FEDERAL COURT OF AUSTRALIA

James v Commonwealth Bank of Australia [2015] FCA 582

On the undertaking of the applicant that he will cooperate with his trustees in bankruptcy and comply with his obligations under the Bankruptcy Act 1966 (Cth) as they may request or direct:

THE COURT ORDERS THAT:

1.    In relation to the following notices (“the Notices”):

(a)    the notice from Gadens Lawyers to Messrs A Scott and M Robinson of PPB Advisory (“the trustees”) dated 29 April 2015;

(b)    the notice from Kemp Strang Lawyers to the trustees dated 27 April 2015;

(c)    the notice from Adrian Holmes, Lawyer to the trustees dated 4 May 2015;

the time stipulated in s 60(3) of the Bankruptcy Act 1966 (Cth) be extended to the date which is seven (7) days after the determination of the appeal.

2.    The operation of the sequestration order made against the estate of the applicant on 24 April 2015 be suspended to the extent necessary to permit the applicant to prosecute the proceedings the subject of the Notices (“the Proceedings”), namely:

(a)    NSW Court of Appeal proceedings No 2015/98507 against the respondent being the application for leave to appeal and, if leave is granted, the appeal;

(b)    NSW Supreme Court proceedings Nos 2014/71424, 2014/71413 and 2014/71396 against Rabobank Australia Limited;

(c)    NSW Court of Appeal proceedings No 2015/118223 against Douglas and 6 others.

3.    The respondents to the proceedings mentioned in Order 2(c) above have liberty to apply on three (3) days’ notice to vary that order.

THE COURT NOTES:

The undertaking by the trustees that they will not make any election to discontinue pursuant to s 60 of the Bankruptcy Act under the Notices or in respect of the Proceedings or any of them without first giving 10 days’ notice in writing to the applicant.

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

REASONS FOR JUDGMENT

1    David Anthony James is a bankrupt. On 24 April 2015, in an ex tempore decision, the Federal Circuit Court dismissed his application for review of the Registrar’s decision to set aside a bankruptcy notice issued against him by the Commonwealth Bank (“CBA”), refused to adjourn the hearing of the CBA’s creditor’s petition, and made a sequestration order against his estate.

2    On 15 May 2015 Mr James filed a notice of appeal in which he alleged that the primary judge made numerous errors. The appeal has not yet been fixed for hearing. By an amended interlocutory application filed on 25 May 2015, Mr James sought a stay of all proceedings and action under the sequestration order pending its determination. He also sought an order pursuant to s 33 of the Bankruptcy Act 1966 (Cth) that the time for certain notices issued under s 60(3) of the Act be extended to a date seven days after the determination of the appeal. The interlocutory application was supported by an affidavit sworn on 15 May 2015 by Richard John Bain Allsop, Mr James’ current solicitor, which sets out the relevant history and to which a large number of documents were annexed, only a selection of which found their way into evidence.

3    During the hearing of the interlocutory application, Mr James handed up some draft short minutes, revising the orders contained in the amended interlocutory application, in effect to substitute for the first proposed order an order that the operation of the sequestration order be stayed to the extent necessary to permit Mr James to prosecute the proceedings the subject of the notices. The orders contained in the draft short minutes are in the following terms (without alteration):

1    An order pursuant to s.33 Bankruptcy Act 1966 that the time stipulated in s.60(3) Bankruptcy Act be extended in relation to the following Notices issued pursuant to s.60(3) Bankruptcy Act to the date which is 7 days after the determination of the Appeal:

(a)    the notice from Gadens Lawyers to Messrs A Scott and M Robinson of PPB Advisory dated 29 April 2015;

(b)    the notice from Kemp Strang Lawyers to Messrs Scott and Robinson dated 27 April 2015;

(c)    the notice from Adrian Holmes, Lawyer to Messrs Scott and Robinson dated 4 May 2015; (“the Notices”).

2    An order that the operation of the Sequestration Order made against the estate of the Applicant on 24 April 2015 be stayed to the extent necessary to permit the Applicant to prosecute the proceedings the subject of the Notices, namely:

(a)    Court of Appeal, Supreme Court of New South Wales proceedings No 2015/98507 against the Respondent being Application for Leave to Appeal and any Appeal granted pursuant to such leave;

(b)    Supreme Court proceedings Nos. 2014/71424, 2014/71413 and 2014/71396 against Rabobank Australia Limited;

(c)    Court of Appeal, Supreme Court of New South Wales proceedings No 2015/118223 against Douglas and 6 ors; (“the Proceedings”).

