FEDERAL COURT OF AUSTRALIA Moravcik v Giasoumi [2016] FCA 1163 File number: VID 551 of 2016 Judge: JESSUP J Date of judgment: 28 September 2016 Catchwords: BANKRUPTCY AND INSOLVENCY – Application to annul bankruptcy – Where sequestration order made after proceedings to recover applicant's payment under unfair preference from liquidated former employer – Whether former employer was trading solvent at time of payment – Whether sequestration order ought not to have been made – Application dismissed. Legislation: Bankruptcy Act 1966 (Cth) ss 40, 109, 153B Corporations Act 2001 (Cth) ss 459E, 459P, 588FE, 588FF, 588FG Cases cited: Hudson v Whalan (1999) 5 ABC(NS) 1 Date of hearing: 30 August 2016 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: General and Personal Insolvency Category: Catchwords Number of paragraphs: 22 Counsel for the Applicant: The applicant appeared in person Counsel for the First and Second Respondents: Mr A Silver Solicitor for the First and Second Respondents: Marsh & Maher Counsel for the Third Respondent: Mr D McAloon Solicitor for the Third Respondent: Thomson Geer ORDERS VID 551 of 2016 BETWEEN: EDUARD MORAVCIK Applicant AND: NICHOLAS GIASOUMI AND ROGER DARREN GRANT (AS JOINT AND SEVERAL LIQUIDATORS OF IWB SERVICES PTY LTD (IN LIQUIDATION) (ACN 053 635 715) First Respondent IWB SERVICES PTY LTD (IN LIQUIDATION) (ACN 053 635 715) Second Respondent KEITH LAURENCE SUTHERLAND Third Respondent JUDGE: JESSUP J DATE OF ORDER: 28 SEPTEMBER 2016 THE COURT ORDERS THAT: 1. The application be dismissed. 2. The taxed costs of the first and second respondents be their costs as petitioning creditors and have priority as such pursuant to s 109(1)(a) of the Bankruptcy Act 1966 (Cth). 3. The taxed costs of the third respondent be his costs in the administration of the applicant's bankruptcy and have priority as such pursuant to s 109(1)(a) of the Bankruptcy Act 1966 (Cth). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT JESSUP J: 1 By order made on 3 July 2014, the estate of the applicant, Eduard Moravcik, was sequestered on the petition of the first respondents, Nicholas Giasoumi and Roger Darren Grant, in their capacity as joint and several liquidators of the second respondent, IWB Services Pty Ltd (in liquidation) ("the company"). The third respondent, Keith Laurence Sutherland, was, and is, the trustee of the estate. 2 In this proceeding, which was commenced on 27 May 2016, the applicant applies to have his bankruptcy annulled pursuant to s 153B of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act"). The matter for determination under that section is whether the sequestration order "ought not to have been made". Here it is not sufficient for the applicant to point to circumstances which, if they had been considered by the Registrar making the order, might well have led to the order not being made. It is necessary for him to establish that the Registrar was, on the facts now known, bound not to make the order: Hudson v Whalan (1999) 5 ABC(NS) 1, 5-6 [9]-[11]. 3 The applicant is a self-employed cleaner. He was engaged by the company to provide cleaning services at its premises in Council Street, Hawthorn, in 2004, and, when the company moved to new premises in Chetwynd Street, West Melbourne, in 2008, he continued to provide those services at that address. It was subsequent to the move that the applicant found that the company was defaulting on its payment of his invoices (which related not only to his own labour but also to supplies which he had purchased as part of his cleaning contract). Accordingly, on 1 April 2011, the applicant ceased to provide services to the company. 4 Acting under s 459E(1) of the Corporations Act 2001 (Cth) ("the Corporations Act"), on 5 April 2011 the appellant caused a statutory demand, relating to a claimed debt of $67,505.68, to be issued in relation to the company. Acting under s 459P(1) of the Corporations Act, on 12 May 2011 the applicant applied for the company to be wound up in insolvency. This proceeding came before a Registrar on 27 June 2011, at which time orders were made for the applicant to file an amended originating process, for the company to file its affidavits by 12 July 2011, and for the applicant to file his affidavit in reply by 19 July 2011. The hearing of the matter was adjourned to 21 July 2011. 5 On 20 July 2011, the company made a payment of $58,000 to the applicant. When the applicant's proceeding under s 459P of the Corporations Act came before the Registrar on 21 July 2011, it was dismissed, with no order as to costs. The order of that day was not ostensibly by consent, but, in the light of the payment made on the previous day, the probabilities are that the order was at least unopposed. 