FEDERAL COURT OF AUSTRALIA Commonwealth Bank of Australia v Paola [2005] FCA 855 BANKRUPTCY – Creditors petition – sequestration order – where debtor claimed that success in other pendant litigation would provide funds to repay creditor – application by debtor to adjourn hearing of petition until determination of other litigation – creditor's petition granted. Bankruptcy Act 1966 (Cth), s 40(1)(g), s 52(1), s58(3)(a) Bayne v Blake (1909) 9 CLR 347 – referred to Cain v Whyte (1933) 48 CLR 639 – referred to Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 598 – referred to Dowling v Colonial Mutual Life Assurance Society Limited (1915) 20 CLR 509 – referred to Field v Commercial Banking Co of Sydney Ltd (1978) 22 ALR 403 – cited Ling v Enrobook Pty Ltd (1997) 74 FCR 19 – discussed Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 – referred to Rozenbes v Kronhill (1956) 95 CLR 407 – cited Springfield Nominees Pty Ltd v Bridgelands Securities Ltd (1992) 38 FCR 217 – applied Westpac Banking Corp v Tsatsoulis [2003] FCA 406 – referred to COMMONWEALTH BANK OF AUSTRALIA v ANTHONY M PAOLA (IN THE MATTER OF ANTHONY M PAOLA) N 1590 OF 2004 HILL J 24 JUNE 2005 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 1590 OF 2004 BETWEEN: COMMONWEALTH BANK OF AUSTRALIA APPLICANT AND: ANTHONY M PAOLA RESPONDENT JUDGE: HILL J DATE OF ORDER: 24 JUNE 2005 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The Estate of Anthony M Paola be sequestrated. 2. The applicant creditor's costs, including any reserved costs, be taxed and paid in accordance with the Bankruptcy Act 1966 (Cth). THE COURT NOTES THAT: 1. The date of the act of Bankruptcy is 27 October 2004. 2. A copy of this order is to be provided to the Official Receiver within two days after the order is entered. 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 1590 OF 2004 BETWEEN: COMMONWEALTH BANK OF AUSTRALIA APPLICANT AND: ANTHONY M PAOLA RESPONDENT JUDGE: HILL J DATE: 24 JUNE 2005 PLACE: SYDNEY REASONS FOR JUDGMENT HILL J 1 Before the Court is a creditor's petition presented by the applicant, the Commonwealth Bank of Australia ("the Bank") against the respondent debtor, Mr Paola. 2 The petition is based upon Mr Paola's failure to comply with a bankruptcy notice served upon him on 6 October 2004. As a result of that failure Mr Paola committed an act of bankruptcy on 27 October 2004. The bankruptcy notice is founded upon a judgment debt obtained by the Bank on 19 July 2004 in the amount of $37,265.13. The petition was presented on 3 November 2004 and was returnable on 8 December 2004. It came before a Registrar of the Court and was adjourned by consent to 8 February 2005. A duty judge was not available on that day and the matter was transferred to my docket. Following directions in March 2005, the matter was set down for hearing on the first available date, that being 15 June 2005. 3 Mr Paola filed a notice of intention to oppose the application in January 2005. That notice contained two grounds. These were stated as follows: "1. Funds to pay out the petition are to be provided from the proceeds of Currabubula Holdings Pty Limited (in Liquidation) an undisputed proof of debt has been admitted by the Liquidator and funds should be released on finalization of Supreme Court proceedings. No 4358 of 2004… 2. The Applicant creditor has intentionally obstructed a settlement agreement between Anthony M Paola and the Liquidator of Currabubula Holdings Pty Limited (in Liquidation) to obtain an unfair advantage". 4 Mr Paola was unrepresented. At the time I set down the petition for hearing I made an order under Order 80 of the Federal Court Rules that the Registrar refer Mr Paola's defence of the petition to a legal practitioner. Unfortunately that order did not result in there being found a practitioner able to represent him. Accordingly, Mr Paola appeared before me at the hearing of the petition unrepresented. Not surprisingly, some facts upon which Mr Paola might have been able to rely were not before me. One such matter, although I doubt if it would necessarily have made any difference to the outcome of the present hearing, was an affidavit of an expert as to the solvency of Currabubula Holdings Pty Ltd which had been filed in the proceedings in the Supreme Court to which reference was made by Mr Paola in his Notice of Intention to Oppose. Since that affidavit had not been read in the Supreme Court proceedings, leave of the Supreme Court would have been necessary before that affidavit could be read in the current proceedings: Springfield Nominees Pty Ltd v Bridgelands Securities Ltd (1992) 38 FCR 217 per Wilcox J; Allstate Life Insurance Co v Australian and New Zealand Banking Group (1995) 57 FCR 360 per Hill J. 5 I am satisfied that the Bank has proved all the matters of which proof is necessary for the making of a sequestration order. Indeed, I did not understand any of these matters to be opposed by Mr Paola. It was his case that I should either dismiss the petition on the basis that there were "other grounds" entitling the Court in its discretion to refuse the grant of a sequestration order or alternatively that I should adjourn the petition until the Supreme Court/Currabubula Holdings Pty Ltd proceedings had been heard and determined when, if determined in his favour, as Mr Paola said it would be, there would be no doubt, so he said, that he would be able to pay all his creditors in full. 6 It might be noted at this stage that after the luncheon adjournment of the hearing counsel for the Deputy Commissioner of Taxation sought leave to intervene in the proceedings and to support the making of a sequestration order. I granted leave. However, counsel did indicate to the Court that the Deputy Commissioner would not oppose an adjournment as the Australian Taxation Office would not be prejudiced by such an adjournment. I shall return later to the debt claimed to be owing to the Australian Taxation Office. 