Federal Court of Australia

Australian Securities and Investment Commission v King [2021] FCA 1610

ORDERS

THE COURT ORDERS THAT:

1.    The estate of Michael Christodoulou King is sequestrated under the Bankruptcy Act 1966 (Cth).

2.    The applicant creditor’s costs be fixed in the sum of $7,668.70 and are to be paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).

The Court notes that the date of commission of the act of bankruptcy is 15 March 2021.    

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

REASONS FOR JUDGMENT

DOWNES J:

Introduction

1    On 19 February 2021, the applicant (ASIC) served a bankruptcy notice dated 12 February 2021 on Mr King, the respondent.

2    The debt claimed in the bankruptcy notice was $379,723.56, which was comprised of $300,000 based on a final judgment of the Supreme Court of Queensland in Australian Securities and Investments Commission v Managed Investments Ltd & Ors (No 10) [2017] QSC 96 together with interest. The relevant order was in these terms:

Under section 1317G of the Corporations Act, King pay the Commonwealth of Australia a pecuniary penalty of $300,000.

3    Pursuant to s 1317GAA Corporations Act 2001 (Cth), the pecuniary penalty is a debt payable to ASIC on behalf of the Commonwealth, and ASIC may enforce a pecuniary penalty order as if it were an order made in civil proceedings against the person to recover a debt due by that person.

4    It was common ground that the pecuniary penalty is a debt which would not be provable in Mr King’s bankruptcy by operation of s 82(3AA) Bankruptcy Act 1966 (Cth), but that, notwithstanding this, ASIC was entitled to serve the bankruptcy notice which was founded upon that penalty.

5    Mr King failed, within 21 days after service of the bankruptcy notice, to pay the penalty or to make an arrangement to ASIC’s satisfaction for payment of the debt. It was common ground that he has not paid any part of the civil penalty.

6    By a creditor’s petition filed 8 September 2021, ASIC seeks a sequestration order against Mr King’s estate. ASIC also seeks certain costs associated with the application, which costs were not opposed.

7    The relevant statutory requirements in relation to the creditor’s petition have been satisfied: see s 52(1) Bankruptcy Act. This was accepted by Mr King. Further, there was no dispute that Mr King had committed an act of bankruptcy within the meaning of s 40(1)(g) and that, subject to a legal argument about jurisdiction, which is addressed below, the factual matters set out in ss 43(1)(b) and 44(1) Bankruptcy Act were also satisfied.

8    In his notice stating grounds of opposition to the creditor’s petition, Mr King’s sole ground of opposition to the sequestration order is that “[t]he Court should exercise its discretion to not make a sequestration order pursuant to section 52(2)(b) of the Bankruptcy Act 1966 (Cth).”

Debts owed or claimed to be owing by Mr king

9    In Australian Securities and Investments Commission v Managed Investments Ltd & Ors (No 10) [2017] QSC 96, Douglas J made orders on 26 May 2017, including orders that Mr King pay:

(a)    the civil penalty of $300,000;

(b)    60% of ASIC’s costs of and incidental to the proceeding on the standard basis (trial costs order); and

(c)    compensation to the Premium Income Fund (PIF) in the amount of $177,017,084 (compensation order).

10    Following an appeal by Mr King to the Queensland Court of Appeal, then an appeal by ASIC to the High Court and an application for special leave to the High Court by Mr King, the High Court reinstated the orders made by Douglas J. The ultimate effect of the orders is that Mr King was ordered to pay, in addition to the penalty and the compensation order, ASIC’s costs of the proceedings at first instance (being the trial costs order) and its costs on appeal. The costs on appeal were ASIC’s costs of Mr King’s appeal to the Court of Appeal, ASIC’s appeal to the High Court and Mr King’s application for special leave to the High Court (further costs orders).

11    Mr King has not paid any part of the civil penalty of $300,000 or the compensation order.

12    As none of the costs liabilities have yet been assessed or taxed, Mr King has no present liability to ASIC to pay those amounts.

13    Ms Jennifer Forbes, an authorised delegate of ASIC, deposed in her affidavit sworn 6 September 2021 that, with respect to the trial costs order and the further costs orders:

…ASIC has not yet had those costs assessed but, given the duration, nature and complexity of the proceedings [in which the costs orders were made], ASIC anticipates its assessed costs will be significant.

