FEDERAL COURT OF AUSTRALIA [2001] FCA 87 Martin & Anor v Commonwealth Bank of Australia BANKRUPTCY - sequestration orders - appeal from Judge of Federal Court - primary Judge dismissing application for review of sequestration orders made by Registrar - whether primary Judge required to conduct hearing de novo - whether primary Judge did so - whether Full Court should re-exercise function exercised by primary Judge. Bankruptcy Act 1966 (Cth), ss 47(1), 52(1), 156A Federal Court of Australia Act 1976 (Cth), ss 27, 35A(5), 35A(6) Federal Court Rules, O 1 r 8, O 77 rr 4(2), 8, 18(1), 18(2), 19(2), 19(3), 19(4) Jageev Pty Ltd v Deane (FCA: Davies J, 15 May 1998, unreported) approved New Era Installations Pty Ltd v Don Mathieson & Staff Glass Pty Ltd (1999) 31 ACSR 53 approved Meehan v Alfaro (1999) 93 FCR 201 approved Harris v Caladine (1991) 172 CLR 84 referred to Cheeseman v Waters (1997) 77 FCR 221 followed D'Antuono v Minister for Health (1997) 80 FCR 226 referred to Colonial Mutual Life Assurance Society Ltd v Donnelly (1998) 82 FCR 418 considered Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 referred to Allesch v Maunz (2000) 173 ALR 648 referred to Guss v Johnstone [2000] FCA 1455 (Drummond, Sackville and Dowsett JJ, 18 October 2000, unreported) referred to Butterworths, Practice and Procedure High Court and Federal Court of Australia, [40,650.1] FREDERICK EDWIN MARTIN & LORRAINE BEVERLEY MARTIN v COMMONWEALTH BANK OF AUSTRALIA N 985 of 2000 NORTH, MANSFIELD & KATZ JJ SYDNEY 22 FEBRUARY 2001 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 985 of 2000 On appeal from a Judge of the Federal Court of Australia BETWEEN: FREDERICK EDWIN MARTIN & LORRAINE BEVERLEY MARTIN APPELLANTS AND: COMMONWEALTH BANK OF AUSTRALIA RESPONDENT JUDGES: NORTH, MANSFIELD & KATZ JJ DATE OF ORDER: 22 FEBRUARY 2001 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The appeal be allowed. 2. The orders made by the primary Judge be set aside. 3. The respondent's creditor's petition be remitted to the primary Judge for further consideration. 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 N 985 of 2000 On appeal from a Judge of the Federal Court of Australia BETWEEN: FREDERICK EDWIN MARTIN & LORRAINE BEVERLEY MARTIN APPELLANTS AND: COMMONWEALTH BANK OF AUSTRALIA RESPONDENT JUDGES: NORTH, MANSFIELD & KATZ JJ DATE: 22 FEBRUARY 2001 PLACE: SYDNEY REASONS FOR JUDGMENT OF THE COURT 1 There is before the Court an appeal from a judgment of a Judge of the Court. That judgment was given on 5 September 2000. 2 It is convenient to set out immediately the background to the appeal. 3 On 11 August 2000, a Registrar of the Court made sequestration orders against the estates of Mr Frederick Edwin Martin and Ms Lorraine Beverley Martin, who are husband and wife. The petitioning creditor was the Commonwealth Bank of Australia ("the Bank"). The relevant acts of bankruptcy were the Martins' having neither complied with nor had set aside a bankruptcy notice served on them by the Bank. The bankruptcy notice had been based on a judgment in favour of the Bank against the Martins in a New South Wales Local Court. That judgment had, in turn, resulted from an order for costs which had been made in favour of the Bank against the Martins in proceedings in the New South Wales Supreme Court. 4 On 29 August 2000, the Martins filed a notice of motion seeking, among other things, the "overturn[ing]" of the sequestration orders made by the Registrar. It is appropriate to treat that notice of motion as having been an application to the Court to review the exercise by the Registrar of the Court's power under subs 52(1) of the Bankruptcy Act 1966 (Cth) ("the Act") to make a sequestration order against a debtor's estate: see subs 35A(5) of the Federal Court of Australia Act 1976 (Cth) ("the Federal Court Act") and O 77, r 8 of the Federal Court Rules ("the Rules"). It is apparent that the primary Judge so treated the notice of motion, since he spoke expressly in his reasons for judgment of "reviewing the order[s] made by [the] Registrar". 5 The Martins' notice of motion was supported by an affidavit in which Mr Martin deposed to the fact that the Martins had recently failed in the New South Wales Court of Appeal to obtain an extension of time within which to appeal from the judgment of the Supreme Court by which they had been ordered, among other things, to pay the Bank's costs. He further deposed to an intention to seek from the High Court of Australia special leave to appeal from the Court of Appeal's judgment. 