JUDGMENT No, K2.2ebe Pedal CATCHWORDS BANKRUPTCY - creditor's petition - sequestration order - substituted creditor - whether a debt was owed to substituted creditor - whether orders of another judge made in different proceedings can be set aside - invalidity of bankruptcy notice due to overstatement of amount claimed -. whether a sequestration order can and should be made where the debtor has no assets - improper motive for pursuing creditor's petition Bankruptcy Act 1966 (Cth) ss 40(1), 43, 49, 52(1) Bayne v_ Blake (No.2) [1909] 9 CLR 360 Rozenbes _v Kronhill [1956] 95 CLR 407 Re Jack Ex parte C.V. Holland (Holdings) Ltd [1959] 19 A.B.C. 268 Re Schierhotter Ex parte Geis [1978] 32 FLR 22 at 29 Radich v Bank of New Zealand Ltd [1993] 45 FCR 101 Re King Ex parte Commercial Bank of Australia Ltd (No.2) [1920] VLR 490 Re_ JEFFREY ROY CHARLES MORTON Ex parte BUDLYRE PTY LIMITED No. NP898 of 1995 EINFELD J FEDERAL COURT OF AUSTRALIA 21 JAN 2003 LIBRARY CANBERRA 29 APRIL 1997 IN THE FEDERAL COURT OF AUSTRALIA ) BANKRUPTCY DISTRICT ) No. NP898 of 1995 OF THE STATE OF NEW SOUTH WALES ) Re: JEFFREY ROY CHARLES MORTON Debtor Ex parte: BUDLYRE PTY ' LIMITED Creditor MINUTE OF ORDERS The Court orders that: 1. A sequestration order be made against the estate of the debtor. 2. The Registrar appoint an appropriate trustee to the estate. 3. The costs of the substituted creditor of and pertaining to the petition, including any reserved costs, be paid by the debtor. 4. The substituted creditor file a minute of these orders with the Registrar in accordance with rule - 124(1). Note: Settlement and entry of orders are dealt with in accordance with Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) BANKRUPTCY DISTRICT ) No. NP898 of 1995 OF THE STATE OF NEW SOUTH WALES ) Re: JEFFREY ROY CHARLES MORTON Debtor Ex parte: BUDLYRE PTY LIMITED Creditor EINFELD J CANBERRA 29 APRIL. 1997 REASONS FOR JUDGMENT Introduction On 1 May 1995 Budlyre Pty Limited (Budlyre) petitioned the Court for the sequestration of the estate of Jeffrey Roy Charles Morton (the deébtor). In the circumstances which follow, the sequestration is now being pursued by a substituted creditor, Mitchell Products Pty Limited (Mitchell Products) formerly named Trufeat Pty Limited (Trufeat). The name was changed at some stage between 1994 and 1997. Background facts This litigation arises out of a complex framework of companies and individuals. Various disputes arising out -2- of the framework of these relationships have been, or are still being, litigated. To understand the issues involved in this bankruptcy petition, it is necessary to have regard to aspects of some of these litigious matters in which the debtor has been engaged leading up to, and throughout, these bankruptcy proceedings. Budlyre and Mitchell Products were companies involved in the distribution of what are called "adult" videotapes in and from the Australian Capital Territory. These videotapes were supplied to them by Benelan Pty Limited. ' The debtor was apparently a manager, director, shareholder and employee of all three companies, his involvement apparently coming about as a result of his engagement by two United States citizens, Mark Franks and Fred Schaeffel, to utilise his knowledge of the Australian business community and what is known as the "adult" entertainment industry. On 4 July 1994 Mitchell Products/Trufeat was placed in receivership and John Vouris, a partner in the firm Court & Co, was appointed receiver/manager. On 15 August 1994 Justice Hill entered a final judgment in favour of Budlyre against the debtor in the amount of $US25,000. An appeal against his Honour's judgment was dismissed by a Full Court of this Court on 23 May 1995. On 28 March 1995 a bankruptcy notice (the notice) was -3- issued and duly served in respect of the debt thereby established to be owed by the debtor to Budlyre. As the debtor failed to comply with the notice within the stipulated period of 14 days, Budliyre petitioned the Court on 1 May 1995 for a sequestration order against the estate of the debtor, citing his failure to comply with the notice as the requisite act of bankruptcy under section 40(1)(g) of the Bankruptcy Act 1966 (the Act). Meanwhile, John Vouris, the receiver/manager of Mitchell Products, sought to recover the costs of the receivership from the debtor, and on 25 October 1994 Justice Hill ordered, inter alia, that the debtor should pay these costs. On 17 March 1995 the costs of the receivership were fixed by his Honour at $99,466.20. The hearing of the creditor's petition for sequestration was set down for 1 August 1995 but on 26 July 1995, Budlyre's solicitors informed the Court that the debt to their client had recently been satisfied by a third party. They also advised that they had been instructed by Mitchell Products (then Trufeat) to apply to the Court to be substituted as creditor in the proceedings. An application for substitution was granted by Justice Tamberlin on 2 November 1995 on the basis that Mitchell Products had at least a claim for an amount outstanding against the debtor, the merits of which should be decided -4~- at the hearing of the petition. On 22 March 1996 Justice Beazley ordered that the date of expiration of the creditor's petition, due to lapse on 30 April 