FEDERAL COURT OF AUSTRALIA
Sampson (Trustee) v Taboada [2017] FCA 79
ORDERS
DAVID SAMPSON AS TRUSTEE OF THE BANKRUPT ESTATES OF NATALIE JOANNE MAKISI & TUIPULOTU SIONE MAKISI Applicant | ||
AND: | First Respondent JULIO TABOADA Second Respondent | |
DATE OF ORDER: |
THE COURT ORDERS THAT:
1. The interlocutory application dated 6 October 2016 be dismissed.
2. The respondents pay the applicant’s costs.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
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4.2 Is there a reasonably arguable defence available to the respondents? | [30] |
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[52] |
BURLEY J:
1 In these proceedings the respondents, Monica Taboada and Julio Taboada (respondents), apply pursuant to an interlocutory application dated 6 October 2016 to set aside a default judgment made by this Court on 12 August 2016 awarded in favour of the applicant in the amount of $262,026.29, plus interest and costs. The relevant background to the default judgment is as follows.
2 On 22 October 2014, Natalie Joanne Makisi and her husband, Tuipulotu Makisi (bankrupts) became bankrupt upon the acceptance of their debtors’ petitions. On 11 February 2015 David Henry Sampson (applicant) was appointed trustee of their bankrupt estates pursuant to the provisions of section 181A of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act). On 30 November 2015, the Official Receiver issued a notice pursuant to section 139ZQ of the Bankruptcy Act (Notice) to the respondents in respect of monies paid by the bankrupts to the respondents in the period before their bankruptcy, in breach of sections 120 and 121 of the Bankruptcy Act. The Notice required that the respondents pay the sum of $262,026.29 within 28 days of being served with it.
3 The respondents failed to comply with the Notice. On 6 May 2016, the applicant filed an originating application and statement of claim in this Court, seeking to enforce the sum of $262,026.29 as a debt pursuant to subsection 139ZQ(8) of the Bankruptcy Act. The respondents filed a Notice of Address for Service in the proceeding but otherwise failed to appear at any directions hearing, filed no defence, and failed to attend the interlocutory application seeking default judgment, which was granted on 12 August 2016.
4 In the present application the respondents seek orders setting aside the default judgment on the basis that they have a good reason for being absent at the hearing and a reasonably arguable defence to the proceedings brought by the applicant on the basis of a proposed application under the Administrative Decisions (Judicial Review) Act 1977 (Cth) (ADJR Act) to set aside the decision to issue the Notice. The applicant opposed the application.
5 On 8 August 2016 the proceedings were listed for a hearing of an application by the applicant for default judgment. The respondents did not appear. On 12 August 2016, I gave default judgment in these proceedings ([2016] FCA 926) in which I summarised the relevant background as set out in the paragraphs below:
3 An originating application and statement of claim were filed on 6 May 2016. On 18 May 2016 Gordon Jeffrey Bryant of F.C. Bryant Thomas & Co. (F.C. Bryant Thomas & Co) filed a notice of address for service on behalf of the respondents nominating that firm's postal, document exchange and email addresses as the addresses for service upon the respondents of documents in the proceedings.
4 In this interlocutory application the applicant relies upon two affidavits affirmed by Nicholas John Hensley affirmed on 27 May 2016 and 19 July 2016, an affidavit of Tyla Hamilton affirmed on 19 July 2016 and an affidavit of David Sampson sworn on 27 June 2016.
5 The 27 May 2016 affidavit of Mr Hensley establishes to my satisfaction that on 12 May 2016 the originating application and statement of claim were sent by post and email to F.C. Bryant Thomas & Co. That affidavit annexes a letter received from F.C. Bryant Thomas & Co dated 17 May 2016 which confirmed receipt of the 12 May 2016 correspondence and acknowledged that that firm was instructed to accept Court documents on behalf of the respondents in these proceedings. Accordingly, service within the Rules [Federal Court Rules 2011 (Cth) (Rules)] of the originating application and statement of claim has been established.
6 No defence has been filed. The respondents did not appear at the hearing of the interlocutory application.
7 The affidavit of Mr Hensley affirmed on 19 July 2016 records that on 6 July 2016, Mr Hensley sent an email to F.C. Bryant Thomas & Co, enclosing the current interlocutory application together with Mr Hensley's earlier affidavit and the affidavit of Mr Sampson. The affidavit of Ms Hamilton deposes to sending the same materials to the postal address of F.C. Bryant Thomas & Co.
