FEDERAL COURT OF AUSTRALIA

Zappia v Deputy Commissioner of Taxation [2020] FCA 897

ORDERS

THE COURT ORDERS THAT:

1.    The interlocutory application dated 15 June 2020 be dismissed.

2.    The appellant pay the first respondent’s costs of and incidental to such application.

3.    Order 1 made by Nicholas J on 23 June 2020 be discharged.

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

REASONS FOR JUDGMENT

NICHOLAS J:

1    On 18 May 2020, a judge of this Court ordered that a composition entered into on 19 September 2018 by the appellant, Mr Zappia (“the composition”) pursuant to s 73 of the Bankruptcy Act 1966 (Cth) (“the Act”) should be set aside: Deputy Commissioner of Taxation v Zappia (No 2) [2020] FCA 669. Her Honour had previously given reasons on 19 December 2019 in support of her conclusion that the composition should be aside: Deputy Commissioner of Taxation v Zappia [2019] FCA 2152. The primary judge granted a stay of that order for a period of 28 days to enable the appellant to file an appeal and, if an appeal was filed, to make a further application for a stay.

2    On 15 June 2020, Mr Zappia filed a notice of appeal together with written submissions that he says will be relied upon at the hearing of his appeal. On 16 June 2020, Flick J, as duty judge, extended the order for the stay granted by the primary judge on 18 May 2020 until 23 June 2020 and further ordered that the interlocutory application filed by the appellant be made returnable before the duty judge on 23 June 2020. On that date I heard Mr Zappia’s application for an extension of the stay. I granted a further extension of the stay granted by the primary judge up to and including 26 June 2020. For the reasons that follow I am not persuaded that any further extension of the stay should be granted.

3    The background to the proceeding before the primary judge, as drawn from her Honour’s reasons for judgment of 19 December 2019, is as follows.

4    Mr Zappia lodged a debtor’s petition on 16 September 2016 which was accepted and he thereby became bankrupt with the second respondent, Mr Spyrakis, becoming the trustee of his estate. Mr Zappia was at that time indebted to the Commonwealth in the amount of $496,056.74.

5    A composition was proposed by Mr Zappia which was accepted by a majority of creditors at a meeting convened on 19 September 2018. It provided for Mr Zappia to pay $140,000 in three instalments payable over a period of 18 months after the acceptance of the composition. In total it would result in a return to creditors of 1.98 cents in the dollar. The Deputy Commissioner of Taxation (“DCOT”) voted against acceptance of the composition.

6    In her first judgment the primary judge explained the relevant statutory scheme and the source of the Court’s power to set aside the composition. As her Honour noted, by s 222(1) of the Act, the Court can make an order setting aside the composition if it is satisfied that the terms of the agreement are unreasonable or are not calculated to benefit the creditors generally or for any other reason.

7    The primary judge referred to the relevant principles governing an application to set aside a composition which her Honour summarised at paragraph [6] of her first judgment. She found that a number of factors weighed in favour of setting the composition aside. These included the complexity of Mr Zappia’s financial affairs, the trustee’s recommendation that there be a public examination of Mr Zappia, and the fact that by the trustee’s calculations, the composition would offer creditors a return that, as her Honour put it at paragraph [9], “… would be fair to characterise … as little or trivial with the consequence that the potential harm to creditors from the setting aside of the composition will be minimal”.

8    Her Honour also referred to a number of other matters including various contentions made by the DCOT concerning the need for further investigation by the trustee of Mr Zappia’s affairs, and the prospect of a greater return to creditors following further investigation. Her Honour referred to a number of specific matters which she considered appeared to call for a more extensive investigation. These included the nature and extent of Mr Zappia’s interests in two properties in Abbotsbury, a company called JRZ Harley Pty Ltd and another called One Whitsunday Development Pty Ltd.

9    In deciding to set aside the composition, the primary judge was exercising a discretion. For Mr Zappia to succeed in his appeal against her Honour’s exercise of her discretion it will be necessary for him to identify error of the kind referred to in House v The King (1936) 55 CLR 499 in the well-known passage that appears at 504-505.

10    Mr Zappia’s notice of appeal contains two grounds of appeal. The first is, in essence, that the Court erred in granting the application “because” of certain matters. The second is that the application to set aside the composition was an abuse of process.

11    It is clear that the Court has power to grant a stay of the primary judge’s order setting aside the composition pending the determination of Mr Zappia’s appeal. However, the applicant for a stay has the burden of persuading the Court that it should be granted. Judgment given after a hearing on the merits is not to be regarded as provisional in character pending the determination of an appeal.

12    The principles governing a stay were considered by the Full Court in Powerflex Services Pty Ltd v Data Access Corp (1996) 67 FCR 65 in the context of what was then O 52, r 17 of the Federal Court Rules 1979 (Cth). The Full Court said at 66:

The principles applicable depend on the terms of 0 52, r 17 of the Federal Court Rules 1979 (Cth). Rule 17(1) provides:

An appeal to the Court shall not:

(a)    operate as a stay of execution or of proceedings under the judgment appealed from; or

… except so far as the Court or a Judge or the court below may direct.

