FEDERAL COURT OF AUSTRALIA Cash Resources Australia Pty Ltd v De Vries [1999] FCA 311 BANKRUPTCY - creditor's petition - whether "other sufficient cause" why sequestration order ought not be made - whether claim by debtors against petitioning creditor sufficient to be counter-balanced against judgment debt or whether claim likely to produce in a short time sufficient funds to relieve the debtors from the present state of insolvency. Bankruptcy Act 1966 (Cth) s 52(2)(b) Ling v Enrobook Pty Ltd (1997) 74 FCR 19 (FC) applied Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 cited IN THE MATTER OF KOOS JOHN DE VRIES, VICKI LOUISE DE VRIES AND RENSKE DE VRIES; CASH RESOURCES AUSTRALIA PTY LTD v KOOS JOHN DE VRIES, VICKI LOUSIE DE VRIES AND RENSKE DE VRIES QG7279 OF 1998 COOPER J BRISBANE 26 MARCH 1999 IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG7279 OF 1998 IN THE MATTER OF: KOOS JOHN DE VRIES, VICKI LOUISE DE VRIES AND RENSKE DE VRIES CASH RESOURCES AUSTRALIA PTY LTD ACN 004 792 330 Applicant AND: KOOS JOHN DE VRIES, VICKI LOUISE DE VRIES AND RENSKE DE VRIES Respondents JUDGE: COOPER J DATE OF ORDER: 26 MARCH 1999 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. In accordance with s 43 of the Bankruptcy Act 1966 (Cth) the estates of Koos John De Vries, Vicki Louise De Vries and Renske De Vries are sequestrated. 2. The petitioning creditor be paid its costs of and incidental to the petition including reserved costs, if any, such costs to be taxed if not agreed and paid out of the bankrupts' estate in accordance with s 109(1)(a) of the Bankruptcy Act 1966 (Cth). Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA QUEENSLAND DISTRICT REGISTRY QG7279 OF 1998 IN THE MATTER OF: KOOS JOHN DE VRIES, VICKI LOUISE DE VRIES AND RENSKE DE VRIES CASH RESOURCES AUSTRALIA PTY LTD ACN 004 792 330 Applicant AND: KOOS JOHN DE VRIES, VICKI LOUISE DE VRIES AND RENSKE DE VRIES Respondents JUDGE: COOPER J DATE: 26 MARCH 1999 PLACE: BRISBANE REASONS FOR JUDGMENT 1 On 14 July 1998 the petitioning creditor, Cash Resources Australia Pty Ltd, filed a petition seeking that the debtors be made bankrupt and that sequestration orders be made in respect of their estates The act of bankruptcy relied upon was non-compliance by each of the debtors with a bankruptcy notice served on each of them. 2 The debtors appeared and opposed the making of the orders sought on the ground that there existed for the purposes of s 52(2)(b) of the Bankruptcy Act 1966 (Cth) ("the Act"), "other sufficient cause [why] a sequestration order ought not to be made." The other sufficient cause was the existence of a substantial claim of the debtors against the petitioning creditor arising out of the termination of a factoring facility provided by the petitioning creditor, and the realisation, by a receiver and manager appointed by it, of securities provided in support of the facility. 3 I am satisfied that each of the debtors : (a) was at all material times and remains indebted to the petitioning creditor in the sum of $2,000 being the taxed costs ordered against them by Brabazon QC DCJ on 21 March 1997 in the District Court at Brisbane, Queensland; (b) was served with a bankruptcy notice in respect of the said judgment debt; (c) failed to comply with the provisions of the bankruptcy notice within the time specified in the notice; (d) Has committed an act of bankruptcy as provided in s 40(1)(g) of the Act; (e) was served with the bankruptcy petition. 4 In these circumstances, the requirements of s 52(1) of the Act are made out and sequestration orders ought to be made unless the court is satisfied that it should exercise the discretion under s 52(2)(b) to refuse to make the order and to dismiss the petition. The onus of making out "other sufficient cause" for the purpose of s 52(2)(b) of the Act lies on the debtors: Ling v Enrobook Pty Ltd (1997) 74 FCR 19 (FC) at 24. 5 As a general rule this Court in its bankruptcy jurisdiction does not decide any claim which a debtor wishes to pursue against the petitioning creditor. Rather, its role is limited to forming a view as to whether it appears that there is sufficient validity in the debtor's claims to justify dismissal or adjournment of the petition: Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115 - 116. 6 In Ling v Enrobook Pty Ltd a Full Court of this Court (Davies, Wilcox and Branson JJ) reviewed the authorities in respect of the discretion to dismiss where a countervailing claim is asserted. Their Honours, after such a review, concluded (74 FCR at 26) :- "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. 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 a 'sufficient cause' for a sequestration order not to be made (see, for example, Maddestra v Penfolds Wines Pty Ltd). 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." 