FEDERAL COURT OF AUSTRALIA

Khouzame v All Seasons Air Pty Ltd, in the matter of: Pierre Khouzame [2014] FCA 1319

THE COURT ORDERS THAT:

1.    The Application filed on 10 September 2014 is dismissed.

2.    The Applicant is to pay the costs of the Respondent.

3.    The time for compliance with the Bankruptcy Notice (BN 172625) is extended to midday on 12 December 2014.

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

REASONS FOR JUDGMENT

1    In 2013 there emerged a dispute between Mr Pierre Khouzame and All Seasons Air Pty Ltd (“All Seasons Air”). All Seasons Air was then a subcontractor retained by Mr Khouzame to install mechanical ventilation and air conditioning for a building being constructed at Five Dock, a Sydney suburb. All Seasons Air maintained that Mr Khouzame owed it money.

2    The dispute resulted in an adjudication carried out pursuant to the Building and Construction Industry Security of Payment Act 1999 (NSW) (the “New South Wales Act”). An adjudication (the “Adjudication Determination”) was made in April 2014. That Determination concluded that All Seasons Air was “entitled to a payment claim” in the sum of $78,120.62. Mr Khouzame failed to pay the adjudicated amount. An Adjudication Certificate was then issued pursuant to s 24 of the New South Wales Act.

3    On 14 May 2014 the sole director of All Seasons Air, Mr Mohamad Bachir, attended upon the Bankstown Local Court for the purpose of entering judgment against Mr Khouzame. In doing so he gave no notice to Mr Khouzame and proceeded ex parte. That Court entered judgment in favour of All Seasons Air in the sum of $84,646.62. That sum was for the amount of $78,120.62 together with $6,358.00 in respect to the adjudicator’s fees and $168 for Local Court filing fees.

4    The judgment amount was not paid.

5    In June 2014 a Bankruptcy Notice (BN 172625) issued on the application of All Seasons Air. The amount there claimed was the sum of $85,236.81 – being the total of the judgment amount plus interest. That Bankruptcy Notice was served on Mr Khouzame in August 2014.

6    On 10 September 2014 Mr Khouzame filed a Summons in the Supreme Court of New South Wales seeking an order (inter alia) that the Local Court judgment be set aside. But an Amended Summons was filed on 25 September 2014 which abandoned that prayer for relief. What remained were requests for an order seeking to quash the Adjudication Determination, a declaration that no construction contract existed and an order for costs. The Local Court judgment, accordingly, has not been stayed or set aside. Indeed, on 2 October 2014 a Judge of the Supreme Court ordered that the proceeding in that Court brought by Mr Khouzame be itself stayed pending his payment into court of the sum of $84,478.62. No such payment has been made.

7    On 10 September 2014 an Application was also filed in this Court seeking to set aside the Bankruptcy Notice, that Application being advanced on the basis of an abuse of process.

8    The time for compliance with the Bankruptcy Notice has been extended on a number of occasions, most recently time for compliance has been extended to 5.00 pm today.

9    It is concluded that:

    notwithstanding the absence of an express statutory power conferred by the Bankruptcy Act 1996 (Cth) (‘Bankruptcy Act’) to set aside a bankruptcy notice, the Court has an implied power to do so;

    there is no evidence of any abuse of process on the part of All Seasons Air;

and that

    the Application to set aside the Bankruptcy Notice should be dismissed.

It follows that the Bankruptcy Notice should not be set aside.

The power to set aside the Bankruptcy Notice

10    The Bankruptcy Act confers no express power to set aside a bankruptcy notice.

11    But the existence of a power of a bankruptcy court go “go behind” a judgment has long been recognised: Corney v Brien (1951) 84 CLR 343. Dixon, Williams, Webb and Kitto JJ there observed with respect to the predecessor provision to s 52(1)(c) of the Bankruptcy Act:

Under this provision the Court of Bankruptcy has undoubted jurisdiction to go behind a judgment obtained by default or compromise or where fraud or collusion is alleged and inquire whether the judgment is founded on a real debt: (1951) 84 CLR at 347.