The language of that rule suggests no limitation upon a broad discretion inhering in the Court. Several judges of the Court, most recently Heerey J in Henderson v Amadio Pty Ltd (No 3) (1996) 65 FCR 66 have followed the decision of the Court of Appeal of New South Wales in Alexander v Cambridge Credit Corporation Ltd (Receivers Appointed) (1985) 2 NSWLR 685, where, at 694, that Court said it was “sufficient that the applicant for the stay demonstrates a reason or an appropriate case to warrant the exercise of discretion in his favour”. The Court of Appeal also referred with approval to a statement of Mahoney JA in Re Middle Harbour Investments Ltd (In liq) (unreported, Court of Appeal, NSW, 15 December 1976) where, with the concurrence of the other members of the Court, Mahoney JA said:

Where an application is made for a stay of proceedings, it is necessary that the applicant demonstrate an appropriate case. Prima facie, a successful party is entitled to the benefit of the judgment obtained by him and is entitled to commence with the presumption that the judgment is correct. These are not matters of rigid principle and a court asked to grant a stay will consider each case upon its merits, but where an applicant for a stay has not demonstrated an appropriate case but has left the situation in the state of speculation or of mere argument, weight must be given to the fact that the judgment below has been in favour of the other party.

Notwithstanding that in the Supreme Court of Victoria a more stringent test has generally been applied (see Cellante v G Kallis Industries Pty Ltd [1991] 2 VR 653; Lagama Pty Ltd v Bridge Wholesale Acceptance Corporation (Australia) Ltd [1995] 1 VR 150), we think we should follow the decision in Alexander v Cambridge Credit. “Special” circumstances do not have to be shown. In any case, in this Court the word “special”, in a comparable context, has not been thought to raise a significant barrier to the exercise of a broad general discretion: Jess v Scott (1986) 12 FCR 187. There, the rule itself dealing with leave to appeal out of time used the expression “special reasons”.

13    The discretion to grant a stay under r 36.08 of the Federal Court Rules 2011 (Cth) is equally broad. All that the applicant needs to do is demonstrate a sufficient reason for granting the stay.

14    Before a stay is granted it is usually necessary for the appellant to show that the appeal has some merit, which may necessitate a consideration of the appellant’s grounds of appeal. The fact that the appellant’s appeal raises arguable grounds will often be self-evident. However, sometimes the appellant may be required to elaborate on the grounds raised in the notice of appeal with a view to persuading the Court that the stay is in aid of a reasonably arguable appeal. The appellant may find it difficult to persuade the Court that the appeal has merit if the grounds of appeal do not engage with either the relevant legal principles or the primary judge’s reasons for the purpose of identifying error, especially if the appeal is against a discretionary judgment.

15    In determining whether a sufficient reason has been shown in favour of granting a stay, the Court will also seek to weigh the hardship or inconvenience that will be suffered by the applicant in the event that a stay is not granted with the appeal being subsequently allowed, against the hardship or inconvenience that the respondent may suffer in the event that the stay is granted with the appeal subsequently dismissed. The Court will, in effect, seek to assess the risk of injustice occurring depending on whether the appeal is or is not successful.

16    The first of the grounds of appeal raised by Mr Zappia consists of nine subparagraphs. Ground 1 states:

The Court below erred in granting the Respondent's application [to set aside the Respondent's composition entered into for the purposes of Section 73 of the Bankruptcy Act] and because:

 (i)    the majority of the Appellant's creditors supported the composition;

(ii)    the Appellant had no special or separate arrangements with any of his creditors that warranted that the composition be set aside;

(iii)    the interests of creditors (and including their financial interests) were better served by the composition remaining in place and of effect;

(iv)    the composition and the reasons why the Bankrupt's creditors accepted it, was consistent with the statutory principles of the Bankruptcy Act 1966 (Cth);

(v)    the perceived "benefit" that by the setting aside the composition a public examination of the bankrupt could occur, was not a benefit;

(vi)    there were no proper reasons that justified any interference with the decision of the majority of creditors;

(vii)    The Appellant's application (and the evidence that supported it), did not satisfy the threshold requirement for the relief that was claimed;

(viii)    The Respondent's own misconduct was a relevant consideration to which the Court failed to pay any consideration or regard, where the Respondent was urging upon the Court that it exercise a statutory discretion;

(ix)    the assistance that the Appellant (as a bankrupt) had provided his trustee for the purposes of the composition and for the purposes of his bankrupt estate, had been of a high standard.

17    There is a fundamental problem with the notice of appeal in that it merely asserts that the primary judge erred “because” of certain matters without indicating in what particular respects her Honour is alleged to have misunderstood or misapplied any relevant legal principle, misunderstood the facts, or failed to have regard to matters relevant to the exercise of her discretion that were relied upon by Mr Zappia at the hearing before her.

18    Mr Hall, who appeared for Mr Zappia, identified the following five points which he relied upon for the purpose of demonstrating that the appeal had merit:

(1)    Her Honour erred in taking into account the fact that a number of Mr Zappia’s creditors seemed to be motivated by non-commercial considerations when exercising her discretion to set aside the bankruptcy composition. Mr Hall submitted that in circumstances where either in bankruptcy or through the composition, the return to creditors was always going to be low, it was open to the creditors to vote for the composition on the basis of what he referred to as “non-commercial considerations”. The implication of the submission was that her Honour erred in having regard to the fact that Mr Zappia’s creditors were motivated by “non-commercial considerations” when exercising her discretion.