3    Reserve liberty to the Respondents to the proceedings in Order 2 (c) above to apply on 3 days notice to vary this order.

4    As the argument on the stay application was protracted, leaving no time for Mr James to reply orally, I reserved my judgment and gave Mr James the opportunity to reply in writing. By consent, I made an interim order covering the matters dealt with in draft order 1.

5    With some minor alterations, including substituting “suspended” for “stayed” in order 2, I am satisfied that these orders should be made on the undertaking given to the Court by Mr James that he will cooperate with his trustees in bankruptcy and comply with his obligations under the Bankruptcy Act as the trustees may request or direct.

General principles

6    Section 52(3) of the Bankruptcy Act enables a court with jurisdiction in bankruptcy, if it thinks fit, and upon such terms and conditions as it thinks proper, to stay all proceedings under a sequestration order for a period not exceeding 21 days. The primary judge was asked to exercise this power but refused.

7    Where an appeal to this Court from another court has been instituted s 29 of the Federal Court of Australia Act 1976 (Cth) (“FCA Act”) gives the Court the power to order, on such conditions as it thinks fit, “a stay of all or any proceedings under the judgment appealed from” and to suspend the operation of any order to which the appeal relates.

8    The Court’s discretion is broad, limited only by the subject matter, scope and purpose of the legislation. As Beach J observed in Endresz v Australian Securities and Investment Commission [2014] FCA 1139 at [14]-[16], generally, all that is required is that the applicant show that there is “a reason or an appropriate case” to warrant the exercise of the discretion in his or her favour (Powerflex Services Pty Ltd v Data Access Corp (1996) 67 FCR 65 at 66), which in turn requires the consideration of two questions: first, whether there is an arguable point in the appeal (Nolten v Groeneveld Australia Pty Ltd [2011] FCA 1494 (“Nolten”) per Kenny J at [24]) or some “rational prospect of success” on any of the grounds of appeal (Burns v AMP Finance Ltd [2005] FCA 761 per Emmett J at [5]); and secondly, whether the balance of convenience favours the grant of a stay (Nolten at [24]).

9    I have concluded that this is an appropriate case to warrant the exercise of the discretion in Mr James’ favour. There is more than one arguable point and the balance of convenience favours the grant of a stay.

Background

10    Relevantly, Mr James’ troubles with the CBA began when it sued him in the District Court of New South Wales on 19 May 2014 for $674,920.12. The lion’s share of this sum represented the amount outstanding under a loan made to a company, Print National Nominees Pty Ltd (“Print National”), of which Mr James was the sole director, and whose debt he had guaranteed. The loan was secured by a mortgage over some real estate owned by the company. When the company defaulted under the loan facility, the CBA called upon the guarantee. When Mr James did not heed the call, the CBA sold the property for a price Mr James now contends was substantially less than its market value.

11    By notice of motion filed on 10 October 2014 and returnable on 31 October 2014, the CBA applied for summary judgment. Mr James, who claims to have been unaware of this application until he was served with the bankruptcy notice, did not appear in court on 31 October 2014 and, due to an oversight, neither did his then solicitor. Consequently, the CBA’s application proceeded ex parte and default judgment was entered against Mr James in the sum of $737,241.39.

12    On 11 November 2014 — eleven days after the publication of judgment — the CBA caused a bankruptcy notice to issue. The notice was served a short time thereafter. Mr James had 21 days in which to comply with it.

13    Before the time for compliance expired, Mr James filed an application in the Federal Circuit Court to set aside the bankruptcy notice. The application was supported by an affidavit. Mr James also sought an interim order extending the time for compliance with the notice until his application was determined.

14    At the time he filed his application, Mr James was unrepresented. It appears that, contrary to r 3.02(2) of the Federal Circuit Court (Bankruptcy) Rules 2006 (Cth) (“Bankruptcy Rules”), his supporting affidavit did not state the amount by which the alleged counterclaim, set-off or cross demand exceeds the amount claimed in the bankruptcy notice and the reason the counterclaim, set-off or cross-demand was not raised in the bank’s District Court action which culminated in the judgment debt in relation to which the bankruptcy notice was issued.