6 Subsection 35A(6) of the Federal Court Act confers on the Court a power, on application under subs 35A(5), to review an exercise of power by a Registrar pursuant to s 35A. It has been held in the past that such a review requires a hearing de novo: see, for example, Jageev Pty Limited v Deane (FCA: Davies J, 15 May 1998, unreported) at 3-4; followed in New Era Installations Pty Ltd v Don Mathieson & Staff Glass Pty Ltd (1999) 31 ACSR 53 at 54-55, [2]-[4] (FCA: Katz J) and in Meehan v Alfaro (1999) 93 FCR 201 at 202, [2] (Katz J). (The last of those three cases involved a review by a Judge of the exercise by a Registrar of the Court's power to make a sequestration order against a debtor's estate.) Before us, counsel for the Bank disputed the correctness of those holdings, although he did so solely by reference to what had been said in the joint reasons for judgment of Mason CJ and Deane J in Harris v Caladine (1991) 172 CLR 84 at 95 and acknowledged that his submission was a formal one only, since we would follow earlier decisions of Full Courts of this Court contrary to his submission. 7 As counsel for the Bank obviously expected that we would, we reject his submission: for an earlier decision of a Full Court of this Court contrary to his submission on a materially identical provision to subs 35A(6) of the Federal Court Act, see Cheeseman v Waters (1997) 77 FCR 221 at 229 (Hill, Heerey and Sundberg JJ). In any event, we point out that the passage from the reasons for judgment of Mason CJ and Deane J in Harris was not concerned with the question of the nature of the function conferred on a judge by a provision like subs 35A(6) of the Federal Court Act; rather, it was concerned with the minimum width of the function which could constitutionally be conferred on federal judges in a setting similar to the present. 8 At the date of the primary Judge's judgment, the Act and the Rules together imposed, on a creditor petitioning for the making of a sequestration order based on a debtor's failure either to comply with or have set aside a bankruptcy notice served on the debtor, an obligation to put before the Court at least five different types of affidavit. (The Rules have since been amended, but those amendments are irrelevant for present purposes.) Those five different types of affidavit were: · an affidavit verifying the petition: subs 47(1) of the Act and O 77, subr 18(1) of the Rules; · an affidavit of service of the relevant bankruptcy notice: O 77, subr 18(2) of the Rules; · an affidavit stating that the creditor's petition, the verifying affidavit and any consent to act as trustee lodged under s 156A of the Act had been served and how they had been served: O 77, subr 19(2) of the Rules; · an affidavit setting out the details of any references in the National Personal Insolvency Index to the debtor, stating that there were no details of a debt agreement, in relation to the debt on which the creditor relied, in the Index on the day the petition was presented and having attached to it a copy of the relevant extract from the Index: O 77, subr 19(3) of the Rules; and · an affidavit stating that the debt on which the creditor relied was still owing: O 77, subr 19(4) of the Rules. 9 The fourth of those types of affidavit was impliedly required to be sworn "no earlier than the day before the hearing date for the petition", while the fifth of those types of affidavit was expressly required to be sworn "as soon as practicable before the hearing date for the petition": see, respectively, the chapeau of O 77, subr 19(3) and O 77, par 19(4)(a) of the Rules. 10 Further, at the date of the primary Judge's judgment, subs 52(1) of the Act provided as follows: "(1) At the hearing of a creditor's petition, the Court shall require proof of: (a) the matters stated in the petition (for which purpose the Court may accept the affidavit verifying the petition as sufficient); (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; and, if it is satisfied with the proof of those matters, may make a sequestration order against the estate of the debtor." 11 In his reasons for judgment, after having set out the background to the proceeding before him, the primary Judge referred to his having before him the Martins' draft application for special leave to appeal to the High Court of Australia. His Honour then said, "Mr Martin says that he wishes to pursue his proposed application to the High Court for [special] leave to appeal from the dismissal of his application for an extension of time within which to appeal to the Court of Appeal. If I were satisfied that there was some prospect of success in the application for special leave, that may be a ground upon which to consider reviewing the order made by [the] Registrar…. However, having considered the draft application for special leave, I am not persuaded there is a sufficiently strong prospect of the application being successful to warrant interfering with the exercise of discretion by [the] Registrar…. In the circumstances, I do not consider that I should set aside the sequestration order. Accordingly, I would dismiss the notice of motion of 29 August 2000, with costs." 