ASIC is a statutory body with an obligation to fulfil the objects of the ASIC Act while administering the relevant laws efficiently. In the circumstances, ASIC has not yet incurred the expense of having its costs assessed noting that the costs of doing so (particularly in respect of the trial) could be significant and are not expected to be recovered from any of the defendants including Mr King. …

14    The evidence discloses that:

(a)    ASIC’s estimated actual professional fees, counsel fees and other disbursements in respect of the trial exceeds $11.19 million;

(b)    ASIC’s estimated actual professional fees, counsel fees and other disbursements in respect of the appeal to the Court of Appeal exceeds $2.75 million; and

(c)    ASIC’s estimated actual costs and disbursements in respect of the proceedings in the High Court exceeds $890,000.

15    Mr Paul Garrett, a legal costs consultant, expressed the opinion in an expert report dated 3 September 2021 that, as a general proposition in respect of proceedings in the Supreme Court of Queensland and the Court of Appeal, he would expect the percentage of recoverable fees on a standard basis to be 40% to 70% of the costs incurred, and that he would anticipate a reduction in counsel’s fees of approximately 20% to 30% to take into account work which may not be recoverable on a party and party basis. In respect of the proceedings in the High Court, Mr Garrett expressed the opinion that recently 60% of professional fees and disbursements actually incurred were allowed.

16    Accordingly, even taking into account the possibility of substantial discounts for any costs assessment/taxation process as envisaged by Mr Garrett, Mr King’s total costs liability to ASIC in respect of the trial costs order and the further costs orders is likely to be between about $4,000,000 and $6,000,000.

17    In addition, Mr King has a further potential liability for an amount exceeding $4.1 million to an insurer, American Home Insurance Company (now known as AIG Insurance) (AIG). AIG advanced defence costs to Mr King totalling $4,108,388. However, because of the findings made against Mr King in the Supreme Court proceedings, which AIG claims have triggered an exclusion clause under the insurance policy, AIG has retained solicitors to seek to recover those defence costs from Mr King. On 3 September 2021, the solicitors demanded payment from Mr King of the amount of $4,108,388.22.

18    In this matter, no evidence was adduced or submission made by Mr King that he was able to pay his debts within the meaning of s 52(2)(a) Bankruptcy Act, being a matter on which he bore the onus: see Bechara v Bates (2021) 388 ALR 414; [2021] FCAFC 34 at [27]. Nor did Mr King adduce any evidence to contradict the facts set out above or the opinions of Mr Garrett.

Relevant legislation

19    Section 41(1) of the Bankruptcy Act provides that an Official Receiver may issue a bankruptcy notice on the application of a creditor who has obtained against a debtor a final judgment or final order that is of the kind described in s 40(1)(g) and is for an amount of at least the statutory minimum.

20    Subsection 40(1)(g) of the Bankruptcy Act provides that a debtor commits an act of bankruptcy if:

…a creditor who has obtained against the debtor a final judgment or final order, being a judgment or order the execution of which has not been stayed, has served on the debtor in Australia or, by leave of the Court, elsewhere, a bankruptcy notice under this Act and the debtor does not …comply with the requirements of the notice or satisfy the Court that he or she has a counter-claim, set-off or cross demand equal to or exceeding the amount of the judgment debt or sum payable under the final order…

21    Section 43(1) of the Bankruptcy Act relevantly provides that, subject to the Act, where a debtor has committed an act of bankruptcy and otherwise meets the statutory residence requirements, the Court may “on a petition presented by a creditor” make a sequestration order against the estate of the debtor.

22    The term “creditor” is not defined in the Bankruptcy Act for these purposes.

23    Section 44(1) of the Bankruptcy Act sets out the conditions on which a creditor may present a petition, being (relevantly to the facts of this case):

(a)    there is owing by the debtor to the petitioning creditor a debt that amounts to the statutory minimum;

(b)    that debt is a liquidated sum due at law or in equity or partly at law and partly in equity and is payable either immediately or at a certain future time; and

(c)    the act of bankruptcy on which the petition is founded was committed within 6 months before the presentation of the petition.

24    The term “debt” is defined in s 5 as “includes liability”. The term “provable debt” is also defined in s 5, being “a debt or liability that is, under this Act, provable in bankruptcy”.

25    Section 52(1) of the Bankruptcy Act provides that, at the hearing of a creditor’s petition, the Court shall require proof of certain matters which include the fact that the debt or debts on which the petitioning creditor relies is still owing and, if it is satisfied with proof of those matters, the Court may make a sequestration order against the estate of the debtor.

26    Section 52(2) of the Bankruptcy Act relevantly provides that, if the Court is satisfied by the debtor that he or she is able to pay his or her debts or that for other sufficient cause a sequestration order ought not to be made, it may dismiss the petition.

