Federal Court of Australia

Osborne v Schembri McCluskys Pty Ltd [2025] FCA 691

ORDERS

THE COURT ORDERS THAT:

1. The appeal be dismissed.

2. There be no order as to costs.

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

REASONS FOR JUDGMENT

HESPE J:

1 This is an appeal by the Appellant debtor (Mr Osborne) from a judgment of the Federal Circuit and Family Court of Australia, dismissing an application for review of a decision of a Judicial Registrar of that Court to make a sequestration order in respect of the estate of Mr Osborne under the Bankruptcy Act 1966 (Cth).

Background

2 The background to this appeal is set out at [3]–[20] of the reasons of the primary judge: Schembri McCluskys Pty Ltd, in the matter of Osborne (Bankrupt) v Osborne [2024] FedCFamC2G 887 (PJ).

3 The respondent creditor, Schembri McCluskys Pty Ltd (Schembri & Co), is a law firm that represented Mr Osborne in an appeal to the Supreme Court of Victoria (Court of Appeal) from criminal proceedings in the County Court of Victoria.

4 Schembri & Co filed proceedings in the Magistrates’ Court of Victoria in relation to Mr Osborne’s non-payment of its legal fees in respect of the appeal from the County Court. On 29 July 2022, following a four day contested hearing, orders were made by the Magistrates’ Court for Mr Osborne to pay Schembri & Co the sum of $54,196.23 and interest of $11,125.62 with a stay on the orders for 30 days. Further orders were made in the Magistrates’ Court on 16 September 2022 ordering Mr Osborne to pay the costs of Schembri & Co’s fees with respect to the Magistrates’ Court proceedings in the sum of $15,223.90 with a stay of 30 days.

5 Mr Osborne filed a notice of appeal in the Supreme Court of Victoria, together with a stay application against execution of the judgments of the Magistrates’ Court of Victoria. On 28 September 2022, a Judicial Registrar of the Supreme Court refused Mr Osborne’s stay application. An appeal from the Judicial Registrar’s refusal was dismissed by a Justice of the Supreme Court on 20 February 2023.

6 As far as this Court understands based on the representations made to it by Counsel for the respondent, the progress of Mr Osborne’s appeal to the Supreme Court from the decision of the Magistrates’ Court is awaiting the outcome of this appeal and the underlying application for a sequestration order. Should a sequestration order be made, it will be for the trustee in bankruptcy to determine whether to proceed with the Supreme Court appeal against the Magistrates’ Court judgment.

the Bankruptcy proceedings

7 A bankruptcy notice, BN 259140 (Bankruptcy Notice) was issued by the Official Receiver on 6 March 2023, demanding payment of a debt in the amount of $84,429.27, payable to Schembri & Co pursuant to the orders of the Magistrates’ Court.

8 Schembri & Co filed a creditor’s petition on 19 April 2023 (Petition). The Petition was based on Mr Osborne owing Schembri & Co “the amount of $84,429.27 by reason of an Order of the Magistrates’ Court of Victoria made on 29 July 2022 and a further Order of the Magistrates’ Court of Victoria made on 16 September 2022 in proceeding number M11114310”.

9 Mr Osborne filed a notice opposing the Petition on 26 June 2023, having been granted an extension of time. The essence of the grounds of opposition was an allegation that the bill for legal services was “void” because Mr Schembri “deliberately sabotaged” Mr Osborne’s appeal from the County Court proceedings by tampering with certain transcripts.

10 Orders were made by a Judicial Registrar of the Federal Circuit and Family Court of Australia on 6 July 2023 sequestering the estate of Mr Osborne. Mr Osborne’s application for a de novo review of the decision of the Judicial Registrar was dismissed by the primary judge following a hearing on 7 August 2024.

decision of the primary judge

11 The primary judge recognised that in conducting the review of the Judicial Registrar’s decision, her Honour was hearing afresh the creditor’s petition for a sequestration order: PJ [27]–[28]. The onus was on the creditor to prosecute the application by satisfying the Court of proof of the matters in s 52(1) of the Bankruptcy Act. The only onus on Mr Osborne was to satisfy the Court of the matters in s 52(2) of the Bankruptcy Act.