7 Mr Paola in his evidence deposed to having cash assets of $64,200, including as an asset that which he described as "Likely dividend from liquidation of Currabubula Holdings P/L (in liquidation)". He noted that his creditors were the Bank (the debt was noted as $39,000) being for an amount owing on a Visa credit card, another bank for a Master Card debt of $15,700, which he said was being paid off by agreement at the rate of $400 per month and family members owed $42,000. He indicated that the liquidation dividend would be used to pay out the Bank and the other bank credit card debt (total $54,700) and the balance of $8,300 would then be used to reduce the loan to family members. It was indicated that the balance of the amount owing to family members would be paid out of a liquidation dividend which his wife was entitled to. There was no evidence as to the attitude of the members of the family who were creditors, or for that matter, from Mrs Paola. Further, it seems from Mr Paola's evidence that there were "contingent creditors arising from personal guarantees" (the amount was unquantified) as well as the following item: "The ATO has a defendable claim against AM Paola in early stages of recovery action by the ATO." No figure was given. 8 Ultimately, Mr Paola admitted for the purpose of the present proceedings only that a notice had been served upon him as a director of another company in the amount of $421,000 being a liability for failing to withhold group tax pursuant to s 222AOC of the Income Tax Assessment Act 1936 (Cth). Although Mr Paola said from the bar table that similar notices had been served on two other directors and that these directors had agreed to pay the liability – with the consequence that Mr Paola would not have a liability – there was no evidence before the Court on that matter. From what I was told by counsel for the Deputy Commissioner of Taxation, a statement of claim had issued and a defence had been filed. What the situation was, whether Mr Paola really did have a defence, the nature of that defence and whether the debtor company which had failed to withhold group tax was solvent or insolvent were all matters not in evidence before me. 9 It is clear on the face of Mr Paola's own statement that he is not solvent. He is clearly unable to pay his creditors from his own money at the moment. Indeed, while leaving out of account the amount said to be owing to the Australian Taxation Office, it is clear that even if Mr Paola did receive what he described as a "Likely dividend", he would still be indebted in an amount of $33,700 to family members, although presumably none of them would wish to be substituted for the Bank in the event that the Bank was paid in full. There is also the problem of his contingent liabilities, about which the Court was told nothing. 10 At the heart of Mr Paola's application was the entitlement he said he had to a distribution from the liquidator of Currabubula Holdings Pty Ltd (in liquidation) ("the company"). The evidence did show that the liquidator of the company had accepted a proof of debt (the proof was, it would seem, in respect of an amount owing jointly by Mr Paola and his wife) for a claim against the company in the sum of $780,000. The first dividend (presumably the amount of $63,000 which Mr Paola refers to as the "Likely dividend from liquidation") was intended at least to be payable by the liquidator on 30 September 2004. However, by letter dated 30 August 2004 addressed to Mr and Mrs Paola, the liquidator advised that he would withhold the dividend to which they were entitled until after proceedings which the company had commenced against Mr and Mrs Paola were determined. 11 Those proceedings had been commenced around August 2004. A copy of the originating process was annexed to Mr Paola's affidavit together with the statement of claim. It is not necessary to set out in detail the allegations which are made. Suffice it to say that there had been an administration of the company and a meeting of creditors resolved to return the company to the control of its directors in November 2001. Thereafter, the company had continued to trade. It was required to make repayments under a facility agreement and on defaulting, was required to pay interest. It is said that debts were thereafter incurred. In March 2002, the company was placed into voluntary administration and thereafter it was placed into liquidation upon the application of the Bank. The claim against Mr and Mrs Paola is that, as directors of the company, they incurred debts of the company knowing that the company was insolvent. Alternatively it is alleged that they breached both statutory and common law duties of care. In either case it is alleged that the company suffered damages as a result. 