15    It appears that the central grounds of the application were that the judgment had been entered in his absence because his solicitor failed to appear, that he was unaware of the entry of judgment until 15 November 2014 and that he had instructed his solicitor to file a notice of motion in the District Court to set aside the judgment and for leave to file a cross-claim. In the draft cross-claim Mr James alleged that the CBA sold Print National’s property for $1.65 million when it was actually worth $3.8 million, resulting in a shortfall of $2.15 million.

16    On 18 December 2014 Mr James’ former solicitor filed a notice of motion in the District Court in accordance with his instructions. The notice of motion was supported by an affidavit sworn by Mr James on 15 December 2014.

17    On 19 December 2014 the Registrar heard the application to set aside the bankruptcy notice and ordered that it be dismissed with costs.

18    On 6 January 2015 Mr James filed an application for review of that decision. The review application was first returnable on 2 February 2015 at which time it was fixed for hearing on 24 April 2015.

19    On 15 January 2015, heedless of the filing of the review application, the CBA filed a creditor’s petition. The first return date for the creditor’s petition was the date the application for review of the bankruptcy notice was listed for hearing.

20    On 11 March 2015 Mr James filed his Notice of Grounds of Opposition to the Creditor's Petition pursuant to leave granted that day, together with supporting affidavits sworn on 22 January 2015 and 11 March 2015.

21    In the meantime, on 6 March 2015 Cogswell DCJ heard Mr James notice of motion to set aside the default judgment. His Honour accepted that there was a reasonable explanation for Mr James’ failure to appear. He also accepted that Mr James had an arguable defence based on his allegation that the CBA had sold the property secured by the loan Mr James had guaranteed at an undervalue, in breach of its duty as mortgagee. Nevertheless, he was persuaded not to set aside the judgment because of the existence of a suspension clause in the guarantee which, while the debt remained unpaid, purportedly precluded Mr James from claiming that there was any right to set-off or counterclaim against the bank without its consent. His Honour described as attractive a submission made on Mr James’ behalf to the effect that the suspension clause was defeated by s 111A of the Conveyancing Act 1919 (NSW) but he did not accept it.

22    Importantly, however, Cogswell DCJ granted a stay of the default judgment until 20 March 2015 in order to permit Mr James to file an appeal. The stay was then extended on condition that by 2 April 2015 he file a summons seeking leave to appeal as the original decision was interlocutory. Mr James filed the summons and, on 13 April 2015, by consent, the Court of Appeal ordered that the stay be further extended up to and including 11 May 2015.

23    According to the summary of argument in the Court of Appeal proceedings, Mr James will contend that Cogswell DCJ erred when he dismissed the motion to set aside the default judgment, there being triable issues about the meaning of the suspension clause, its validity or enforceability, having regard to the terms of s 111A(5) of the Conveyancing Act or under the Contracts Review Act 1980 (NSW) or otherwise (as against public policy). A similar question was expressly left open by the Court of Appeal in O'Brien v Bank of Western Australia Ltd (2013) 16 BPR 31,705; [2013] NSWCA 71. In addition, the summary discloses that Mr James intends to argue that there is a triable issue as to whether the guarantee should be set aside because of the CBA’s misleading or deceptive conduct which induced him to sign the guarantee.

24    Mr James’ woes do not end here, however.

25    On 16 May 2014 ANZ Bank (“ANZ”) obtained a judgment against Mr James in the Supreme Court in the amount of $13,928,818.66. It appears that Mr James did not honour the judgment debt and so on 9 December 2014 the Official Trustee issued a bankruptcy notice at ANZ’s instance in the sum of $11,751,606.73. ANZ appeared before the primary judge as a supporting creditor. In the proceeding below Mr James stated in an affidavit sworn on 11 March 2015 that he intended to bring an action against ANZ for damages in excess of $20 million. Rabobank Australia Limited (“Rabobank”), another creditor, claims that Mr James is liable to it under one or more guarantees he signed in relation to loans it extended to other companies with which he is associated. Mr James is one of a number of plaintiffs who sued Rabobank in the Supreme Court, presumably to claw back all or some of this debt. Those proceedings were struck out but Mr James was given leave to re-plead.

The ostensible reason for the stay application

26    The effect of s 60(2) of the Bankruptcy Act is that, upon the making of the sequestration order, the application for leave to appeal was stayed until Mr James’ trustees in bankruptcy make an election in writing to prosecute or discontinue the proceeding, and so, too, any other proceeding in which Mr James was a moving party. 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, s 60(3) states that the trustee is deemed to have abandoned the action.

