FEDERAL COURT OF AUSTRALIA

Tran v Pu [2015] FCA 97

THE COURT ORDERS THAT:

1.    The appeal is allowed.

2.    Orders 1 and 2 made by Judge Whelan on 26 August 2014 be set aside.

3.    The appellant’s application for review be remitted to her Honour for further hearing in accordance with these reasons.

4.    The respondent is to pay the appellant’s costs of this appeal.

5.    The trustees’ costs of and incidental to this appeal be treated as costs and expenses in the administration of the appellant’s estate pursuant to 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 8 July 2014, the appellant’s estate was sequestrated pursuant to an order made by Registrar Burns. The sequestration order was made on a creditor’s petition filed by the respondent on 30 May 2014.

2    On 15 July 2014, the appellant filed an application for review of the sequestration order. That application was dismissed by her Honour Judge Whelan of the Federal Circuit Court of Australia on 26 August 2014.

3    By an application filed on 16 September 2014 in this Court, the appellant has appealed the decision of Judge Whelan.

4    The appeal comes before me as a single judge of this Court exercising appellate jurisdiction pursuant to s 25(1AA)(a) of the Federal Court of Australia Act 1976 (Cth).

5    For the reasons that follow, I have determined to allow the appeal.

Background

6    On 16 April 2013, the respondent obtained default judgment against the appellant in the Magistrates’ Court of Victoria in the sum of $35,678.61 (the judgment debt). This amount comprised the principal underlying debt of $33,850, interest of $1,373.01 and costs of $455.60.

7    On 14 October 2013, the respondent issued a bankruptcy notice based on the judgment debt.

8    Throughout February 2014 there were settlement negotiations between the solicitors for the appellant and respondent. On 16 April 2014, a Deed of Settlement (the Deed) was entered into between the appellant, the respondent and Ocean Australia Pty Ltd for the payment by the appellant of $20,000 in full settlement of the judgment debt. Clauses 2-4 and 6 of the Deed provided:

2.0    Release by parties

2.1    In consideration of the initial payment and dependent upon Phillip's continued compliance with Section 1.0 of this Deed, Feng and Eureka jointly and severally undertake not to initiate any legal proceedings on the basis of Phillip's failure to comply with the Bankruptcy Notice including, but not limited to, a Creditor's Petition in the Federal Circuit Court of Australia.

2.2    In consideration of the final payment and in consideration of the parties complying with all matters set out in Section 1.0 of this Deed, the parties release and forever discharge each other from all actions, proceedings, suits, claims, demands and costs of any description whatsoever which either party now has or at any time hereafter may have had or which but for the execution of this Deed could or might have had against the other in relation to the Agreement, including (but not limited to) the Debt, the Judgment, the Bankruptcy Notice and the Counterclaim.

2.3    For the avoidance of any doubt, nothing in this Deed prevents Phillip from initiating legal proceedings of any nature against Tommy for any claim or claims he may have with respect to payments made by Phillip to Tommy with respect to the Agreement or otherwise (including the payments referred to in paragraphs D and E of the recitals of this Deed) and Feng and Eureka further jointly and severally assign to Phillip all their rights and interest (if any) with respect to these payments made by Phillip to Tommy.

3.0    Bar to proceedings

3.1    This deed may be pleaded as a full and complete defence by the parties to any action, suit or proceeding commenced, continued or taken by or on behalf of any party in connection with any of the matters referred to in this Deed.

4.0    Default

4.1    In the event that Phillip defaults in relation to any payment that is due under this Deed, and the default is not remedied within a period of seven days after the date on which Feng serves written notice of default on Phillip, then Feng shall be entitled to apply to the Court on the basis of Phillip’s non-compliance with the Bankruptcy Notice.

…

6.0    Entire agreement

6.1    This Deed contains the entire agreement and understanding between the parties on everything connected with the subject matter of this Deed and supersedes any prior agreement or understanding whether written or oral regarding anything connected with that subject matter.

On 14 May 2014, the appellant defaulted on the first payment due under the Deed.