7 The materials relied upon by the debtors relate to the appointment by the petitioning creditor of a receiver and manager under certain securities in November 1990 and the realisation of the assets over which those securities were held. In November 1990, the petitioning creditor also initiated proceedings in the District Court at Brisbane (Plaint No 5139 of 1990) to recover what it alleged was a balance due and outstanding in respect of factored debts due to the petitioning creditor. On 2 January 1991, the debtors filed a defence and counterclaim to the District Court claim. The counterclaim was for $200,000 for damages for improperly and prematurely appointing a receiver and manager and for misrepresentation in respect of statements implying that the debtors would be given time to pay. The proceedings in the District Court did not progress with alacrity. Discovery was requested and was given between May and October 1993. Thereafter the litigation languished and the debtors were required to apply for leave to proceed on their counterclaim, three years having expired since the last step was taken by them. On 21 March 1997, that application was refused by Brabazon QC DCJ and his Honour ordered that the costs of the application be paid by the unsuccessful debtors. It was this order for costs which gave rise to the judgment debt. 8 In addition to the District Court counterclaim, the debtors commenced proceedings in the Supreme Court of Queensland (Writ No 9417 of 1996) on 6 November 1996 against the petitioning creditor. By those proceedings they seek unspecified damages for breach of contract, misrepresentation, unconscionable conduct and deceit and damages pursuant to the Fair Trading Act (Qld) together with interest and costs. On or about 28 November 1997 they delivered a statement of claim which claimed $300,000 as damages. The statement of claim merely replicated the District Court pleading so far as was relevant and increased the damages claimed to $300,000. On 10 December 1997, Mr Justice Byrne refused to have the proceedings stayed as an abuse of process having regard to the concurrent existence of the District Court proceedings. The petitioning creditor delivered its defence on 16 December 1997 in the Supreme Court proceedings. 9 Save for an application pending in the Supreme Court for production of certain documents, which the debtors also sought to have produced in these proceedings by service of a subpoena, nothing further has happened. 10 The debtors were not legally represented in the conduct of their opposition to the petition. Although they were given the opportunity to cross-examine the Queensland Manager of the petitioning creditor, that cross-examination did not establish that the petitioning creditor or those acting on its behalf have consciously refused to discover documents which would establish that the audit which disclosed non-banking to the account of the petitioning creditor of money received by the debtors from trade creditors as was required by the factoring agreement, was in error, and, that the steps taken thereafter were legally wrong. Nor does it follow that the failure of the receiver and manager to achieve the cost price of stock on a receiver's sale necessarily means that the stock was sold at an under valuation or that the debtors have a cause of action against the petitioning creditor for any alleged sale at an under-value. No such cause of action has been pleaded against the petitioning creditor, and putting aside the liability of the petitioning creditor for the conduct of the receiver and manager, statute of limitations considerations arise. 11 On the whole of the material it has not been shown that the debtors have a real claim to be counterbalanced against the judgment debt or that the present Supreme Court proceedings are likely to produce, in a short time, sufficient funds to relieve the debtors from a present state of insolvency. In those circumstances, I am not satisfied that sufficient other cause not to make sequestration orders has been made out. 12 Whether or not the debtors have a substantial claim in respect of the termination of the factoring agreement and the conduct of the receivership is something that can be determined by the trustee to whom any cause of action will pass as property of the debtors. If the trustee is persuaded to litigate the claim to a successful conclusion, the benefit of the litigation will not be lost to the debtors or to their creditors generally. I certify that the preceding twelve (12) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Cooper . Associate: Dated: 26 March 1999 Applicants in person: Koos De Vries, Vicki De Vries and Renske De Vries Solicitors for the Respondent: Flower & Hart Date of Hearing: 24 February 1999 Date of Judgment: 26 March 1999