12 Among the creditors of the company was the Bank. It stood in the shoes of the State Bank of New South Wales which had at some stage advanced monies to the company. The insolvency of the company, if it was insolvent at a relevant time, undoubtedly arose, at least in part, as a result of litigation between the Bank and the company. That litigation in which the company was initially successful and in which it was paid damages of almost $1.8 million culminated in victory by the Bank in the Court of Appeal of the Supreme Court of New South Wales (see State Bank of New South Wales Ltd v Currabubula Holdings Pty Ltd [2001] NSWCA 47) and the company being required to repay to the Bank the amount of damages it had been paid together with interest and costs. Special leave to appeal the judgment of the Court of Appeal was refused by the High Court of Australia. 13 It is accepted by the Bank that Mr Paola's defence against the liquidator's claim is not trivial. A letter of advice from Mr Paola's solicitors to him goes as far as suggesting that the prospects of the liquidator succeeding on at least part of the claim was "slight". It was recommended by the solicitors in that letter that application should be made to strike out the statement of claim or part of it. No such application was made, although such an application was foreshadowed to the Court at earlier directions hearings. It would seem that there are, as well as legal issues raised by the statement of claim, questions of fact as to whether the company was insolvent at relevant times, and indeed whether, having regard to the nature of liabilities of the company, it could be said that in the relevant period debts were incurred by the company. It can be said that the ultimate litigation will raise quite substantial issues. 14 It might also be noted that the allegation that Mr Paola contravened s 588G(2) of the Corporations Act 2001 (Cth) is a very serious allegation. If proven it could result (albeit in other proceedings which could take account of evidence in the Supreme Court proceedings) in the imposition of a civil penalty up to a maximum of $200,000. It can readily be appreciated that Mr Paola has a real and significant interest in defending the proceedings which have been brought against him by the liquidator and not only on financial grounds. 15 It seems that attempts were undertaken to settle the litigation between the liquidator and Mr and Mrs Paola. The evidence concerning the settlement negotiations is rather sketchy. There is some conflict in the evidence that has been filed but it is not necessary to resolve any such conflict. Perhaps all the evidence suggests is that at one stage the liquidator was interested in a settlement. It may well have been Mr Paola's impression that settlement was almost agreed upon. He alleged in argument that terms of a settlement had in fact been agreed in October 2004 and that the liquidator had agreed to put those terms to creditors for their approval. It may well be that the proposed settlement did, as Mr Paola suggested from the bar table, have the support of the liquidator. For present purposes I am prepared to accept his assertion that this was the case. However, it seems that the Bank, which appears to be the largest creditor of the company, opposed settlement and it fell through. 16 However, even if I accept that the facts are as Mr Paola sees them to be, it does not follow that Mr Paola can succeed in opposing the petition on his second ground which in essence alleges some improper conduct of the Bank which is presumably to be inferred from the facts I have set out. To succeed against the Bank on this basis it would be necessary for Mr Paola to show that the filing of the petition and the prosecution of the petition by the Bank amount to an abuse of process. It is clear law that if it were established that a bankruptcy petition was presented for an extraneous purpose such an abuse of process would be shown and would constitute a ground for the Court refusing the making of a sequestration order upon the petition of the Bank (see: Bayne v Blake (1909) 9 CLR 347; Dowling v Colonial Mutual Life Assurance Society Limited (1915) 20 CLR 509; Rozenbes v Kronhill (1956) 95 CLR 407; Clyne v Deputy Commissioner of Taxation (1984) 154 CLR 598). 17 However, it is not an abuse of process for the bank, acting no doubt in its own self interest, to reject the settlement which Mr Paola proposed and which, on the assumption I have made, was approved by the liquidator and having obtained a judgment which Mr Paola did not pay, petitioning the Court for the making of a sequestration order against the estate of Mr Paola. No extraneous purpose in the sense which the cases use that expression has been shown in the Bank presenting the petition. The Bank was not bound as a creditor to accept the settlement, even if that settlement was recommended by the liquidator. Whatever the Bank's commercial reasons for doing so, there is nothing which suggests that the Bank acted improperly. 