Federal Court Grants Adjournment in Bankruptcy Case

OUTCOME: Allowed

FEDERAL COURT OF AUSTRALIA

[[COMPANY] v [RESPONDENT] [2005] FCA 1852

BANKRUPTCY – Application for adjournment of petition in circumstances where debtor has pending action against employee of petitioning creditor in relation to events associated with origin of judgment debt – Discussion of relevant principles – Adjournment granted. [NAME] v [COMPANY] (1997) 74 FCR 19 discussed and applied [[COMPANY] v [NAME] [RESPONDENT] 1079 of 2004 WILCOX J 12 DECEMBER 2005 [APPELLANT]

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 1079 of 2004

BETWEEN: [[COMPANY]

[RESPONDENT]

RESPONDENT

[APPELLANT] OF ORDER: 12 DECEMBER 2005

[APPELLANT]

THE COURT ORDERS THAT: 1. The hearing of the petition be adjourned until 10.15am on Wednesday, 15 February 2006. 2. Costs of today be costs in the petition. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 1079 of 2004

BETWEEN: [[COMPANY]

[RESPONDENT]

RESPONDENT

JUDGE: WILCOX J

DATE: 12 DECEMBER 2005

PLACE: [APPELLANT] FOR

JUDGMENT WILCOX J: 1 Listed for hearing today is a petition by the [[COMPANY] ('[COMPANY]') seeking a sequestration order against the estate of [NAME] [RESPONDENT]. 2 Proceedings between the parties have a considerable history. I need not set out that history; it is stated in a chronology prepared by [COMPANY] which is not in dispute. [ADDRESS] of Appeal of New South Wales has granted leave to appeal against a decision of Matthews AJ, given on 17 December 2004, in which her Honour dismissed an application by one [NAME] for summary dismissal of a damages claim brought against him by Mr [RESPONDENT]. [NAME] was the officer of [COMPANY] who arranged a loan to [COMPANY] ('[NAME]'), which loan [COMPANY] claims to have been guaranteed by Mr [RESPONDENT]. [COMPANY] sued Mr [RESPONDENT] on the guarantee, thus giving rise to the judgment on which the bankruptcy petition is based. [ADDRESS] of Appeal heard argument about the matter on 12 September 2005. [ADDRESS] granted leave to appeal, but reserved judgment on the appeal itself. Information obtained by [RESPONDENT], counsel for the debtor, indicates that the Court hopes to give judgment in the appeal before the end of term, that is to say within the next few days. 5 When the matter came on this morning, [NAME] sought an adjournment of the hearing of the petition until February 2006. He put the application on two bases. First, he referred to the forthcoming judgment in the Court of Appeal and submitted this was a material matter which ought to be taken into account. He conceded that, if the decision of the Court of Appeal went against his client, the order made by Matthews AJ was reversed and it was decided the action brought by Mr [RESPONDENT] against [NAME] should be summarily dismissed, that would be the end of the road, so far as his client was concerned, in his dispute with [COMPANY]. In that event, as I understand [NAME], he would be unable to put any substantial argument against the making of a sequestration order. On the other hand, [NAME] suggested, if his client proved successful in upholding the order of Mathews AJ this would provide a basis for a further application for an adjournment – this time until after the trial of the action against Mr [NAME]. 6 The second matter that [NAME] referred to was a forthcoming hearing before [NAME], fixed to commence on 6 February 2006, concerning a dispute between [NAME] and a receiver appointed by [COMPANY]. The dispute apparently relates to actions taken by the receiver in disposing of assets of [NAME]. To the extent that [NAME] was successful against the receiver, this may affect the quantum of the debt recoverable by [COMPANY] against [NAME] and, therefore, the amount recoverable by [COMPANY] against Mr [RESPONDENT] under the guarantee. However, it is not contended that the hearing before [NAME] could have the effect of totally removing the indebtedness of [NAME] to [COMPANY] and therefore, if the guarantee be valid, Mr [RESPONDENT]' indebtedness to [COMPANY]. 7 The matter that has given me concern arises out of the Supreme Court action. As I have said, if Mr [RESPONDENT] is unsuccessful in the Court of Appeal, that seems to be the end of the road; it would be appropriate for a sequestration order to be made. On the other hand, if he is successful in the Court of Appeal, his contention will be that he has a claim against Mr [NAME], the quantum of which would equal or exceed the quantum of his indebtedness to [COMPANY]. 8 There is a problem as to whether the Supreme Court claim could be resolved before expiry of the bankruptcy petition on 9 July 2006. However, I think that consideration carries less than its usual weight in the present case, for two reasons. 9 The first reason is that it is apparent, from the affidavit evidence, that the only reason there is doubt about the action for damages being determined before 9 July next is that [COMPANY] has chosen to proceed slowly in preparation for the hearing. I do not say that critically. From one point of view, this was a prudent course. [COMPANY], presumably, did not wish to incur legal costs in preparation of a trial which, if it succeeded before the Court of Appeal, would never take place. However, in taking that course, [COMPANY] took the risk that, if it failed in the Court of Appeal, the result would be a trial that could not be completed before expiration of the bankruptcy petition. It is not possible to further extend the life of the bankruptcy petition. 10 The other reason is that the evidence indicates that there are no creditors, at least no substantial creditors, of Mr [RESPONDENT] other than [COMPANY] and, perhaps, a company controlled by Mr [RESPONDENT]. This does not seem to be a case where strangers have claims against Mr [RESPONDENT], as was the situation in [NAME] v [COMPANY] (1997) 74 FCR 19, an authority cited by [NAME] SC, senior counsel for [COMPANY]. 