27    Three notices were served on Mr James’ trustees in bankruptcy relating to separate actions commenced by Mr James.

28    On 27 April 2015 Kemp Strang Lawyers gave notice to the trustees of three different proceedings in which Mr James was a plaintiff, all commenced in the NSW Supreme Court on 7 March 2014. These proceedings, as I understand it, were the proceedings lodged against Rabobank and allege breaches of the Farm Debt Mediation Act 1994 (NSW). On 29 April 2015 Gadens Lawyers, on behalf of the CBA, gave notice to the trustees of the pending proceeding in the Court of Appeal. On 7 May 2015 the trustees received notice from Adrian Holmes Lawyer of an appeal filed by Mr James in the Court of Appeal on 21 April 2015 in yet another matter. Mr Allsop said in the final paragraph of his affidavit that Mr James told him he was concerned that the trustees will elect not to continue to prosecute the proceedings referred to in these letters, including the Court of Appeal proceedings, and that he will lose the right to prosecute the proceedings even if the appeal from the Circuit Court is successful.

29    After receiving each of the notices, the trustees wrote to Mr James asking for documentation to enable them to assess the likelihood of recovery in those actions for the benefit of the creditors of the bankrupt estate. It appears that Mr James did not reply to these letters until the day before the hearing in this Court of his stay application. No evidence was therefore given as to what the trustees might do. The time prescribed by s 60(3) has now elapsed. In the absence of any advice to the contrary, I infer that the trustees have not made an election either to prosecute or discontinue any of the proceedings with the result that, but for the interim order, the trustees would be deemed to have abandoned all these actions.

The primary judge’s reasons

The application to review the Registrar’s decision

30    The review application was a hearing de novo: Federal Circuit Court Rules 2001 (Cth), r 20.03.

31    Mr James applied for an order under s 41(6A) of the Bankruptcy Act extending the time for compliance with the bankruptcy notice until after his application for leave to appeal to the Court of Appeal had been determined.

32    The primary judge dismissed the application because:

(a)    not all the requirements of r 3.02 of the Bankruptcy Rules had been satisfied;

(b)    the Court had no power to extend time for compliance or to dispense with compliance, notwithstanding the decision to the contrary in Burrell v Reavill Farm Pty Ltd (2014) 286 FLR 310; [2014] FCCA 1449 (Judge Manousaridis), which, according to his Honour, was plainly wrong; and

(c)    even if he had a discretion to extend time for, or dispense with, compliance, he would not have exercised it in Mr James’ favour “[g]iven the lack of a real and sufficient counterclaim, set-off or cross-demand”, which meant that the application had “no sufficient prospect of success”.

33    His Honour then proceeded to deal with the creditor’s petition.

The creditor’s petition for a sequestration order

34    At the hearing of a creditor’s petition, the Court may make a sequestration order against the debtor’s estate if, having required proof of the matters stated in the petition, service of the petition, and the fact that the debt or debts on which the petitioning creditor relies is or are still owing, the Court is satisfied with that proof: Bankruptcy Act, s 52(1). On the other hand, if the Court is not satisfied with proof of any of these matters or is satisfied by the debtor that he or she is able to pay his or her debts or that for other sufficient cause a sequestration order ought not be made, it may dismiss the petition: Bankruptcy Act, s 52(2). Nevertheless, the Court has a discretion at any time to adjourn the proceeding: Bankruptcy Act, s 33(1).

35    The primary judge declined to adjourn the hearing of the petition. The reasons he gave (at [16]) were that he was satisfied that there was an “underlying debt”, that the counterclaim, set-off or cross demand would give rise to an amount equal to or in excess of the judgment debt and that this was “not a case in which there is any merit or basis to go behind the judgment debt”.

36    His Honour referred (at [21]) to Mr James’ application for leave to appeal, noted that it was fixed for hearing on 11 May 2015, and observed that it was not necessary “on either application” to determine the issues it raised. He then considered whether Mr James was likely to succeed in any claim against the CBA and said (at [22]) that on the material before the court he was not satisfied that he was. His Honour went on to say that he was satisfied that, if Mr James were to succeed, “it would be for an amount substantially less than the amount currently owing to the petitioning creditor”. His Honour also said (at [24]) that Mr James was unlikely to succeed in his claim against the CBA alleging a breach of s 111A of the Conveyancing Act and there was no arguable case that the contract of guarantee was unjust at the time it was made (referring to a possible Contracts Review Act claim).

37    In addition, his Honour observed that Mr James owed $11,751,606 to ANZ. He noted that on 19 May 2014 Mr James had filed a statement of claim against ANZ but his Honour considered it to have no merit.

