Judgment No. [1987] FCA 833 IN THE FEDERAL COURT OF AUSTRALIA No. P.779 of 1986 No. P.780 of 1986 BANKRUPTCY DISTRICT OF THE STATE OF VICTORIA RE: SVEN BO ANDERS HEDIN and DOROTHY MAY HEDIN EX PARTE: MALINEX PTY. LTD. (In Liquidation) Coram: Ryan J. Date: 9 June 1987 Place: Melbourne REASONS FOR JUDGMENT By these petitions the petitioning creditor seeks sequestration orders against the respective estates of the debtors based on their non-compliance with a bankruptcy notice dated 9 -December 1985. Each bankruptcy notice required payment of $12,200 being the amount of a judgment obtained against each of the debtors in the County Court of Victoria on 19 November 1985 by way of damages for conversion of a truck. The first-named debtor applied to set aside the bankruptcy notice, and on 21 July 1986 that application was dismissed by Northrop J. Thereafter the present petition was issued against him on 5 August 1986. In the meantime a petition had been issued against the second-named debtor on 29 May 1986. On 24 September 1986 the first debtor gave notice of intention to oppose the petition against him on the following grounds: "1. IT have a counterclaim against the Petitioning Creditor in the sum of $32,693.75 being a sum in excess of any debt owing to the Petitioning Creditor. 2. On the 10th day of July, 1986 Formal Proof of Debt of Claim was lodged with the Liquidator of the Petitioning Creditor herein in the sum of $32,693.75. 3. This sum is far in excess of any sum due to the Petitioning Creditor. 4. On or about the 2nd day of September, 1986 the Debtor received from the Liquidator of the Petitioning Creditor herein a letter enclosing a Notice Requiring Further Evidence in Supporting Formal Proof of Debt or Claim, and stating that the claim was neither accepted nor rejected. 5. Some Further Evidence has been provided but to provide the remainder of Further Evidence referred to, the Debtor requires access to the records held by the Liquidator. The Liquidator has agreed to make the records available but has not yet done so. 6. That in all circumstances it would not be just or. equitable for a Sequestration Order to be made." On 4 December 1986 the second debtor gave notice of intention to oppose the petition against her on substantially the same grounds. On 3 November 1986 the petition against the first debtor came on for hearing before Northrop J. who indicated that he was satisfied with the proof of the matters which prima facie entitled the petitioning creditor to a sequestration order. Thereupon, his Honour commenced to consider the material which, it was urged on behalf of the debtor, demonstrated other sufficient cause within the meaning of s.52(2)(b) of the Act for which the Court should be satisfied that a sequestration order should not be made. When it became apparent that the resolution of that question would take some time, his Honour directed that a date for the further hearing of the petition and the notice to oppose the petition, which was estimated to occupy one day, be fixed at the callover to be held on 21 November 1986. Upon the matters coming on for hearing before me, Mr. Clarke of counsel for the petitioning creditor sought to set aside summonses to witnesses issued on the application of the debtors and directed to Warick Allen Leeming the liquidator of the petitioning creditor, and Peter William Bau, an employee of the firm of chartered accounts of which Mr. Leeming is a partner. It was submitted by Mr. Clarke that the matters to which those witnesses could be expected to depose were irrelevant to the question of whether or not sequestration orders should be made. To permit some understanding of the controversy between the petitioning creditors and the debtors, it is necessary to describe in more detail the events leading up to the issue of the petitions. It appears that before 1981 Mr. and Mrs. Hedin through the vehicle of the petitioning creditor ("Malinex") effectively carried on the business of operating the "B.P. Roadhouse" at Mansfield. Some third person was also then a shareholder in Malinex, and when that person sought to withdraw his participation, Mr. Hedin approached a Mr. I.D.S. Collie, a director of Collian Holdings Pty. Ltd. who apparently agreed that his company should inject further capital into, and become a shareholder in, Malinex. It was allegedly agreed, after the entry of Collian Holdings Pty. Ltd. as a shareholder in Malinex, that Mr. and Mrs. Hedin should become employees of Malinex and should jointly draw a salary of $770 a fortnight. Mr. Hedin also alleges that "full commissions" earned by him and his wife from a completely separate business were advanced by way of loan from