FEDERAL COURT OF AUSTRALIA

Ewert v Martin [2018] FCA 1931

ORDERS

THE COURT ORDERS THAT:

1.    Subject to the interest of any secured creditor of the respondents, Nick Combis of Vincents be appointed as Trustee (Trustee) pursuant to s 50 of the Bankruptcy Act 1966 (Cth) to take control of all “property” as defined in s 5 of the Bankruptcy Act 1966 (Cth) of the first respondent and second respondent, including, but not limited to, the property located at 1 Hemes Close, Pacific Pines in the State of Queensland, more particularly described as Lot 418 on SP 129009, Title Reference 50335651 (Hemes Close Property) and all stock, shares, bank accounts and vehicles owned by the first respondent and the second respondent until further order.

2.    That the Trustee shall open a bank account with a trading bank in the joint names of the first respondent and the second respondent and the Trustee (Trustee’s Nominated Account) and arrange that monies may be withdrawn from that account only upon the authority of the Trustee or a nominated officer of the Trustee.

3.    The Trustee shall have the following powers:

(a)    Powers to communicate on behalf of the first respondent and second respondent, provide instructions on behalf of the first respondent and second respondent, and direct funds due to the first respondent and second respondent from the sale of the Hemes Close Property to the Trustee’s Nominated Account; and

(b)    Powers enabling the Trustee to engage any third party, including legal representation, as the Trustee requires to discharge his statutory duties under this Order.

4.    That the first respondent and second respondent be restrained, without the prior approval of the Court, from paying, lending or depositing any money with, or transferring or delivering any property to, a person or a company so authorised by the Trustee.

5.    That the first respondent and second respondent be restrained, without the prior approval of the Court, from remitting, transferring, sending or taking monies or other property out of Australia.

6.    That the first respondent and second respondent’s property ceases to be subject to the control of the Trustee upon the determination of the creditor’s petition filed 29 October 2018 in the Federal Circuit Court.

7.    The applicant serve this order on the respondents by email at the email addresses previously used to contact the respondents by 12.00pm on 21 November 2018.

8.    Any party adversely affected by the orders in paragraph 1 to 6 hereof may apply on two (2) clear days’ notice for any variation of same.

9.    The applicant's costs of an incidental to the application are to be paid by the respondents.

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

REASONS FOR JUDGMENT

DERRINGTON J:

Introduction

1    The application before the Court seeks orders pursuant to s 50 of the Bankruptcy Act 1966 (Cth) (the Act) and, in particular, that certain property be vested in a trustee. Section 50 is an unusual provision because it grants the Court power to make an order for the appointment of a trustee to property, even though a sequestration order has not been made against the estate of the owner of that property. Nevertheless, for the reasons which follow, I am of the opinion that the applicant, Ms Anita Gertrud Ewert, has satisfied the Court that it is in her interests and the interests of the creditors of the respondents, Mr Jonathan Martin and Ms Lekeeta Leah Martin, that the trustee be appointed.

2    It should be noted that the application was brought on urgently with the Court sitting in Sydney and Counsel for the applicant appearing by videolink from Brisbane.

Background

3    The history of this matter is unsettling, particularly because the applicant, Ms Ewert, is the mother of the second respondent, Ms Martin, and the mother-in-law of the first respondent, Mr Martin. Between the protagonists, there has been litigation over many years. The proceedings originally commenced in the Supreme Court of Queensland, where Ms Ewert sought declarations as to her entitlement to a beneficial interest in property at Pacific Pines in the state of Queensland which had come to be registered in the respondents’ names. I will refer to that as the Hemes Close Property.

4    The proceedings, although initiated in the Supreme Court of Queensland, were transferred to the District Court of that State. They were characterised by inordinate delays and obfuscation by the respondents during the interlocutory processes and, indeed, after the trial had been completed. The extensive material filed for the purpose of this application demonstrates quite clearly that, from the current perspective, the respondents’ conduct in that litigation was quite appalling. They failed to comply with the rules of Court on multiple occasions. They sought multiple adjournments for what now appears to be specious reasons. They failed to provide disclosure or documents as required by the rules of the District Court of Queensland. Indeed, they failed or refused to sign a request for trial date, which forced Ms Ewert to seek an order dispensing with such signature. There were also multiple orders of the District Court with which the respondents failed to comply.

5    It is, perhaps, not necessary to further recite the litany of the respondents’ failures to comply with their obligations as litigants before the Court during the course of the interlocutory processes. However, the consequence of those failures was that a number of costs orders were made against them in favour of Ms Ewert. The total of those costs orders amounts to $249,257.45. I will refer to that as the “Bankruptcy Debt”.