Fullagar J there also observed:

… If the judgment in question followed a full investigation at a trial on which both parties appeared, the court will not reopen the matter unless a prima-facie case of fraud or collusion or miscarriage of justice is made out: (1951) 84 CLR at 356-357.

Fullagar J had there earlier traced the reasons for the Court “going behind” a judgment back to those times when the Lord Chancellor administered the bankruptcy law and “applied certain of the rules which had become established in the administration of the estates of deceased persons”: (1951) 84 CLR at 354. See also: Ilhan v Cvitanovic [2009] NSWSC 160 at [30], (2009) 73 NSWLR 644 at 651 per Barrett J.

12    This Court is in no different position. Notwithstanding the absence of an express power, it has been recognised in this Court that the existence of “such a power is necessarily to be inferred and is within the general powers of the court conferred by s 30(1)”: Bryant v Commonwealth Bank of Australia (1994) 217 ALR 251 at 253 per Davies, Foster and O’Loughlin JJ. Section 30(1) of the Bankruptcy Act provides as follows:

The Court:

(a)     has full power to decide all questions, whether of law or of fact, in any case of bankruptcy or any matter under Part IX, X or XI coming within the cognizance of the Court; and

(b)    may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter.

The power to set aside a bankruptcy notice is also necessarily implicit in s 41(6A)(b) of the Bankruptcy Act. That sub-section (including the chapeau) provides as follows:

Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

(a)    proceedings to set aside a judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or

(b)    an application has been made to the Court to set aside the bankruptcy notice;

the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.

13    Subsequently, in Lindholdt v Merritt Madden Printing Pty Ltd [2002] FCA 260 Weinberg J reaffirmed the power of this Court to set aside a bankruptcy notice. His Honour there observed:

[41]    There is no express power in the Act to set aside a Bankruptcy Notice. However, such a power arises by necessary implication, and is within the general powers of the Court conferred by s 30(1) of the Act: Bryant v Commonwealth Bank of Australia [1994] FCA 1091.

[42]    It has been held that this Court can set aside a Bankruptcy Notice as an abuse of process in the exercise of its inherent jurisdiction: Re Sterling; Ex parte Esanda Pty Ltd (1980) 30 ALR 77 and Re Lentini; Ex parte Lentini v CSR Ltd (1991) 29 FCR 363. For example, if it is apparent that the purpose of a Bankruptcy Notice is to put pressure on a debtor to pay a debt rather than to invoke the Court's insolvency jurisdiction, then the filing of the Bankruptcy Notice is itself an abuse of process: Brunninghausen v Glavanics [1998] FCA 230.

[43]    It may be more apt to describe the power of the Court to set aside a Bankruptcy Notice as an abuse of process as an exercise of the Court's implied jurisdiction rather than an exercise of its inherent jurisdiction. That is because serious doubts exists as to whether the Court has any inherent jurisdiction. In any case, there is no doubt that the Court has the power to ensure that its processes are not abused by the improper invocation of its jurisdiction. This is simply an application of the general principles articulated in Walton v Gardiner (1993) 177 CLR 378.

His Honour there proceeded to set aside the Bankruptcy Notice as an abuse of process.

14    The power to go behind a judgment may thus be exercised on an application to set aside a bankruptcy notice: Olivieri v Stafford (1989) 24 FCR 413 at 430-431 per Gummow J; Xu v Wan Ze Property Development (Aust) Pty Ltd (in liquidation) [2014] FCA 461 at [55] per Robertson J.

15    It can thus be accepted that this Court has power to make an order setting aside the Bankruptcy Notice served on Mr Khouzame for an abuse of process – should such an abuse be made out.

An abuse of process?