8 Having reviewed these materials, I am satisfied that service of the interlocutory application and supporting documents was properly effected in accordance with rule 17.01(2) of the Rules.
9 As I have noted, the applicant seeks default judgment. The originating application seeks the following orders:
(1) Judgment in the sum of $262,026.29 pursuant to section 139ZQ(8) of the Bankruptcy Act 1966 (Cth).
(2) That the respondents pay interest on the sum of $262,026.29 from 7 December 2015 up to and including the date of judgment pursuant to section 51A of the Federal Court of Australia Act 1976 (Cth).
(3) That the respondents pay interest on the judgment sum pursuant to section 52 of the Federal Court of Australia Act 1976 (Cth).
(4) That the respondents pay the applicant's costs of the proceedings.
10 The originating application is supported by a statement of claim which includes allegations; that Natalie Joanne Makisi and her husband, Tuipulotu Sione Makisi, became bankrupt on 22 October 2014 upon filing a debtors' petition with the Official Receiver; that on 11 February 2015 the applicant was appointed Trustee of the bankrupt estates of Natalie and Tuipulotu Makisi; that the respondents are Natalie Makisi's mother and father; that on 30 November 2015 the Official Receiver issued a notice pursuant to section 139ZQ of the Bankruptcy Act 1966 (Cth) to the respondents demanding payment of the sum of $262,026.29 within 28 days of receipt of the notice; that on 7 December 2015 and 7 February 2016 the first and second respondents respectively were served with the notice; that the respondents failed to comply with the notice.
11 No defence has been filed to the statement of claim as required by rule 16.32 of the Rules. Accordingly, these allegations are to be treated as admitted by the respondents pursuant to rule 16.07(2); Sony Corporation v Costaneo [2012] FCA 153 (Costaneo) at [15].
12 I am satisfied that the respondents are in default under rule 5.22 in that the respondents have failed to file defences, have failed to attend a hearing in the proceeding, and have failed to defend the proceeding with due diligence; Costaneo at [17].
6 As a consequence, default judgment was awarded to the applicant in the amount of $262,026.29 plus interest and costs.
7 The Schedule to the Notice issued pursuant to section 139ZQ of the Bankruptcy Act (Schedule) set out the basis for the applicant’s claim upon the respondents.
8 As its contents are central to the respondents’ submissions in the present case, it is convenient to set out parts of it below (emphasis added):
1. Natalie Joanne Makisi and Tuipulotu Makisi Sione Makisi (‘the debtors’) became bankrupt on 22 October 2014 when their debtor’s petitions were accepted by the Official Receiver.
2. David Henry Sampson (‘the trustee’) is the trustee of the above administration.
3. Natalie Makisi’s parents Julio Nelson Taboada and Monica Cristina Taboada (‘Mr & Mrs Taboada’) were the joint registered proprietors of a property located at 138B Ramsgate Road, Ramsgate NSW (Folio 701/1127175) (‘the Ramsgate Property’).
4. On 29 July 2009, the debtors purchased a 50% interest in the Ramsgate Property for $305,000 from Mr & Mrs Taboada. Upon registration of the transfer, the Ramsgate Property was owned by:
a. Mr & Mrs Taboada as joint tenants as to 50/100; and
b. The debtors as joint tenants as to 50/100 (collectively ‘the Owners’).
5. On 29 July 2009, the Owners granted a first registered mortgage over the Ramsgate Property to Sandhurst Trustees Limited (‘Sandhurst’) in the sum of $350,000.
6. The trustee submits that on 20 October 2010, the Owners refinanced the Sandhurst mortgage secured over the Ramsgate Property and granted a first registered mortgage to Bendigo and Adelaide Bank Limited (‘BABL’) in the sum of $560,000 and comprising of two loans of $350,000 and $210,000.
7. The trustee submits that the $210,000 advanced from BABL was for the benefit of Mr & Mrs Taboada only and was withdrawn from the equity in the Ramsgate Property (‘the 2010 Equity Drawdown’).
8. On 14 June 2014, the Ramsgate Property was sold at public auction for $902,000.
9. On 28 July 2014, the Ramsgate Property settled and the total net sale proceeds of $291,443.18 plus the balance of the deposit of $22,609.40 (‘the Net Sale Proceeds’) was paid to Mr & Mrs Taboada only.