6    The trial in the District Court of Queensland commenced on 4 April 2018, and it too was characterised by delay caused by the conduct of the respondents. Indeed, the material shows that the second respondent, Ms Martin, admitted to intentional non-compliance with her obligations of disclosure. On 9 April 2018, after a four day hearing, his Honour Judge Koppenol delivered an ex tempore judgment in favour of the applicant, declaring that the Hemes Close Property was held on trust for her. His Honour ordered the transfer of that property to Ms Ewert. It is apparent, that his Honour also made a costs order against the respondents on an indemnity basis, to which one of the respondents audibly responded from the Bar Table, “Good luck getting that”.

7    In a manner which is consistent with their obfuscation throughout the interlocutory and trial processes of the District Court proceedings, after judgment the respondents refused to comply with the order of the Court that they transfer the Hemes Close Property to the applicant. She was again forced to apply to the Court for orders compelling the compliance with the previous order, this time requiring the transfer of the property.

8    On 7 September 2018, a Bankruptcy Notice was issued against the respondents based on the non-payment of the Bankruptcy Debt. The material shows that they were served with the Bankruptcy Notice on 4 October 2018. They did not comply with that notice within the period of 21 days and nor was any application made to set it aside. It follows, that an act of bankruptcy occurred on or about 25 October 2018.

9    The difficulties arising from the conduct of Mr and Mrs Martin were not confined to their dispute with Ms Ewert. It appears, they also were in dispute with the Commonwealth Bank of Australia (CBA). On 18 August 2017, it applied for summary judgment against them in respect of their liabilities, presumably, under a mortgage of the Hemes Close Property. Summary judgment was granted in furtherance of that application on 18 August and, on 5 March 2018, the CBA obtained an enforcement warrant in respect of that property.

10    The respondents thereupon engaged in a number of steps to delay the enforcement of the CBA’s judgment against them. That included complaining to the financial ombudsman service and applying to the Court for a stay of the enforcement warrant, although they did not ultimately appear at the hearing of their own application. Ultimately, having ignored an eviction warrant, on 17 September 2018 the respondents were physically evicted from the property. That removal of them required the attendance of two police officers, a bailiff and locksmiths. Forcible entry was necessary. Nevertheless, the CBA took possession of the property.

11    Ms Ewert is concerned about the CBA’s intention with respect to the Hemes Close Property, it being, on the evidence, the only substantial asset the respondents own. On 2 October 2018, her solicitors wrote to the CBA, noting that the bank had entered into possession and seeking to ensure that the balance of any proceeds of any mortgagee sale would not be released back to the respondents and also sought information as to the timeframe for the sale of the property. They also indicated the possibility of Ms Ewert making an application under s 50 of the Bankruptcy Act. On 8 October 2018, the CBA responded by refusing to engage with the solicitors for the applicant stating that they were presently unable to provide any information concerning their client’s customers.

12    On 29 October 2018, a creditor’s petition was filed in the Federal Circuit Court seeking a sequestration order against the respondents. That petition was founded upon the non-compliance with the Bankruptcy Notice. Its first return date is set down for 28 November 2018. Necessarily, Ms Ewert is concerned about the potential for the sale of the Hemes Close Property before the hearing of the petition and the destination of any excess proceeds. She fears, and not without substantial reason, that were the liquid assets, being the proceeds of the sale, to be returned to the respondents, they would be dissipated and put beyond her reach for the purposes of satisfying the debt which founded the bankruptcy notice.

The respondents have notice of these proceedings

13    On 29 October 2018, this application and supporting material was served on the respondents. Evidence has been provided as to the manner in which that service took place. It was an unfortunate affair, with the process-server being required to chase both the respondents to their car in an attempt to serve them. Importantly for present purposes, on that day Mr Martin, the first respondent, sent to Ms Ewert a number of text messages in relation to the bankruptcy proceeding and one which contained expletives, as well as the statement “You … expect things to go smoothly. Well, that ain’t happening!”.

14    There is no doubt that the solicitors for Ms Ewert have provided to the respondents the sealed documents in relation to these proceedings, that is the application as well as the affidavit material in support. Given the nature of the proceedings, the date on which the matter would be heard was not on the application, but the evidence also shows quite clearly the respondents have been informed the proceedings are to be heard today at this time. The matter was called on at the time allotted. There was no appearance for the respondents. The matter was called outside of the Court, both in Brisbane and in Sydney. Again there was no appearance.

Consideration

15    As mentioned, this is an application under s 50 of the Bankruptcy Act, which reads as follows:

50 Taking control of debtor’s property before sequestration

(1)    At any time after a bankruptcy notice is issued, or a creditor’s petition is presented, in relation to a debtor, but before the debtor becomes a bankrupt, the Court may:

 (a)    direct the Official Trustee or a specified registered trustee to take control of the debtor’s property; and

     (b)    make any other orders in relation to the property.