16    The instances in which an abuse of process may be established were not exhaustively set forth by Weinberg J in Lindholdt. Indeed, his Honour’s reference to Re Sterling; Ex parte Esanda Pty Ltd (1980) 30 ALR 773, 44 FLR 125 makes that apparent. In Re Sterling Lockhart J observed:

This Court, and the Federal Court of Bankruptcy before it, have set aside bankruptcy notices over many years on various grounds. Instances of the exercise of this power are where the notice is not in accordance with the terms of the judgment and is calculated to perplex the debtor; the notice is issued for the whole of a judgment debt, yet the judgment debtor has paid into court in part satisfaction of the debt; in truth no debt lies behind the judgment… and the sum of which payment is required by the terms of a notice has in fact been paid by the debtor…: (1980) 44 FLR at 129.

Even these situations are there referred to by Lockhart J as but “instances” of the circumstances in which the power may be exercised. The power to set aside a bankruptcy notice, Lockhart J subsequently observed, was not to be “governed by rigid rules”: Clyne v Deputy Commissioner of Taxation (NSW) (No 4) (1982) 66 FLR 301 at 307, 13 ATR 302 at 307. His Honour there observed:

As I observed in Re Sterling; Ex parte Esanda Ltd, (1980) 44 F.L.R. 125, the court’s power to set aside bankruptcy notices is not conferred specifically by any provision of the Act, although it is assumed (see, for example, s 41(6A), (6B) and (6C)). Courts exercising bankruptcy jurisdiction have set aside bankruptcy notices over many years and on various grounds. The circumstances in which notices may be set aside are not governed by rigid rules and do not fall into fixed categories. The power may be exercised if warranted on the facts of a particular case. The source of this power is s 30(1) of the Act. That subsection has been liberally construed by the courts. The circumstances which may give rise to questions or problems in matters of bankruptcy are so multifarious that it is impossible to confer powers upon the court to deal with them other than in general terms. Such powers must not be given any narrow or mean construction. Noncompliance with the requirements of a bankruptcy notice is an act of bankruptcy on which almost every petition is based which comes before the court. A bankruptcy notice is the foundation of a bankruptcy and involves quasi penal consequences. The court must be able to supervise bankruptcy notices at all stages of their existence. If an alternative source of power were needed, however, it would be found in the court’s inherent jurisdiction. In my opinion fairness requires that the bankruptcy notice be set aside.

See also: Seller v Deputy Commissioner of Taxation [2011] FCA 865 at [15]-[20], (2011) 282 ALR 80 at 84-86 per Flick J. But “more than mere assertion would be required to set aside [a] bankruptcy notice … upon the footing that it was an abuse of process”: Watts v Adelaide Bank Ltd [2009] FCA 420 at [18] per Buchanan J.

17    The argument as to an abuse of process in the present proceeding is founded upon an assertion by Mr Khouzame that Mr Bachir (on behalf of All Seasons Air) breached its “duty of candour” when making the ex parte application for judgment before the Bankstown Local Court.

18    The existence of a “duty of candour” when making an ex parte application may presently be accepted. A party making an ex parte application, it may be accepted, has a duty to bring to the attention of the Court all matters relevant to the order being sought: cf. Minter Ellison (A Firm) v Raneberg [2011] SASC 159. Gray J there observed:

[23]    … The obligation to make full disclosure on an ex parte application is a heavy responsibility. This is so, as orders on such applications are an exception to a fundamental principle of natural justice; that is, that a person against whom a claim is made must be afforded a reasonable opportunity of appearing and presenting his or her case. The duty of the moving party is one of complete candour and it is owed to the court itself. The seriousness of the responsibility of full and frank disclosure on the part of the moving party is demonstrated by the fact that the consequences of a failure to make such disclosure apply whether the failure was deliberate or unintentional. …

It may further be accepted that the concept of an abuse of process extends to a breach of the duty on the part of a party making an ex parte application to fully bring to the attention of a Court all matters relevant to the order being sought. Although a judgment once entered is generally regarded as final and conclusive, the power of a Court of bankruptcy to “go behind a judgment” arises because the Court is not merely concerned exclusively with the rights and interests of the judgment creditor and the judgment debtor but is also concerned with the rights of all creditors: cf. Colvin, Assailing a Judgment Relied Upon in a Bankruptcy Notice (1986) 2 Aust Bar Rev 164 at 170.

