July 2012. The judgment on which the bankruptcy notices were founded was a consent judgment of the Supreme Court of New South Wales (“Supreme Court”) made in April 2012 in the sum of $3.75 million.

4    The appellants’ summary of argument stated that the issue for consideration on the appeal was whether the registrar and the primary judge “erred when they failed to adhere to and apply the mandatory provisions” of the Farm Debt Mediation Act 1994 (NSW) (“FDM Act”).

5    However, the notices of appeal and the detail of the appellants written submissions raised other issues. The issues may be grouped under two broad headings:

(1)    Whether the FDM Act applied to the question of whether to make the sequestration orders (grounds 1 to 4 and 7 to 10);

(2)    If no, whether there was “other sufficient cause” why the sequestration orders should not have been made, particularly the fact that the appellants had not exhausted their rights of appeal in proceedings challenging the validity of a notice issued under s 11 of the FDM Act (grounds 5 and 6).

6    The appellants complained that the effect of the primary judge’s exercise of discretion to dismiss the application for review was the deemed abandonment of the appellants subsisting legal rights in an application for special leave to appeal to the High Court from a decision of the New South Wales Court of Appeal (“Court of Appeal”) in Permanent Custodians Ltd v McMahon [2013] NSWCA 275 (“Court of Appeal decision”).

Statutory framework

Bankruptcy Act 1966 (Cth)

7    Section 43 of the Bankruptcy Act provides:

(1)    Subject to this Act, where:

(a)    a debtor has committed an act of bankruptcy; and

(b)    at the time when the act of bankruptcy was committed, the debtor:

(i)    was personally present or ordinarily resident in Australia;

(ii)    had a dwelling-house or place of business in Australia;

(iii)    was carrying on business in Australia, either personally or by means of an agent or manager; or

(iv)     was a member of a firm or partnership carrying on business in Australia by means of a partner or partners or of an agent or manager;

the Court may, on a petition presented by a creditor, make a sequestration order against the estate of the debtor.

8    Section 52 of the Bankruptcy Act provides relevantly:

(1)    At the hearing of a creditor's petition, the Court shall require proof of:

(a)     the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);

(b)     service of the petition; and

(c)     the fact that the debt or debts on which the petitioning creditor relies is or are still owing;

and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.

…

(2)     If the Court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:

(a)     that he or she is able to pay his or her debts; or

(b)     that for other sufficient cause a sequestration order ought not to be made;

it may dismiss the petition.

9    Section 60 of the Bankruptcy Act provides relevantly:

…

(2)     An action commenced by a person who subsequently becomes a bankrupt is, upon his or her becoming a bankrupt, stayed until the trustee makes election, in writing, to prosecute or discontinue the action.

(3)     If the trustee does not make such an election within 28 days after notice of the action is served upon him or her by a defendant or other party to the action, he or she shall be deemed to have abandoned the action.

….

(5)     In this section, action means any civil proceeding, whether at law or in equity.

Farm Debt Mediation Act 1994 (NSW)

10    Section 3 of the FDM Act provides that the object of the Act “is to provide for the efficient and equitable resolution of farm debt disputes. Mediation is required before a creditor can take possession of property or other enforcement action under a farm mortgage.”

11    By s 4 of the FDM Act, “enforcement action” is defined to mean, in relation to a farm mortgage,

taking possession of property under the mortgage or any other action to enforce the mortgage, including the giving of any statutory enforcement notice, or the continuation of any action to that end already commenced, but does not include:

(a)    the completion of the sale of property held under the mortgage in respect of which contracts were exchanged before the commencement of this Act, or

(b)    the enforcement of a judgment that was obtained before the commencement of this Act.

12    Section 5(1) of the FDM Act provides that the Act applies in respect of creditors only in so far as they are creditors under a farm debt. By s 5(2)(b), the FDM Act does not apply in respect of a farmer whose property is the subject of a bankruptcy petition presented by any person.