    (1A)    The Court may give a direction or make an order only if:

     (a)    a creditor has applied for the Court to make a direction; and

 (b)    the Court is satisfied that it is in the interests of the creditors to do so; and

     (c)    the debtor has not complied with the bankruptcy notice.

(1B)    If the Court directs a trustee to take control of the debtor’s property, the Court must specify when the control is to end.

(2)    Without limiting the generality of subsection (1), the Court may, at any time after giving a direction under subsection (1), summon the debtor, or an examinable person in relation to the debtor, for examination under this section in relation to the debtor.

(3)    A summons to a person under subsection (2) shall require the person to attend:

(a)    at a specified place and at a specified time on a specified day; and

(b)    before the Court, the Registrar or a magistrate, as specified in the summons;

to be examined on oath under this section about the debtor and the debtor’s examinable affairs.

(4)    A summons to a person under subsection (2) may require the person to produce at the examination books (including books of an associated entity of the debtor) that:

     (a)    are in the possession of the first mentioned person; and

 (b)    relate to the debtor or to any of the debtor’s examinable affairs.

(5)    For the purpose of the examination under this section of a person summoned under subsection (2), subsections 81(2) to (17), inclusive, apply, with any modifications prescribed by the regulations, as if:

 (a)    a sequestration order had been made against the debtor when the Court gave the direction under subsection (1) of this section;

     (b)    the examination were being held under section 81; and

 (c)    a reference in those subsections to a creditor were a reference to a person who has a debt that would be provable in the debtor’s bankruptcy if a sequestration order had been made as mentioned in paragraph (a) of this subsection.

16    The section is, in some respects, an unusual provision. But in reality it is, in fact, a codified power of Court to protect the integrity of its own proceedings. In this respect it is not unlike many other powers exercised by Courts when the judgments or processes are sought to be undermined by litigants who seek to dispose of their assets before judgment can be enforced. In Deputy Commissioner of Taxation v Klein (1983) 14 ATR 540, Neaves J of this Court said of s 50, at page 545:

The section is, clearly, a provision in aid of the creditors of a debtor who has already committed an act of bankruptcy and has a creditor’s petition pending against him. It is a necessary and ancillary provision designed to enable appropriate steps to be taken to preserve and protect the property of a debtor so that, in the event of a sequestration order being made, that property will be available for distribution equitably amongst them in accordance with the statutory provisions contained elsewhere in the Bankruptcy Act 1966. That this is its purpose is reinforced by a consideration of the provisions contained in subs 50(2) with their emphasis on obtaining information concerning the debtor or his trade dealings, property or affairs.

17    Ultimately, the question is whether or not the making of an order is in the interests of the creditors and or the debtors. That, of course, calls into question a number of issues, which I will deal with presently.

18    However, before doing that it is important, to note that there are a number of prerequisites to the exercise of the power. The first is, of course, that the debtor has not complied with a Bankruptcy Notice and the creditor’s petition has been presented. These matters have been satisfied in this case. Secondly, the creditor must seek directions as to the approximate expenses likely to be incurred by the trustee pursuant to the appointment before sequestration, and that has occurred. Thirdly, a trustee should be nominated and an affidavit obtained consenting to act as such. That has occurred in this case, and Mr Nick Combis of Vincents, who is a well-known and well-respected insolvency practitioner in Queensland, has agreed to act as a trustee. Finally, the Court must specify when the control of the debtor’s property by the trustee is to end. That requirement can be satisfied in the orders which are to be made.

The interests of the creditors

19    The first substantive issue is whether it is necessary, in the interests of the creditors, for the order to be made? Here the applicant submitted that it is necessary for a number of reasons. First, the respondents have made no arrangements to secure the debt and are delaying, as long as possible, the payment of the debt. Secondly, that there is a risk of dissipation and, thirdly, that the order will achieve the purposes of the Act without prejudicing the respondents in any way. The applicant also submitted that the only other party who might be affected by the order is the CBA, being the secured creditor. Whilst I accept the submissions made on behalf of Ms Ewert by Mr de Waard of Counsel that the making of orders vesting control of the Hemes Close Property in Mr Combis as trustee would not adversely affect the mortgagee’s rights, it is, probably, appropriate to make that pellucidly clear in any order made.

No attempt to secure payment of the Bankruptcy Debt and attempts to delay

20    Turning to the first matter. It is very clear on the evidence adduced by the applicant that the respondents are seeking to delay the payment of any debt owing by them. They have utilised the Court processes in every way possible to defer and obfuscate their obligations to Ms Ewert and the history of the dispute between the parties is notable for the appalling delay tactics engaged in by them. They not only delayed Ms Ewert’s entitlement to recover title to the Hemes Close property, but they have also attempted to hinder her enforcement of the costs orders which she obtained. It is apparent, as Mr de Waard submitted, that they have made no attempt to secure payment of the debt. That is, as Neaves J said in Klein, a circumstance to which s 50 and the question of the interest of the creditors is directed.

