FEDERAL COURT OF AUSTRALIA

Lillas & Loel Lawyers Pty Ltd v Smits (No 2) [2016] FCA 106

ORDERS

THE COURT ORDERS THAT:

1.    The Deputy Commissioner of Taxation be added as the second respondent to this proceeding with the present respondent becoming the first respondent. The title of this proceeding is amended accordingly.

2.    The sequestration order made in this proceeding on 20 January 2016 is stayed until close of business on 10 February 2016.

3.    If a notice of appeal in respect of the sequestration order is filed on or before 10 February 2016, the first respondent may apply for an extension to the stay.

4.    The applicant and the second respondent may apply for security for costs in respect of any such appeal.

5.    If an appeal is not filed by close of business on 10 February 2016, the sequestration order takes full effect.

6.    Any application for an extension of the stay or an application for security of costs should be heard together.

7.    Costs reserved.

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

REASONS FOR JUDGMENT

(REVISED FROM TRANSCRIPT)

LOGAN J:

1    By an application filed on 28 January 2016 Mr Leonardus Smits, presently a bankrupt, made an application for an order that the sequestration order of 20 January 2016, by which he was made bankrupt, be set aside.

2    These reasons for judgment must be read in conjunction with the reasons for judgment which I delivered on 20 January 2016 for the making of that sequestration order and the refusal, implicit in the making of that sequestration order, of an application which had been made that day by Mr Smits for an adjournment of the hearing of the creditor’s petition: see Lillas & Loel Lawyers Pty Ltd v Smits (2016) FCA 11 (the sequestration judgment).

3    Mr Smits also sought by the application, unusually, an order in a separate proceeding: QUD 900 of 2015. That proceeding is an appeal by him against the refusal by the Federal Circuit Court to set aside the bankruptcy notice, non-compliance with which forms the basis of the act of bankruptcy relied upon by the petitioning creditor, Lillas & Loel Lawyers Pty Ltd (Lillas & Loel). In respect of that appeal, Mr Smits sought an order that it be dismissed. Unsurprisingly and subject to terms as to Mr Smits’ payment of costs, Lillas & Loel did not oppose the making of an order of dismissal in respect of that appeal. I made an order accordingly. The dismissal of that appeal is not without significance in relation to the relief which Mr Smits came to seek today.

4    It is necessary to say “came to seek today” because, in the course of submissions, the application that the sequestration order be set aside was pressed but faintly. That was because of attention having been drawn in the submissions of both Lillas & Loel as well as the Deputy Commissioner of Taxation (the Commissioner) to the terms of s 37(2) of the Bankruptcy Act 1966 (Cth) (the Act). That subsection qualifies the power found in s 37(1) of the Act for the Court to rescind, vary or discharge an order made by it under the Act or to suspend the operation of such an order.

5    Section 37(2) of the Act materially provides that the Court does not have power to rescind or discharge or to suspend the operation of: (a) a sequestration order. The qualification found in s 37(2) is, as Buchanan J observed in de Robillard v Carver (2007) 159 FCR 38 at para 138, “a limitation on the power of the Court to rescind or discharge its own orders”. As his Honour further observed, at para 139:

Although the Bankruptcy Act does not refer to setting aside sequestration orders, a source of power to that effect may be found at s 153B of the Bankruptcy Act which provides: “If the Court is satisfied that a sequestration order ought not to have been made … the Court may make an order annulling the bankruptcy.

6    The application heard today was not for the annulment of the bankruptcy. A qualification found in s 37(2) of the Act does not affect either the Court’s power under s 52(3) of the Act to stay all proceedings under a sequestration order for a period not exceeding 21 days, or the separate power, found in r 36.08 of the Federal Court Rules 2011 (Cth), to stay the execution of a proceeding until an appeal is heard and determined. Upon being confronted with the terms of s 37(2) of the Act, Mr Edwards of counsel, who appeared directly briefed for Mr Smits, responded affirmatively to an enquiry from me as to whether, nonetheless, a stay of the sequestration order was sought.

7    Upon further enquiry it transpired that an appeal had not yet been lodged by Mr Smits against the sequestration order, but that he had given instructions for an appeal to be instituted. Though it is possible for the Court to extend the time within which to file a notice of appeal, in the ordinary course an appellant must file a notice of appeal within 21 days after the date on which the judgment appealed from was pronounced: r 36.03. The effect of that rule, given the date of the sequestration order, is that the final day for the filing, without any grant of extension, of a notice of appeal is 10 February 2016. The power granted by s 52(3) of the Act and the time within which an appeal must be lodged (without any extension), are designed to operate harmoniously.