12 The primary judge summarised the provisions in Part IV, Div 2 of the Bankruptcy Act, including, relevantly, ss 52(1) and 52(2), which provide:

(1)    At the hearing of a creditor’s petition, the Court shall require proof of:

(a)    the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient);

(b)    service of that petition; and

(c)    the fact that the debt or debts on which the petitioning creditor relies is or are still owing;

and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor.

…

(2)    If the court is not satisfied with the proof of any of those matters, or is satisfied by the debtor:

(a)    that he or she is able to pay his or her debts; or

(b)    that for other sufficient cause a sequestration order ought not to be made;

it may dismiss the petition.

13 The primary judge recognised that jurisdiction to make a bankruptcy order exists pursuant to s 43(1) of the Bankruptcy Act where a debtor has committed “an act of bankruptcy” and at the time when the act of bankruptcy was committed, the debtor had a prescribed connection with Australia: PJ [36]. The primary judge recognised at PJ [37] that an “act of bankruptcy” includes a circumstance where a creditor:

* obtained a final judgment or order (the effect of which has not been stayed) against a debtor;

* has served the debtor a bankruptcy notice under the Act; and

* the debtor does not, within the time fixed for such compliance (in the case of service in Australia):

* comply with the requirements of the bankruptcy notice; or

* satisfy the Court that they have a counter-claim, set-off or cross demand equal to or exceeding the judgment debt payable and that could not have been set up in the action or proceeding in which the judgment or order was obtained: s 40(1)(g).

14 The primary judge was satisfied that Mr Osborne had been served with the Bankruptcy Notice: PJ [46]. The Magistrates’ Court judgment debt was for more than $10,000 and execution of the effect of that judgment had not been stayed. The primary judge was satisfied that Mr Osborne had not complied with the requirements of the Bankruptcy Notice within the requisite time and had committed an act of bankruptcy: PJ [47]. The primary judge was also satisfied that the act of bankruptcy was committed within six months before the presentation of the creditor’s petition, as required by s 44(1)(c) of the Bankruptcy Act: PJ [47]. Although the petitioning creditor held security over property of Mr Osborne, the petitioning creditor had stated in its amended Petition that it was willing to surrender the security if the sequestration order was made. The primary judge was satisfied that ss 44(2)–(4) were satisfied: PJ [48].

15 The primary judge then considered the requirements in s 52 of the Bankruptcy Act. The primary judge was satisfied that the requirements of ss 52(1)(a) and (b) were satisfied: PJ [50]–[54].

16 As indicated above, Mr Osborne disputed that the debt was owing because he contended that Mr Schembri had “deliberately sabotaged” Mr Osborne’s criminal appeal and that therefore Mr Schembri was not entitled to the legal fees the subject of the Magistrates’ Court orders. Mr Osborne’s contentions were summarised by the primary judge: PJ [56]. The summarised contentions were that Mr Schembri:

* altered Mr Osborne’s record of interview with Victoria Police, removing relevant evidence and rewording the transcript. Mr Osborne contends that Mr Schembri did this as Victoria Police and the Prosecutor had removed relevant evidence and reworded the record of interview in order to secure his convictions and Mr Schembri altered the record of interview “to match what the Police and Prosecutor did at my trial, a copycat”;

* altered the video and audio tape of Mr Osborne’s record of interview with Victoria Police, as these had also previously been altered by Victoria Police and the Prosecutor;

* reworded the trial transcripts to remove exculpatory evidence and provided this documentation to the Counsel engaged to represent Mr Osborne in the Appeal Proceedings;

* tampered with and altered other exculpatory evidence, including text messages and telephone records; and

* instructed an employee of Schembri & Co to provide a false affidavit and give false evidence before the Magistrates’ Court, which led to the judgment debt being ordered and the issuing of subpoenas against the three barristers involved in the Appeal Proceedings being refused by the Magistrate in the Magistrates’ Court proceedings. Mr Osborne contends that the evidence of the Counsel engaged to represent him in the Appeal Proceedings would confirm that Mr Schembri removed and tampered with relevant evidence and reworded the police record of interview.