18 It would seem that the Supreme Court litigation has reached the stage where evidence has been filed and an attempt has been made to obtain a date for hearing. The liquidator's evidence was, it seems, all filed by 1 February 2005. The evidence of Mr Paola would seem likewise to be complete. The matter was listed before a Registrar of the Court on the same day as the petition was heard by me and I allowed a short adjournment to permit Mr Paola to appear before the Registrar. Despite an agreement between the solicitors for the liquidator and Mr Paola to obtain a hearing date in early October, the Registrar allotted hearing dates to matters earlier in the list, with the result that the matter could not be allocated a hearing date and was adjourned to the next call-over in September 2005. It seems that no hearing date is available in the Supreme Court list until probably December 2005 or January or February 2006. 19 The liquidator, upon his appointment, set about realising the assets of the company. This was, it would seem from the evidence, a somewhat difficult task. The principal asset of the company was a property of some 15,000 acres carrying sheep and crops. There were other properties as well and although up to date financial information of the company was not put before me, it would seem that all assets have now been realised, or at least the substantial part of the company's assets have been realised. There is some suggestion, subject to the claim of the liquidator against Mr and Mrs Paola that a subsequent dividend might well be payable to them. One letter before me, (it was not necessarily reflective of the current situation) suggested payment of a total dividend to creditors of 14 cents in the dollar. 20 In these circumstances Mr Paola submits either that the Court should dismiss the petition on the basis that on completion of the Supreme Court proceedings there would be funds to pay out the Bank or, alternatively, that the Court should adjourn the petition to allow the Supreme Court proceedings to be heard and determined. 21 As I made clear to the parties during the hearing, I would not dismiss the petition on the basis that Mr Paola submits. First there is the problem that even if Mr Paola were successful in the Supreme Court proceedings it was far from clear that he was solvent, even if he were able to pay out the judgment debt of the Bank. Depending upon what happened with the amount apparently owed to the Australian Taxation Office, contingent creditors and debts owed to members of the family, it may well be the case that Mr Paola is hopelessly insolvent. 22 More importantly however, Mr Paola has not established that it would be an appropriate exercise of the Court's discretion to dismiss the petition to allow him to continue to pursue the defence of the claim against him, where that claim was unlikely to be finally determined for a quite significant period of time and where on the information before the Court (if it be relevant), the Court is unable to determine whether or not Mr Paola's defence would be successful. It is one thing to say that Mr Paola has a substantial defence to the claim. It is quite another to say that Mr Paola must succeed in his defence of it. 23 The starting point in the way the Court must entertain the application by Mr Paola is the well known principle enunciated by Henchman J of the Supreme Court of Queensland at first instance and approved by the High Court on appeal in Cain v Whyte (1933) 48 CLR 639 and thereafter repeated by Dixon CJ, Webb and Fullagar JJ in Rozenbes v Kronhill (1956) 95 CLR 407 at 414: "… prima facie, on proof of the matters mentioned in s 56(2) [now s 52(1)], the Court will proceed to make an order for sequestration, and … it is for the debtor to show some cause overriding the interest of the public in the stopping of unremunerative trading, and the rights of individual creditors who are unable to get their debts paid to them as they become due. Something has to be put before the Court to outweigh those considerations before it can be said that sufficient cause is shown against the making of a sequestration order". 24 A claim by a debtor that success in proceedings not yet determined would provide funds to repay the petitioning creditor does not necessarily show such cause. Much would seem to depend upon the circumstances. Despite the suggestion implicit in the submissions of counsel for the Bank that the case of Ling v Enrobook Pty Ltd (1997) 74 FCR 19 established a proposition of law which would operate to deny to Mr Paola the ability to have the Court dismiss the petition, I do not think that that case does more than illustrate that the Court would have a discretion to dismiss the petition in an appropriate case. In that case, a Full Court of this Court (Davies, Wilcox and Branson JJ) held that the fact that the debtor had a claim in tort against a creditor, albeit not the petitioning creditor, which if successful would provide funds to pay off all creditors (not just some as in the present case), did not mean that the decision of the Primary