8    It further transpired on enquiry that the basis upon which it was proposed to ground the appeal was that the sequestration order was made in circumstances which amounted to a denial of procedural fairness. In other words, it was procedurally unfair, so the ground of appeal would be cast, to refuse the adjournment application and instead proceed to sequestration. The question then is not whether the sequestration order should be set aside, for in that regard, and as both Lillas & Loel and the Commissioner have correctly submitted, that application must fail, given the terms of s 37(2) of the Act. Rather, the question is whether or not all proceedings under the sequestration order should be stayed?

9    In my view, the focus of the stay application should be the period within which, in the ordinary course, the appeal should be filed. In other words, the question is whether or not to stay all proceedings under the sequestration order until close of business on 10 February 2016? That entails the exercise of a discretion. Earlier authority, conveniently collected in McDonald, Henry and Meek Australian bankruptcy law and practice: embodying the Bankruptcy Act 1966 and the rules and forms annotated (6th ed) at para 52.3.15, is to the effect that the relevant considerations which arise are whether there is an arguable point on the proposed appeal and whether the balance of convenience favours the granting of a stay.

10    It may be accepted that an exercise of the judicial power, such as was entailed in the decision to make the sequestration order and, for that purpose, to refuse the application for an adjournment, carries with it an obligation to afford each of the parties, including materially Mr Smits, procedural fairness. What was entailed in the decision to refuse the adjournment application and instead proceed to sequestration was the exercise of a discretion. The statutory test for the exercise of that discretion is that found in s 206(1) of the Act, which is set out in para 19 of the sequestration judgment.

11    The question which sought to be agitated on the appeal, being one involving the exercise of a discretion, it will be necessary for the appellant to show that the discretion miscarried on one or more of the bases set out in House v The King (1936) 55 CLR 499 (House).

12    It was not put on the application for the stay on behalf of Mr Smits that the consideration made explicitly relevant in s 206(1) of the Act had not been taken into account. That consideration is that it would be for the advantage of the creditors that Mr Smits’ affairs be administered under the personal insolvency agreement. Instead, as I understood it, what was put was that the refusal of the adjournment and proceeding to sequestration was unreasonable; unreasonable in the sense described in House.

13    There is a necessary element of self-critique in assessing whether there is an arguable case involved in the foreshadowed appeal in the sense that the discretion concerned was exercised by me. Accepting that, and whilst I also accept the foundation premise of the procedural fairness obligation, I am not persuaded that the case for an appeal, on the basis identified, is a persuasive one. That is not to say, that it is impossible of argument, only that it faces the formidable difficulty of demonstrating unreasonableness.

14    In that regard, I especially bear in mind that the return date for the petition was one which had been fixed as far back as November 2015, when it was adjourned for hearing until 20 January 2016. That adjourned return date was allowed to remain, even though the creditors’ meeting had been adjourned from 23 December 2015 until 19 January 2016. As is also apparent from the sequestration judgment, influential in the refusal of the adjournment and the consequential decision to proceed to the making of a sequestration order, were the terms of the deed under which Morgan Conley came to accept a substantially lesser sum than that for which that firm was accepted for proof for the purposes of the creditors’ meeting.

15    Read today on behalf of Mr Smits was an affidavit from him which, even after objection, sought to put in issue the amount of the debt owed to the Commissioner. For his part, the Commissioner read a further affidavit, the detailed annexures to which provided an evidentiary foundation for the conclusion prima facie that Mr Smits’ RBA deficit debt as at 28 January 2016 was $302,746.28 as opposed to the lesser sum for which Mr Smits contended namely, $95,162.49. As I understood it, the purpose of the reading of Mr Smits’ affidavit in this regard was to highlight evidence which, but for the refusal of the adjournment application, could have been put before the Court.

16    That evidence though does strike me as evidence which could, with reasonable diligence on Mr Smits’ part, given the contingency to which I refer in the sequestration judgment, have been put before the Court on 20 January 2016. Further and in any event, it looks to me as if, when one engages in a detailed reconciliation, the RBA deficit debt is indeed of the order referred to in the Commissioner’s affidavit material. As to the Lillas & Loel debt, the dismissal of the appeal against the Federal Circuit Court judgment underscores that there is no challenge to the indebtedness under the costs order of the Supreme Court of Queensland, which forms the basis for the bankruptcy notice concerned.