1996, be extended to 30 April 1997. Many delays were caused during 1996 by the hearing of a number of interlocutory applications seeking or concerning the contemporaneous resolution of this bankruptcy matter with another set of proceedings involving the debtor. Delays were also caused during this period by repeated amendments made to applications filed by the debtor. Because this procedure was causing or leading to an excessive strain on the Court's scarce resources, and was as well wreaking possible injustice to the pubulic interest and to Mitchell Products, in the latter case not least because the petition was reaching the end of its permitted life, I took the initiative at one of the interlocutory hearings on 10 December 1996 of fixing the hearing of the petition for 31 January 1997. As he had done on many previous occasions when appearing before the Court, Mr Morton made a number of complaints about his difficulties in meeting this timetable, so special arrangements were made to meet these alleged problems. Among them were that he was permitted to submit his evidence and submissions in handwriting, that the; evidence of Mitchell Products would be taken in , Sydney on 31 January 1997 with the debtor connected by -5- video link in Canberra, that the Court would travel to Canberra on 19 February 1997 to receive his and his witnesses' evidence in person, that he could be assisted at the bar table by a legally unqualified person, and that the final submissions in the matter would be taken in writing. As events happened, the debtor offered no oral evidence in Canberra, so that the expense of the Court and the other party was substantially wasted, and the final written submissions of the debtor totalled 68 pages. As with much of his lengthy written submissions at other stages of the proceedings, a considerable ' quantity of this material was tendentious, insulting and completely irrelevant to the proceedings. The creditor's petition Under section 43 of the Act, the Court may make a sequestration order against the estate of a bankrupt on the petition of a creditor where the debtor has committed an act of bankruptcy, in this case his failure to comply with the bankruptcy notice requiring payment to Budlyre of its final judgment against him for the sum of $US25,000 pronounced by Justice Hill on 15 August 1994. Thus the jurisdiction of the Court to make a sequestration order was enlivened. -~§~ The requirements relating to a substituted creditor are to be found in section 49 of the Act which states, inter alia, that a creditor can be substituted in the petition if the Court considers it proper to do so. Justice Tamberlin so considered on 2 November 1995. Thus Mitchell Products took over the position of Budlyre in respect of the creditor's petition for the sequestration order. It is not necessary for a final order to have been made in respect of the substituted creditor so long as the final order relates to the act of bankruptcy. By virtue of section 52(1) of the Bankruptcy Act the Court may make a sequestration order against the estate of the debtor if it is satisfied, inter alia, with the proof of: (a) the matters stated in the petition...; (b) service of the petition; and (c) the fact that the debt or debts on which the petitioning creditor relies is or are still owing... The matters stated in paragraphs 1 to 3 of the petition were verified by the affidavits of Mark Franks, director of Budlyre and former business associate of the debtor, sworn on 27 April 1995, and of Paul Anthony Di Pasquale, director of Budlyre, sworn on 1 September 1995. These paragraphs alleged that the debtor did in fact owe the -7J- creditor -» the amount specified in the petition. Paragraph 4 of the petition, dealing with the debtor's failure to comply with the notice which constituted the act of bankruptcy relied on, was verified by the affidavit sworn on 1 May 1995 by Simon Arthur, a law clerk who conducted the appropriate search of the relevant records. Proof of the service of the bankruptcy notice was offered in the form of an affidavit sworn on 3 April 1995 by Kris Sabatino, a licensed commercial agent engaged as a ' process server. With respect to service of the petition required by section 52(1)(b), Registrar Hedge ordered on 7 June 1995 that personal service be dispensed with and that service be effected by the mailing of the petition to the debtor at his home address. The petitioner alleged that service was subsequently made by post, as attested to by Phillip Lapic, a law clerk, in an affidavit sworn on 23 June 1995. Despite the submission of the debtor that he was not properly served with the petition, I am quite satisfied that the combined weight of the order for substituted service and the evidence of Mr Lapic is sufficient to discharge the creditor's onus under section 52(1) (b) of the, Act in this respect. Indeed, on the basis of all these verifications, I am satisfied with the proof of the -8- matters stated in the petition, including the service of both the bankruptcy notice and the petition. It is a matter of record that despite being offered the opportunity of doing so, the debtor did not cross examine any of these witnesses on their affidavits or challenge their evidence in any way. The only challenge he wished to