CATCHWORODS BANKRUPTCY - Security for costs - Application by debtor for security on application by creditor for declaration pursuant to $.222 by Bankruptcy Act 1966 - Power of court to order security under Bankruptcy Act 1966 - Creditor's alleged impecuniosity consequence of the actions of the debtor. Bankruptcy Act 1966 ss.30(1), 32, 222 & 315. Bankruptcy Rules Rule 14 Federal Court Act 1976 sub.s.56(1) Federal Court Rules Order 1 rule 11 No. 3 of 1987 x Re: BARRY PATRICK HODBY Debtor Ex Parte: JOHN KENNY Creditor Fisher J. Adelaide i3th August 1987 A 14 AUG 1987 FEDERAL COURT AUSTRALIA| OF PRINCIPAL my REQISTAY an ~ RECEIVED te ae eee eng er ee IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY GENERAL DIVISION No.3 of 1987 X BANKRUPTCY DISTRICT OF THE STATE ee Sw SS OF SOUTH AUSTRALIA Re: BARRY PATRICK HODBY * Debtor Ex Parte: JOHN KENNY Creditor FISHER J. JUDGE MAKING ORDER WHERE MADE ADELAIDE DATE OF ORDER 13 AUGUST 1987 THE COURT ORDERS THAT: 1. This application be dismissed. 2. The debtor, Barry Patrick Hodby do pay the costs of this application. Note: Settlement and entry of order is dealt with in Bankruptcy Rule 124. yer IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT REGISTRY) GENERAL DIVISION No.3 of 1987 X BANKRUPTCY DISTRICT OF THE STATE OF SOUTH AUSTRALIA Re: BARRY PATRICK HODBY Debtor Ex Parte: JOHN KENNY Creditor REASONS FOR JUDGMENT 13 August 1987 FISHER J. : This is an application by Barry Patrick Hodby ("the debtor") for an order that John Kenny ("the creditor") do furnish security for costs in relation to an application which he, as creditor, has made to this Court. The latter application was for a declaration pursuant to s.222 of the Bankruptcy Act 1966 ("the Act") that a Deed of Arrangement executed by the debtor is void or alternatively that the Deed be terminated. The creditor also seeks a sequestration order against the estate of the debtor. Some background facts need to be related. The creditor obtained a judgment against the debtor in the District Court of Adelaide on 11 September 1985 for the sum of $30,000 and costs. On 25 February 1986 the Registrar at the request of the creditor issued a bankruptcy notice directed to the debtor. This notice was served on him on 6 March 1986. On 20 March 1986 the debtor seo orn ee of toate Yee age oe pe fa y te ey pe oor wren ee ee a ee ae re en eos rare , : > vt a} : 2. filed an affidavit which I subsequently found to comply with sub.s.41(7) of the Act and which in consequence extended the time for compliance with the bankruptcy notice. He also made application to set aside the bankruptcy notice on the ground that he had a counter-claim, set-off or cross demand which exceeded the amount of the judgment debt and which he could not have set up in the action in which the judgment was obtained. After a hearing in which the issues were vigorously contested I gave judgment on 14 October 1986 dismissing the application with costs against the debtor. On 28 October 1986 the creditor issued a creditor's petition which was served on 4 November 1986. On 3 November 1986 the debtor filed a notice of appeal against these orders which appeal was ultimately abandoned on 20 January 1987. No order has as yet been made for the costs arising out of the debtor's appeal. On 16 January 1987 the debtor signed an authority under sub.s.188(1) of the Act authorising Richard George Freer ("the trustee") to call a meeting of his creditors and to take control of his property. This meeting was held on9 February and adjourned to 18 February 1987. At the adjourned meeting the creditors apparently approved by the requisite majority the offer of the debtor to execute a Deed of Arrangement under sub.s.204(1) of the Act in accordance with a draft Deed submitted to the meeting. The creditor made application to this Court on 9 March 1987 under s.222 of the Act for a declaration that the Deed of Arrangement was void or alternatively an order under s.236 that —— wre 2 eo oo re oes xe seas at oe merrepe rere pe 3. it be terminated. The grounds upon which it was contended that these orders should be made were set out in some detail in the application and were supported by an affidavit. The application has been set for hearing in this Court on Monday 17 August 1987. On 3 April the debtor filed a notice of opposition contending that the creditor's application was vexatious and an abuse of process and that the Deed of Arrangement complied or substantially complied with the requirements of Part xX of the Act. The next step in the contest was the application by the debtor that the creditor be ordered to provide security for the debtor's costs of the application to set aside the Deed. This application was made by the debtor on the ground that the creditor would be wholly unable to meet an order to pay the debtor's costs of the former's application. A hearing of the debtor's application took place on 22 July 1987. Counsel for the creditor contended that this Court had no jurisdiction to make an order for security under the Act except as expressly provided by rule 14 of the Bankruptcy Rules. This rule is as follows: "14(1) This rule applies to a petitioning creditor — {a) if the petitioning creditor - (i) is ordinarily resident outside Australia; (ii) is a bankrupt; or (iii) has made default in payment of costs ordered by a court to be paid by him to the debtor; (b) if a petition under Act is pending against the creditor; or (c) if the petitioning creditor's affairs are being administered by a trustee in accordance with a composition that is binding by virtue of sub-section 238(1) of the Act. oo -- 2,7 5 ee Jor ers — =m ese 4. 