them to Malinex. The amounts so advanced between May 1981 and February 1982 totalled, it is claimed, $16,993. According to Mr. Hedin, disagreements arose between him and Mr. Collie and, as a result, Malinex, whose finances were effectively controlled by Mr. Collie ceased on 17. November 1981 to pay salaries to Mr. and Mrs. Hedin although they continued to operate the B.P. Roadhouse and Malinex accepted the benefit of that work. Mr. Hedin further claims that during May 1982 the sum of $20,895.99 being the proceeds from the sale of the fuel agency business separately conducted by himself and his wife, was lent to Malinex "in the form of fuel needed to supply the continuing operation of the Roadhouse". On 28 October 1982, Malinex went into liquidation. In the meantime, on 28 September 1982 Mr. Hedin had ceased to work at the Roadhouse "after having been authorized by Andrew Dunner an officer of the then Provisional Liquidator, to continue to work because two functions had been booked in at the Roadhouse after September 1982, the date of the Provisional Liquidation." Mr. Hedin has quantified his own claim on Malinex for salary, overtime and payment in lieu of leave from 17 November 1981 to 28 September 1982 after deducting drawings made by him during that period, at $17,880. Mr. Hedin further claims that he and his wife are entitled to be indemnified by Malinex in an amount of $17,220.42 which they were required to pay to the Australia and New Zealand Banking Group Ltd. pursuant to a guarantee of repayment by Malinex of a loan. Proofs of debt have been lodged by Mr. Hedin with the liquidator of Malinex covering claims referable to each of the matters outlined above. The liquidator, in an affidavit sworn 28 October 1986, has deposed, in respect of the first of those proofs of debt, that until further evidence is received, "I am unable to make a final decision as to whether or not I should accept the proof of debt, reject the proof of debt, or accept the proof of debt in part and reject it as to the balance." However, the liquidator did indicate a preliminary view on the earlier proof of debt in a letter to Mr. Hedin dated 26 September 1986, the material parts of which were as follows: "Based on the information provided, I am not prepared to accept either of the Proofs of Debts lodged against Malinex Pty. Ltd. without further information. In relation to wages and holiday pay, I advise that I have perused the payroll records available to me and have determined that neither you nor your wife have draw regular salaries for the period stated by you. On the face of it, therefore, I would be prepared to accept the claim for unpaid wages over that period less the lump sums drawn by way of advance and the ANZ Bank loan. This amount would be calculated as follows:- Total Wages due as claimed $16,940 Less: Advance (6,353) Less: ANZ Loan (8,336) Leaving an amount outstanding of - $2,251 which would be apportioned 50% to yourself and 50% to Mrs. D.M. Hedin Holiday pay claimed in your Proof amounted to $2,188.80. My calculation for holiday pay would be a total of $2,052, again which would be fayided equally between yourself and Mrs. D.M. edin. In relation to your claim for wages and holiday pay, I intend to write to the former directors and enquire if there are any special circumstances involved in the employment of yourself and Mrs. D.M. Hedin which I should know before I can accept these claims. In relation to overtime, based on the information you have provided, I am not prepared to accept any claim. In relation to the claim for commission, this claim has been disputed by the former directors and on that basis. I would not accept this clain. In relation to the last part of your claim which has been headed as 'Loan Monies', on the information available to me I cannot establish that you have substantiated this claim as a debt due by Malinex Pty. Ltd." Mr. Hedin has sworn that, "although I now know that I had a right to make a counter-claim or set-off in relation to the foregoing, at the time (of the proceedings giving rise to the judgment debt) I did not know that such a counter-claim or set-off could be made. My Solicitor did not advise concerning a counter- claim or set-off. I was of the belief that as the company had no assets, I was unable to reclaim the monies owed to me." In addition, Mr. Hedin has deposed that on 18 September 1986 he received a letter from the liquidator of Malinex containing, amongst others, the following passages: "*'The Court has determined that even if your claims are admitted then offset will not apply. It is my personal view that there is absolutely no hope of achieving an offset «.-''. 