13    Section 6 of the FDM Act provides that “enforcement action” taken by a creditor to whom the FDM Act applies otherwise than in compliance with the Act is void.

14    Section 7 of the FDM Act provides:

(1)    Nothing in this Act affects the operation of the Contracts Review Act 1980 or any other Act or law that deals with the granting of relief in respect of harsh, oppressive, unconscionable or unjust contracts or on the grounds of hardship.

(2)     Nothing in this Act is to be construed as affecting the operation of the Banking Act 1959 of the Commonwealth and, in particular, the duty of the Reserve Bank under Division 2 of Part II of that Act.

(4)     Other than as provided in this section, this Act has effect despite any other Act.

15    By s 8(1) of the FDM Act, a creditor to whom money under a farm mortgage is owed by a farmer must not take enforcement action against the farmer in respect of the farm mortgage until at least 21 days have elapsed after the creditor has given a notice to the farmer under this section. By s 8(3), this section does not apply if a certificate is in force under s 11 in respect of the farm mortgage concerned.

16    Section 11(1) of the FDM Act provides relevantly:

(1)     The Authority must, on the application of a creditor under a farm mortgage, issue a certificate that this Act does not apply to the farm mortgage if:

(a)     the farmer is in default under the farm mortgage, and

(b)    no exemption certificate is in force in relation to the farm mortgage, and

(c)     the Authority is satisfied that:

(i)     satisfactory mediation has taken place in respect of the farm debt involved, or

(ii)     the farmer has declined to mediate, or

(iii)     3 months have elapsed after a notice was given by the creditor under section 8 and the creditor has throughout that period attempted to mediate in good faith (whether or not a mediation session or satisfactory mediation took place during that period).

Decision under appeal

17    On 3 February 2014, the primary judge made the decision under appeal. In deciding to dismiss the applications for review of the registrar’s decision to make the sequestration orders, his Honour said:

[14] In his submissions Mr McMahon seeks to re-agitate the issues concerning s.11(1)(a) that have already been the subject of decisions by the Supreme Court, its Court of Appeal and, in a way, by the High Court of Australia. The gravamen of his argument is that if I do not review this decision and set aside the sequestration order he will not have an opportunity to argue his case in the High Court. His arguments will be “cut off at the knees”. I understand Mr McMahon’s concern, but the authorities are now clear that whilst favourable consideration is always given to allowing a debtor to appeal against the primary decision which constitutes the debt the subject of the bankruptcy: Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137, this is not the case when the applicant is seeking special leave from the High Court to appeal against a decision of a Court of Appeal: Narain v Euroasia (Pacific) Pty Ltd [2010] FCA 1352 at [52] [(“Narain”)].

[15] In those cases the court must be satisfied that there are real prospects of success in the appeal. It is not for this Court to second guess the views of four judges of the Supreme Court of New South Wales and a judge of the High Court of Australia, all of whom have indicated that the arguments that Mr McMahon wishes to put forward on behalf of himself and his wife are unlikely to succeed. He has told me nothing to convince me that the arguments have any more strength today than they did when they were considered by those eminent jurists.

Nature of appeal

18    The appellants appeal as of right from the decisions below: s 24, Federal Court of Australia Act 1976 (Cth). Pursuant to s 25(1AA) of that Act, the appellate jurisdiction of the Court in relation to an appeal from a judgment of the FCC is exercised in this case by a single judge.