The absence of any breach of duty

19    Relevantly, the Adjudication Determination in the present proceeding provided as follows:

27]    In summary I determine the claimant is entitled to a payment claim calculated as follows:

28]    On a final note it is apparent from the invoices at 27.1] and 27.2] that the claimant has not made any allowances for any money that may have been paid to date. The respondent says that it has previously paid the clamant $27,500.00 (Incl GST) and if this is so then this amount should also be accounted for in any payment by the respondent to the claimant in relation to the adjudicated amount.

20    The payment of the sum of $27,500 assumed some prominence during the course of the hearing this morning.

21    There is no dispute that All Seasons Air has received an amount of $27,500 on 4 November 2013.

22    That amount was paid to All Seasons Air by the owner of the development site, Omega House Pty Ltd (“Omega”).

23    All Seasons Air maintains that the amount was paid in respect to work performed by it at the request of Omega. Mr Bachir maintained in his oral evidence this morning that he had a conversation with a principal of Omega (Mr Brian Metledge) on 4 November 2013. Mr Bachir maintained that he expressed concern at the fact that he had not been paid for work performed on site and that other sub-contractors were expressing a like concern. He told Mr Metledge that he was not doing any more work. Mr Metledge expressed his understanding as to Mr Bachir’s position. Mr Bachir further maintained that the agreement reached with Mr Metledge was that All Seasons Air would complete work on site and would perform the work “directly” for Omega. There was agreement that Omega would pay the sum of $27,500 on account of work to be undertaken.

24    Mr Khouzame maintains that the $27,500 assumed a different character. He maintains that this amount represented payment of part of the monies owed by him to All Seasons Air. This account is supported by at least two factors, namely:

    the fact that although the monies were paid on 4 November 2013 there was no reference to the monies being received until an invoice issued on 13 February 2014; and

    the fact that an e-mail exchange between Mr Khouzame and Mr Metledge in November 2013 indicates that a sum of $27,500 was paid by Omega “on behalf” of Mr Khouzame.

25    Left to one side is any question as to whether the proper characterisation of the payment of $27,500 properly forms part of the proceeding in the Supreme Court seeking to quash the Adjudication Determination. If that were the proper characterisation of the payment, it could be suggested that Mr Khouzame is now impermissibly seeking in this Court to side-step the stay of the Supreme Court proceeding pending the payment into that Court of the amount ordered. Also left to one side is any question as to whether the possible grounds for the quashing of that Determination can be so clinically separated from the conduct of All Seasons Air in proceeding to seek judgment founded upon the Adjudication Certificate.

26    The argument advanced on behalf of Mr Khouzame seized upon the failure on the part of Mr Bachir when he attended upon the Bankstown Local Court on 14 May 2014 to disclose either:

    the fact that there was a “real and serious dispute” as to whether the sum of $27,500 had been received in respect of work previously undertaken at the request of Mr Khouzame; and/or

    the fact that there was a failure to disclose the contents of paragraph 28 of the Adjudication Determination.

It mattered not, according to this submission, whether the failure to disclose was “deliberate or unintentional”: cf. Minter Ellison at [23]. Reliance was also placed on behalf of Mr Khouzame on:

    the failure on the part of Mr Bachir to comply with s 25(2) of the New South Wales Act, that sub-section requiring an affidavit to be filed with the Adjudication Certificate at the time of seeking judgment disclosing whether the whole or any part of the “adjudicated amount” remained unpaid.

The legislative requirement to file such an affidavit, only emphasised the importance – so it was submitted – of the duty imposed upon a party seeking to proceed ex parte.