'There are no funds whatsoever in Malinex Pty. Ltd.'. ... 'Mr. Collie is financing collection action against you, and I can only intervene if I believe a reasonable settlement has been offered ++.' 'You will record that the last time we met, I told you that Mr. Collie will not let this matter rest and that he will insist the matter is taken to the full extent of the law' ... 'The dispute between Mr. Collie, the company and yourself boils down toa dispute between Collie and yourself. The company is simply the vehicle through which the action is being taken. I have no discretion but to adhere to Mr. Collie's wishes, as he is prepared to fund the action ow eee The liquidator has not denied writing those passages. Nor has he suggested that they did not reflect the true state of affairs at the time when they were written. Indeed, Mr. Leeming's letter to Mr. Hedin of 26 September 1986, from which I have already quoted, concludes with the following paragraph: "As you are aware, I have not called for Proof of Debts in this administration, as there is virtually no likelihood of a dividend to unsecured creditors being paid. In relation to your claim, if it is established for wages and holiday pay, which are preferential creditors, I advise that there are substantial claims for costs in the liquidation which have not been paid, and which I also see little likelihood of being paid, which rank ahead of your claims." As well, in his affidavit of 28 October 1986 in answer to the two affidavits of Mr. Hedin, Mr. Leeming has sworn, "Unless I am successful in recovering funds from Mr. Hedin there will not be sufficient funds available to meet the costs, charges and expenses of the winding up and provisional liquidation which are entitled to priority pursuant to Section 441(1)(a) and (b) of the Companies (Victoria) Code. Should however, sufficient funds become available, and to fully cover the amounts entitled to priority under Section 441] (1)(a)-(h), even if Mr. Hedin's proof of debt is accepted in its entirety, the only amounts which the Debtor would receive would be an amount of up fo $2,000.00 in respect of wages and an amount of up to $1,500.00 for accrued leave pursuant to Section 441(1)(e) and (g) of the Companies (Victoria) Code. I am not aware of any assets of the Creditor which shall enable me to realise sufficient to enable any payment whatsoever to ordinary unsecured creditors. Furthermore, the order for payment to preferred creditors under Section 441 may be varied by order of the Court pursuant to Section 450 of the Companies (Victoria) Code. Mr. Collie has informed me, and I verily believe, that he may make application under that section to the Supreme Court of Victoria for payment in priority to other creditors by reason of an indemnity which he has given to me in relation to the costs of litigation." Mr. Clarke for the petitioning creditor contended that whether the debtors are entitled to prove for an amount of only $4,103 which the liquidator is presently disposed to admit, or over $70,000 representing the total of the various Claims advanced by Mr. Hedin, is irrelevant to the operation of s.86 of the Bankruptcy Act as made applicable by s.438 of the Companies (Victoria) Code to the winding-up of Malinex. Section 86(1) provides: "Subject to this section, where there have been mutual credits, mutual debts or other mutual dealings between a person who has become a bankrupt and a person claiming to prove a debt in the bankruptcy - (a) an account shall be taken of what is due from the one party to the other in respect of those mutual dealings; (b) the sum due from the one party shall be set off against any sum due from the other party; and (c) only the balance of the account may be Claimed in the bankruptcy, or is payable to the trustee in the bankruptcy, as the case may be." It was argued by Mr. Clarke that there was no element of the mutuality required by s.86(1) between the judgment debt relied on by the petitioning creditor as the foundation for the making of sequestration orders against the estates of the debtors and any of the debts allegedly due from Malinex to the debtors. However, Mr. Bingham, the solicitor for the debtors, disavowed any reliance on s.86. He said that the debtors were seeking to resist the making of sequestration orders by invoking s.52(2) which provides that if the Court is not satisfied with the proof of any of the matters specified in s.52(1), "or is satisfied by the debtor - (a) that he is able to pay his debts; or (b) that for other sufficient cause a sequestration order ought not to be made, it may dismiss the petition." The summonses to witness to Messrs. Leeming and Bau were directed, Mr. Bingham