Issues

27    There were two issues for determination on this application:

(a)    whether the Court has jurisdiction to make a sequestration order on the application of ASIC, in reliance upon non-compliance with a bankruptcy notice which sought payment of a non-provable debt; and

(b)    whether, in the exercise of the Court’s discretion under ss 43(1) and 52(1) of the Bankruptcy Act, a sequestration order ought to be made.

28    For the reasons below, the answer to both of these questions is “yes”.

Submissions by ASIC

29    In relation to whether the Court has jurisdiction, ASIC submitted (in summary) that:

(a)    the words in s 43 must be read together with the words of s 40(1)(g);

(b)    on a proper construction of the statutory scheme, ASIC is a “creditor” permitted to present the creditor’s petition;

(c)    ASIC was permitted to serve the bankruptcy notice based on a non-provable debt: see ASIC v Forge (2003) 133 FCR 487; [2003] FCAFC 274 (Branson, Emmett and Stone JJ); and

(d)    as ASIC was permitted to serve the bankruptcy notice based on a non-provable debt, it follows that ASIC must be able to present a creditor’s petition based on non-compliance with such a bankruptcy notice. Were it otherwise, service of a bankruptcy notice based on a non-provable debt would be liable to be set aside as an abuse of process.

30    As to the exercise of discretion, ASIC submitted that, whilst the fact that the debt that ASIC relies upon is not provable in the bankruptcy is a factor that may be taken into account, the factors in favour of exercising the Court’s discretion to make a sequestration order in this case outweigh the non-provable nature of the debt, including relevantly:

(a)    there is a strong inference to be drawn from the uncontested evidence that Mr King is hopelessly insolvent in circumstances where Mr King has chosen not to lead any evidence to suggest that he is able to pay his debts or that there is any other sufficient cause to dismiss the creditor’s petition; and

(b)    the evidence that ASIC has the benefit of very substantial costs orders (totalling in the millions of dollars, although not yet assessed or taxed) against Mr King, which will be provable in any bankruptcy, and shows that ASIC has a direct interest in the making of a sequestration order.

Submissions by Mr King

31    In relation to whether the Court has jurisdiction, Mr King submitted (in summary) that:

(a)    a civil penalty under section 1317G is not a provable debt under the Act;

(b)    a debt which is not provable in bankruptcy is capable of underpinning a bankruptcy notice. The issue of a bankruptcy notice calls for no judicial discretion; and

(c)    by reason of the Full Court decision in O'Mara Constructions Pty Ltd v Avery (2006) 151 FCR 196; [2006] FCAFC 55, the Court has no jurisdiction to make a sequestration order where the debt underpinning a creditor's petition is not provable in bankruptcy.

32    As to the exercise of discretion, Mr King submitted that:

(a)    the making of a sequestration order is always discretionary. That discretion ought to be exercised judicially. The Court has a discretion not to make a sequestration order where there is “other sufficient cause” not to do so;

(b)    the bankruptcy regime exists for provable debts. Where the debt which underpins a creditor's petition is not provable in bankruptcy, it is axiomatic that “other sufficient cause” is made out. The existence of the Court's jurisdiction to entertain a creditor's petition where there is no provable debt is anomalous;

(c)    in that situation, the Court should not make a sequestration order unless “special circumstances” are present, which are rare and relatively undefined. In this case, ASIC carries the burden of proving that there are the “special circumstances” necessary to persuade the Court to exercise the discretion for a sequestration order based on a petition solely with a judgment for a non-provable debt (and no other debt itself capable of forming the basis for a bankruptcy notice);

(d)    allegations precipitous to the non-provable debt and/or historical conduct of the debtor is not enough to justify the making of a sequestration order. For example, ASIC's reliance on other debts allegedly owed by the respondent to ASIC and others is not properly founded; and

(e)    on the facts of this case, there are no “special circumstances” shown to justify the making of a sequestration order in this case.

Whether the court has jurisdiction

33    There are two key reasons why the Court has jurisdiction to make a sequestration order where the creditor’s petition is based on non-compliance with a bankruptcy notice which is based on a non-provable debt.