19    The primary judge was required to exercise a discretion in making his decision: cf Clapham v Commonwealth Bank of Australia [2013] FCAFC 84 at [40]; Narain at [50]. Accordingly, the principles that apply to this appeal are the principles governing an appeal from an exercise of discretion, set out in the following well-known passage taken from House v R (1936) 55 CLR 499 at 504-505:

The manner in which an appeal against an exercise of discretion should be determined is governed by established principles. It is not enough that the judges composing the appellate court consider that, if they had been in the position of the primary judge, they would have taken a different course. It must appear that some error has been made in exercising the discretion. If the judge acts upon a wrong principle, if he allows extraneous or irrelevant matters to guide or affect him, if he mistakes the facts, if he does not take into account some material consideration, then his determination should be reviewed and the appellate court may exercise its own discretion in substitution for his if it has the materials for doing so. It may not appear how the primary judge has reached the result embodied in his order, but, if upon the facts it is unreasonable or plainly unjust, the appellate court may infer that in some way there has been a failure properly to exercise the discretion which the law reposes in the court of first instance. In such a case, although the nature of the error may not be discoverable, the exercise of the discretion is reviewed on the ground that a substantial wrong has in fact occurred.

20    In Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd (1967) 10 FLR 381 at 391, Gibbs J said of a predecessor to s 52(2) of the Bankruptcy Act:

The Court has a discretion to exercise; it is a wide discretion and must be exercised in the light of all the circumstances, not forgetting on the one hand that the petitioning creditor, if he has proved the existence of the debt and the act of bankruptcy, has what may be called a prima facie right to a sequestration order, and, on the other hand, that the fact that a majority in number and value of the creditors desires an administration under the deed is a matter to be considered, and is an important matter if the majority is substantial. Finally, however, the Court has to decide in what manner the discretion should be exercised in all the circumstances of the particular case, having regard to the interests of the various parties and the interest of the public.

21    In Narain, Gray J held that, by s 52(2), the onus of establishing “sufficient cause” to warrant the exercise of the discretion in favour of the debtor, if all the elements prescribed by s 52(1) have been established, falls upon the debtor.

Facts

22    In 2009 and 2010, the respondent advanced $3.3 million to the appellants on the terms and conditions set out in two loan agreements. The loans were secured by mortgages granted over various properties. The advances were farm debts within the meaning of the FDM Act. The mortgages were farm mortgages within the meaning of the FDM Act.

23    The appellants defaulted under the loan agreements. Pursuant to s 8 of the FDM Act, the respondent gave notice to the appellants of its intention to take enforcement action and of the availability of mediation under the Act.

24    A mediation was held on 14 June 2011, as a result of which the parties entered into a heads of agreement. The heads of agreement relevantly provided an opportunity for the applicants to remedy their defaults under the loan agreements by 15 August 2011, failing which the respondent was entitled to commence recovery action against them.

25    On 11 August 2011 (that is, four days before the expiry of the time available to the appellants to remedy their defaults), the Rural Assistance Authority issued a certificate under s 11 of the FDM Act.

26    The applicants did not remedy their defaults by 15 August 2011. On 15 September 2011, the respondent served notices under s 57(2)(b) of the Real Property Act 1900 (NSW).

27    On 12 December 2011, the respondent commenced proceedings in the Supreme Court, seeking writs of possession of the farms the subject of the farm mortgages and judgment for the amount outstanding on the mortgages.

28    In April 2012, the appellants consented to orders for possession of the relevant properties, and judgment in the sum of $3.75 million in favour of the respondent. Writs of possession were executed and all properties have now been sold.

29    On 11 July 2012, bankruptcy notices in respect of the appellants were issued. The judgment relied upon for the issue of the bankruptcy notice was the consent judgment.

30    On 17 August 2012, the appellants applied to the Supreme Court seeking that the consent orders be set aside or alternatively stayed. The application was heard and dismissed by Schmidt J on 24 September 2012.

31    On 7 December 2012, Garling J in the Supreme Court heard and dismissed an application by Mr McMahon for orders having the effect of deferring public auctions scheduled for the following day.

32    On 10 December 2012, creditor’s petitions in respect of the appellants were presented, following the appellants failure to comply with the bankruptcy notices.