10. The debtors did not receive any of the net sale proceeds.
11. The trustee submits that the debtors were entitled to a 50% interest of the proceeds from the 2010 Equity Drawdown in addition to a 50% interest of the Net Sale Proceeds from sale of the Ramsgate Property. The transfer of the debtors’ 50% interest in the 2010 Equity Drawdown and the Net Sale Proceeds to Mr & Mrs Taboada for nil consideration, in the period commencing 5 years before bankruptcy, represents an undervalued transaction which is void as against the trustee pursuant to section 120 of the Act.
…
12. On the evidence the trustee contends that the transfer of the debtors’ 50% interest in the 2010 Equity Drawdown and the Net Sale Proceeds to Mr & Mrs Taboada is void pursuant to Section 120 of the Act.
…
9 The Schedule also included claims that the respondents had received a transfer of property that is void against the trustee pursuant to section 121 of the Bankruptcy Act. For the present purposes it is not necessary to address that claim. In the present application the parties have addressed the content of the Schedule in the context of the claim under section 120.
10 The respondents rely in support of their application upon Part 39 rule 39.05(a) of the Federal Court Rules 2011 (Cth) (Rules) which provides as follows:
The Court may vary or set aside a judgment or order after it has been entered if:
(a) it was made in the absence of a party; …
…
11 The discretionary power of the Court to set aside an order that was made in the absence of a party finds statutory force in rule 39.05(a). The rules do not prescribe the matters to which the Court is to have regard in the exercise of its discretion. However, it is usual for the Court in the circumstances to have regard to the explanation given by the absent party for its absence, and whether the evidence discloses a defence of sufficient merit to warrant setting aside the order and permitting the matter to go to trial; 3D Funtimes Limited v Intellec Development Group Pty Ltd (No 2) [2011] FCA 407 at [6] (Siopis J). In Deputy Commissioner of Taxation v Hua Wang Bank Berhad (No 2) [2010] FCA 1296; (2010) 81 ATR 40, Kenny J considered Order 35 rule 7(2)(a), which was the equivalent to the present rule under consideration. Her Honour said (at [10]):
The proposition that, generally speaking, a court will not exercise the power conferred by O 35 r 7 unless the applicant can show that by accident without fault on his part he has not been heard is well established: see also Wentworth v Woollahra Municipal Council (1982) 149 CLR 672 at 684; State Rail Authority of NSW v Codelfa Construction Pty Ltd (1982) 150 CLR 29 at 38; Registrar of Aboriginal Corporations v Murnkurni Women’s Aboriginal Corporation (1995) 137 ALR 404 at 406; Watson v Anderson (1976) 13 SASR 329 at 333; Rosing v Ben Shemesh (1959) [1960] VR 173 at 176; and Evans v Bartlam [1937] AC 473 at 480. The corollary of this is that “where a party has had full notice, and has had the opportunity of availing himself of the contest, he will be bound by the decision”: see Ratcliffe v Barnes (1862) 2 Sw. & Tr 486, 164 ER 1085 at 1087, applied by Payne J in Re Barraclough (dec’d) [1967] PI at 10-11 (saying “[t]he fundamental principle therefore is that a party should be bound by the decision if he has had an opportunity to appear and oppose the proceedings”). See also Nicholson v Nicholson (1974) 4 ALR 212 at 218-9.
12 The power under rule 39.05 is to be exercised with caution, and is ordinarily only exercised in “exceptional circumstances”; Wati v Minister for Immigration and Multicultural Affairs (1997) 78 FCR 543 at 549 – 552; Australian Securities and Investments Commission v ActiveSuper Pty Ltd (No 4) [2013] FCA 318 at [6].
13 The respondents rely on an affidavit sworn by Monica Taboada on 6 October 2016 in order to supply an explanation for the absence of the respondents at the hearing and also to disclose the basis of a defence which is submitted by the respondents to have sufficient merit to warrant setting aside the orders made on 12 August 2016.
14 In relation to the explanation for absence, Ms Taboada deposes to the following relevant matters. She says that she was unable to instruct her legal representatives due to her diagnosis with a major depressive disorder. She claims to have had a breakdown during the course of the proceedings and that, although she instructed a legal representative to accept service on her and her husband’s behalf, she was unable to provide proper instructions.