34    First, the statutory scheme supports a finding that the Court has jurisdiction.

35    Second, the decision of O'Mara can be distinguished, and does not have the consequences as submitted by Mr King.

The statutory scheme supports the construction contended by ASIC

36    As stated by Kiefel CJ, Nettle and Gordon JJ in SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362; [2017] HCA 34 at [14]:

The starting point for the ascertainment of the meaning of a statutory provision is the text of the statute whilst, at the same time, regard is had to its context and purpose. Context should be regarded at this first stage and not at some later stage and it should be regarded in its widest sense. This is not to deny the importance of the natural and ordinary meaning of a word, namely how it is ordinarily understood in discourse, to the process of construction. Considerations of context and purpose simply recognise that, understood in its statutory, historical or other context, some other meaning of a word may be suggested, and so too, if its ordinary meaning is not consistent with the statutory purpose, that meaning must be rejected.

(footnotes omitted)

37    Although the civil penalty in this case is not a provable debt, the Full Court in Forge held that the fact that such a debt is not provable in bankruptcy is not an impediment to the issue of a bankruptcy notice in reliance on the debt, and that there is no discretion to set aside a bankruptcy notice on this basis. Forge concerned pecuniary penalty orders made under s 1317EA of the former Corporations Law. By reason of those penalty orders, it was accepted that ASIC was a creditor for the purposes of s 40(1)(g) Bankruptcy Act.

38    Having regard to the context and purpose of s 43, the words in s 43 of the Bankruptcy Act must be read together with the words of s 40(1)(g). That is to say, s 43 gives the Court discretion to make a sequestration order when certain conditions have been met, which include the commission of an act of bankruptcy by the debtor and the presentation of a petition by a creditor. The reference to “act of bankruptcy” is necessarily a reference back to s 40 which identifies when an act of bankruptcy has been committed by a debtor.

39    If, as accepted in Forge, ASIC is “a creditor who has obtained against a debtor a final judgment” for the purposes of s 40(1)(g) and so is permitted to serve a bankruptcy notice, it would be incongruous if ASIC was not also “a creditor” which may present a petition in reliance on an act of bankruptcy arising from non-compliance with the bankruptcy notice that ASIC was legally permitted to serve.

40    This means that “creditor” within s 40(1)(g) should be given the same meaning as “creditor” in s 43 of the Bankruptcy Act.

41    Support for this conclusion is found in the text of the Bankruptcy Act.

42    Section 44(1) contains further conditions which must be satisfied before a creditor’s petition may be presented, including the existence of a debt or debts which is or are owing to the petitioning creditor. The term used in s 44 is “debt” and not “provable debt”, both of which are defined terms in the Bankruptcy Act. The definition of “debt” is not confined to only those debts which are provable debts but encompasses all debts and liabilities. That meaning should be applied to the term “debt” in s 44 unless a contrary intention appears: see Tjungarrayi v Western Australia (2019) 269 CLR 150; [2019] HCA 12 at [89]. No such contrary intention is apparent in this case.

43    In other parts of the Bankruptcy Act, where it is necessary to draw a distinction between creditors with provable debts and creditors with non-provable debts, the language of the Bankruptcy Act makes that plain. See, for example, s 81(1)(a).

44    Finally, ss 40(1)(g), 43 and 44 are all contained in Part IV of the Bankruptcy Act. Unless there is some reason lying within the clear terms of the Act, the word “creditor” in each of these provisions should be interpreted consistently: Tabcorp Holdings Ltd v Victoria (2016) 328 ALR 375; [2016] HCA 4 at [65]; Regional Express Holdings Ltd v Australian Federation of Air Pilots (2017) 262 CLR 456; [2017] HCA 55 at [21]. In Tabcorp, the High Court observed that:

…A consistent meaning should ordinarily be given to a particular term wherever it appears in a suite of statutory provisions.

45    For these reasons, the statutory scheme does not support a view that the expression “creditor” in s 43 should be interpreted differently to the expression “creditor” in s 40(1)(g) of the Act. There is therefore no reason within the scheme of the Bankruptcy Act to restrict the meaning of “creditor” in s 43 to creditors with provable debts.

O'Mara can be distinguished

46    Mr King submits that by reason of the decision of the Full Court in O'Mara, the Court has no jurisdiction to make a sequestration order where the debt underpinning the creditor’s petition is not provable in bankruptcy.

47    O’Mara concerned a judgment debt obtained in February 1992, in reliance on which a bankruptcy notice was issued in November 2003. The petition was presented on 3 September 2004. It was heard on 31 May 2005 and dismissed by a federal magistrate on 5 July 2005, which dismissal was the subject of the appeal to the Full Court.