14(2) The Court may, upon application made by a debtor on whom a petition has been served, order the petitioning creditor to give security to the Court for the costs of the debtor in and in relation to the proceedings - (a) if the petitioning creditor is a petitioning creditor in relation to whom this rule applies; or (b) in any other case - if there is a special reason for making the order." Counsel for the debtor did not argue that in a matter such as this the Court had jurisdiction under this Rule even though as it happened the creditor was a petitioning creditor whose petition had been served upon the debtor. In such circumstances sub-rule 14(2}(b) might conceivably have been relied upon on the ground that there was a special reason for making the order. However upon execution of the Deed of Arrangement the provisions of sub.s.233(2) of the Act took effect and the creditor was not competent to proceed with his petition. Counsel agreed with the submission of counsel for the creditor that he could not rely upon Rule 14 as it had no application to present circumstances. Instead, counsel for the debtor contended that I had jurisdiction to make the order for security under Order 28 Rule 3(1)(b) of the Federal Court Rules. However in this regard he overlooked the provisions of Order 1 Rule 11 of those Rules, namely — "11.(1) Except as to Order 41 (which relates to form of documents), these Rules do not apply to proceedings under the Bankruptcy Act 1966. (2) Subject to Order 41, the practice and procedure of the Court in relation to proceedings under the Bankruptcy Act 1966 shall be in accordance with the TI, ohne ft 5 ch one ey TN roe slain ateter cnet rine 5. Bankruptcy Rules and the Bankruptcy (Offences) Rules as in force for the time being." His alternative submission was to the effect that the Court had jurisdiction under s.32 of the Act, as follows: "32. The Court may, in any proceeding before it, including a proceeding dismissed for want of jurisdiction, make such orders as to costs as it thinks fit." I can not accept this contention, as this section is undoubtedly directed only to the making of orders for costs to be paid by or in favour of parties to the proceedings. It has no application to orders for security for costs. It is in form very similar to s.43 of the Federal Court Act which Act also contains a_ separate section conferring wide powers to make orders for security for costs to be given. Sub-sections (1) and (5) of 5.56 are relevant. "(1).The Court or a Judge may order a plaintiff in a proceeding in the Court or an appellant in an appeal to the Court to give security for the payment of costs that may be awarded against him. eee (5). This section does not affect the operation of any provision made by or under any other Act or by the Rules of Court for or in relation to the furnishing of security." Counsel for the debtor then mentioned without arguing the provisions of sub.s.30(1) of the Act. In my view the arguments in favour of jurisdiction have not been exhaustively or even adequately canvassed. Counsel for the creditor contended that the Court had no wen gees rte pe ee Phy eB OE ee nee ee 6. jurisdiction and in particular no jurisdiction if the specified ground was that a creditor might be impecunious and unable to meet any order for costs. In my view there are a number of ways in which this question can be approached. However as I am of the opinion that, even if I have Jurisdiction to make the order sought by the debtor, I would in any event reject the application. I have not formed any firm conclusion on the powers of this Court. I do however lean to the view that jurisdiction does exist in circumstances additional to Rule 14 but that orders for security should only be made in exceptional circumstances. Such circumstances would only exist if the order was "necessary for the purposes of carrying out or giving effect to" the Act (sub.s.30(1)(b) of the Act). The Federal Court exercises jurisdiction in bankruptcy, in accordance with sub.s.19(1) of the Federal Court Act, by virtue of sections 27 and 28 of the Act. It follows that for the purposes of sub.s.56(1) set out above, proceedings in bankruptcy are proceedings "in the