21    In this case, unlike in other cases where the delay tactics have to be inferred, the statements by the respondents of their intention to delay and frustrate the applicant make any detailed consideration of this issue somewhat otiose. Their words indicating that Ms Ewert will not be paid, or not be paid until after a long and drawn-out process, have been supported by their conduct, both in the District Court and subsequently. I have no doubt that they will seek to utilise the same tactic in the bankruptcy proceedings, if they are able. It follows, that in relation to this issue it is clear, the respondents have not made any arrangements to secure payment of the apparently undoubted indebtedness to the applicant and, worse than that, they are attempting to avoid paying the debt altogether.

Risk of dissipation of assets

22    The second point made by Mr de Waard is that there is a risk that, unless prevented from doing so, the respondents will dissipate their assets to avoid meeting their liabilities. If the Hemes Close Property is sold by the CBA and the surplus proceeds paid to the respondents they will then be in possession of money which is liquid and able to be disposed of easily. It would be inconsistent with their erstwhile strategies to expect that they would retain the money for the purposes of satisfying their obligations to the applicant. It follows that there is a very strong inference in this case that the respondents would attempt to dissipate any proceeds they receive from the sale of the Hemes Close Property.

23    Mr de Waard of Counsel raised in his submissions, quite properly, the question of whether or not the requirement of a risk of dissipation is necessary at all. He has made reference to a number of cases from the analogous area, being that of freezing orders, and in particular to the decision of Edmonds J in Curtis v NID Pty Ltd [2010] FCA 1072, which discussed the issue of a real risk of dissipation. Whilst it might be tempting on some occasion, to ascertain the precise nature of the application of such cases to s 50, this is not the occasion where that needs to be done. Although for myself I doubt that a risk of dissipation would be a prerequisite to the exercise of the Court’s power, in the present case the risk is patent given the past conduct of the respondents and, in particular, their unashamed taunting of the applicant to the effect that, despite having secured judgments against them, she would be lucky in recovering any money. That is, in these circumstances, more than sufficient to establish a risk of dissipation if it were necessary to demonstrate that. It, certainly, supports the existence of a positive intention to evade judgment and with that a risk of dissipation of the assets. That, of course, is supported by the delaying tactics which have occurred to date.

Achieving the purpose of s 50 of the Bankruptcy Act

24    The last matter to which Mr de Waard referred was that an order under s 50 will achieve the purpose of the Act without prejudicing the respondents. This question, again, does not need detailed consideration. Obviously the making of an order will achieve the objects and purpose of the Act, being the payment of creditors through the liquidation of the estate of debtors who commit an act of bankruptcy. Here, an act of bankruptcy has, undoubtedly, occurred. The bankruptcy notice was issued. There has been non-compliance with that notice and no attempt to set it aside and the creditor’s petition filed and served. On the material there appears to be no doubt that a bankruptcy order will be made in the near future. The risk of dissipation of assets is, as I have said, patent, and were that to occur, the object of the Bankruptcy Act will be thwarted.

Prejudice to the respondents

25    The question of prejudice to the respondents is another matter, but the reality is that the act of bankruptcy having occurred and the making of the sequestration order being almost inevitable, the creditors of the respondents have an interest in the assets of the estate. It would appear that the respondents themselves have little, if any, remaining residual beneficial interest in those assets in that the evidence before the Court supports the conclusion that their debts far exceed their assets. Although that conclusion is reached considering the material in a general sense, it is nevertheless a realistic conclusion. No doubt the respondents will be unhappy that their remaining interest in the Hemes Close Property will vest in a trustee, but given that they have been evicted from that property, that is unlikely to make any difference to them. Ultimately in the circumstances there does not appear to be any prejudice to the respondents amounting from the making of this order.

An order for the appointment of trustees should be made

26    In the result, the applicant has satisfied the Court that the prerequisites for the exercise of the power under s 50 have been met, and further, she has satisfied the Court that the discretion ought to be exercise in her favour.

27    It follows, that there will be an order in terms of the draft proffered to the Court by Mr de Waard, subject to an amendment to order 1 so that it is clear the order will not affect the rights and interests of the CBA in the Hemes Close Property.

28    It is noted the orders also provide for the restraining of the respondents from disposing of their property without the approval of the Court. Such an order is necessarily ancillary to the vesting of the property into the hands of the trustee.

Costs

29    The applicant has sought her costs of the application. There is no reason why the applicant ought not to have her costs. The application was necessitated by the conduct of the respondents. It follows, that I will make an order that the respondents pay the applicant’s costs of and incidental to this application.

Associate:

Dated:    4 December 2018