17 Schembri & Co submitted to the primary judge that Mr Osborne’s complaints as to Mr Schembri’s alleged conduct had been fully ventilated before the Magistrates’ Court and determined adversely to Mr Osborne following a contested hearing and that appeals to the Supreme Court in relation to a stay of the orders of the Magistrates’ Court were refused. It was submitted that, consequently, Mr Osborne was estopped from contesting the judgment debt, citing the High Court in Tomlinson v Ramsey Food Processing Pty Ltd [2015] HCA 28; 256 CLR 507 at [21]–[23] (French CJ, Belle, Gageler and Keane JJ).

18 The primary judge accepted the submissions of Schembri & Co: PJ [57]. The primary judge referred to the affidavit evidence of Mr Osborne and found that it was apparent from that affidavit that the matters Mr Osborne sought to rely upon to establish that the debt is “void” were raised before the Magistrates’ Court and rejected in the course of a four day contested hearing: PJ [58]. Having been satisfied that the matters sought to be agitated by Mr Osborne in the Federal Circuit and Family Court proceedings had been the subject of final judicial determination, the primary judge concluded that res judicata applies to result in the merger of the right or obligation in the judgment and / or issue estoppel arises and that therefore Schembri & Co had proved the matters required by s 52(1)(c) of the Bankruptcy Act.

19 Mr Osborne appealed from the judgment of the primary judge. His notice of appeal ran to some 20 grounds, most of which appeared to reiterate the grounds raised before the primary judge. Part of the grounds included that the primary judge “wrongly estopped from me from [sic] contesting the matter”.

20 The respondent contended that Mr Osborne could not demonstrate error in the reasoning of the primary judge and the appeal ought to be dismissed.

21 For the reasons set out below, the primary judge erred in accepting the respondent’s submissions concerning res judicata and issue estoppel. Those contentions were based on a misunderstanding of the role of the Court in bankruptcy proceedings.

22 The High Court in Tomlinson at [20]–[22] set out the general principles relating to res judicata and issue estoppel:

An exercise of judicial power, it has been held, involves “as a general rule, a decision settling for the future, as between defined persons or classes of persons, a question as to the existence of a right or obligation, so that an exercise of the power creates a new charter by reference to which that question is in future to be decided as between those persons or classes of persons”. The rendering of a final judgment in that way “quells” the controversy between those persons. The rights and obligations in controversy, as between those persons, cease to have an independent existence: they “merge” in that final judgment. That merger has long been treated in Australia as equating to “res judicata” in the strict sense.

Estoppel in relation to judicial determinations is of a different nature. …Yet its operation is not confined to an exercise of judicial power; it also operates in the context of a final judgment having been rendered in other adversarial proceedings. … [Issue estoppel] operates to preclude the raising in a subsequent proceeding of an ultimate issue of fact or law which was necessarily resolved as a step in reaching the determination made in the judgment. The classic expression of the primary consequence of its operation is that a judicial determination directly involving an issue of fact or of law disposes once for all of the issue, so that it cannot afterwards be raised between the same parties or their privies.

23 As the High Court explained, res judicata and issue estoppel operate as between defined parties. Insofar as res judicata is concerned, the rights and obligations in contention as between those parties merge in the final judgment of the Court. Issue estoppel prevents an issue of fact or law that was involved in a judicial determination from being raised again between the same parties or their privies.

24 The nature of the powers of the Court in bankruptcy and the place a judgment occupies in bankruptcy proceedings was explained by the High Court in Wren v Mahony [1972] HCA 5; 126 CLR 212 (Barwick CJ, Menzies, Windeyer, Owen and Walsh JJ). From that decision, the following principles emerge:

(1) In bankruptcy proceedings, the Court deals not only with the particular debt of the petitioning creditor but with the whole class of the creditors to the debtor. The Court in bankruptcy proceedings interferes with the rights of all of the debtor’s creditors who are not before the Court. The question is not one of a dispute between two parties (at 223 (Barwick CJ, Windeyer and Owen JJ concurring)).

(2) The foundation of the Court’s power to declare a person a bankrupt is the existence of the petitioning creditor’s debt (at 221).