38    At [27] his Honour said:

Notwithstanding the proximity of the hearing date before the Court of Appeal in respect of a leave application, this Court has a broader interest than the parties which includes a public interest in relation to its bankruptcy jurisdiction in respect of an insolvent debtor and the interest of the supporting creditor opposing an adjournment is a relevant factor taken together with the lack of merit in relation to the claim being advanced by Mr James on the findings that I have made. An adjournment in this case would also give rise to the real prejudice of the incurring of further unrecoverable costs by the petitioning creditor in circumstances where the Court is satisfied that the

counterclaim, set-off or cross demand will not give rise to an amount equal to or in excess of the judgment debt.

39    His Honour said at [28] that he had also taken into account the fact that the review application and the creditor’s petition would have been heard on an earlier date, but for an adjournment on compassionate grounds.

40    After declaring that he was satisfied as to the formal matters required to be proved under s 52(1) and that there was no sufficient cause not to make a sequestration order, his Honour made the order.

41    Mr Pritchard SC, who appeared for Mr James, then applied for a stay under s 52(3) to enable Mr James to proceed with the leave application in the Court of Appeal, which his Honour refused.

Is there an arguable case on the appeal?

42    The notice of appeal contains 13 grounds raising some 21 alleged errors. It is sorely in need of amendment, as Mr Cashion SC, who appeared for Mr James on the present application with Mr Baird, frankly acknowledged. The Court was informed, however, that the central issues in the appeal are:

(1)    Did the primary judge have power to extend time for compliance with r 3.02 of the Bankruptcy Rules and, if so, whether as a matter of discretion, he should have done so?

(2)    In dismissing the review application, did the primary judge misdirect himself on the relevant tests? In particular, did his Honour fail to consider, as it is submitted he should, the prospects of the Court of Appeal granting Mr James leave to appeal and allowing the appeal against Cogswell DCJ’s decision to refuse to set aside his order for summary judgment in favour of the bank?

(3)    Did the primary judge err in the exercise of his discretion in failing to adjourn the creditor’s petition pending determination of the proceedings in the Court of Appeal?

43    There is certainly an arguable case that the primary judge erred in concluding that he had no power to grant Mr James an extension of time or to dispense with strict compliance with r 3.02.

44    In Burrell Judge Manousaridis referred, amongst other things, to three decisions of this Court which the primary judge did not mention in his reasons and which tell against his Honour’s conclusion. It is sufficient for present purposes to refer to one – Hussain v King Investment Solutions Pty Ltd (2006) 153 FCR 428 – which was a case where the debtor failed to serve his application to set aside a bankruptcy notice within the three days required by the rules (then r 30.02(4) of the Federal Magistrates Court Rules 2001 (Cth), which Judge Manousaridis observed was in substance the same as r 3.02(3) of the Bankruptcy Rules). There, Gyles J said at [25]-[26]:

There is a critical difference between rules of court, on the one hand, and statutory obligations on the other. … [T]here is always an overriding power in the court to dispense with the effect of rules of court. The applicable provision here was r 1.06 of the Federal Magistrates Court Rules 2001 … In my opinion, the proceeding was not a nullity, as the failure to abide by the rules as to service could have been excused.

45    In Burrell the judgment creditor relied on a decision of Edmonds J in O’Meara v Deputy Commissioner of Taxation [2009] FCA 1575 to the effect that a failure to file an affidavit as required by r 3.02 of the Federal Court (Bankruptcy) Rules 2005 (Cth), which is the same as r 3.02 of the Bankruptcy Rules, “mandates what is required for an application to set aside a bankruptcy notice”, so that if there is non-compliance, “it is as if no application to set aside the Bankruptcy Notice was ever filed”. But Judge Manousaridis said at [47] that O’Meara could not be regarded as authority for the proposition that the court had no power under r 1.06(1) of the Federal Circuit Court Rules to dispense with compliance with any of the Bankruptcy Rules for no application was made to Edmonds J that he do so and his Honour’s attention was never drawn to the three judgments of this Court to the contrary.

46    While I have not had the benefit of full argument on this question, I must say that, far from being “plainly wrong”, the reasoning in Burrell seems to me to be compelling.