9    As I have said, on 30 May 2014 the respondent filed a creditor’s petition and on 8 July 2014 a sequestration order was made against the appellant’s estate. The available act of bankruptcy asserted was non-compliance with the bankruptcy notice. Malcolm Kimbal Howell and Roderick Mackay Sutherland of Jirsch Sutherland Pty Ltd were appointed joint trustees of the estate.

10    On 15 July 2014, the appellant filed the application for review of the sequestration order in the Federal Circuit Court. Judge Whelan heard that application on 26 August 2014. Both parties were represented. The trustees were also represented, although not joined as parties. The key issue identified by her Honour (at an earlier hearing on 21 August 2014) was whether the Deed bound the appellant such as to prevent him from bringing the application for review.

11    Before her Honour, the appellant argued that the judgment debt was not a real debt as it was based on fraud and that the respondent was “not the correct creditor”. The appellant claimed that he had never met or entered into any agreement with the respondent and that he did not owe a debt to him. He claimed that he had paid all sums due on the underlying debt to Huy (Tommy) Tran, the ex-business partner of the respondent. The appellant submitted that her Honour should “go behind” the judgment debt.

12    The application for review was opposed on the grounds that the appellant was barred from bringing such proceedings by the terms of the Deed, in particular cl 3.1.

13    Five affidavits were filed in support of the application for review: two affidavits sworn by the appellant on 15 July 2014 and 25 August 2014; the affidavit of Huy (Tommy) Tran filed on 20 August 2014 and the affidavits of Patricia Oman (the appellant’s solicitor) sworn on 21 and 26 August 2014. The respondent relied on the affidavit of Colin Edward O'Neill (the respondent’s solicitor) sworn on 13 August 2014.

14    On 26 August 2014, Judge Whelan dismissed the application for review with costs. Her reasons published on 29 August 2014 concluded the following at [4] to [14]:

4.    There is an aspect of public policy with respect to these proceedings and that is the issue of the public interest in the encouraging of settlement of legal proceedings as between parties to litigation.

5.    The Court should not lightly ignore a deed of settlement entered into by parties to litigation with the benefit of legal advice, whatever the Applicant Bankrupt now says about the quality of the advice he received.

6.    It is inherent in a deed of settlement, that parties agree to compromise what legal rights they believe they may have, in order to avoid further litigation.

7.    In this case, the Petitioning Creditor agreed to compromise on the amount claimed and for which a default judgment had been obtained.

8.    The Applicant Bankrupt in these proceedings agreed to abandon a counterclaim. I note that that counterclaim is said to arise from “loss and damage as a result of Feng and Eureka’s breach of the Agreement” (Affidavit of Colin Edward O’Neill filed 14 August 2014, Annexure “CON-3”, p.3 at para.H).

9.    The Deed was a commercial settlement. While I agree that the drafting is not the best, the key provisions, for the purpose of these proceedings, lie in clause 3 and 4 of the Deed (Ibid).

10.    Clause 3.0 of the Deed is headed “Bar to Proceedings”. It states:

3.1    This Deed may be pleaded as a full and complete defence by the parties to any action, suit or proceeding commenced, continued or taken by or on behalf of any party in connection with any of the matters referred to in this Deed (Affidavit of Colin Edward O’Neill filed 14 August 2014, Annexure “CON-3” at p.4).

11.    Clause 4.0 of the Deed is headed “Default”. It states:

4.1    In the event that Phillip defaults in relation to any payment that is due under this Deed, and the default is not remedied within a period of seven days after the date on which Feng serves written notice of default on Phillip, then Feng shall be entitled to apply to the Court on the basis of Phillip’s non-compliance with the Bankruptcy Notice (Ibid).

12.    While those clauses may be open to some differing views on how they might be construed, the interpretation which, in my view, is consistent with the commercial nature of the agreement, is that both parties agreed to consider the Deed to be a complete defence to any action, suit or proceeding, commenced, continued or taken save that should the Applicant Bankrupt default on payment, the Petitioning Creditor would be entitled to proceed with the Bankruptcy Notice by bringing a creditor’s petition.