48    At [2], the Full Court summarised the grounds on which the federal magistrate had dismissed the petition in these terms:

… The federal magistrate dismissed the petition on two grounds. The first was that the presentation of a creditor’s petition in bankruptcy was an action on a cause of action on a judgment within the meaning of s 17 of the Limitation Act 1969 (NSW) and was statute-barred. The second was that the appellant’s debt was “statute-barred” by virtue of s 17, and that the appellant therefore lacked the necessary capacity to present the petition pursuant to ss 43 and 44 of the Bankruptcy Act 1966 (Cth).

49    At [3], the Full Court stated that: “[t]he matters in issue in this case and their resolution depend upon the interaction of the Bankruptcy Act and the Limitation Act.”

50    Section 17(1) Limitation Act 1969 (NSW) provided, relevantly, that “[a]n action on a cause of action on a judgment is not maintainable if brought after the expiration of a limitation period of twelve years running from the date on which the judgment first becomes enforceable…”. In O'Mara, the 12 year limitation period after the judgment had expired before the bankruptcy notice was served.

51    On appeal, the Full Court considered that the first step in the appeal was to decide whether the creditor had the capacity to present and prosecute the petition and that this question involves an examination of the operation of s 17 of the Limitation Act and various provisions of the Bankruptcy Act.

52    With that context, the Full Court in O’Mara cited two High Court authorities which were said to be relevant to its consideration of the proper construction of s 43 Bankruptcy Act.

53    The first case was Motor Terms Co Pty Ltd v Liberty Insurance Ltd (1967) 116 CLR 177. As noted by the Full Court at [19], the question in that case was whether a winding-up order in respect of a corporation could be made on the petition of a creditor whose debt was current at the date of presentation but which was statute-barred by the date of the hearing. The majority (Barwick CJ, Taylor and Menzies JJ) considered that the date for determining the status of a petitioning creditor’s debt was the date of the presentation of the petition. At [19], the Full Court in O’Mara quoted the comments of Kitto J (in dissent). However, these comments were directed towards a different statutory scheme to the Bankruptcy Act and aspects of the reasons were expressed to be on a prima facie basis.

54    The second case was Tanning Research Laboratories Inc v O’Brien (1990) 169 CLR 332; [1990] HCA 8, in which the High Court applied Motor Terms Co. That case was concerned with whether a liquidator had properly rejected a proof of debt by a foreign company under an agreement which contained an arbitration clause. The High Court’s comments in Tanning Research (as cited in O’Mara) do not lend any support to the view that a petition may only be presented by a creditor with a provable debt.

55    Having discussed both Motor Terms Co and Tanning Research, the Full Court in O’Mara summarised the principles said to flow from those cases in these terms at [24]:

In summary, if a debt is statute-barred it will not be provable in the winding up of a company and cannot ground the presentation of a petition. The same approach applies in bankruptcy. To the extent that s 17 barred recovery by the appellant of the debt as against the respondent, it was unenforceable against any trustee in bankruptcy. To the extent that the debt was unenforceable, it could not be relied upon by the appellant in presenting and prosecuting the petition.

56    However, the statements in that paragraph (and indeed in the case more generally) are expressly limited to statute-barred debts – that is to say, debts which are not recoverable by reason of the expiry of some relevant limitation period.

57    Further, the Full Court’s conclusion in that paragraph is premised on the debt being unenforceable based on s 17 barring “recovery by the appellant of the debt as against the respondent”. That is to say, to the extent that s 17 barred the creditor from recovering the debt from the debtor, the debt could not be relied upon to present a petition. That is to be contrasted with the facts presently before the Court where there is no bar on recovery by ASIC of the penalty.

58    Further, that paragraph says nothing at all, either expressly or by necessary implication, about a circumstance where there is a debt which is enforceable by the creditor against the debtor, but which is not provable in bankruptcy, as opposed to a debt which is both not enforceable by the creditor against the debtor and not provable in the bankruptcy.

59    Finally, that paragraph (and indeed the balance of the reasons in O'Mara) says nothing about the manner in which the Full Court in Forge had interpreted the meaning of the expression “creditor” for the purposes of s 40(1)(g) some three years earlier and how the meaning given to that section might be used in determining who might be a “creditor” who can present a creditor’s petition under ss 43 and 44 of the Act.

60    In conclusion and for these reasons, O'Mara is not binding on this Court in the way contended by Mr King. It does not contain any general proposition in relation to non-provable debts beyond those which might be statute-barred, which is what the Full Court was considering in that case.

Conclusion

61    For the reasons set out above, as a matter of jurisdiction, the Court may entertain the creditor’s petition.

Whether to make a sequestration order

62    The Court retains a discretion whether or not to make a sequestration order even when all of the jurisdictional requirements are established. The discretion is unfettered, and if Mr King seeks to satisfy the Court under s 52(2) that he is solvent or there is some “other sufficient cause” to dismiss the creditor’s petition, the onus is on him to satisfy the Court of those matters.