15 Ms Taboada annexes her medical records. No evidence was adduced by any medical practitioner to explain the records or Ms Taboada’s medical condition. No substantive submissions were put as to precisely what was to be taken from the rather voluminous exhibit that included materials concerning the medical affairs of the respondents. The summary that follows appears from a review of those materials insofar as they record Ms Taboada’s health from the end of 2015.
16 On 21 December 2015, Ms Taboada was involved in a motor vehicle accident but was discharged on the same day. On 10 January 2016, she suffered chest pains, visited her local hospital and was discharged five days after admission. On 30 January 2016, she presented to her doctor feeling depressed and appears to have been prescribed medication to treat it. On 10 June 2016, she again presented to her doctor with depression. His observations record “has insight and cognition is not impaired”. It appears that some medication was prescribed. On 5 July 2016, Ms Taboada presented to her doctor with influenza, and on 11 July 2016, 2 September 2016 and 12 September 2016, she attended on medical practitioners, although their notes appear to make no reference to mental illness. On 12 September 2016, one of the doctor’s notes records “good control on meds. No complains [sic], no SE. Needs refill script. General chat”.
17 Ms Taboada’s affidavit also records that she is the primary carer for her husband, Julio Taboada, and that he has been diagnosed with Parkinson’s Disease and has suffered other health ailments including “a number of heart attacks and a quadruple bypass surgery at the time of one of the Federal Court proceedings”. She also records that she is the primary carer for her 80 year old mother and that at the time of the Federal Court proceedings (which I assume to mean the events set out above at [3] and [5]), the receipt of correspondence from the applicant or his legal representative became too much and she “attempted/had suicidal thoughts. I did not understand that [sic, the] Federal Court proceedings or what I was supposed to do, given my condition I was unable to process or function”.
18 Later in her affidavit, Ms Taboada records that her previous solicitor informed her that she should get an expert to help her as bankruptcy law is not his field. She then records that she has, since late 2015 and during the course of 2016, made inquiries regarding legal aid or pro bono assistance. She records that on or around 25 May 2016 she spoke to a legal aid solicitor who informed her that she did not qualify for assistance and on around 27 May 2016 she applied to the Law Society for a pro bono solicitor.
19 In relation to the substance of the proposed defence to the proceedings which are the subject of the default judgment, Ms Taboada’s affidavit records that she and her husband were joint registered proprietors of a property located at 138B Ramsgate Road, Ramsgate, New South Wales (Ramsgate property). She asserts that in about June 2009, she had a conversation with the bankrupts and her husband during which she and her husband offered to sell half of the Ramsgate property to the bankrupts for $350,000. They offered to pay $305,000, with the additional $45,000 to be loaned from the respondents, with interest. The bankrupts and the respondents also agreed that if, at the time the property was sold, the $45,000 had not been repaid, it would be financed from the proceeds of the sale. On 29 July 2009, the bankrupts purchased a 50% interest in the Ramsgate property for the amount of $350,000. Finance for the purchase was provided by way of a mortgage in favour of Sandhurst Trustee Limited (Sandhurst mortgage). The affidavit also records that on 20 October 2010, the bankrupts sought to refinance the Sandhurst mortgage and were granted a first registered mortgage through Australian Mortgage Options in the sum of $560,000 comprising two loans, a first loan of $350,000, and a second loan of $210,000. The loans were in the names of the bankrupts and the respondents. There was an agreement that the bankrupts would be responsible for the payment of the $210,000 loan and Ms Taboada paid the balance of the loan amounts.
20 On 14 June 2014 the Ramsgate property was sold at public auction for $902,000. The mortgages were discharged and the total net sale proceeds of $291,443.18 (apparently net of fees and taxes) were paid to the respondents. Ms Taboada’s affidavit records that proceeds from the Ramsgate property were intended for the respondents’ retirement which was a further reason why they received the whole of the net sale proceeds rather than having the proceeds being divided between the respondents and the bankrupts.
21 In [22] and [25] of her affidavit, Ms Taboada records the substantive basis for her proposed defence to the proceedings (as counsel for the respondents confirmed in oral argument). It was that she had been advised to challenge the decision of the Official Receiver to issue the Notice pursuant to the ADJR Act. She asserts (at [25] of her affidavit) that there are three reasons why, subject to further advice, such a review would be advanced:
(a) The inclusion in the Notice of the $210,000.00 draw down may have been outside the limit [which was, in submissions, clarified to mean the time limit under subsection 120(3)(a) of the Bankruptcy Act]. The draw down took place on 20 October 2010 and the bankrupts were sequestered on 22 October 2014 and I have not had an opportunity nor has the Respondent it use [sic] any evidence relating to insolvency at that time.