Court". It can be argued that 56(1) in empowering the Court to order security does not affect the operation of any provision in the Bankruptcy Act or any provision of the Rules thereunder except Rule 14. If this be the case, this Court can exercise the power to order security in accordance with s.56(1) so long as the exercise does not run counter to Rule 14. Alternatively it may be argued that the fact that the wa a . eo 7. Rule making power provided in sub.s.315(1) of the Act having been exercised to authorise orders for security under Rule 14, these are the only circumstances in which this Court exercising jurisdiction under the Act can make an order for security. Sub-section 315 provides that - "(1) The Governor-General may make rules or regulations not inconsistent with this Act, prescribing all matters that by this Act are required or permitted to be prescribed, or that are necessary or convenient to be prescribed for carrying out or giving effect to this Act, and, in particular, prescribing matters for or in relation to- (a)... (b) the practice and procedure of courts having jurisdiction under this Act, including costs and taxation of costs;" It is significant that there is no specific reference to orders for security for costs in the matters prescribed, although it could be argued that such orders normally come within the general words "practice and procedure". If there is substance in this view, the general and wide power to order security in sub.s.56(1) would "affect" the operation of the Bankruptcy Act and Rules in relation to security and in consequence the power under that sub-section would be excluded. A less restrictive approach is to regard the power to make orders for security as available in circumstances other than Rule 14 if such orders are considered necessary for the purposes of carrying out or giving effect to the Act. Sub-section 30(1)(b) grants this wide power to the Court. "30(1) The Court - cel iad (a) ... (b) may make such orders (including declaratory orders and orders granting injunctions or other equitable remedies) as the Court considers necessary for the purposes of carrying out or giving effect to this Act in any such case or matter." I would favour this approach but emphasize that the power would only be available for exercise if the Court could consider it "necessary for the purposes of carrying out or giving effect" to the Act. It is not easy to visualize circumstances in which an order for security would be so necessary. Normally such an order is made for the benefit or protection of litigants, and not for the stated purposes. However there may well be circumstances where the Court might consider it appropriate to make an order, for example to deter vexatious litigants or protect the court against an abuse of process. Rule 113 presumably does not assist to enlargen the power of the Court as some provision has been made (by Rule 14) with respect to security for costs. On this aspect of the case I have derived assistance from two authorities on like applications under the English Bankruptcy legislation. In the case In re Vanderhaege, Ex parte Izard (1988) 20 Q.B.D. 146 there was an application by a_ trustee for security of costs against a creditor appealing against his rejection of a proof of debt. Cave J. said on that page - "This application must be refused. The counsel for the trustee was unable to produce any enactment or authority that security for costs can be ordered in such a case as this. The Rules which have been referred to indicate the cases in which such security can be required, and that raises the prima facie inference that it cannot be enforced in cases which are a peas oe weer eee rei ewe Ranney < rr ach hereaiee) ety eer e ceecmes corte ee on ee re pe ter rer res mo 9. not mentioned in the Rules." The headnote to the report of the case stated that the Court had no jurisdiction to make the order sought. The Court of Appeal in In re Semenza Ex parte Paget (1894) 1 Q.B. 15 did not agree that Cave J. held he had no jurisdiction. Lord Esher M.R. drew attention to the fact that provision was made by the legislature that security for costs be given by a petitioning creditor in circumstances similar to Rule 14 herein and also on appeals. It had dealt with these two stages of bankruptcy proceedings but omitted the intermediate stages. There was no express general power to order security. He said on page 19: "IT think that the legislature, in dealing with the rules made under the Act of 1883 with the question of security for costs, advisedly left out this intermediate proceeding in the bankruptcy, and refrained from making a rule that security for costs should be given. I do not think that by omitting to make such a_ rule the legislature has taken away the jurisdiction of the Court to order security to be given; but the rules which have been made - that security may be ordered to be given in the two cases of