63    For the reasons explained below, a sequestration order will be made.

Mr King is insolvent

64    In Forge, Branson and Stone JJ stated at [15] that:

…The conduct encompassed by s 40(1)(g), even where undertaken in respect of a final judgment or final order in respect of a debt not provable in bankruptcy, is an act which prima facie demonstrates insolvency. All persons are under an obligation to comply with final judgments or final orders. Failure to do so, especially after having been placed on notice that compliance is required by the party in whose favour the final judgment or final order was made, may be assumed to indicate an inability to do so; that is, to indicate insolvency. …

65    In Forge at [30], Emmett J observed that:

…Examination of the cases where an act of bankruptcy will be committed, as set out in s 40(1), indicates that the scheme of the Act is to identify markers or criteria that point towards insolvency. That is to say, they identify markers or criteria pointing towards a state of affairs whereby a debtor is unable to pay his or her debts in the ordinary course as the debts fall due for payment. Each of the cases described in s 40(1) suggests such an inability on the part of a debtor….

(italics in original)

66    Mr King failed to pay the pecuniary penalty which was the subject of the order of the Supreme Court of Queensland in 2017.

67    Mr King failed to comply with the bankruptcy notice served on him on 19 February 2021.

68    Mr King also has a liability to PIF for the compensation order, being a sum exceeding $177 million, plus interest, which has not been paid.

69    The unchallenged evidence therefore establishes that Mr King owes debts exceeding $177 million (at least) which would be provable in the bankruptcy.

70    There is nothing to suggest that Mr King is able to pay those debts. He is insolvent.

ASIC has an interest in the sequestration order

71    ASIC’s debt which it relies on for the creditor’s petition would not be provable in the bankruptcy of Mr King. However, for the reasons explained above, the fact of the civil penalty not being provable in Mr King’s bankruptcy does not prevent a sequestration order being made.

72    In any event, ASIC has a direct interest in the sequestration order sought. That is because it has the benefit of significant costs orders against Mr King which would be provable in any bankruptcy. If a sequestration order is made, ASIC may seek to prove in the bankruptcy for the amount of those costs orders.

Public interest considerations

73    In Forge at [29], Emmett J stated that:

Bankruptcy legislation is not for the determination of disputes arising between citizens or between citizen and State. It is legislation designed for the benefit of the community as a whole. Thus, in considering whether or not to exercise powers under the Act, the court must have regard not only to the rights of the parties to the proceedings, but to the community as a whole. Such considerations must be taken into account in exercising the discretion whether to make or refuse to make a sequestration order under s 52.

74    There is a strong public interest in the sequestration of Mr King’s estate having regard to the evidence before the Court indicating both insolvency and the existence of substantial provable debts.

75    The sequestration of Mr King’s estate is also consistent with the public interest in fair notice being given to the public in dealing with an insolvent person which is provided by the bankruptcy regime.

76    Mr King submitted that there is an even greater public interest in the due administration of justice and the use of the bankruptcy regime for its proper purpose and that the scheme is not intended to be punitive in nature. The issue of whether ASIC is using the bankruptcy regime for an improper purpose is addressed below in relation to the issue of whether there is an abuse of process.

77    Mr King also submitted that the Commonwealth is the best-resourced litigant in the nation and that, for that reason, ASIC has a duty to act as a model litigant. Mr King submitted that there is an at least equally powerful public interest in ensuring that the Commonwealth, via its agency ASIC, does not rely on an anomaly within the legislation to secure a sequestration order. However, for the reasons explained below, there is no “anomaly” within the legislation and so there is no “powerful public interest” of the kind submitted by Mr King.

Special circumstances are not required to make a sequestration order based on a non-provable debt

78    Mr King submitted that the bankruptcy regime exists for provable debts and that, where the debt which underpins a creditor’s petition is not provable in bankruptcy, it is axiomatic that “other sufficient cause” is made out. Mr King also submitted that the existence of the Court's jurisdiction to entertain a creditor’s petition where there is no provable debt is anomalous.

79    Mr King submitted that, in that situation, the Court should not make a sequestration order unless “special circumstances” are present, which are rare and relatively undefined and that ASIC had failed to demonstrate such circumstances.

80    In support of these submissions, Mr King relied upon the decisions of Russell v Russell [1998] 1 FLR 936; [1998] BPIR 259 and Levy v Legal Services Commission [2001] 1 All ER 895; [2000] EWCA Civ 285, and submitted that the Court should apply the approach taken in these cases.