(b) As at October 2010, I [had] no reason to believe that both bankrupts were not solvent.
(c) The Notice failed to set off an account for the loan agreement which my husband and I had with my daughter and son-in-law in 2009 regarding the repayment of approximately of [sic] $54,000 [which I assume to mean $45,000] and balance of the difference which I will explain below (these amounts do not include interest).
22 The affidavit of David Henry Sampson sworn on 27 October 2016 largely confirms the matters referred to in the Schedule. It also addresses the steps that the applicant has taken to inform the respondents of the Notice and the chronology of the Federal Court proceedings. One factual matter with which the applicant disagreed was the amount that the respondents agreed with the bankrupts would be paid for the half interest in the Ramsgate property. Ms Taboada’s affidavit refers to the sale price being $350,000. The Schedule, however, records at [4] that the sale price of the Ramsgate property is $305,000. In this regard, Mr Sampson refers to and relies upon the Real Property Transfer (Transfer) which was registered in respect of the Ramsgate property. That records that the transfer of the half of the respondents’ interest in the property was made to the bankrupts in consideration of $305,000. Mr Sampson also refers to the proof of debt of each of the bankrupts, which contain no reference to a further loan of $45,000 from the respondents to the bankrupts. Mr Sampson gives evidence that neither of the respondents have submitted a proof of debt in either of the bankrupts’ estates, and that he has not been shown any documents evidencing the loan agreement for $45,000 which would persuade him that this alleged loan is in fact a debt provable in the bankrupt estate of the bankrupts.
23 Mr Sampson also deposes to the fact that on 20 October 2010, the respondents and the bankrupts, together the owners of the Ramsgate property, refinanced the loan and granted a first mortgage to the BABL in the sum of $560,000 comprising two loan accounts for $350,000 and $210,000. The $210,000 was paid only to the respondents and constituted a withdrawal from the equity in the Ramsgate property. This forms the foundation of the claim (set out in [11] and [12] of the Schedule) that the respondents had received a transfer of an additional 50% interest in the 2010 equity drawdown of $210,000.
4.1 Explanation for absence from the hearing
24 The first requirement under rule 39.05 of the Rules, as interpreted by the authorities, is to consider whether the respondents have supplied a satisfactory explanation for their absence at Court. In this regard I consider Ms Taboada to be somewhat deficient.
25 There are a number of difficulties with Ms Taboada’s evidence as an explanation for her failure to attend or be represented at the interlocutory hearing in the application for default judgment. The primary reason which she advances for being unable to instruct her legal representatives was due to her asserted major depressive disorder. However, the medical reports to which I have referred above did not indicate that Ms Taboada was in no condition to provide instructions to those representing her. To the contrary, the medical material available suggests that despite suffering from depression, her cognitive abilities are not impaired and her evidence of seeking to obtain pro bono legal advice suggests that she was in a position, at least to that extent, to look after her affairs in the period from May to August 2016. The doctor’s note on 12 September 2016 indicated “no complains [sic]”.
26 In her affidavit, Ms Taboada said:
6. On 12 August 2016, judgment was entered against Julio and I by default in these proceedings (“the Judgment”).
7. I was unaware of the listing of the matter before the court at that time having previously instructed F C Bryant Thomas & Co to act on behalf of myself and Julio.
27 It might be noted that the respondents’ former solicitors filed a Notice of Address for Service on 18 May 2016 and for the entirety of the conduct of the proceedings up until judgment was entered on 12 August 2016 that position did not change. Ms Taboada does state that she was unaware of the listing of the matter before the Court, but the listing of which she was “unaware” is the date upon which judgment was delivered (12 August 2016) not the date that it was listed to be heard (8 August 2016) or any of the dates for earlier procedural steps in the proceedings. Further, no evidence has been supplied by the respondents’ former solicitors, and there is no suggestion that they had failed to; keep her informed of the progress of the proceedings, inform her of the date or content of procedural directions made in the proceedings, or inform the respondents of the consequences that were likely to follow upon their failure to participate in the proceedings. Such evidence was plainly able to be adduced by the respondents, but was not. In the absence of such evidence, I infer that the respondents were so informed.