33    On 27 March 2013, the appellants sought and obtained injunctive relief to restrain the auctions of two of the properties pending an application for relief including declarations that the s 11 certificate was issued ultra vires and that the statement of claim in the possession proceedings was prohibited by the FDM Act. An order was sought that the consent orders be set aside. The application was heard by Davies J, who refused to grant the relief sought: Permanent Custodians Ltd v McMahon [2013] NSWSC 769. At [32], his Honour found that the appellants remained in default under the loan agreements after the heads of agreement was made, whilst being given an opportunity to rectify that default by one of the methods agreed in the heads of agreement. At [37], Davies J rejected contentions by the appellants that the s 11 certificate was issued ultra vires and was void.

34    The appellants applied for leave to appeal from the decision of Davies J. On 28 August 2013, the Court of Appeal decision was made, dismissing those applications.

35    The appellants sought special leave to appeal to the High Court. On 24 October 2013, the appellants sought orders including a stay until further order of proceedings in the FCC in respect of the creditors’ petitions. Gageler J rejected the application (McMahon v Permanent Custodians Ltd [2013] HCATrans 254), saying relevantly:

I am not persuaded that the present is a case in which the application for special leave to appeal has the requisite substantial prospects of success. The construction of the [FDM Act] for which the applicants contend was rejected in the Court of Appeal in reasons for judgment given by Justice Ward, with which Justices Meagher and Barrett agreed. The reasons given by Justice Ward, in particular at paragraphs 45 to 56 of those published reasons for judgment, provide a very strong basis for rejecting the construction. Moreover, the applicants do not dispute that a section 11 certificate could validly have issued just four days after the certificate they challenge was in fact issued and they do not suggest that anything done by the respondent before that time amounted to the commencement of enforcement action. Added to those difficulties in the way of grant of special leave to appeal are that the orders now sought to be set aside were made by consent and that the decision of Justice Davies was interlocutory in character.

36    On 1 November 2013, the sequestration orders were made.

37    On 9 January 2014, the appellants’ application for special leave to appeal to the High Court was deemed to have been abandoned by operation of s 60(3) of the Bankruptcy Act.

38    There is no doubt that the debt on which the petitioning creditor relied was owing at all relevant times. There was no evidence tendered by the appellants of their solvency.

39    The appellants disputed that they had committed an act of bankruptcy, on the basis that the consent judgment should have been set aside by Davies J.

Grounds 1 to 4 and 7 to 10 of the Notice of Appeal

40    Grounds 1 to 4 and 7 to 10 of the Notice of Appeal are predicated on the contention that the FDM Act applied to the question of whether to make the sequestration orders.

41    This contention fails because of s 5(2)(b) of the FDM Act, which expressly provides that the Act does not apply to a farmer whose property is the subject of a bankruptcy petition presented by any person. When the sequestration orders were made, the property of the appellants was the subject of the creditors petitions presented on 10 December 2012: cf Sharpe v Hargraves Secured Investments Ltd [2013] NSWCA 288 at [75] and [76]; Sharpe v Bailey [2014] FCA 921 at [94].

42    It follows that the primary judge was not required to apply the FDM Act in making the decision under appeal. To the contrary, that Act was expressed not to apply in the circumstances of this case.

43    These reasons are sufficient to dispose of grounds 1 to 4 and 7 to 10 of the notice of appeal. Even so, I will address the particular questions identified by the appellant’s written submission as questions for determination, namely:

(1)    Does the FDM Act have primacy over the Bankruptcy Act by reason of s 7(4) of the FDM Act?

(2)    Whether the bankruptcy notices were barred or prohibited “enforcement action” under the FDM Act, so that there was no act of bankruptcy to found the creditors petitions pursuant to s 52 of the Bankruptcy Act.

44    As to the first question, s 7(4) has no relevant operation because the scope of operation of the FDM Act is restricted by s 5, with the result that the Act does not apply in this case.