indicated, to the existence and amounts of debts alleged to be owed by Malinex to Mr. and Mrs. Hedin. The existence and amount of those debts, particularly if they overtopped the judgment debt of $12,200 specified in the bankruptcy notices, and the fact that Mr. and Mrs. Hedin would receive little or no dividend in the winding up of Malinex, would be argued to constitute "other sufficient cause" within s.52(2)(b). If there were some prospect of Mr. and Mrs. Hedin recovering at least some money from Malinex in respect of those parts of their claims against it which may prove to be valid, the Court could adopt the approach taken by Gibbs J., (as he then was) in Re Schmidt Ex parte Anglewood Pty. Ltd. (1968) 13 FLR 111 where his Honour observed, at 116: "Where, however, the debtor claims to be entitled to unliquidated damages in tort against the petitioning creditor the position seems to me to be different. As a general rule this Court is not an appropriate forum to decide sucha claim and is limited to forming a view as to whether it appears that there is sufficient validity in the - debtor's claims to justify a dismissal or adjournment of the petition. I agree in general with what was said in Re Player (1962) 19 ABC 277 in relation to this question. Considerable evidence directed to this issue has been given before me and it seems to me that I ought to consider this evidence for the purpose of deciding only whether it is probable that the debtor has against the petitioning creditor a claim which is likely to succeed. If I am satisfied that the debtor has a claim against the petitioning creditor equal to or exceeding the amount of the judgment debt, I should not make a sequestration order. If, however, it appears that the debtor has a claim which is less than the amount of the petitioning creditor's judgment debt, the proper course would seem to be to require the debtor, if he desires to avoid a sequestration order, to Pay the difference between the amount of the judgment debt and the amount which it seems probable to me that he will recover in the proceedings against the petitioning creditor. In many cases it would be more convenient, assuming that the debtor showed that he had a real claim to litigate, to adjourn the proceedings to enable his claim to be tried in the ordinary courts, but that course was not taken in the present case, Partly because the existence of any valid claim was vigorously denied by the petitioning creditor and partly because the proceedings in the Supreme Court have been somewhat dilatory." Re Player was a case in which a judgment debtor asserted that the petitioning creditor was indebted to a company, of which the debtor claimed to be the sole director, in an amount greater than the judgment debt. The inquiry in that case was apparently confined to the sufficiency of the evidence in support of the debtor's assertion. Thus, at 282, Paine J. observed: "Now before the debtor can succeed in an objection raised under s.56(3)(b), in order to maintain his opposition he must at least produce some real evidence to show that there is a reasonable ground for instituting an action by him, such an action as would result in awarding him a cross- claim or a counter-claim equal to or exceeding the amount of the judgment debt. Now that has been set out quite Plainly by the Court of Appeal - and, incidentally, a very strong Court of Appeal - in Re Foster; Ex parte Basan (1885), 2 Morr. 29. There was no evidence in Re Player of the financial position of the company to which the debtor pointed. After reviewing a number of authorities, Paine J. concluded, at 284: "Now in the present case the debtor's claim rests in effect on his own assertion, unsupported by any other evidence, although as I have pointed out, something of that nature should have been advanced. He claims that investigation of the affairs of the Dunoon company, which of course might entail the liquidation of the company, will show that the petitioner has overdrawn on his share of that company's profits and that he is liable to repay the same to the company, and that in such case the debtor would be entitled to the net result of such a proceeding. Well, to adopt the phrase used in that first case to which I referred, In re Isaac, [£(1885) 2 Morr. 258] the evidence, if I may so call it, is shadowy in the extreme. No sufficient proof has been advanced by the debtor to warrant holding over this present petition for an indefinite period." Here, the evidence so far available suggests that no assets of Malinex will be available for distribution to its unsecured creditors. However, in my opinion there are several factual aspects of the case which require