28 In this context, it is also to be noted that no affidavit evidence has been supplied by Mr Taboada. Nor is it suggested that Ms Taboada is supplying evidence on information and belief from Mr Taboada. Whilst it is possible to infer that Mr Taboada’s poor health had impaired his ability to participate in the proceedings, there is insufficient material to conclude that he is a purely passive actor in the matter or that he has no knowledge of the affairs concerning his own finances.
29 Given that the respondents were in a position to supply a cogent explanation for their failure to attend and that the onus lay clearly upon them to do so, I am not satisfied that they have provided a satisfactory explanation for their absence at court.
4.2 Is there a reasonably arguable defence available to the respondents?
30 The focus of the respondents’ arguments was upon the decision of the Delegate of the Official Receiver (Delegate) to issue the Notice. Counsel for the respondent accepted that the provisions of section 139ZS of the Bankruptcy Act, and in particular subsection 139ZS(1A), precluded the respondents from mounting a challenge to the Notice under the Bankruptcy Act, because no application was made for an order setting the Notice aside within 60 days after it had been given to the respondents. As a consequence, counsel submitted that it was necessary, and appropriate, to seek orders under the ADJR Act for the decision of the Delegate to be set aside.
31 The respondents provided no draft cross-claim that identified the basis upon which such an application may be brought. Nor did any written submission identify the circumstances in which it might be said that the decision of the Delegate was vitiated. However, the respondents submitted that various “errors” were to be found in the Schedule which provided a basis for concluding that the decision to issue the Notice had been based on incorrect information, with no opportunity being afforded to the respondents to address or rectify the errors.
32 The respondents submitted that the decision of the Delegate to issue the Notice based on the information in the Schedule was a reviewable decision. Counsel conceded that the availability of such relief in the circumstances of a decision of the Official Receiver was novel and could point to no authority in support of such an approach. However, he submitted that as the application to the Delegate is ex parte, and no material that was provided to the Delegate had been disclosed to the respondents either prior to the issue of the Notice or subsequently, grounds under s 5(1) of the ADJR Act were available. The respondents submit that they were given no opportunity to be heard in relation to the decision making process on the part of the Delegate which led to the issue of the Notice which, by its terms, also has criminal sanctions attached to it by reason of the operation of section 139ZT of the Bankruptcy Act. They submit that they ought to be able to challenge the Notice in its present form, as otherwise they may be denied natural justice. The respondents contended in oral argument that the decision to issue the Notice was liable to be challenged on the basis of subsections 5(1)(a), (e), (f), (h) and (j) of the ADJR Act. No detail was supplied as to how these subsections might be said to apply.
33 As noted above, Ms Taboada’s affidavit (at [25]) set out the factual basis upon which the respondents rely as follows:
(a) The inclusion in the Notice of the $210,000.00 draw down may have been outside the limit [which was, in submissions, clarified to mean the time limit under subsection 120(3)(a) of the Bankruptcy Act]. The draw down took place on 20 October 2010 and the bankrupts were sequestered on 22 October 2014 and I have not had an opportunity nor has the Respondent it use [sic] any evidence relating to insolvency at that time.
(b) As at October 2010, I [had] no reason to believe that both bankrupts were not solvent.
(c) The Notice failed to set off an account for the loan agreement which my husband and I had with my daughter and son-in-law in 2009 regarding the repayment of approximately of [sic] $54,000 [which I assume to mean $45,000] and balance of the difference…
34 In oral argument counsel for the respondent clarified the argument identified in (a) and (b). He submitted that the Schedule erroneously assumed that there was no obligation upon the trustee to establish that the bankrupts were insolvent at the time of the equity drawdown of $210,000. Counsel submitted that in fact the obligation under subsection 120(3)(a) of the Bankruptcy Act lay on the trustee, and this was a material error that the respondents were given no opportunity to address.
35 The argument in (c) concerned the factual dispute as to the amount for which the bankrupts acquired their 50% interest in the Ramsgate property with the respondents contending that it was $350,000 rather than $305,000 as indicated in [4] of the Schedule.
36 In oral argument, counsel for the respondents added another argument, namely that the Notice incorrectly calculated the respective interests of the respondents and the bankrupts by failing to take into account the interest held by the bankrupts in the Ramsgate property.
