Starbucks Corporation v McLeay [2005] FCA 1269

FEDERAL COURT OF AUSTRALIA

Starbucks Corporation v McLeay [2005] FCA 1269 STARBUCKS CORPORATION AND ANOR v GREGORY GEORGE MCLEAY NSD 1869 of 2004 ALLSOP J 8 SEPTEMBER 2005 SYDNEY

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 1869 of 2004

BETWEEN: STARBUCKS CORPORATION

FIRST APPLICANT

STARBUCKS COFFEE COMPANY (AUST) PTY LTD

SECOND APPLICANT

AND: GREGORY GEORGE MCLEAY

RESPONDENT

JUDGE: ALLSOP J

DATE OF ORDER: 8 SEPTEMBER 2005

WHERE MADE: SYDNEY

THE COURT ORDERS THAT:

1. I permit Erin Kathleen Holland, Deputy Commissioner of Taxation of the Commonwealth of Australia, Operations Program to be substituted on the petition as the applicant. 2. I dispense with any requirements to amend the petition. 3. The petition be dismissed. 4. Each party pay its, her and his own costs of the application for substitution and of the hearing of the petition. 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 NSD 1869 of 2004

BETWEEN: STARBUCKS CORPORATION

FIRST APPLICANT

STARBUCKS COFFEE COMPANY (AUST) PTY LTD

SECOND APPLICANT

AND: GREGORY GEORGE MCLEAY

RESPONDENT

JUDGE: ALLSOP J

DATE: 8 SEPTEMBER 2005

PLACE: SYDNEY

REASONS FOR JUDGMENT

1 In this matter Gregory George McLeay is sought to be made bankrupt by the Australian Taxation Office (ATO) in the following way. Starbucks Corporation and associated companies obtained an order against Mr McLeay and others on 24 April 2004 from a Judge of this Court ordering that Mr McLeay pay those parties $28,000, that sum being assessed costs for the hearing of the application heard on that day in the absence of Mr McLeay. The order for costs was conditional. It provided that: That amount be paid provided that liberty is reserved to the first, second or third respondents [which included, relevantly, Mr McLeay as the second respondent] to apply for court taxation of those costs, provided that such application is filed within 60 days of the service of the orders on that party. 2 On the evidence before me the service was made upon Mr McLeay three days later, on 26 April 2004. The 60 days expired on and including 25 May 2004. On that day, that is, on 25 May 2004, Mr McLeay sent by facsimile to the Federal Court Registry a letter which was not in a court form but in substance was an application for taxation. The facsimile was received by the Registry at 17:21 hours on 25 May. As the letter of Mallesons Stephens Jaques, who were the solicitors for Starbucks, pointed out to Mr McLeay on 31 May 2004, by reason of the fact that the letter was received by the Registry 51 minutes after 4.30 pm, Order 5A rule 7 of the Federal Court Rules provided that the transmission was taken to have been filed on the following day. Thus, Mr McLeay was out of time. 3 Plainly, an order could have been sought that that time be extended nunc pro tunc. Mr McLeay gave evidence before me that he made some application to the Court in relation to setting aside the orders made but that those applications were not heard. There does not seem to have been a precise application ensuring that the debt for $28,000 for costs was taxed. I would construe the order of his Honour as one in substance that a debt was due unless the liberty reserved to the respondents was taken up within time. As I said, plainly an order could have been sought that time be extended, given that Mr McLeay was 51 minutes out of time, in fact, though, under the Rules, one day out of time. 4 There is no evidence before me as to whether this consideration was drawn to the attention of the Official Receiver on the issue of a bankruptcy notice. An inference is perhaps available that the Official Receiver did not have it drawn to his attention. If he had one doubts whether a bankruptcy notice would necessarily have been issued. However, I do not conclude that the Official Receiver was not told. I simply do not know. 5 The bankruptcy notice was then served on Mr McLeay. It expired and an act of bankruptcy on its face was committed. However, it was committed in the circumstances that I have identified. A creditor's petition was then filed based on that act of bankruptcy. Mr McLeay was then by an order of the Registrar made bankrupt. He brought application before me earlier this year for review of that order and for its annulment. I heard the applications together. During the course of the application the Starbucks creditor entered negotiations with Mr McLeay later, by consent, orders were made setting aside the sequestration order. However, in those orders I made provision for the protection of supporting creditors if they wished to move upon the same creditor's petition. The ATO has taken up the burden of so doing. 