more investigation before the Court can properly exercise the discretion conferred by s.52(2)(b). Without attempting to exhaust them, those aspects include the liklihood of Mr. and Mrs. Hedin receiving any distribution in the winding up of Malinex, the likely benefit to the creditors of Malinex if the estates of the debtors are administered in bankruptcy, and whether there are any other creditors of. Mr. and Mrs. Hedin. If Malinex were the only creditor, that would be a matter to be considered in deciding whether to make a sequestration order, although it would by no means be conclusive against the making of an order. Thus, in Re Hecquard Ex parte Hecquard (1889) 24 QBD 71, Lindley L.J., with whom the other members of the Court of Appeal agreed, observed, at 76: "If the debtor has only one creditor this is a point to be considered by the registrar on hearing the petition, but it cannot be laid down as a matter of principle that, if there is only one creditor, the registrar ought to dismiss the petition. The trustee in bankruptcy may be able to set aside transactions and get in assets which could not be set aside or got in without an adjudication of bankruptcy. The mere fact that a man has only one creditor is not a sufficient ground for saying that bankruptcy proceedings cannot be maintained against him." The suggestion that Mr. Collie, or his company, Collian Holdings Pty. Ltd. agreed to indemnify the liquidation of Malinex against the costs of these bankruptcy proceedings raises a further aspect for investigation. There is high authority for the proposition that bankruptcy proceedings should be directed to obtaining a distribution of a debtor's assets amongst his creditors, and should not be instigated or maintained to achieve some collateral Purpose. See e.g. Re Majory £1955] Ch. 600 where Sir Raymond Evershed MR, in delivering the judgment of the Court of Appeal, comprehensively examined the authorities establishing that the courts will not permit a bankruptcy petition to be used as an instrument of "extortion". Among the principles which the Court of Appeal distilled from that examination were the following, at 623: "(3) The so-called 'rule' in bankruptcy is, in truth, no more than an application of a more general rule that court proceedings May not be used or threatened for the purpose of obtaining for the person so using or threatening them some collateral advantage to himself, and not' for the purpose for which such proceedings are properly designed and exist; and a party so using or threatening proceedings will be liable to be held guilty of abusing the process of the court and therefore disqualified from invoking the powers of the court by proceedings he has abused. (4) On the other hand, having regard to what Jenkins L.J. (in Ex parte Henlys Ltd. £19533 Ch.195 at 212) called 'the potent instrument of oppression' which bankruptcy proceedings (with their potential consequences upon property and status) provide, the court will always look strictly at the conduct of a creditor using or threatening such proceedings; and if it concludes that the creditor has used or threatened the proceedings at all oppressively, for example, in order to obtain some payment or promise from the debtor or some other collateral advantage to himself properly attributable to the use of the threat, the court will not hesitate to declare the creditor's conduct extortionate and will not allow him to make use of the process which he has abused. (5) In every case it is a question of fact in all the circumstances of the case whether there has been, in truth, extortion." It would be quite inappropriate to express any view on how that question of fact should be resolved in the present case without all parties having a full Opportunity to adduce evidence relevant to the purpose for which the present petitions are being prosecuted, apparently with the financial support of Mr. Collie or his company. The extent to which an administration in bankruptcy of the estates of Mr. and Mrs. Hedin is likely to contribute to a distribution in the liquidation of Malinex, or, at least, to the costs of that liquidation, may also bear ona finding as to the purpose for which the petition against Mr. and Mrs. Hedin has been maintained. Accordingly, I decline to set aside either of the summonses to witness directed to Mr. Leeming and Mr. Bau. The further hearing of these petitions will be adjourned to a date to be fixed, and the costs of the hearing on 16 February 1987 will be reserved. I certify that this and the preceding fifteen (15) pages are a true copy of the Reasons for Judgment of the Honourable Mr. Justice Ryan. Dated: F Pena 19 d> FOG Fea nje. Associate