37 In response, the applicant contends that the respondents’ submissions as to the appearance of errors in the Schedule is incorrect. He submits that in the absence of error, no basis has been made out upon which a review might succeed, even assuming (which he disputed) that relief in the form of a review under the ADJR Act is available in the present circumstances. He submits that the correctness of the Schedule can be demonstrated by reference to the factual matters within it that refer to section 120 of the Bankruptcy Act, and which demonstrate that the respondents were indeed transferees of property pursuant to a void transaction.
38 The default judgment was based on the failure on the part of the respondents to comply with the Notice, which was, as noted, issued by the Official Receiver pursuant to section 139ZQ of the Bankruptcy Act demanding payment of $262,026.29.
39 Section 139ZQ relevantly provides:
Official Receiver may require payment
(1) If a person has received any money or property as a result of a transaction that is void against the trustee of a bankrupt under Division 3, the Official Receiver:
(a) if the Official Trustee is the trustee--on the initiative of the Official Receiver; or
(b) if a registered trustee is the trustee--on application by the trustee;
may require the person, by written notice given to the person, to pay to the trustee an amount equal to whichever of the following is applicable:
…
(d) in any other case – the money or the value of the property received.
(2) The notice must set out the facts and circumstances because of which the Official Receiver considers that the transaction is void against the trustee.
(3) The notice may:
(a) require the amount to be paid at a time or within a period set out in the notice; or
(b) require the amount to be paid at such times, and in such instalments, as are set out in the notice.
(4) After the Official Receiver has given a notice to a person under subsection (1), the Official Receiver may at any time, by a further notice given to the person, revoke or amend the first-mentioned notice.
…
(7) If a person is required by a notice under this section to pay to the trustee the value of any property, the requirement is taken to be complied with if the property is transferred to the trustee.
(8) An amount payable by a person to the trustee under this section is recoverable by the trustee as a debt by action against the person in a court of competent jurisdiction.
…
40 The Notice was served on the first respondent on 7 December 2015 and the second respondent on 7 February 2016.
41 Section 139ZS of the Bankruptcy Act provides:
Power of Court to set aside notice
(1) If the Court, on application by a person to whom a notice has been given under section 139ZQ or by any other interested person, is satisfied that this Subdivision does not apply to the person on the basis of the alleged facts and circumstances set out in the notice, the Court may make an order setting aside the notice.
(1A) The application must be made:
(a) not later than 60 days after the day the notice under section 139ZQ was given to the applicant; or
(b) if the applicant is another interested person--not later than 60 days after the day the applicant became aware that the notice has been given.
(2) A notice that has been set aside is taken not to have been given.
42 Subsection 139ZS(1A) was introduced by amendment made to the Bankruptcy Act which was effective on 14 October 2015 (introduced by the Civil Law and Justice (Omnibus Amendments) Act 2015 (Cth)). The respondents accept, and it was not in dispute, that the mandatory language of that subsection is such that no application can be brought later than 60 days after the day the Notice under section 139ZQ was given. Nor is it in dispute that neither of the respondents sought to set aside the Notice.
43 The respondents’ first argument was that the $210,000 equity drawdown took place outside the period applicable under section 120(3) of the Bankruptcy Act, and accordingly the Schedule erroneously failed to demonstrate the insolvency of the bankrupts at the time of the transaction.
44 This argument is unsustainable in the light of the language of section 120 and proper analysis of the dates involved.
45 Section 120 of the Bankruptcy Act relevantly provides:
Undervalued transactions
Transfers that are void against trustee
(1) A transfer of property by a person who later becomes a bankrupt (the transferor) to another person (the transferee) is void against the trustee in the transferor's bankruptcy if:
(a) the transfer took place in the period beginning 5 years before the commencement of the bankruptcy and ending on the date of the bankruptcy; and
(b) the transferee gave no consideration for the transfer or gave consideration of less value than the market value of the property.
…
(3) Despite subsection (1), a transfer is not void against the trustee if:
(a) in the case of a transfer to a related entity of the transferor:
(i) the transfer took place more than 4 years before the commencement of the bankruptcy; and
(ii) the transferee proves that, at the time of the transfer, the transferor was solvent; or
(b) in any other case:
(i) the transfer took place more than 2 years before the commencement of the bankruptcy; and
(ii) the transferee proves that, at the time of the transfer, the transferor was solvent.