make was to the appropriateness of the finding of a debt in the first place, that is, he sought to "go behind" the debt, as the expression is, as found by Justice Hill. On the basis of the argument put in this regard, I found and formally hold that this is not an appropriate case for this procedure to be permitted. There was simply no doubt thrown on the finding of the debt by any evidence. The third requirement of section 52(1) is that the debt on which the petitioner relies is still owing. The debt on which Mitchell Products relied was the remuneration of its receiver which, as earlier noted, Justice Hill had ordered the debtor to pay and had fixed. According to an affidavit sworn on 3 August 1995 by Mr Vouris, the amount involved was, on the same day as his Honour's fixing of the amount of the remuneration, transferred from the account of Mitchell Products to the account of Court & Co, the firm in which Mr Vouris was a partner, in satisfaction of the order. Mitchell Products thus became a creditor of the debtor in respect of the amount of -9- $99,466.20: The evidence of Gerald Hercus, a director of Mitchell Products, in an affidavit sworn on 30 January 1997, was that no money had been received by the company in respect of this debt. He stated that the debt remained wholly due and unsatisfied. Prima facie the third requirement of section 52(1) was therefore satisfied. However, the debtor submitted that there was no debt because Mitchell Products did not actually pay the money to the receiver and so did not become a creditor of the debtor. This assertion is not supported by, indeed is in the teeth of, the sworn evidence. In paragraph 6 of his affidavit, Mr Vouris clearly stated that as receiver/manager of the company he was aware of the transferral of the money from Mitchell Products in satisfaction of the orders of Justice Tamberlin. It seems to me probable that Mr Vouris would know whether he had received a payment of personal fees of the order of $100,000. The debtor also submitted that he was not liable for this debt, but rather that the receiver and another person were liable for it. As well as being in conflict with his earlier submission that there was in fact no debt at all, there was no evidence adduced by the debtor to this effect and his bald unsupported assertion cannot be accepted over the sworn testimony of the witnesses. It -10- is apparent that in this particular case the requirements of section 52(1) of the Act have been satisfied and the Court therefore has the power to make a sequestration order against the estate of the debtor. Nevertheless, it is necessary to consider the lengthy and comprehensive submissions of the debtor as to why a sequestration order ought not to be pronounced. The substance of these submissions, which covered some 68 closely typed pages, can be summarised as follows: 1. The orders made by Justice Hill on 25 October 1994 and the orders made by Justice Tamberlin on 2 November 1995 were invalid and should be set aside. The debtor cited the fact that he was not present or was unrepresented on one or more occasions during the hearings before Justice Hill as a reason for his Honour's orders to be set aside. He also stated that because the substituted creditor did not specifically apply for an order for payment of the receiver's costs in the proceedings before Justice Hill on 25 October 1994, such an order should not have been made or should be set aside. In respect of Justice Tamberlin's orders, there was no submission other than the assertion that the orders were invalid. -1ll- Given that there is no application before the Court in these proceedings to set aside the orders of Justice Hill or Justice Tamberlin, it is difficult to discern a basis on which the Court might uphold the submissions. But in any case a single Judge of this Court is simply not in a position to set aside orders previously made in other proceedings by other Judges. Only a Full Court can do so and it is now well past the time fixed for any such appeals. -An appeal against one of Justice Hill's judgments has already been dismissed. It cannot be reactivated in another guise. In any event, the submissions are entirely irrelevant to the determination of the question at hand -~ which is proof of the petition for bankruptcy and the appropriateness of a sequestration order. 2. The Court should go behind the judgments and orders of Justice Hill. There is no doubt as to the existence of the relevant debt. No reason consistent with authority has been given to go behind any judgment of Justice Hill and this Court will not do so. 3. The creditor's petition should fail because the bankruptcy notice on which it is founded is invalid. This is because the judgment of Justice Hill entered on 15 August 1994 should not have been made. " The same reasons apply to this group of submissions as to -12- the first--group. The debtor has had the opportunity to challenge the judgment of Justice Hill by way of appeal which was dismissed. These submissions are entirely irrelevant to this hearing. 