27    For present purposes, it is sufficient to conclude that any dispute between All Seasons Air and Mr Khouzame as to whether the sum of $27,500 should be deducted fails to establish any abuse of process on the part of All Seasons Air and, in any event, only assumes marginal relevance.

28    To the extent that this dispute does assume relevance, Mr Bachir’s account of the conversation and the agreement reached on 4 November 2013 is accepted.

29    On one view of the evidence, and most probably the correct conclusion to be reached, the monies paid by Omega to All Seasons Air were in respect of work performed by All Seasons Air at the request of Omega. On that approach, no monies have been received by All Seasons Air in respect of any of the monies otherwise due and payable by Mr Khouzame. But it is unnecessary to reach any firm conclusion.

30    On any view of the evidence, it falls well short of establishing that the monies received by All Seasons Air from Omega were monies accepted by All Seasons Air in part satisfaction of the debt otherwise owed by Mr Khouzame.

31    Taken at its highest, all that the evidence establishes is the simple fact that there is a dispute as to the proper characterisation of that payment. All that All Seasons Air has done in proceeding to enter judgment against Mr Khouzame is to act upon its own account and its own understanding of the events. It has not been shown that the view upon which All Seasons Air has proceeded is anything other than a genuine belief that it received the payment from Omega in respect to work that it performed at the “direct” request of Omega and not in respect of a part payment for the amounts owed by Mr Khouzame.

32    The evidence falls far short of establishing any breach of any “duty of candour” on the part of All Seasons Air in not disclosing to the Bankstown Local Court the payment it received from Omega or the existence of any dispute as to the proper characterisation of that payment or the terms of paragraph 28 of the Adjudication Determination. There was no obligation on the part of All Seasons Air to disclose to the Bankstown Local Court the claim of Mr Khouzame that the amount adjudicated was in dispute. Mr Bachir, on the facts of the present case, had the benefit of an Adjudication Certificate and was entitled to rely upon the quantum of the amount specified in that Certificate. There were no circumstances which required him to further disclose matters which had previously been the subject of dispute and which continued to be disputed by Mr Khouzame.

33    Non-compliance with s 25(2) of the New South Wales Act does not, of itself, establish an abuse of process in the present case. Although the failure to comply with a statutory provision may in some circumstances constitute an abuse of process for bankruptcy law purposes, the failure to file an affidavit at the time of seeking the entry of judgment does not rise that high. On Mr Bachir’s account of the evidence, and an account which is accepted, he attended upon the Bankstown Local Court and signed such forms as he was then asked to sign. On his account he was asked whether he had received any payment in respect to the adjudicated amount and he responded in the negative. Any failure to file an affidavit to that effect, assuming there to have been such a failure, does not provide any independent reason to conclude that there was any abuse of process or breach of any “duty of disclosure”.

A dispute as to the amount owing?

34    It should finally be noted that a mere dispute as to the amount owing by a judgment debtor to a judgment creditor is not sufficient, of itself, to vitiate a bankruptcy notice.

35    Counsel for Mr Khouzame did not advance any submission to the contrary. Counsel also disclaimed any submission that the mere overstatement of the amount due and payable to All Seasons Air in the Bankruptcy Notice of the sum of $27,500 would not vitiate that Notice. It was the alleged abuse of process which was relied on and not the fact of any overstatement.

36    Such concessions were properly made.

37    Power to issue a bankruptcy notice on the application of a creditor who has obtained a “final judgment or order” is conferred by s 41(1) of the Bankruptcy Act.

38    Section 41(5) of the Act addresses the circumstances in which it is claimed that the amount specified in the notice “exceeds the amount in fact due”. That sub-section provides as follows:

A bankruptcy notice is not invalidated by reason only that the sum specified in the notice as the amount due to the creditor exceeds the amount in fact due, unless the debtor, within the time allowed for payment, gives notice to the creditor that he or she disputes the validity of the notice on the ground of the misstatement.