46 The chronology provided in [1] – [6] of the Schedule establishes that the transfer (relevantly, the creation of a mortgage interest in the Ramsgate property) took place more than four years before the commencement of the bankruptcy. By the operation of subsection 120(3)(a)(ii), it is for the transferee (i.e., the present respondents), to prove that at the time of the transfer, the transferor (i.e., each of the bankrupts) was solvent. The presumption applies in favour of the applicant, and it was not necessary for the applicant to establish insolvency. Accordingly, in my view this argument cannot be sustained.
47 The second argument advanced by the respondents was that the schedule incorrectly failed to take into account the fact that the true value of the bankrupts’ interest in the Ramsgate property was $350,000 and not $305,000. This is addressed in Ms Taboada’s affidavit and was the subject of a response in the applicant’s affidavit. In my view the applicant was clearly entitled to rely on the Transfer as objective, contemporaneous evidence of the price (that is, $305,000). For the reasons set out in the applicant’s evidence (some of which are set out above at [22]) he was entitled to take the view that the respondents had a valid claim on the bankrupts’ estates in the amount of $45,000.
48 The third argument advanced by the respondents is that the Schedule failed correctly to take into account the ownership position in respect of the Ramsgate property. It was submitted, in particular, that the applicant did not take into account the fact that there were four owners of the Ramsgate property, two of those owners were the respondents (who held their interests as between each other as joint tenants) and two of whom were the bankrupts (who also held their interests as joint tenants) with each pair of owners being tenants in common. As a consequence, the respondents were entitled to receive the benefit of the mortgage from Bendigo and Adelaide Bank Limited (BABL) in the amount of $210,000.
49 However, this argument appears to misread the Schedule.
50 The Schedule at [6] and [7] identifies that the owners of the Ramsgate property (being all four of the owners) refinanced the mortgage and granted a first registered mortgage to BABL in the sum of $560,000 and comprising two loans of $350,000 and $210,000. Whilst the property was in the name of all four owners, the entirety of the benefit of the $210,000 advance from the BABL was for the respondents. It was correct in that circumstance for the applicant to observe in the Notice that the bankrupts (“debtors”) were entitled to 50% of the proceeds from the $210,000 equity drawdown. They did not receive that benefit, and accordingly it was a “transfer” that fell within section 120 of the Bankruptcy Act. The balance of the proceeds of sale of the property was $291,443 all of which, along with the balance of the deposit, was paid on settlement to the respondents. However, as owners of a half share in the property, the bankrupts were entitled to 50% of these proceeds. That correctly formed the basis for the subject matter of [9] of the Schedule.
51 Finally, as noted above, the respondents contend that they are entitled to relief under the ADJR Act which would entitle them to orders setting aside the Notice. Several hurdles stand in the respondents’ way. First, as noted, nowhere have the respondents provided adequate details of their claim under the ADJR Act. No draft pleading has been supplied or particulars of alleged failures to comply with that Act provided. Secondly, insofar as one can discern the arguments advanced based on the terms of the Schedule, they are not factually correct (as noted above). Thirdly, (although in light of my conclusion above it is not necessary to determine this point), I note that the proposed ADJR Act proceedings are speculative in the sense that they seek to superimpose a judicial review process on the scheme set out in Subdivision J of the Bankruptcy Act. The basis for this has not been explained and no authority, direct or analogous, has been cited to support it. Finally, the judgment that the respondents seek to set aside is a default judgment entered in proceedings to enforce the payment of a debt owed to the applicant as the trustee of the bankrupts’ estate pursuant to subsection 139ZQ(8) of the Bankruptcy Act. The issuing of the Notice did not generate that judgment, and it was not conclusive of the facts to which it referred. In proceedings under section 139ZS, the respondents could have applied to set the notice aside. In proceedings (such as those to which the default judgment related) to recover a debt, the respondents could have disputed the accuracy of the amount to be paid; Vale v Sutherland (2009) 237 CLR 638 at [16], [26]. In these circumstances, a challenge to the decision to issue the Notice is, in any event, unlikely to provide a means for altering the factual basis upon which the default judgment was based.
52 Taking into account the weakness of the explanation for the failure of the respondents to attend the hearing of the proceedings and the erroneous factual basis for the proposed substantive grounds of any application for review under the ADJR Act, I do not consider that the respondents have established a basis upon which I should exercise my discretion to set aside the orders that were made on 12 August 2016.
53 In light of the reasons set out above, the interlocutory application should be dismissed and the respondents should pay the applicant’s costs.
I certify that the preceding fifty-three (53) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Burley. |