45    As to the second question, the respondent conceded, for the purposes of the appeal, that the bankruptcy notices were enforcement action within the meaning of the FDM Act. In ground 7 of the notice of appeal, the appellants recognised that, whether or not the bankruptcy notices and creditor petitions may be deemed “void” depended upon whether the High Court granted special leave to appeal from the Court of Appeal decision and, if granted, subsequently allowed the appeal by saying:

…his Honour chose to ignore that the giving of the “bankruptcy notice” and subsequent creditors petition constituted enforcement “action” under the [FDM Act] and may have been deemed “void” as “enforcement action” pursuant to s 6 of the [FDM Act ] if the High Court had been allowed the opportunity to grant special leave to appeal and had subsequently allowed the appeal [emphasis added].

46    The respondent argued that it was not precluded from obtaining the bankruptcy notices because there was a certificate is in force under s 11 in respect of the farm mortgage concerned. The only basis on which the appellants contended that the respondents were not entitled to obtain the bankruptcy notices was that no such certificate was in force. That issue was resolved against the appellants by the Supreme Court. An application for leave to appeal from the Supreme Court’s decision failed. As a matter of comity, it was appropriate for the primary judge to follow the decisions of the Supreme Court and the Court of Appeal unless they were clearly wrong, particularly as they involved questions of statutory interpretation of State legislation: cf Hamilton Island Enterprises Pty Ltd v FCT [1982] 1 NSWLR 113 at 119; Undershaft (No 1) Ltd v Commissioner of Taxation (2009) 175 FCR 150 at [68]-[88].

47    It follows that the bankruptcy notices were not barred or prohibited by the FDM Act, and non-compliance with the bankruptcy notices led to acts of bankruptcy by each of the appellants.

Ground 5

48    The appellants contend that the primary judge erred:

…in citing Narain v Euroasia (Pacific) Pty Ltd [2010] FCA 1352 at [52] as an authority in matters seeking special leave to the High Court when in fact that decision despite any factual similarities ought to have been distinguished and not relied upon as it related to a matter where the exercise of a discretion and the interpretation of the extent and circumstances when the court “may” exercise its discretion was instead relevant. In the subject case the [appellant] in its written submissions, (see also the judgement [sic] cited by his Honour, Ahern. Deputy Commissioner of Taxation (Qld.) (1987) 76 ALR 1337) drew attention to the injustice or perceived injustice to be done to parties such as the [appellant] in being “cut off at the knees” in not having had the opportunity to argue the substantive merits of a case by the premature making of a sequestration order when same should not have been made or at the very least the making of such order being postponed until after the final determination of the substantive relevant matters by a superior court. At the time of the sequestration order being made (1st November 2013) the application for Special Leave to the High Court had not been finally determined and the important legal issue awaited and awaits determination of the High Court in matters relating to the mandatory nature, operation and effect of Section 7.4 of the [FDM Act] and the increasing abuse by farm creditors in seeking circumvention of the said Act by the use by farm creditors of provisions of the Bankruptcy Act 1966 (Cth.) to extinguish claims before Section 7.4 can be conclusively considered and its application determined by the High Court.

49    In Narain at [52], Gray J said:

The submissions of counsel for Ms Narain included the proposition that the federal magistrate was bound to give her an opportunity to pursue her application for special leave to appeal to the High Court, and any resulting appeal, so that the federal magistrate’s refusal to do so established that his Honour was in error. That proposition cannot be sustained. It cannot be the case that a court dealing with a creditor’s petition is bound to permit the debtor to invoke every possible avenue of appeal. The capacity of some debtors to generate new proceedings, in vain attempts to overturn judgments against them, is part of the experience of every judicial officer who deals with bankruptcy cases. The existence of a discretionary power carries with it the proposition that each exercise of discretion must be based on the circumstances of the particular case.

50    The primary judge was correct to cite Narain in this case. The issue is that case was the same as the issue before the primary judge, namely, whether to affirm the decision to make the sequestration orders in the exercise of the relevant discretion.