This is a provision which has received some considerable judicial attention.

39    Section 41(5) makes clear “the general rule” that a bankruptcy notice is not invalidated only by reason of the fact that the amount specified in the notice exceeds the amount in fact due: Seovic Civil Engineering Pty Ltd v Groeneveld [1999] FCA 255, (1999) 87 FCR 120 at 128-129. Hill, Sackville and North JJ there observed:

[36]    While it is not strictly necessary for us to decide, we think that the better view is that a notice by the debtor which simply asserts, without more, that the amount specified in the bankruptcy notice exceeds the amount actually due, does not comply with the requirements of s 41(5) of the Bankruptcy Act. The expression “the misstatement” strongly suggests that the debtor must do more than merely assert that there is a misstatement in the bankruptcy notice. The subsection requires the debtor to provide sufficient information in the notice to enable the creditor to identify what is said to be the alleged misstatement. Only then does the debtor's notice displace the general rule established by s 41(5), that the bankruptcy notice is not invalidated only by reason that the sum specified therein as the amount due to the creditor exceeds the amount in fact due.

Their Honours continued:

[37]    This construction of s 41(5) of the Bankruptcy Act is supported by policy considerations. The object of a debtor's notice under s 41(5) is to inform the creditor that the debtor disputes the bankruptcy notice and does so on the ground of a misstatement contained in that notice. The point of the notice is to draw to the creditor's attention the misstatement, thereby giving the creditor the opportunity to consider, for example, whether the bankruptcy notice should be withdrawn and a fresh notice, correcting the misstatement, issued. If the creditor is given no hint in the notice as to the nature of the misstatement, there is a considerable risk that the debtor will be able to take unmeritorious advantage of minor errors (such as the small mistake in the present case) and that unnecessary and wasteful litigation will eventuate. It is no answer to say that the creditor can ask for particulars, since the debtor would not be obliged to give any until after litigation had been instituted. Indeed, a debtor wishing to take advantage of the technicalities of the law of bankruptcy might be well-advised to say as little as possible for as long as possible about the true nature of the alleged misstatement in the bankruptcy notice.

Where a notice complying with the requirements of s 41(5) has been given, an overstatement in the Bankruptcy Notice of the amount in fact due renders the notice invalid, whether or not the overstatement could reasonably mislead the debtor: Skouloudis v St George Bank Ltd [2008] FCA 1765 at [23], (2008) 173 FCR 236 at 243-244 per Edmonds J. See also: Herat v McLean Holdaway Pty Ltd [2014] FCA 816 at [19] per Flick J.

40    On the facts of the present case, no notice was given in reliance upon s 41(5).

41    And no question of Mr Khouzame being confused or misled by the amount claimed in the Bankruptcy Notice can realistically arise. At all materials times it is concluded that he was aware of the quantum of the Adjudication Determination and the Adjudication Certificate.

42    In the absence of any notice having been given in reliance upon s 41(5), and in the absence of any confusion or uncertainty on the part of Mr Khouzame as to the manner in which the sum claimed in the Bankruptcy Notice was calculated, any dispute as to the amount claimed would not vitiate the Bankruptcy Notice.

CONCLUSIONS

43    The Application filed in this Court on 10 September 2014 seeking to set aside the Bankruptcy Notice served on Mr Khouzame on should be dismissed.

44    There is no reason why the Applicant should not pay the costs of All Seasons Air.

45    To either allow Mr Khouzame a further opportunity satisfy the terms of the Bankruptcy Notice or to permit him an opportunity to challenge the present decision, the time for compliance with the Bankruptcy Notice is extended to midday on 12 December 2014.

THE ORDERS OF THE COURT ARE:

1.    The Application filed on 10 September 2014 is dismissed.

2.    The Applicant is to pay the costs of the Respondent.

3.    The time for compliance with the Bankruptcy Notice (BN 172625) is extended to midday on 12 December 2014.

Associate:

Dated:    5 December 2014