12 A question arises whether, in exercising the power of the Court under subs 35A(6) of the Federal Court Act, the primary Judge, although required to do so, failed to hear de novo the Bank's creditor's petition. The Court raised that question with counsel for the Bank during the hearing of the appeal. (Mr Martin, we add, appeared on the appeal both for himself and, with leave, for his wife, as he had done before the primary Judge.) When the Court raised that question with counsel for the Bank, he, as we understood him, conceded, after reflection, that the primary Judge had not heard the Bank's creditor's petition de novo. (If, however, we misunderstood his position, then it may fairly be said that his submission that the primary Judge had heard the Bank's creditor's petition de novo was made very faintly indeed.) What we understood to have been his concession accords in any event with the conclusion to which we have independently come on the question. 13 Three matters have combined to lead us to the conclusion which we have just expressed. 14 First, the passage from the primary Judge's reasons for judgment which we have quoted above suggests to us that the only matter to which he adverted in reviewing the Registrar's exercise of the Court's power was the prospects for success of the Martins' special leave application. We do not consider that it could fairly be said that implicit in that passage was a statement by the primary Judge of his satisfaction with the proof of the matters of which subs 52(1) of the Act requires the Court to be satisfied before it can make a sequestration order against a person's estate. Furthermore, when adverting to the prospects for success of the Martins' special leave application, the primary Judge did not do so for the purpose of exercising his own discretion whether to make sequestration orders against the Martins' estates, assuming the conditions precedent to the exercise of that discretion were satisfied; rather, he did so for the purpose of deciding whether the exercise by the Registrar of her discretion had miscarried: compare D'Antuono v Minister for Health (1997) 80 FCR 226 at 233 (Burchett J), referring to the error implicit in such an approach on a review of a Registrar's decision. 15 Secondly, the primary Judge made no reference elsewhere in his reasons for judgment to his being satisfied with the proof of the matters of which subs 52(1) of the Act requires the Court to be satisfied before it can make a sequestration order against a person's estate. 16 Thirdly, the Bank had filed no affidavits on the Martins' application for review. That meant that, if the primary Judge were to hear de novo the Bank's creditor's petition, it would be necessary for him to have regard to those affidavits earlier filed by the Bank and used before the Registrar. That could presumably be done (though we note the suggestion in Butterworths' Practice and Procedure High Court and Federal Court of Australia at [40,650.1] that it might only be capable of being done with consent). However, two of those affidavits, if they were to be had regard to by the primary Judge, did not comply with the timing requirements imposed for their swearing by O 77, subrr 19(3) and (4) respectively of the Rules, which requirements we take to be applicable to a review by a Judge of the making of a sequestration order by a Registrar. Presumably, the primary Judge could have waived non-compliance by the Bank with those timing requirements: see O 1, r 8 and O 77, subr 4(2) of the Rules. However, that would have been a significant step for the primary Judge to take, given the evident purpose of those timing requirements, and one would have expected to find in his reasons for judgment a reference to that matter (and to the matter of his use generally of the earlier affidavits) if the primary Judge considered that he was hearing de novo the Bank's creditor's petition. No such reference appears. 17 We add that we have also given consideration to the question whether, assuming (contrary to the view which we take) that the primary Judge was satisfied with the proof of the matters of which subs 52(1) of the Act requires the Court to be satisfied before it can make a sequestration order, it was nevertheless unnecessary for him to refer in his reasons for judgment to his having that satisfaction. We have decided, however, that such reference was necessary. 