47    In Burrell, Judge Manousaridis also held that the debtor’s failure to comply with r 3.02 of the Bankruptcy Rules were formal defects or irregularities which the court could excuse. In this respect, his Honour relied on s 57(1) of the Federal Circuit Court of Australia Act 1999 (Cth), which provides that proceedings in that court are not to be invalidated by a formal defect or irregularity unless the court is of the opinion that substantial injustice has been caused by the defect or irregularity which cannot be remedied by an order of the court.

48    In the present case, the primary judge did not advert to the reasons given in Burrell, let alone explain what was wrong with them. In the circumstances, it is impossible to understand how he could have come to the conclusion that the decision was plainly wrong: see Informax International Pty Ltd v Clarius Group Ltd (2011) 192 FCR 210 at [53]-[56] (Perram J).

49    The CBA did not attempt to defend this aspect of the judgment. Rather, it argued, in substance, that, assuming the primary judge erred in holding that he had no power to dispense with compliance with r 3.02 (or part thereof), there was no error in the exercise of the discretion.

50    On this question, as on the question whether the primary judge erred in failing to adjourn the hearing of the creditor’s petition, the principles in House v The King (1936) 55 CLR 499 apply. This means that Mr James will have to persuade the Court that his Honour acted on a wrong principle, allowed extraneous or irrelevant matters to guide or affect him, mistook the facts, failed to take into account a material consideration or that on the fact his decision was unreasonable or plainly unjust so as to enable the Court to infer that the exercise of the discretion miscarried.

51    In this respect, the CBA referred to the evidence upon which Mr James relied in support of his cross-claim, submitting that the primary judge was right to conclude that, even if the evidence were received, the highest amount Mr James could recover in damages if he succeeded would be lower than the judgment debt, the shortfall being some $37,000. But this submission did not take into account the interest to which Mr James would be entitled on the damages he would recover if the cross-claim succeeded – a matter his Honour appears to have overlooked.

52    Mr James pointed to a number of matters he contended demonstrate that his Honour’s discretion miscarried. They included:

    the failure to consider Mr James’ argument that, as the default judgment had been stayed, it was not a debt which is “payable immediately or at a certain future time” within the meaning of s 44(1)(b) of the Bankruptcy Act;

    the failure to consider as a relevant matter the prospects of the Court of Appeal granting the application for leave to appeal and the prospects of success of any appeal;

    misdirecting himself by considering instead the prospects of success of the cross-claim in the event that the default judgment was set aside;

    considering the merits of Mr James’ proposed cross-claim as on a final hearing despite the limited material before him.

53    The first of these points strikes me as a very strong one. Section 44(1) relevantly provides that:

A creditor’s petition shall not be presented against a debtor unless:

(a)    there is owing by the debtor to the petitioning creditor a debt that amounts to $5,000 …; [and]

(b)    that debt …

(i)    is a liquidated sum due at law or in equity or partly at law and partly in equity; and

(ii)    is payable either immediately, or at a certain future time; and

…

54    The primary judge did not even mention the stay granted in the District Court and continued with the CBA’s consent by the Court of Appeal. Yet, the effect of the stay was to suspend any requirement for payment of the judgment debt. The CBA’s petition was presented when the debt on which the bankruptcy notice (and therefore the petition) was founded was not payable immediately or at a certain future time. In those circumstances, it is very hard to see why his Honour considered there was any justification for proceeding to hear the petition, let alone to make the sequestration order.

55    The second dot point is also significant for, if the Court of Appeal were to find error in Cogswell DCJ’s decision, the default judgment which was the basis of the bankruptcy notice, could be set aside. Mr James submitted that the application for leave to appeal was brought bona fide and was being prosecuted diligently, in compliance with an undertaking to proceed with expedition, and there was no submission to the contrary.

56    His Honour did refer to the pending leave application in the Court of Appeal and the issues it raised, but he said that it was not necessary for him to determine them. He went on to hold that he was not satisfied that Mr James was likely to succeed in any claim against the petitioning creditor and that, if he did, it would be for an amount substantially less than the current debt to the CBA. In these respects, Mr James submitted that his Honour erred by failing to ask himself the right question, namely, whether Mr James had an arguable case on the application for leave to appeal and, if leave is granted, on the appeal itself.

57    The CBA maintained, however, that the primary judge had indeed considered whether Mr James had an arguable case on appeal, referring to his Honour’s remarks at [15]. There his Honour said:

This is not a case in which the merits or prospects of success warrant extension of time for compliance with the bankruptcy notice as the dispute is not in my opinion of sufficiently arguable. I have taken into account the general desirable course given the proceedings on foot in the Court of Appeal as identified as Re Baker; ex parte Baker v Staples [1995] FCA 1520 at [5] and Beckwith v Pedler (1999) FCA 1312 but I am satisfied the proceedings on foot will not give rise to a counterclaim, set-off or cross demand equal to or in excess of the amount of the judgment debt.