a petitioning creditor who is a foreigner resident abroad, and of an appeal to the Court of Appeal ~- are strong to shew that the jurisdiction, with regard to this intermediate step in the bankruptcy procedure, ought only to be exercised in extreme cases. To say exhaustively what those extreme cases would be is impossible; but I can conceive that, if the registrar were able to see that the claim was shadowy in the extreme, and the appeal against the trustee's decision was very unlikely to succeed, then he might order security to be given. I do not say that that is the only case in which the jurisdiction might be exercised with respect to a foreigner resident abroad who appeals against the rejection of his proof by the trustee. There may be other extreme or serious cases; but I am of opinion that, where the dispute is one which may fairly and reasonably be decided one way or the other, the Court ought not, having regard to the rules made under the Act of 1883, to make the order that security for costs should be given. I think that Cave, Jd., decided In re Vanderhaege, Ex parte Izard 20 Q.B.D. 146, on that ground. It appears to me that he was careful to avoid saying there was no jurisdiction at all." Sanne aaah eee ' ahe 10. Lopes, L.J. said at page 22 of Cave J's reasoning - "In my reading of that judgment it does not go the length of saying that there was no jurisdiction to order security to be given; but it says, in effect, that the jurisdiction ought not be exercised in ordinary cases." If it was necessary for me to come to a firm conclusion on jurisdiction for the purpose of my decision in this matter I would rely upon the last-mentioned approach. I would however not have the slightest doubt that an order for security would in this matter not be "necessary" for the purposes of carrying out or giving effect to the Act. I should state my reasons for refusing an order on the merits of the debtor's application. The ground upon which I am asked to make the order is that the creditor is impecunious. That fact, if it be so, is not made abundantly clear, and the debtor's counsel did not cross-examine the creditor on his affidavit. But even if this was established, that is generally not a ground for making an order particularly if such an order would entail the termination of the proceedings. The matters to which the solicitor for the creditor deposes in her affidavit are matters which should be investigated by this Court. There is however an even stronger ground upon which I would refuse the application for security on its merits. If the creditor is impecunious it can be said that this state is the consequence of the actions of the debtor. There has been much litigation between them anda total failure on the part of the debtor to make payment of any amounts for which he has been adjudged liable, whether it be the judgment sum, costs or a epee eres ae ae nye ee one weet as as we ee ee ee ne ee ee rary ran : weeps eee Sree - tA on epee ee eee ee ey > il. interest. The debtor has not challenged the information deposed to in an affidavit which I directed, with the consent of the debtor's counsel, to be filed at the conclusion of the hearing. The creditor is entitled to a judgment sum of $30,000 together with $8,263.11 taxed costs and interest thereon for almost two years, all of which sums are unpaid. The debtor is also liable to pay the costs of the proceedings to set aside the creditor's bankruptcy notice and almost certainly will be ordered to pay the costs of an application to stay action upon the bankruptcy notice, the abandoned appeal and the creditor's petition which was rendered incompetent by the execution of the Deed of Arrangement. The creditor also has instituted Supreme Court proceedings against the debtor claiming a substantial sum. I refer to the approach of Brennan J. in Lucas v Yorke and Another (1983) 50 ALR 228 when he said on page 230 after referring to the fact that the appellants' admitted impecuniosity had arisen from losses sustained in carrying on a business - "It is an important consideration that the making of an order for security for costs will effectively shut out an appeal designed to recover losses which have caused the appellants' impecuniosity: See Farrer v Lacy,Hartland & Co (1885) 28 Ch.D 482 at page 485." In my opinion and on the assumption I have jurisdiction to make the order sought, justice would not be served by making a at, ' wee ee re ee ee ee 12. such an order. 1 dismiss the application and order that the debtor pay the costs thereof. I certify that this and the \\ preceding pages are a true copy of the Reasons for Judgment of Mr Justice Fisher. Associate = 7a ~" Dated: (2 Aro INST, we ae sag ee —-; elie Counsel for the Debtor: Selicitors for the Debtor: Counsel for the Creditor: Solicitors for the Creditor: Heard: 22 duly 1987 13. Mr. M. Kemp Kemp & Co. Mr. R. J. Whitingtan Piper Habkewell & Piper poo eee toe tes