17    Part of the reasoning which resulted in the refusal of the adjournment was a conclusion that the return to creditors under the personal insolvency agreement concerned, or approved at the creditors’ meeting, was miniscule. As to this, affidavits by a Mr Muhammad were also read on behalf of Mr Smits. It was put that the refusal of the adjournment had prevented Mr Muhammad from filing evidence informing the Court of his intentions concerning his proposals to increase the dividend available to creditors.

18    These intentions though appear to have been ex-post facto intentions. In other words, there is now evidence that, by a deed of assignment dated 29 January 2016 for a consideration of $10,000, Mr McDonald, the former controlling trustee, assigned to Vestical Financial Services Pty Ltd, the monies owing to him as controlling trustee. The effect of this, so it was contended, was to increase the amount available for distribution to creditors by $40,000. This appears from Mr Muhammad’s affidavit evidence to have been a transaction which occurred at his initiative.

19    That it might occur was not, on the evidence, disclosed to creditors at the meeting of 19 January 2016. That does not, in my view, amount to evidence which would support an argument that the refusal of the adjournment was unreasonable.

20    It was a noteworthy feature of the adjournment application that Mr Smits led no evidence at all, other than to tender the deed. It was that deed which led me to observe in the sequestration judgment that it was at least moot as to whether Mr Pitman, the principal of the debtor firm Morgan Conley, remained entitled to vote in the amount accepted by Mr McDonald for proof.

21    Another factor raised on the evidence before me today, which intrudes in relation to the balance of convenience question, is that deposed to in a further affidavit from Mr Orlizki and read on behalf of Lillas & Loel. That raises the prospect that Mr Smits and Mr Muhammad had engaged in November last year in transactions, the effect of which was to dilute Mr Smits’ shareholding in a company, Cennzeal Pty Ltd. Until 19 November 2015, Mr Smits was the sole shareholder in that company. On that day, 5000 shares were allotted to Mr Muhammad. The issuing of those shares diluted Mr Smits’ holding in Cennzeal Proprietary Limited from 100 per cent to 0.02 per cent. It is unnecessary to reach any concluded view about that particular transaction, but it is one which would benefit from the attention of a trustee in bankruptcy’s enquiry.

22    Mr Smits has not placed before me any evidence today as to his solvency. The most recent evidence, that which was placed before the creditors’ meeting, is that he is hopelessly insolvent. There is no offer made on his behalf to file a Statement of Affairs. It would of course be possible to condition a stay so as to require the filing of such a statement.

23    There is no doubt that bankruptcy entails a change of status. It also subjects the bankrupt to particular restrictions as set out in the Act. Further, the likelihood is that an appeal against the sequestration order could not be heard until, at the earliest, the May sittings of the Court and perhaps even not until the Court’s August sittings. Heard, of course, is one thing; determined is another. So I do take into account that there is in prospect, a period which would follow, perhaps for some months, of being subject to an unstayed order. Today the question is the more limited one though of whether to stay even until the expiry of the appeal period. That period is a little over a week now.

24    The balance of convenience in respect of a stay as short as that in the face even of all of the countervailing considerations to which I have referred does, in my view, favour the granting of a short stay so as to enable the filing of an appeal on the ground foreshadowed. Whether, thereafter, there ought to be any extension of the stay in the face of the considerations which I have mentioned, is not a subject which should be prejudged. There are though, as I have observed, very persuasive considerations in the circumstances of this particular case which intrude on the balance of convenience in that regard and they are not favourable to Mr Smits. It would be as well to measure those against a precisely drawn notice of appeal than to anticipate.

25    What I propose therefore to do is to:

(1)    Stay all proceedings under the sequestration order until close of business on 10 February 2016.

(2)    Grant to Mr Smits, liberty to apply for an extension of that stay in the event that a notice of appeal is filed on or before that date.

If no notice of appeal is filed, then the stay will expire in accordance with its terms and the sequestration order will then be wholly operative.

26    A question which would necessarily also arise, in the event that there is a notice of appeal filed and a stay sought, is whether that further stay ought to be on terms as to the provision of security for costs. I am acutely aware of the costs burden thus far visited in these proceedings on both Lillas & Loel and the Commissioner. Again, one ought not to anticipate what might be the fate of any such application. I do though expressly reserve to each of Lillas & Loel and the Commissioner liberty to apply in respect of the provision of security for costs in the event that Mr Smits chooses to file a notice of appeal, as he is presently disposed so to do.

27    The further order I will make is that any application for an extension of the stay and any application for the provision of security for costs should be heard together. Costs will be reserved.

Associate:

Dated:    19 February 2016