58    For present purposes, however, the question is did his Honour consider whether Mr James had an arguable case before the Court of Appeal. It is not apparent to me that he did.

59    I appreciate that at [16] the primary judge said there was “[no] merit or basis to go behind the judgment debt”. Putting to one side for the moment the question of whether or not there was a judgment debt at this point in time, the default judgment having been stayed, this statement appears to have been made without any consideration of the arguments Mr James intended to put to the Court of Appeal and in circumstances in which his Honour expressly refrained from saying anything about the point at the heart of the proposed appeal – the enforceability of the suspension clause. This is a matter of some importance. In Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 the Full Court (Davies, Lockhart and Neaves JJ) held at 148:

It is also well established that in general a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings provided that the appeal is based on genuine and arguable grounds: Re Rhodes; Ex parte Heyworth (1884) 14 QBD 49; Bayne v Baillieu (1907) 5 CLR 64 and Re Verma; Ex parte DCT (1985) 4 FCR 181.

These cases rest on the broad principle that before a person can be made bankrupt the court must be satisfied that the debt on which the petitioning creditor relies is due by the debtor and that if any genuine dispute exists as to the liability of the debtor to the petitioning creditor it ought to be investigated before he is made bankrupt. Bankruptcy is not mere inter partes litigation. It involves change of status and has quasi-penal consequences.

60    The primary judge appears to have had sufficient material to determine whether the leave application and the foreshadowed appeal were arguable. One of the annexures to Mr Allsop’s affidavit filed in the Circuit Court was Mr James’ summary of argument in the Court of Appeal.

61    For these reasons, on any view, Mr James has at least an arguable case that the primary judge fell into appealable error.

Where does the balance of convenience lie?

62    Mr James submitted that the balance of convenience strongly favours the grant of a stay pending the hearing of the appeal. He referred to the pending proceeding in the Court of Appeal, which, if successful, will result in the setting aside of the judgment which gave rise to the act of bankruptcy upon which the creditor’s petition was based and the sequestration order made. He also pointed to prejudice he would suffer as a result of the s 60(3) notice issued by Gadens, the CBA’s solicitors, which, he contended, will have the effect of shutting him out of appealing the very judgment upon which he was made bankrupt. In circumstances in which the judgment was entered in his absence due to the acknowledged default of his solicitor, he described this as a “great injustice”. He submitted that the only prejudice to the CBA would be the loss of its default judgment, contending that there was no prejudice to the CBA if time for compliance with the s 60(3) notice issued by its solicitors were extended.

63    Mr James submitted that he was also prejudiced by the separate s 60(3) notice issued by Rabobank which, like the CBA, would suffer no prejudice if the order affecting it were to be made.

64    On the other hand, the creditors all urged the Court not to make the orders Mr James sought.

65    Rabobank submitted that the balance of convenience was against the making of order 1(b) (that the time in s 60(3) of the Bankruptcy Act be extended) because, even if the proceeding was abandoned, that would not destroy the underlying cause of action (see Stobbart v Mocnaj (1996) 16 WAR 318; Temsign Pty Ltd v Biscen Pty Ltd (1998) 20 WAR 47 per Wheeler J. As Wheeler J explained in Temsign (at 58):

[The cause of action] remains alive, and it is open … to the trustee either to bring a fresh action based upon it or, on the annulment of the bankruptcy, to assign it to the bankrupts for them to prosecute, subject to the effect of any orders which may be made in the proceedings.

66    Even so, this leaves Mr James open to an application by Rabobank to dismiss the action for want of prosecution. Mr James also submitted that limitation issues might arise and, in any event, the proceedings might not be able to be reinstated without the leave of the Court. It is unnecessary to decide whether these problems are likely to arise. It is sufficient for present purposes that there is a risk that they might.

67    Rabobank also submitted that if the proposed orders were made, “the matter” would remain on its books and that was an ongoing prejudice to Rabobank. Compared to the prejudice to Mr James, this is inconsequential. Moreover, given the limited nature of the proposed orders, any prejudice to Rabobank would be short-lived.