(3) A Court in bankruptcy proceedings is entitled to inquire into the judgment debt and the circumstances in which the judgment was given because the Court is entitled to see that a person is not made bankrupt without the foundation of the existence of the petitioning creditor’s debt. That right of the Court exists independently of the conduct of the debtor or the creditor (at 222).

(4) The judgment is not conclusive in bankruptcy proceedings “even though under the general law, the prior existing debt has merged in a judgment” (at 224). See too Ramsay Health Care Australia Pty Ltd v Compton [2017] HCA 28; 261 CLR 132 at [57] (Kiefel CJ, Keane and Nettle JJ).

(5) Even in circumstances where a debtor’s application to set aside a judgment had failed, a Court in bankruptcy proceedings can go behind the judgment and inquire whether notwithstanding the judgment, there was a debt (at 221–222).

(6) In making its inquiries, the Court in bankruptcy is not setting aside the judgment but goes around it. The existence of the judgment is prima facie evidence of a debt (at 222).

25 In bankruptcy proceedings, the Court is not exercising power that relates to the determination of rights and obligations as between the debtor and the petitioning creditor but as between the debtor and all the debtor’s creditors. It is for this reason that the Court in bankruptcy proceedings is able to go behind the judgment debt to be satisfied that the debt exists for the purposes of s 52(1)(c). The principles of res judicata and issue estoppel are not engaged. As the High Court explained in Ramsay at [54]–[55]:

In point of principle, scrutiny by a Bankruptcy Court of the debt propounded by a judgment creditor seeking a sequestration order in no sense involves an attempt to impeach the judgment. A Bankruptcy Court is not concerned with whether the judgment should be set aside as upon an appeal, or even as a default judgment or a judgment obtained by fraud may be set aside; nor is a Bankruptcy Court concerned to deny the effect of the judgment as “res judicata” between the parties to it. A Bankruptcy Court is not concerned to prevent the judgment creditor from invoking the ordinary processes of execution available under the general law. Rather, a Bankruptcy Court is concerned with whether the debt on which it is based is truly a basis for the making of a sequestration order. A Bankruptcy Court has a statutory duty to be “satisfied” as to the existence of the petitioning creditor’s debt; a creditor should not be able to make a person bankrupt on a debt which is not provable.

The scrutiny required by s 52 as to whether there is, in truth and reality, a debt owing to the petitioning creditor serves to protect the interests of third parties, particularly other creditors of the debtor. It is of critical importance to appreciate that such persons were not parties to the proceedings that resulted in the judgment debt. It has long been recognised that their interest in being paid their debts in full should not be prejudiced by the making of a sequestration order in reliance on a judgment debt which does not reflect the true indebtedness of the debtor to the petitioning creditor….

26 The Court in bankruptcy proceedings needs to be satisfied of the existence of the debt of the petitioning creditor as a necessary foundation for making a sequestration order. Although the Court in bankruptcy proceedings has power to go behind the judgment debt in reaching its state of satisfaction, a Court will not do so as a matter of course. Occasions for the exercise of the power to inquire into judgment debt include (Wren at 222–223):

[c]ircumstances tending to show fraud or collusion or miscarriage of justice or that a compromise was not a fair and reasonable one, in the sense that even if not fraudulent it was foolish, absurd and improper, or resulted from an unequal position of the parties…

27 The circumstances in which a Court may choose to go behind the judgment debt are not limited to those circumstances: Ramsay at [39] and [48]. The question is whether the material before the primary judge raises substantial questions as to whether there was in truth and reality a debt due to the petitioning creditor: Ramsay at [49].

28 The relevant principle was articulated by the High Court in Ramsay at [68] in the following terms:

For the purposes of s 52 of the Act, a judgment may usually be taken to be sufficient evidence of a debt in that a judgment against a debtor in favour of a creditor obtained after a trial is, generally speaking, a reliable indication of the true state of indebtedness as between creditor and debtor. Indeed, such a judgment can usually be expected to provide the most reliable statement of the debt humanly attainable because the ordinary processes of the adversarial system provide a practical guarantee of reliability. The testing of the relative merits of a claim and counterclaim under the rigours of adversarial litigation will usually establish the true state of accounts as between the parties to the proceedings. Accordingly, a Bankruptcy Court will usually have no occasion to investigate whether the judgment debt is a true reflection of the real debt. But where the merits of a claim and counterclaim have not been tested in adversarial litigation, a judgment debt will not have this practical guarantee of reliability.