(2)    Her Honour erred in failing to take into account the fact that there was no funding for a public examination when exercising her discretion to set aside the composition. This was said to be a matter relevant to the exercise of her Honour’s discretion which she neglected to take into account. This is not a matter raised in the grounds of the notice of appeal. There was also disagreement between the parties as to whether the stated premise of this complaint (ie. that there was no funding for a public examination) was borne out by the evidence.

(3)    Her Honour erred in taking into account “special arrangements” made between Mr Zappia and his creditors in circumstances where there was no evidence before her Honour that any such special arrangements had been made.

(4)    Her Honour erred in failing to find that the interests of creditors, including their financial interests, were better served by the composition remaining in place. As I understood him, Mr Hall said that her Honour should have found that the interests of creditors were best served by leaving the composition in place particularly in circumstances where there was no funding for a public examination.

(5)    Her Honour erred in failing to have regard to evidence given by Mr Zappia as to the circumstances in which his debt to the Commissioner had arisen.

19    As to point (1), the relevant findings made by her Honour are at paragraphs [11] and [12] of her first judgment. Her Honour said that the evidence established that Mr Zappia represented to some of his creditors that he would repay their debts in full if and when he was able to do so and that from this it must be inferred that some of those creditors may well have voted in favour of the composition on the basis of an expectation that they would or could receive more than the composition enabled them to receive. Her Honour saw that as a fact weighing heavily in favour of setting aside the composition.

20    Mr Zappia does not challenge the finding that he made the relevant representations to some of his creditors as found by her Honour. Nor does he suggest that the making of such representations was not a relevant matter that her Honour was entitled to take into account and give weight as she considered fit.

21    As to point (2), Mr Metlej, the solicitor for the DCOT, submitted that it was not correct to say that there was no evidence in relation to the funding before the primary judge. Mr Hall did not dispute that proposition in reply.

22    Point (3) is really is an extension of the first point. Her Honour did not make any finding to the effect that Mr Zappia had made “special arrangements” with any of his creditors. Rather, her Honour found, as I have noted, that certain representations had been made and that creditors’ voting may well have been influenced by them.

23    Point (4) constitutes no more than a generalised statement of disagreement with the primary judge’s decision to set aside the composition. So far as reliance was placed on the funding for a public examination, I refer to what I have previously said on that topic.

24    As to point (5), her Honour said in her first judgment at paragraph [15]:

The fact that Mr Zappia has issues about his indebtedness to the Deputy Commissioner is also immaterial. Whatever concerns Mr Zappia may have about his dealings with the Deputy Commissioner do not weigh as material factors in the resolution of this matter.

25    It is clear from this passage in her Honour’s reasons that she considered the submission made on Mr Zappia’s behalf in relation to the circumstances giving rise to his indebtedness to the DCOT but concluded that it was not material to the exercise of the discretion. The discretion exercised by her Honour was a broad one that did not require her to take into account the circumstances in which the debt to the DCOT first arose. Accepting that it may have been open to her Honour to take this matter into account, it does not follow that she committed any error in not doing so. The submissions made on Mr Zappia’s behalf did not explain why her Honour’s conclusion that the circumstances giving rise to Mr Zappia’s indebtedness to the DCOT was immaterial could involve any error of law.

26    In my view none of the points relied upon by Mr Zappia are shown to have merit.

27    In the present case, if a stay is not granted then:

(a)    the annulment Mr Zappia obtained by reason of the composition will be reversed;

(b)    Mr Zappia will be a discharged bankrupt;

(c)    the administration of Mr Zappia’s bankrupt estate will recommence, and the second respondent will resume office as his trustee in bankruptcy.

28    Mr Zappia gave evidence by affidavit that he entered into various commercial and loan agreements on the assumption that his composition was valid. He did not include in his affidavit any further information about such agreements. He says in his affidavit that he is concerned that the order made by the primary judge will have consequences for the agreements he entered into. Again, his affidavit does not disclose what those consequences may be and Mr Hall’s submissions did not provide any further information to the Court relevant to that matter. Mr Zappia would have known at the time that the creditors voted on the composition that the DCOT was opposed to it. In the absence of evidence to the contrary I would infer that he also knew that the DCOT had a right to object to the composition and a right to apply to have it set aside.

29    Nothing that was put to me on behalf of Mr Zappia leads me to think that his appeal has any reasonable prospects of success. So far as other matters relevant to the discretion to grant a stay are concerned, I am not persuaded that my refusal to grant him a stay will cause him any hardship or inconvenience that would justify granting the stay even if it is assumed that his appeal may be successful.

30    In the result, there will be an order that Mr Zappia’s interlocutory application seeking an order continuing the stay previously granted be dismissed. Mr Zappia must pay the first respondent’s costs of and incidental to the application.

31    Orders accordingly.

Associate:

Dated:    25 June 2020