68    Rabobank argued that order 2 was beyond the Court’s power because s 37(2)(a) of the Bankruptcy Act prevents the Court from staying a sequestration order. This argument must be rejected, for the reasons given at 7 above. The Court has power under s 29(1)(b) of the FCA Act to suspend the operation of the order and in substance that is precisely what Mr James seeks. In response to Rabobank’s argument, Mr Cashion proposed substituting “suspended” for “stayed” in the draft short minutes of order.

69    In any event, Rabobank submitted that order 2 was unnecessary because the trustees gave an undertaking to the Court not to make any election to discontinue any of the proceedings without first giving 10 days’ notice in writing to Mr James. I reject this submission, too. The undertaking still leaves Mr James at risk of having the proceedings dismissed without any of them being determined on their merits.

70    The CBA submitted that even if the primary judge fell into error, he would have been entitled to substitute ANZ for the CBA as the petitioner and make the sequestration order based on ANZ’s debt. ANZ effectively adopted this submission.

71    ANZ also pointed to Mr James’ failure to call evidence as to his financial position, a matter which often weighs heavily against a bankrupt seeking a stay of a sequestration order: see, for example, Liprini v Liprini [2010] FCA 1117 at [12] and [22] (Jagot J); Singh v Owners Strata Plan No. 11723 [2012] FCA 538 at [57] (Griffiths J).

72    These submissions have force. Mr James’ current debts appear to be colossal. It is reasonable to infer from the absence of evidence that he is not presently in a position to meet them. But the countervailing considerations are such as to persuade me that the balance of convenience is with Mr James. The inconvenience or injury to the CBA and the two supporting creditors if Mr James’ interlocutory application is granted is outweighed by the inconvenience or injury to Mr James if his application is refused.

73    First, this is far from a frivolous or barely arguable appeal. There is good reason to believe that the primary judge erred in more than one respect. Having regard to the stay that was in place at the time the sequestration order was made, the decision to proceed with the hearing of the creditor’s position is particularly troubling.

74    Secondly, the relief Mr James now seeks is very confined. He merely wishes to keep his Supreme Court proceedings alive until his appeal is determined.

75    Thirdly, the evidence shows that Mr James has been cooperating with his trustees in bankruptcy. Mr James relied on an affidavit sworn on the morning of the hearing and filed in Court in which he detailed the steps he had taken, including by dealing with the trustees’ requests and supplying them with his Statement of Affairs. It is true, as ANZ pointed out, that there was no prompt response to the trustees’ request for information arising out of the s 60(3) notices and the response was incomplete, but it is not an insignificant consideration that the trustees made no such complaint. Nor is it insignificant that the trustees did not oppose the making of the orders.

76    Fourthly, Mr James gave an undertaking to the Court that he will continue to cooperate with his trustees and that he will comply with his obligations under the Bankruptcy Act as they may request or direct.

77    Fifthly, the appeal will be heard at the conclusion of the next Full Court sittings..

78    Sixthly, there is no evidence of actual prejudice to any creditor and the suggested prejudice is minimal.

79    Seventhly, in contrast, if the orders Mr James seeks were not made, in all likelihood he would suffer irremediable prejudice. There is every chance that the trustees would not pursue the litigation and that the creditors would move to have all the proceedings dismissed. In relation to the application before the Court of Appeal against the CBA, it is well to recall what the Full Court (Pincus, Burchett and Gummow JJ) said in Adamopoulos v Olympic Airways SA (1990) 95 ALR 525 at 531:

An appeal against the very judgment which founds the bankruptcy notice is a matter of significance requiring advertence to the possibility that the appeal may be justified. Nor is it realistic to entertain any confidence, in other than a special case, that a trustee in bankruptcy will decide to pursue an appeal with merit. The extremely experienced counsel who appeared for the respondents was unable to recall any instance where such a thing had happened. A much more likely consequence of a sequestration order is the abandonment of the appeal, whatever its merits, and its dismissal for non-prosecution.

80    Finally, there is authority for the proposition that where, as here, there is a bona fide appeal challenging the existence of the debt upon which the bankruptcy is founded, a stay of the sequestration order should “fairly readily be granted”: Evans v Heather Thiedeke Group Pty Ltd (1990) 95 ALR 424 (Pincus J); Menzies v Paccar Financial Pty Ltd [2010] FCA 692 (Ryan J).

Conclusion

81    In all the circumstances, orders should be made along the lines of those proposed by Mr James in the draft short minutes of order. Costs should follow the event.

Associate:

Dated:    11 June 2015