81    The decision of Russell is a single judge decision of the Chancery Division of the High Court of Justice. In that case, the relevant facts were that Mrs Russell had obtained a prior costs order against Mr Russell in matrimonial proceedings. Mrs Russell had then served a petition on Mr Russell and the issue before Chadwick J was whether a bankruptcy order should be made in circumstances where the costs order obtained by Mrs Russell was not a provable debt in the bankruptcy.

82    At page 942, Chadwick J stated:

Prima facie, therefore, there will be little purpose in making a bankruptcy order on the petition of a wife who founds her petition on an order to pay a lump sum made in family proceedings. Little purpose, because the trustee in bankruptcy will have no functions to perform in relation to the wife and will be in no position to distribute any part of the estate to her. Indeed, the effect of the order is to postpone the wife to the other creditors whose debts can be proved in the bankruptcy.

In the absence, therefore, of some special circumstances it seems to me that, as a matter of discretion, it will not usually be appropriate to make a bankruptcy order on a petition presented by a wife in respect of a debt which arises under a lump sum order made in family proceedings.

In the present case, however, there are, as it seems to me, special circumstances [which were found in that case].

83    In Levy, the Court of Appeal, Civil Division, considered an issue relating to an appellant who had been ordered to pay his former wife’s costs in family proceedings, in circumstances where the order was not a provable debt in bankruptcy. The question before the Court of Appeal was whether a statutory demand should be set aside (where a statutory demand was the equivalent of a bankruptcy notice in Australia). Jonathan Parker LJ, with whom the Court agreed, stated that:

[34]     On any footing, a bankruptcy order made on a petition which is based on a non-provable debt is an anomaly, since (as Chadwick J pointed out in Russell v Russell) the trustee has, by definition, no functions to perform in relation to the petitioner… Consequently, a creditor with a non-provable debt will receive no distributions in the bankruptcy, and the trustee will owe no duties towards him. It would therefore seem surprising if the 1986 Act confers jurisdiction on the court to make a bankruptcy order on a petition based on a non-provable debt. …

[37]     It is to be noted that the definition [of bankruptcy debt in the 1986 Act] makes no distinction between provable and non-provable debts. A non-provable debt is a debt to which the bankrupt is subject at the commencement of his bankruptcy, and thus falls within the definition. …

[38]     I therefore agree with Chadwick J in Russell v Russell that since the 1986 Act plainly allows a creditor with a non-provable debt to present a bankruptcy petition based upon that debt, it must follow that the court has jurisdiction under the 1986 Act to make a bankruptcy order on such a petition. Accordingly in my judgment Miss Shekerdemian was right to accept that that jurisdiction exists.

[39]     In what circumstances, then, will the jurisdiction be exercised? In Russell v Russell, Chadwick J referred to the need for ‘special circumstances’. …

[44]     In what circumstances, then, might the court be persuaded to exercise its jurisdiction to make a bankruptcy order on a petition based on a non-provable debt? Since the jurisdiction exists, I have to accept that there may be wholly exceptional cases where the court will be persuaded, in its discretion, to do so. I confess, however, that I find it extremely difficult to foresee the circumstances in which that may occur, since, for reasons already given, the jurisdiction itself seems to me to be wholly anomalous. …

84    For the following reasons, I do not accept Mr King’s submissions.

85    First, there is nothing in the language or purpose of ss 43, 44 or 52 of the Bankruptcy Act that would require an interpretation that (as in the United Kingdom) there needs to be some “special circumstances” before a petitioning creditor with a non-provable debt can obtain a sequestration order.

86    Second, as s 52 confers jurisdiction on the Court, it is “quite inappropriate to read the provision by making implications or imposing limitations which are not found in the express words”: see Robson as former trustee of the estate of Samsakopoulos v Body Corporate for Sanderling at Kings Beach CTS 2942 [2021] FCAFC 143 at [230] (Colvin J, Allsop CJ, Markovic J, Derrington J, and Anastassiou J agreeing).

87    Third, the decision in Levy (applying the approach in Russell) is inconsistent with the Full Court authority of Forge. The Full Court in determining Forge:

(a)    dealt with an equivalent proceeding as was under consideration in Levy, being an application to set aside a bankruptcy notice;

(b)    construed the specific provisions of the Bankruptcy Act (rather than the provisions of the Insolvency Act 1986 (UK) which the Court in Levy was construing); and

(c)    reached the opposite conclusion to the Court of Appeal in Levy as to whether a bankruptcy notice issued in reliance on a non-provable debt should be set aside.