13.    It would make no sense for the Petitioning Creditor to agree to the terms of the Deed unless the Applicant Bankrupt was barred from bringing proceedings such as these as, otherwise, if the Applicant Bankrupt defaulted, the Petitioning Creditor would have gained nothing.

14.    I am satisfied that the Deed is a bar to the application instituted in this application for review and the application is therefore dismissed.

Grounds of appeal

15    The appellant appeals her Honour’s judgment on 3 grounds:

1.    The learned judge committed a jurisdictional and/or non-jurisdictional error of law by failing to discharge her duty to conduct a re-hearing of the respondent's application for sequestration in accordance with section 52 of the Bankruptcy Act 1966 (Cth) ("the Act").

2.    The learned judge erred in law by failing to "go behind the judgment" in order to determine whether the requirements of section 52 of the Act were satisfied.

3.    The learned judge erred in law by misconstruing the terms and legal effect of the Deed of Settlement dated 16 April 2014 ("the Deed") by holding that the Deed precluded the Appellant:-

a.    from opposing an application for a Sequestration Order filed by the respondent; and

b.    from filing an Application for Review in relation to the making of the Sequestration Order made by a Registrar of the Federal Circuit Court on 8 July, 2014.

16    As below, the trustees were represented before me. Three affidavits were filed on behalf of the trustees – the affidavit of Antonia Kokkinis (a manager at Jirsch Sutherland) sworn on 2 December 2014 and the affidavits of Malcolm Kimbal Howell sworn on 2 December 2014 and 4 December 2014. The trustees neither consented to nor opposed the appeal, but in the event that the sequestration order was set aside they sought various consequential orders including an additional order annulling the bankruptcy, which I will later explain. The appellant also filed an affidavit on the appeal, but it can be put to one side for present purposes.

Ground 1 – Was a rehearing de novo carried out?

17    Her Honour concluded that “the Deed is a bar to the application instituted in this application for review” ([14]). On that basis she dismissed the application.

18    There are a number of difficulties with that position.

19    First, the text and context of r 20.03(a) of the Federal Circuit Court Rules 2001 (Cth) (FCC Rules), s 104(2) of the Federal Circuit Court of Australia Act 1999 (Cth) (FCC Act) and the constitutional imperative (Harris v Caladine (1991) 172 CLR 84 at 164 per McHugh J) required her Honour to carry out a rehearing de novo. One consequence was that her Honour had to consider afresh the elements of s 52 of the Bankruptcy Act 1966 (Cth) (the Act), including whether the petitioning creditor had satisfied the elements of s 52(1) and whether the debtor had discharged any onus of establishing the matters in s 52(2)(a) or (b) such that in the exercise of discretion the making of a sequestration order might be refused. But it seems to me that no such rehearing de novo was carried out. The Deed was taken to be a bar to such a process. But on no view could the Deed (even assuming its construction in favour of the respondent) be such a bar. To so treat it was inconsistent with r 20.03(a) and s 104(2). Moreover, to so treat it would leave in place the Registrar’s order under a delegation absent the constitutional control discussed by McHugh J; that is an impermissible bifurcation.

20    Second, equally if not more importantly, the Deed could not be a bar to the Federal Circuit Court carrying out the statutory task required of it under s 52 (see Totev v Sfar (2008) 167 FCR 193; [2008] FCAFC 35 at [14] per Emmett J). Subsections 52(1) and (2) relevantly provide:

52    Proceedings and order on creditor's petition

(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.

…

No private contractual bar could foreclose the operation of s 52 and the task required of the Federal Circuit Court under s 52. The language of s 52 required that Court to consider and apply its terms. For example, s 52(1) refers to “…the Court shall require proof…”. Further, under s 52(1) the Court is only empowered to make a sequestration order “if it is satisfied with the proof of…” the matters set out in s 52(1)(a)-(c). Further, the Court’s satisfaction or non-satisfaction of various matters under s 52(2) is relevant to the exercise of its power to dismiss the petition. On a rehearing de novo, the Federal Circuit Court was required to consider and deal with all such matters. And only after that consideration could disposition of the application for review occur.