29 The primary judge’s reasons were based on a misapplication of the principles of res judicata and issue estoppel. These principles do not justify a refusal by a Court in bankruptcy proceedings to examine the circumstance leading to the judgment debt. The reasoning is directly contrary to the reasoning of the High Court in Ramsay at [58] where it was stated that “[t]he circumstance that under the general law a prior existing debt is taken to merge in a judgment has not been regarded as in some way operating to relieve a Bankruptcy Court of the paramount need to have satisfactory proof of the petitioning creditor’s debt”.

30 However, the material before the primary judge (such as it was) did not raise substantial reasons for questioning whether behind the judgment there was in truth and reality a debt due to the petitioning creditor. None of the pleadings nor originating process before the Magistrates’ Court, nor the reasons for judgment of the Magistrates’ Court were provided to either the primary judge or to this Court. The petitioning creditor’s submissions to the primary judge in relation to the course of the Magistrates’ Court proceedings were based primarily on the evidence of Mr Osborne himself which he prepared as a litigant in person. The primary judge described the material before her at PJ [58]:

In the 26 July Affidavit at paragraphs [4]–[55] Mr Osborne addresses his complaints regarding Mr Schembri’s conduct and the contested hearing before the Magistrates’ Court which led to the judgment debt. It is apparent from that affidavit, and therefore Mr Osborne’s own evidence, that the matters Mr Osborne seeks to rely upon to establish that the debt is “void” were raised before the Magistrates’ Court and rejected in the course of a four day contested hearing.

31 Also before the primary judge was a copy of the orders of the Judicial Registrar of the Supreme Court, recording that the Supreme Court Judicial Registrar had declined to stay execution of the judgment of the Magistrates’ Court, at least in part because it was doubted that the notice of appeal raised a question of law and an appeal to the Supreme Court is available only on a question of law. Mr Osborne’s appeal from the refusal of the stay was dismissed.

32 Limited though it was, the evidence before the primary judge supported a finding that the judgment debt had followed a contested hearing where, although Mr Osborne had not been represented, both parties had been afforded an opportunity to present their arguments and that the arguments Mr Osborne sought to raise before the primary judge had been ventilated by him in the Magistrates’ Court proceedings.

33 Mr Osborne’s contentions before this Court and the primary judge are premised on convoluted allegations concerning the conduct of Mr Schembri involving amongst other things Mr Schembri doctoring a copy of transcripts of police interviews before providing them to Counsel for Mr Osborne with the result that the version of the transcripts provided to Counsel briefed by Mr Schembri to appear for Mr Osborne in his appeal corresponded with the version of the transcript that Mr Osborne alleges was doctored by the prosecution. Mr Osborne alleges both the prosecutor in his initial trial and Mr Schembri in the preparation of his appeal from the County Court engaged in doctoring transcripts. Mr Osborne relies upon an assortment of isolated quotes from recordings, transcripts and documents that do not appear to provide a coherent basis for the allegations he makes and which had been tested in the hearing before the Magistrates’ Court.

34 Although the fact that judgment had been ordered following a contested hearing does not of itself preclude the Court from going behind the judgment, the material before the Court did not raise a real question as to whether Mr Osborne had failed to present his case on its merits at the trial in the Magistrates’ Court (cf Ramsay at [66]). The Court is satisfied that, Mr Osborne’s claims having been tested in adversarial litigation before the Magistrates’ Court, the judgment debt has a “practical guarantee of reliability” in the sense described in Ramsay at [68].

35 Based on the material before it, the Court is satisfied that there was a debt owed to the petitioning creditor and that the making of the sequestration order was not erroneous.

36 Although Mr Osborne’s appeal is to be dismissed, it is not for the reasons advocated by the respondent. The respondent’s case before this Court and the primary judge proceeded on a basis which was misconceived. In the circumstances of this case, the Court declines to order costs.

Associate:

Dated:    26 June 2025