4. The bankruptcy notice filed on behalf of Budlyre was invalid because it understated the amount claimed by $US144.38 which was the interest calculated on the judgment debt. It is settled law that a bankruptcy notice will be invalid where the creditor persists with a claim for an amount greater than that specified in the bankruptcy notice. However, that is not the case in this matter. The bankruptcy notice makes it clear that only the amount shown, namely the amount of the judgment debt, is actually claimed by the creditor. There is no evidence that the creditor has ever persisted with a claim which included the interest payable on the judgment amount. In Re Schierhotter Ex parte Geis [1978] 32 FLR 22 at 29, Nimmo and Deane JJ cited with approval a passage from the reasons of Manning J in Re Jack Ex parte C.V. Holland (Holdings) Ltd [1959] 19 A.B.C. 268 which stated in part: There is no objection to a sum being claimed which is less than the real amount due, so long as the notice makes it clear that nothing « more is claimed to be due on the judgment beyond the amount specified in the notice. -13- It is clear that in this case the judgment creditor has only ever pursued the amount shown in the bankruptcy notice and at no time pursued a claim for the interest on the judgment debt. The notice is therefore valid. 5. The debtor has no assets. There is insufficient evidence before the Court to enable it to decide this question of fact. Even if this was not the position, the fact that there is no available evidence to suggest that the debtor has any assets does "not mean that a sequestration order should be refused: Bayne v_ Blake (No.2) [1909] 9 CLR 360. It is merely a factor that may be taken into account in the assessment of whether a sequestration order should be made: Radich v Bank of New Zealand Ltd (1993) 45 FCR 101 at 112-113. Given that there is insufficient evidence to support the assertion in this case, it cannot be a ground for refusing to make the sequestration order. Even if there was some such evidence, it would have to be placed in the context that the debtor has found the time and money to launch and conduct numerous court proceedings and pursue them with hundreds of pages of affidavits and submissions. During this ordeal he has obviously been able to sustain and maintain himself and any others who depend upon him for sustenance. Without an investigation -14- by a trustee in bankruptcy, I believe that it would be entirely premature to determine that his financial position at this stage warrants a dismissal of the petition on the ground of futility. 6. The debtor has a substantial and bona fide cross- demand or set-off. The debtor submitted that, as a matter of law, a sequestration order should not be made where there is a substantial and bona fide cross-demand or set-off. Generally speaking this is a correct statement of principle, but there is no evidence to show that it applies in this case. Proofs of debt lodged by the debtor with the receiver /manager of the substituted creditor were rejected and no appeal was lodged by the debtor. There is no other evidence produced which could possibly support the assertion that the debtor has a substantial and bona fide cross~demand or set-off. 7. The substituted creditor, its solicitors and others have an improper motive in bringing the current application, The question of whether there has been some extortion or abuse of process is a question of fact: Rozenbes v Kronhill [1956] 95 CLR 407. There is no evidence in the , present case to support a finding that there has been any -15- such behaviour or that such an improper motive lies behind the pursuit of a sequestration order. Even if there were such evidence, an order for sequestration should not be refused if, apart from such motive, the substituted creditor is entitled to the order: Re King Ex parte Commercial Bank of Australia Ltd (No.2) [1920] VLR 490. Conclusion The remainder of the debtor's submissions ranged from assertions of facts, sometimes scandalous, that were not but should properly have been the subject of evidence, to rambling irrelevancies and sheer obfuscation. In particular his vituperative attacks on the solicitors for the creditor have not been supported by any evidence at all. I reject absolutely his contentions in this regard. Despite having thoroughly read and carefully considered all of his submissions, I can find no factual, evidentiary or legal substance in any of the arguments which could possibly found a refusal of the sequestration order. The petitioning creditor has successfully made out all of the required elements of section 52(1), and in light of the:, reasons given, I am satisfied that this is an appropriate case for the making of a sequestration order -16- against the estate of the debtor. I order that the Registrar appoint an appropriate trustee to the estate. I order that the debtor pay the substituted creditor's costs of and pertaining to the proceedings, including any reserved costs. I direct that the creditor file with the Registrar a minute of these orders in accordance with rule 124(1). 1 certify that this and the Fierce / preceding pages are a true copy of the Reasons for Judgment herein of hi s Justice Einfeld 8 Honour Ve Associate Dated: 24 Agel 1992 For the substituted Mr G.B.Colyer instructed by creditor: Ms Jan Redfern and Ms Helen Tot of Hunt & Hunt, Solicitors For the debtor: Mr Morton in person Dates of Hearing: 29 January and 19 February : * Date of judgment: 29 April 1997