88    Finally, the approach of Jonathan Parker LJ in Levy, which was to focus upon whether there was utility in making an order on the application of a creditor who would not be able to participate in the bankruptcy, is not consistent with the scheme or the purpose of the Bankruptcy Act in Australia, which requires the Court to have regard not only to the rights of the parties to the proceedings, but to the community as a whole: see Forge at [29].

89    For these reasons, I decline to adopt the approach taken in Russell and Levy. In particular, I disagree that, in Australia, where the debt which underpins a creditor’s petition is not provable in bankruptcy, it is “axiomatic” that “other sufficient cause” is made out within the meaning of s 52(2)(b). Nor is it the case that in Australia, the jurisdiction of the Court to make a sequestration order on the petition of a creditor relying on a non-provable debt is “anomalous”.

90    It follows that ASIC does not need to show some “special circumstances” in order for a sequestration order to be made. It is therefore not necessary to consider whether ASIC has demonstrated any such “special circumstances”.

No abuse of process by ASIC

91    An indirect suggestion is made by Mr King’s submissions that ASIC is using the bankruptcy regime for an improper purpose. It was also submitted that the regime is not intended to be punitive. These submissions appear to be a veiled submission that ASIC is seeking a sequestration order to punish Mr King, and that this amounts to an abuse of process. Mr King also submitted expressly that:

If the reason for ASIC creditor's petition is to achieve a more cost-effective way of enforcing their costs orders, that in itself may even amount to an abuse of process.

92    However, the evidence before me does not establish any abuse of process by ASIC. Nor is there any evidence from which it can be inferred that ASIC is seeking to bankrupt Mr King so as to punish him, for example.

93    The fact that ASIC also has a presently unquantified provable debt (being the costs orders) is a matter relevant to the exercise of the Court’s discretion but it is not grounds for suspicion that ASIC is misusing the Court’s process. Rather, it is evidence that demonstrates that ASIC has an interest in Mr King’s bankruptcy. That is, if anything, a factor in favour of making a sequestration order.

94    Since the jurisdiction exists, there is nothing at all inappropriate in ASIC moving to seek a sequestration order be made against an insolvent debtor, nor about the fact that ASIC has done so without having its costs orders assessed prior to doing so. That is because the presentation and prosecution of a creditor’s petition are acts which are done for the benefit of all of the debtor’s creditors. It is trite that a sequestration order is made not only for the orderly dealing with the provable debts of the debtor but also for the protection of the public.

95    A person alleging abuse of process must show that the predominant purpose of the other party in using the legal process has been one other than that for which it was designed: Williams & Ors v Spautz (1992) 174 CLR 509, 529 per Mason CJ, Dawson, Toohey and McHugh JJ.

96    In that case, Brennan J (as his Honour then was) referred to the cases of Dowling v Colonial Mutual Life Assurance Society Ltd (1915) 20 CLR 509; [1915] HCA 56 (where the creditor had sought to subject the debtor to examination) and King v Henderson [1898] AC 720, (where the creditor petitioned for sequestration so as to obtain a dissolution of a partnership), and observed at page 534 that:

…In both instances, sequestration was the primary object intended. In both cases, the creditor had an ulterior motive for pursuing his legal rights, but the ulterior motive did not affect the character of the result which the plaintiff intended the proceedings to achieve. The pursuit of a legitimate remedy is not converted to an abuse of process by an unworthy and ulterior motive.

97    In the present case, ASIC invokes the jurisdiction for the purpose for which it exists – to have a sequestration order made against the estate of an insolvent debtor and in whose estate ASIC has a real interest.

98    Mr King also submitted that, if a sequestration order was made, then ASIC would have an “ad infinitum trigger” to bring a creditor’s petition.

99    However, the evidence before me does not establish any future hypothetical threatened abuse of process by ASIC.

100    Further, if ASIC did bring a further creditor’s petition based on the penalty, it would fall to the Court to exercise its discretion on that further application taking account of all relevant facts, including the fact that a sequestration order had previously been made on ASIC’s application in respect of the same debt. It does not follow from such a hypothetical prospect that a sequestration order should not be made on this application.

Conclusion

101    Mr King has failed to demonstrate that for other sufficient cause a sequestration order ought not be made within the meaning of s 52(2)(b) Bankruptcy Act.

102    For this reason and having regard to the other considerations referred to above, I consider it to be appropriate to make a sequestration order.

Associate:

Dated:    20 December 2021