6 The evidence led in support of the applications before me was, if I may use the expression, in standard form. The formal affidavits although prepared and filed on behalf of Starbucks were read as to the filing of the relevant documentation and its service. The affidavit of debt was that of Douglas Bruce Carmen who is an officer of the ATO. He annexed a running sheet taken from the records of the ATO which computes on its face present liability by Mr McLeay of some $69,500. Mr McLeay disputes that and says that he has most recently today paid what he says he owes the ATO being $25,301.31. 7 There is, therefore, a dispute as to the sum of approximately $44,000. The nature of that dispute is less than clear on the evidence. However Ms Whan, in her submissions, indicated that it can be understood by reference to Mr McLeay's assertions as to when credit should have been in his running account with the ATO. That may or may not be so. However there is no judgment debt for any sum and there is no agreed sum owing beyond that which was set out in Mr McLeay's affidavit filed on 7 September which had a sum owing of $25,301.31 which has now been paid. 8 There is no dispute, based on Mr McLeay's own evidence, that a debt was owing to the ATO when the act of bankruptcy occurred. During the time of Mr McLeay's status as a bankrupt the acting Official Receiver prepared evidence dealing with the affairs of Mr McLeay. Using that material, I asked Mr McLeay some questions in the witness box. Mr McLeay gave evidence on oath that he has a six bedroom house in Cremorne on which is owed approximately $1.1 million by way of home loan and business loan. Mr McLeay swears that there are no further secured interests on the home. He indicated that he had a valuation of $2.2 million in the last two years. While that written evaluation was not in Court, I think the fact that I have lived in Sydney all my life allows me to take judicial notice that some reliance can be placed upon the house being worth at least in the order of $1.5 million, if not more. 9 By reference to the work of Mr Cruikshank, the acting Official Receiver, I asked Mr McLeay as to what other creditors there were apart from the ATO and a strata title company which has been, until this afternoon, another proposed supporting creditor. He indicated to me that there were no other creditors by which I took him to mean no other creditors over the $5000 mark which I indicated and by which I understood no other creditors of any substance. 10 There is a most unfortunate history to this matter. That is not said in any way critically of the ATO. It may be, as Ms Whan said, that Mr McLeay has been more than tardy in the payment of his obligations to the revenue. However failure to pay the revenue is not a badge of insolvency. It may be depending on all the circumstances. 11 Here the important thing for me is to understand whether I should make an order under s 52 of the Bankruptcy Act 1966 (Cth). Section 52 is a section which changes the status of members of the public. They become bankrupts. They become subject to liabilities and responsibilities which others in the community do not share. Notwithstanding the changes over the years, it is still fair to say, especially in professional circles, that the status of bankruptcy is one which is still a mark of failure and to be avoided if the due undertaking of affairs are to be continued. It is an important step to take in anyone's life. It is a step which only in extraordinary circumstances should ever be taken in circumstances where it is tolerably clear that the party is solvent. 12 The case of Sarina v Council of the Shire of Wollondilly (1980) 32 ALR 596 is the best example of that. Mr Sarina, who styled himself King Ron of Wollondilly refused year after year to pay his council taxes and rates. Bankruptcy proceedings were brought in this Court. Mr Sarina quite happily admitted that he was utterly unwilling to pay the debts, but he contested mightily that he was unable to. He owned a good proportion of the land around Warragamba Dam that was in private hands. The Court dismissed the petition. A court of bankruptcy is not a debt collection agency. Its function is to deal with people in the community who are insolvent. 