21    Further, there is a related rationale as to why a private contractual bar could not foreclose the proper application of s 52. Lord Esher MR elegantly expressed the broader perspective, albeit in a related context, as follows:

•    “… the question is, not so much what is the right of the debtor, or what the conduct of the debtor or of the creditor has been, but rather whether the Court ought to exercise this great power, which deals not only with the particular debt of the petitioning creditor, but with the whole class of the creditors of the debtor, including the petitioning creditor…” [my emphasis] (Ex parte Lennox; In re Lennox (1885) 16 QBD 315 at 321);

•    “… the Court is not dealing simply between the petitioning creditor and the debtor, but it is interfering with the rights of his other creditors, who, if the order is made, will not be able to sue the debtor for their debts…” (In re Fraser; Ex parte Central Bank of London [1892] 2 QB 633 at 636);

•    “… the question is not one of a dispute between the two parties; it is a matter which will affect, and materially affect, the rights of all the creditors who are not before the Court when it has to determine whether a receiving order should or should not be made…” [my emphasis] (In re Hawkins; Ex parte Troup [1895] 1 QB 404 at 408);

•    “Each creditor is materially affected to the extent that he cannot by his own diligence get the whole of his debt. From the moment of bankruptcy, though he be the most diligent of the creditors, he has to go into equal competition with the most idle.” (In re Hawkins (supra at 409)).

22    No private contractual bar can negate the Court’s duty not to limit the scope of the matters to be considered in a fashion not authorised by s 52 and in a context not limited to an inter partes dispute. Proceedings involving the making or reviewing of sequestration orders are not just inter partes litigation.

23    Third, given the nature of s 52, and its public purpose and effect on the property and creditors of the debtor, any public policy or interest in encouraging the settlement of litigation (see [4] and [5] of her Honour’s reasons) had little work to do save in one circumstance concerning the Court’s power to look behind a judgment debt in considering s 52(1)(c) and perhaps s 52(2)(b).

24    The Deed at most could only have had relevance to whether the Court should have gone behind the judgment upon which the petitioning creditor relied or the act of bankruptcy was founded (if it was founded upon non-compliance with a bankruptcy notice relying upon that judgment).

25    A court has a discretion to go behind a judgment. This may be exercised where:

(a)    the judgment has been obtained by default or compromise; or

(b)    the judgment has been obtained following an adjudication on the merits where both parties appeared, but where there are substantial reasons for questioning whether there is in substance a debt, including whether the judgment is tainted with fraud, collusion or a miscarriage of justice.

26    In such a case a court may go behind the judgment to ascertain whether the judgment was founded on a real debt (Corney v Brien (1951) 84 CLR 343 at 347 per Dixon, Williams, Webb and Kitto JJ; Wren v Mahony (1972) 126 CLR 212 at 221-224 per Barwick CJ; Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 147-8 per Davies, Lockhart and Neaves JJ). This is a s 52(1)(c) question and see generally Ali v Retail Decisions Pty Ltd [2012] FCA 1130 at [17] to [20] per Bromberg J and Yarranova Pty Ltd v Shaw (No 2) [2014] FCA 616 at [69] per Gordon J (endorsed by the Full Court in Shaw v Yarranova Pty Ltd [2014] FCAFC 171 at [27] per Bennett, Flick and Yates JJ), although some authorities have also brought this within s 52(2)(b).

27    The Deed at most may have been relevant to consider in that context, but not to foreclose her Honour’s proper consideration of s 52. But the Deed was not so used by her Honour in that more limited context.