Judge not to dismiss the petition was in error. Their Honours noted that a different situation could arise where the debtor had a claim against the petitioning creditor (see s 40(1)(g) of the Bankruptcy Act 1966 (Cth) ("the Act") and Re Schmidt; Ex parte Anglewood Pty Ltd (1968) 13 FLR 111 at 115-6 per Gibbs J, then Judge of the Bankruptcy Court, and Ling v Commonwealth (1994) 51 FCR 88 where the full Court of this Court set aside a sequestration order made against Mr Ling who had proceedings pending against the petitioning creditor and ordered that the further hearing of the petition be adjourned until the determination of Mr Ling's proceedings). The Full Court did, however, reject an argument raised by the debtor that there was a public interest in allowing a debtor to prosecute litigation which the debtor has commenced. Where the debtor's claim is against a third party, the question whether there is sufficient cause will obviously be more difficult to answer. However, the Court noted that sufficient cause might be found where a debtor had a claim against a third party and was well advanced with litigation to establish that claim and the claim was likely to result in the debtor being in a position to pay his or her debts (cf Madderstra v Penfolds Wines Pty Ltd (1993) 44 FCR 303). I do not think that their Honours necessarily intended to confine the circumstances where sufficient cause existed to that case. No doubt it will be relevant to consider all the circumstances and especially whether the state of insolvency of the debtor might exist only for a short period. It will be relevant also whether the petition might be extended for a sufficient time to enable the debtor to receive the fruits of the litigation and thus be in a position to repay all creditors. 25 The problem in the present case for Mr Paola is twofold. First, it would seem quite likely that the Supreme Court proceedings, if they took their course, might not be finally heard and determined (with or without appeals) before the petition (even if extended, at the expiration of twelve months), expired at the end of two years, ie in November 2006. Second, on the facts, success in the case in the Supreme Court would still leave Mr Paola insolvent even if he were in a position to pay off the Bank. In exercising any discretion given to me I take into account the importance of the proceedings to him. It would not seem that the proceedings by the liquidator against him would be stayed under s 58(3)(a) of the Act, at least so far as they relate to the claim for insolvent trading, because the proceedings are to recover unliquidated damages and arise otherwise than by reason of a contract, promise or breach of trust (s 82(2) of the Act). 26 In my view the present is not an appropriate case in which the petition should be dismissed. There remains then the question whether the Court should accede to the application of Mr Paola to adjourn the hearing of the petition. That application was opposed by the Bank. It was not opposed by counsel for the Australian Taxation Office who indicated, as already noted, that his client was not disadvantaged by an adjournment. 27 It is not in dispute that the Court has power to adjourn the hearing of the petition. In doing so, the Court will consider all relevant circumstances. An indication of circumstances which might be considered is to be found in Field v Commercial Banking Co of Sydney Ltd (1978) 22 ALR 403 at 411-412 in the judgment of Sweeney J. That judgment also recognises that prima facie, on proof of the matters mentioned in s 52(1) of the Act, the court will proceed to make a sequestration order. An example of a case where an adjournment was refused may be seen in Westpac Banking Corp v Tsatsoulis [2003] FCA 406 per Branson J. 28 Not without some hesitation, I have come to the conclusion that an adjournment should not be granted in the present case. In doing so, I have taken account of the possibility that the Supreme Court proceedings might be possibly determined, at least at first instance before, after an initial renewal, the petition became stale. It does not seem likely that the proceedings would be finally determined if appeals are filed by the losing party. If an adjournment were to be granted it would, in the first instance, only be to a date earlier than the expiration of twelve months from the petition having been presented. I take into account also that the proceedings, even if successful, would still leave Mr Paola insolvent. I am unable to ignore the debt of the Australian Taxation Office, which is, to say the least, large. It seems to me that the present is a case where the prima facie position referred to in the authorities should apply. The Bank has proven all relevant matters entitling it to a sequestration order and there is no just cause why a sequestration order should not be made. I now do so. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Hill. Associate: Dated: 24 June 2005 Counsel for the applicant: Mr MBJ Lee Solicitor for the applicant: J K O'Sullivan Counsel for the Deputy Commissioner of Taxation: Mr P Rodionoff The respondent appeared in person Date of Hearing: 15 June 2005 Date of Judgment: 24 June 2005