11 [NAME] is an interesting case because it draws a distinction between indebtedness to the petitioning creditor and indebtedness to a stranger. In a decision preceding this one, a sequestration order was made against [NAME] on the petition of the Commonwealth of Australia, the party against whom [NAME] wished to prosecute a claim for damages. That sequestration order was set aside by a [ADDRESS]: see [NAME]; Ex parte [NAME] v Commonwealth of Australia (1995) 58 FCR 129. The reason was that the person against whom the sequestration order had been made had a live claim against the petitioning creditor for an amount of money that exceeded the claim which was the basis of the bankruptcy petition. Later, a second sequestration order was made, this time on the petition of [NAME], a company unaffected by the dispute between [NAME] and the Commonwealth. [NAME] was the owner of premises that had been leased by [NAME]. [NAME]'s claim was for outstanding rental. That sequestration order was upheld by a differently constituted [ADDRESS]: see [NAME] v [NAME], cited above. 12 As noted by Mr [NAME], the relevant principles are discussed at page 26 of the report of the second case. [ADDRESS] said: 'The above authorities do not, in our view, support the appellant's contention that the courts recognise a public interest in allowing a debtor to prosecute litigation commenced by the debtor. The public interest recognised by such authorities is that which, in broad terms, is reflected also in s 40(1)(g) of the Act; that is, that a sequestration order ought only to be made on the basis of an indebtedness which is not counterbalanced by a claim by the debtor against the petitioning creditor. Such authorities provide no comfort to a debtor who asserts a claim, not against his or her creditor, but against a third party.' 13 I pause to note the Court's emphasis upon the correspondence of identity between the petitioning creditor and the party against whom the claim was made. Mr [RESPONDENT] emphasises that, in the present case, Mr [RESPONDENT]' claim is made against Mr [RESPONDENT], whereas the petitioning creditor is [COMPANY]. However, Mr [NAME] was a servant of [COMPANY], at the time of the events which give rise to [COMPANY]'s claim against Mr [RESPONDENT]. He was apparently involved in arranging the credit facility and taking security documents, including the guarantee. The evidence is that his costs, in the litigation between him and Mr [RESPONDENT], have so far been borne by [COMPANY]; although [COMPANY] has not yet provided to him an indemnity against any liability he may suffer in that proceeding. Mr [NAME] stands in an intermediate position between an identical party and a total stranger, as was [NAME]. 14 It is also relevant to note that, in the second [NAME] decision at 26, the [ADDRESS] went on: 'The authorities also show that satisfaction that the debtor is well advanced with litigation likely to result in the debtor being in a position to pay his or her debts may well provide a basis for a finding that there is "sufficient cause" for a sequestration order not to be made … But the authorities do not suggest that it is in the public interest to allow insolvent debtors to prosecute litigation generally. They only recognise that it is not in the public interest for a debtor to be forced into bankruptcy by reason of a state of insolvency likely to be of only short duration.' 15 I think I should take that paragraph into account in considering this application. At the present time, it is impossible to say whether the debtor is 'well advanced with litigation likely to result' in him being in a position to pay his debts, including his debts to [COMPANY]. If [COMPANY] succeeds in the strikeout motion, then the debtor will not be well advanced with such litigation; it will have been terminated. If the debtor succeeds in that motion, so that his action against Mr [NAME] is able to proceed, the question will be whether it can be said he is so well advanced with that litigation that he can take advantage of the second principle, having regard also to the fact that Mr [NAME] is in an intermediate position in regard to the first principle. 16 I have decided to accede to [NAME]'s application for an adjournment until February. I propose the matter be listed in the second week in February. By that time, the decision of the Court of Appeal will almost certainly be known. If the Court of Appeal rules against Mr [RESPONDENT], I suspect there will be nothing further that can be said on his behalf and a sequestration order will be made. If the Court of Appeal rules in favour of Mr [RESPONDENT], there will be a question as to the position which the litigation has reached at that time. There is currently an application for a stay listed, before a registrar, in the first week in February. That application may be overrun by events. In any event, [NAME] informed me it would be his client's intention to seek expedition of his action against [NAME]. If Mr [RESPONDENT] is to take advantage of what I call the second principle, it would be necessary for him to be able to show me what he has done in that regard. I am not today indicating a view, one way or the other, as to whether a further adjournment might be granted in February, if the action against Mr [NAME] is still on foot. 17 The course I propose will allow the situation to be clarified, by an adjournment for what is a comparatively short period of time and will cause no particular prejudice, other than the general prejudice any creditor suffers in being delayed in finalising a claim. There is no evidence that Mr [RESPONDENT] has been removing assets or, in any other way, adversely affecting the ability of his estate to pay whatever dividend it might pay if a sequestration order was made today. 18 I will adjourn the hearing of the petition until 10.15 am, Wednesday, 15 February. The costs of today will be costs in the petition.

I certify that the preceding eighteen (18) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Wilcox.

Associate: Dated: 20 December 2005

Counsel for the Applicant: [redacted]

Solicitor for the Applicant: [redacted]

Counsel for the Respondent: [redacted]

Solicitor for the Respondent: [redacted]

Date of Judgment: 12 December 2005