13 Here the evidence is far from confidently persuasive that Mr McLeay is solvent. I say that because there is no reliable body of evidence before me in written form of the valuation of his house. But on the evidence Mr McLeay gave, I think there is a reasonable state of confidence that Mr McLeay has substantial equity in his home with his wife. The other considerations which I bring to bear in this matter in the exercise of discretion and in the exercise of the power under s 52 is how this matter has come to be in this Court. Again, this is said without the slightest criticism of the ATO. I have real reservations about whether any bankruptcy notice should have ever issued. The fault for that may lie in a number of places, most particularly, perhaps, at Mr McLeay's feet. He should have made an application to Beaumont J to have the time extended to comply with the costs order. 14 However, what has happened has happened. The operation of the bankruptcy laws can sometimes constrain parties like an iron web, especially once an act of bankruptcy apparently has been committed. However, in approaching this matter and exercising of the power under s 52, I take into account that though an act of bankruptcy was apparently committed, it's been brought about in circumstances that are regrettable. 15 There is a disputed debt between the ATO and Mr McLeay. 16 The annexure to Mr Carmen's affidavit is some evidence of the resolution of that dispute. I considered the application of s 135 of the Evidence Act 1995 (Cth) to reject that evidence of the annexure of Mr Carmen. The matters to which I gave consideration are the fact that it would not have been a difficult exercise for the ATO, given that it does not have a judgment, to set out in clear terms the precise history of how this debt arose, the nature of the apparent dispute allowing the matter to be dealt with with some clarity. However, on reflection, I do not think that s 135 of the Evidence Act is the appropriate mechanism for dealing with those issues. 17 The stating of the issues in that way reflects, it seems to me, that the dispute about this debt is a matter that should go to trial. The debt beyond that which has been paid appears to be disputed. The proper resolution of that dispute is not the bankruptcy court but a court of appropriate jurisdiction to hear an action for debt which apparently is disputed. 18 The matters to which I have referred as to the history of this proceeding inform my discretion in this way. The exercise of the power under the Bankruptcy Act is not only the exercise of power in a lis between the parties. It is the exercise of a power in which there is public interest. In circumstances where, though in part his fault, Mr McLeay can take real objection to how the matter has fallen out and how it has come that he has been held to have committed an act of bankruptcy and in fact been sequestrated is a matter of public interest and this assists informing me against the exercise of power under s 52. 19 If Mr McLeay were plainly insolvent it may well be that that unfortunate history would be something that simply would have to be accepted in the light of the insolvent status of the person in those circumstances. After all, as I have said, the overriding consideration in a court of bankruptcy is the public interest and the interest of the parties in the context of the insolvency of the debtor. Bearing in mind all the circumstances here, in particular how this matter has arisen, the nature of the dispute as to the balance of the debt and the apparent asset position of Mr McLeay, I would not make a sequestration order under s 52. Adequate circumstances appear in my view to make an order under s 49 in relation to the substitution but, having made that order, I would dismiss the petition. 20 Given that Mr McLeay appears to have paid the ATO I do not see any point in suspending the operation of the dismissal of the petition or otherwise standing the matter over. This matter has been in the Court for long enough and I think in all the circumstances the parties should take their differences as to who owes money to whom and, if so, in what amount, to a court of competent jurisdiction. 21 Before I make the orders, as I have said, to a large extent the ATO is not to be criticised in relation to the handling of this matter. My questions of potential criticism perhaps lay elsewhere including to Mr McLeay in acting in his own interests last year. However, Mr McLeay is not represented and the orders that I would make would, subject to hearing from the parties, include an order that each party pay its and his own costs. 22 Therefore, the orders I make are as follows: 1. I permit Erin Kathleen Holland, Deputy Commissioner of Taxation of the Commonwealth of Australia, Operations Program to be substituted on the petition as the applicant. 2. I dispense with any requirements to amend the petition. 3. The petition be dismissed. 4. Each party pay its, her and his own costs of the application for substitution and of the hearing of the petition. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Allsop.