18 A judge must, in the judge's reasons for judgment, apprise the parties to the litigation before the judge of the "essential ground or grounds" of the judge's decision: see, for example, Colonial Mutual Life Assurance Society Ltd v Donnelly (1998) 82 FCR 418 at 432 (Wilcox, O'Connor and Sackville JJ). Such a requirement appears to us to be particularly important when the reasons for judgment concerned are the reasons for sequestrating a debtor's estate (or, what is the same thing, affirming an earlier decision doing so). That is so because, "Bankruptcy … involves a change of status and has quasi-penal consequences": Ahern v Deputy Commissioner of Taxation (Qld) (1987) 76 ALR 137 at 148 (FCA: Davies, Lockhart and Neaves JJ). It is an essential ground of a Judge's decision to make an order sequestrating a debtor's estate or affirming a Registrar's decision to do so that the Judge is satisfied with the proof of the matters of which subs 52(1) of the Act requires the Court to be satisfied before it can make a sequestration order and the Judge must therefore apprise the parties, in the Judge's reasons for judgment, of the existence of that satisfaction. 19 In the circumstances, a question arises as to the orders which should be made to resolve the appeal. The ultimate submission on that matter by counsel for the Bank was that, if we were to conclude that the primary Judge had erred by not conducting a hearing de novo of the Bank's creditor's petition, then we should, in effect, stand in the shoes of the primary Judge and decide for ourselves whether or not to affirm the Registrar's decision. To that end, he sought to have us receive further evidence, including, in particular, affidavits of the types referred to in O 77, subrr 19(3) and (4) of the Federal Court Rules, which affidavits satisfied the timing requirements of those provisions. He acknowledged that, if we accepted his submission, it would be necessary for us to permit the Martins some time to put on further evidence in reply to the Bank's further evidence before conducting a further hearing of the Bank's creditor's petition. 20 When counsel for the Bank made that submission, we enquired of him whether he could refer us to any case in which, when an appellate court had concluded that a primary judge had breached the rules of natural justice (as appears to us to be an appropriate characterisation of the present circumstances), it had, rather than ordering a new trial, re-exercised the function which the primary judge had exercised. He told us that he could not do so. 21 Whether an appellate court, having concluded that the primary judge erred, will (assuming that it has the power to do so) re-exercise the function which the primary Judge has exercised, as opposed to ordering a new trial, is a matter within its discretion: see, for example, Allesch v Maunz (2000) 173 ALR 648 at 656, [30] (HCA: Gaudron, McHugh, Gummow and Hayne JJ). We do not consider it appropriate, given the nature of the error made by the primary Judge as we have characterised it above, to re-exercise the function which the primary Judge has exercised. 22 We add that, if we had considered it appropriate to re-exercise the function which the primary Judge has exercised, a further question would have arisen as to whether we should receive for that purpose the Bank's further evidence. We note that the evidence provided in an attempt to persuade us to receive that further evidence offered no explanation as to why evidence of that type had not been put before the primary Judge. In Guss v Johnstone [2000] FCA 1455 (Drummond, Sackville and Dowsett JJ, 18 October 2000, unreported), Sackville J, with whom Drummond and Dowsett JJ agreed, referred (at [43]) to the fact that the discretion to receive further evidence conferred by provisions such as s 27 of the Federal Court Act can be informed by factors such as the availability of the evidence at the trial and said (at [45]) that the failure of the party seeking to persuade the Full Court in that case to receive further evidence to address at trial the issue to which that further evidence went "would have weighed heavily against the exercise in his favour of the discretionary power conferred by s 27 of the Federal Court Act". If we had had to address the s 27 question, the Bank's similar failure in the present case would have had a similar effect on us. However, in the circumstances, the question does not arise. 23 We will therefore allow the appeal, set aside the orders made by the primary Judge and remit to him for further consideration the Bank's creditor's petition. 24 There should be no order as to the costs of the appeal or of the proceeding before the primary Judge, given that the Martins raised neither before the primary Judge nor before this Court the ground on which their appeal has succeeded. I certify that the preceding twenty four (24) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justices North, Mansfield & Katz. Associate: Date: 22 February 2001 Appellants in person . Counsel for the Respondent: Mr T Thawley Solicitor for the Respondent: L E Taylor Dates of Hearing: 14 and 16 February 2001 Date of Judgment: 22 February 2001