28    Fourth, there may be cases where an application for review is brought mala fide, for an improper purpose or otherwise constitutes an abuse of process (Williams v Spautz (1992) 174 CLR 509 at 526-531 per Mason CJ, Dawson, Toohey and McHugh JJ). But in such a case, an application to stay the review (or summary dismissal) may be the appropriate process to follow. But in this case, no such application was brought. Further, no such circumstance was alleged. Further, I say this generally, for it is hard to conceive of such a case in the context where an application for review is brought by a debtor challenging the making of a sequestration order. Further, if the effect of the stay produces an impermissible absence of review of the Registrar’s order, then yet further problems may arise.

29    Generally, the Federal Circuit Court failed to carry out the task required of it in two senses. First, it did not engage in the task of a rehearing de novo. Second, and relatedly, it did not engage in the task required under s 52 of the Act. Perhaps this can be characterised as a jurisdictional error (Craig v South Australia (1995) 184 CLR 163 at 177-180), but I do not need to linger on characterization.

30    I should say that in reaching this conclusion, I have not overlooked the submissions of the respondent. Rather, they lack substance.

31    It was said that the Court had a power of summary dismissal (s 17A(2) of the FCC Act and r 13.10 of the FCC Rules) and that this power had been exercised by her Honour in the present case on the basis of the Deed being a bar. But no such formal application was made; there was no formal document and my review of the transcripts for the hearings on 21 and 26 August 2014 does not support the contention that such a power was being exercised. A review of the transcripts indicates a process resonating more with the determination of a preliminary question, but even this is not an apposite description given the breadth of the submissions made at the hearing and the evidence adduced. Further, if such a summary dismissal power was available, then it might be used in circumstances such as discussed in [28] above. But such circumstances were not the present case. Further, if it was to be used in circumstances such as the present, her Honour would first have been required to consider the matters set out in [20] to [27] above before considering whether to exercise her powers to summarily dismiss the application for review on the basis of the Deed alone being a bar. No such consideration occurred. More particularly in that context, her Honour would have been required to consider the public effect and third party consequences of exercising her powers of summary dismissal. Further, if the ground relied upon was “no reasonable prospect of success”, it is difficult to see how this could have been established on the Deed alone, particularly given the difficulties of construction and the strength of the legal arguments adverted to in [20] to [27] above.

32    The respondent also contended that “appeals (de novo or otherwise) are susceptible to compromise and settlement”, that “court rules even encourage it, including in an appeal context” and that “[c]ourts ordinarily give effect to parties’ agreements to cease further litigation”. It was said that “[p]roceedings brought in breach of a bar to proceedings are routinely dismissed summarily”. All true, but subject to two qualifications, both of which have importance in the present context. First, such generalities are subject to the restrictions inherent in the specific process being undertaken and the statutory context involved. Second, the present case is not just inter partes litigation in terms of the nature of the process engaged and the consequences of making a sequestration order (or in this case, leaving it in place if the application for review was to be dismissed).

33    In summary, I do not consider the respondent’s platitudes to be an answer to the appellant’s criticism. Ground 1 is made out. That conclusion justifies setting aside her Honour’s decision and remitting the matter to her for reconsideration of the application for review. But it is appropriate to also address grounds 2 and 3, given that there is to be a remittal.

Ground 2 – Failing “to go behind the judgment”

34    As I have said, the significance of the Deed may have relevance as to whether her Honour should have gone behind the judgment, but no broader.

35    One should distinguish between two steps in that process, viz:

(a)    First, is there a basis for going behind the judgment? Is there a substantial reason for questioning whether there is a debt?

(b)    Second, if this is answered in the affirmative, then a full investigation of whether there is a debt should then be undertaken.

36    The significance of the Deed is directly relevant to the first step, but of less relevance to the second step subject to any release or covenant not to sue that may be applicable.

37    I am not able to say that her Honour erred in failing to go behind the judgment. Rather, the real and anterior point is that if her Honour had carried out a rehearing de novo as required, her Honour ought to have considered the significance of the Deed in the context of the first step as to whether she should go behind the judgment. She did not so consider the Deed in that context, but rather considered the Deed as a broader bar, so that the application for review failed in limine.