51    The primary judge was entitled to decide that the appellant’s right to seek special leave to appeal should not cause him to refuse to make the sequestration orders. The appellants have not identified any appellable error in the primary judge’s exercise of his discretion.

52    Accordingly, ground 5 fails.

Ground 6

53    The appellants contend that the primary judge erred:

In commenting that he believed the application for special leave “was a pro bono basis” when it was not and there was no evidence, submissions or suggestion by either party that the application for special leave was made on “a pro bono basis”. The forming of such unfounded belief affected his Honour’s discretion in such a manner as the bona fides, substance and merits of the application for special leave may have been called into question and doubted and would have appeared to have affected his Honour’s discretion in considering the “prospects” and “balance of convenience” matters raised by Gageler J.

54    It is not clear what significance was attributed by the primary judge to his belief that the application for a stay in the High Court was made on a pro bono basis.

55    This Court’s powers are exercisable only if the appellant can demonstrate that, having regard to the evidence before the appellate court, the judgment under appeal is the consequence of some legal, factual or discretionary error: Abeysinghe v Minister for Immigration & Multicultural & Indigenous Affairs [2004] FCA 1558.

56    His Honour’s erroneous belief does not constitute an error of fact. It is a matter that appears to have added weight, in the assessment of the primary judge, to his conclusion that he was not satisfied that the appellants had real prospects of success on an appeal to the High Court. This was a conclusion that was clearly open to the primary judge and which is not challenged on the appeal. In those circumstances, I am not satisfied that the primary judge’s erroneous belief led him into appellable error.

57    Accordingly, this ground of appeal fails.

Finality of Supreme Court judgment

58    In their written submissions, the appellants seemed to say that their argument as to the validity of the s 11 certificate had never been determined. For example:

Until my application for special leave was either accepted or rejection my wife and I as applicants had rights and the respondent was effectively in limbo and had no enforcement action under the agreement of which to take, not only of the mediation agreement but also for any ‘default’ for the purposes of the Act.

And

…the Section 11 certificate as issued should have been set aside and this was a open legal question for determination by my Application for Special Leave which [the primary judge] has sought to deny me.

59    In his oral submissions, Mr McMahon also made the submission that he and his wife had been “cut off at the knees” by losing the opportunity to apply for special leave to appeal to the High Court.

60    However, the true position is that the decision of Davies J was a decision pronounced by a judicial tribunal with jurisdiction over the cause of action after hearing the appellant’s case. In Burrell v The Queen (2008) 238 CLR 218 at [15], Gummow ACJ, Hayne, Heydon, Crennan and Kiefel JJ said:

it is important to recognise that underpinning consideration of the issues presented in this matter are fundamental principles about finality of litigation. As was said in D'Orta-Ekenaike v Victoria Legal Aid [(2005) 223 CLR 1]: "A central and pervading tenet of the judicial system is that controversies, once resolved, are not to be reopened except in a few, narrowly defined, circumstances." That tenet finds reflection in rules concerning the bringing of an action to set aside a final judgment on the ground that it was procured by fraud [DJL v The Central Authority (2000) 201 CLR 226] and in doctrines of res judicata and issue estoppel. The principal qualification to the general principle of finality is provided by the appellate system.

61    The appellants had a statutory right to seek leave to appeal in the Court of Appeal, which they exercised.

62    Thereafter, the appellants had a further statutory right to seek special leave to appeal to the High Court, albeit that right was subject to deemed abandonment under s 63(3) of the Bankruptcy Act.

63    However, unless and until the judgment of the Court of Appeal was overturned, the parties were not in limbo and there was no “open question”: the issue as to the validity of the s 11 certificate had been disposed of by a decision pronounced by a judicial tribunal with the relevant jurisdiction.

Conclusion

64    The appellants have not identified any appellable error by the primary judge in the decision under appeal.

Associate:

Dated:    19 November 2014