Ground 3 – Construction of the Deed

38    It is said that her Honour erred in construing the terms and legal effect of the Deed in holding that it precluded the appellant from opposing the petition and also from filing and proceeding with the application for review. I agree. The Deed contained no such express contractual preclusion.

39    Clause 4.1, an exception to the releases provided in cl 2, provided that if the appellant defaulted, the respondent was “entitled to apply to the Court on the basis of Phillip’s non-compliance with the Bankruptcy Notice”. It said nothing about the capacity of the appellant to defend such proceedings or to take any review proceedings relating to any orders made thereunder, which in substance would still be in the nature of a defensive step by the appellant.

40    Clause 3.1 said little of relevance either. It referred to the Deed being “pleaded as a full and complete defence by the parties to any action”. Clearly, cl 3 is subject to cl 4.1. Now it is the respondent that brought the petition, as he was entitled to do, and the appellant who has defended it. It is difficult to see how the respondent could use the Deed as a defence in this context. And on the application for review, which is a rehearing de novo, the positions in substance have not altered. The appellant was still in substance in the defensive position. It would be a triumph of form over substance to say that the appellant’s application for review is an “action, suit or proceeding” which the respondent is “defending”. Clause 3.1 says little more than that if one party to the Deed brings an action, presumably contrary to the Deed or relating to a claim released by the Deed, then the party sued can plead the Deed in bar. But here, the respondent brought an action in conformity with the Deed (cl 4.1), the petition. Moreover, it is the appellant in substance defending it. The respondent’s position is twice removed from what cl 3.1 contemplates.

41    The respondent has pointed out that the Deed’s recitals refer to the judgment debt and the bankruptcy notice. True that may be. And as I have said, the Deed may have relevance as to whether her Honour should have looked behind the judgment debt. But such references hardly justify rewriting cl 3 on the basis that it “is consistent with the commercial nature of the agreement”. Finally, I do not agree with her Honour’s enthymeme at [13] where the unstated premise, which I do not accept, appears to be that cl 3.1 would have no work to do absent the construction advanced by the respondent.

42    In my view, the Deed on its face did not provide the bar asserted. In any event, it could not be a bar against the operation of s 52 and the exercise required for the reasons previously given.

Conclusion

43    Her Honour’s decision should be set aside and the matter remitted for further consideration. The sequestration order made by the Registrar will be left in place pending the further disposition of the application for review. As there has been no review according to law, the sequestration order has not yet been successfully impugned.

44    There are three further matters.

45    First, I considered whether I should determine the application for review myself. But I do not have all the affidavit material that was before her Honour. Further, the issues raised in opposition to the petition will involve evidence and cross-examination. Further, given the nature of the errors identified, it is more appropriate that the matter be remitted to her Honour for reconsideration (see Martin v Commonwealth Bank of Australia (2001) 217 ALR 634; [2001] FCA 87 at [20] to [23] per North, Mansfield and Katz JJ; Allesch v Maunz (2000) 203 CLR 172 at [30] per Gaudron, McHugh, Gummow and Hayne JJ).

46    Second, the trustees submitted that if I was to set aside the sequestration order, I should additionally annul the bankruptcy pursuant to s 153B of the Act; they perceived that annulment would protect them for work done in administering the estate and would also give them an entitlement to be paid out of the assets formerly vested in them. This raises an interesting issue (see for example Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 at [38] to [43] per Weinberg J; Flint v Richard Busuttil & Co Pty Ltd (2013) 216 FCR 375 at [49] to [55] per Allsop CJ, Katzmann and Perry JJ; Pattison v Hadjimouratis (2006) 155 FCR 226 at [39] to [81] per Jacobson J). But as I have not set aside the sequestration order, the issue does not presently arise.

47    Third and finally, it is appropriate to record, in fairness to her Honour, that some of the matters discussed above involve a slight reconceptualization of how the case was advanced before her Honour.

48    I will make orders in the terms foreshadowed.

Associate:

Dated:    20 February 2015