6 By special resolution passed on 11 November 2011, the members of the company resolved that the company be wound up voluntarily by way of a creditor's voluntary winding up, and that the first respondents be appointed joint and several liquidators. That was the "relation-back day" for the purposes of the Corporations Act. Having examined the affairs of the company, Mr Giasoumi concluded that the company was insolvent at the time when it made the payment to the applicant on 20 July 2011 and that, having been made during the six months ending on the relation-back day, the payment amounted to a voidable transaction within the meaning of s 588FE of that Act. 7 By letter to the applicant dated 29 November 2012, Mr Giasoumi stated his view that the company's payment of $58,000 on 20 July 2011 was an unfair preference, and demanded payment of that sum. On 14 December 2012, a further letter of demand was sent to the applicant. Both letters were "returned to sender", but I am satisfied, from the evidence in this case, that the applicant resided at the address to which they were sent. 8 On 26 July 2013, the first respondents commenced a proceeding for recovery of $58,000 from the applicant in the Magistrates' Court of Victoria. In their Complaint, they sought an order pursuant to s 588FF of the Corporations Act directing the applicant to pay that sum, together with interest and costs. The applicant did not defend this proceeding. On 17 December 2013, the first respondents secured judgment against the applicant, by default, in the sum claimed, plus $6,332.41 interest and $2,552.82 costs. By letter dated 7 January 2014, the first respondents demanded payment of the total owing under the judgment, but payment was not forthcoming. 9 On 10 February 2014, the first respondents and the company caused a bankruptcy notice to be issued in relation to the applicant. That was subsequently served on him, and formed the basis of the creditor's petition which led to the making of the sequestration order the subject of the present application under s 153B of the Bankruptcy Act. 10 From the written submissions handed up by the applicant on 30 August 2016, it appears that his case under s 153B has two, related, elements. First, he contends that the company was not insolvent in July 2011 when it made the $58,000 payment to him. And secondly, he relies on s 588FG of the Corporations Act. 11 As to the first element, the applicant points to an affidavit filed by the company in his proceeding under s 459P of the Corporations Act. It was the affidavit of Ken Wortley, a director of the company, sworn on 27 June 2011. Aside from putting in issue the amount claimed by the applicant, Mr Wortley swore to his belief that the company was "solvent and … able to pay its debts as and when they fall due." He provided some unaudited figures, and exhibited the company's financial statements, in support of that belief. He said that, on those figures, the company's "net asset position" as at the end of May 2011 was $218,512.68. Neither Mr Wortley nor any other person then involved in the financial control of the company was called as a witness by the applicant in the present case. 12 As against that, Mr Giasoumi gave the following evidence, on which he was not cross-examined (and in which he referred to the six-month period ending on the day of the winding-up resolution as "the relation back period"): I concluded that the company was insolvent during the relation back period due to the following: i. The Company failed to meet payment terms set by trade and statutory creditors, including the Applicant; ii. During the [relation back period] creditors' accounts were outstanding for more than ninety days; iii. During the [relation back period], creditors, including the Applicant, issued demands to the Company for their overdue accounts; iv. Creditors, including the Applicant, the Australian Taxation Office, KULTA Group, and Veolia Environmental Services (Australia) Pty Ltd, threatened or took legal action against the Company; v. The Company entered into payment arrangements with the Applicant, as it was unable to pay its debts as and when they fell due; vi. The Company had defaulted on a number of payment arrangements with the Applicant; vii. On 5 April 2011, the Applicant had issued a Creditor's Statutory Demand for Payment of $67,505.68 against the Company; viii. On 12 May 2011, the Applicant had issued a Notification of Court Action relating to winding up against the Company for failure to pay the sums set out in the Statutory Demand. The Notification was filed in the Federal Court of Australia in Victoria pursuant to proceeding matter number VID 388/11; … ix. As at the [relation back period], the Company had a net deficiency of assets to liabilities of $2,160,806.00. 13 How do these facts, which relate not to the solvency of the applicant in July 2014 but to the solvency of the company in the six-month period ending on 11 November 2011, bear upon the applicant's title to an order under s 153B of the Bankruptcy Act? He seems to be saying that it should now be held that the company was not then insolvent, that the first respondents were not entitled to recover the sum of $58,000, plus interests and costs, from him, and that, therefore, the debt the subject of the bankruptcy notice did not exist. I would reject that case. 14 With respect to the underlying proposition about the solvency of the company in the second half of 2011, Mr Giasoumi's evidence was comprehensive and credible. No serious attempt was made to undermine it. The tender of a self-evidently tendentious statement by a director of the company under the cloud of the applicant's own winding-up application, sworn though it was, is a long way short of what would be required to cast doubt on Mr Giasoumi's direct evidence in the present case. The appellant has not made good his assertion that the company was solvent on 20 July 2011. 15 But the applicant's difficulties do not end there. The cause of action which the first respondents had against the applicant in the Magistrates' Court did not relate to a pre-existing debt. The effect of s 588FE of the Corporations Act was that the payment of 20 July 2011 was, if the first respondents were correct, voidable. That did not make the sum involved payable to them as a matter of immediate entitlement. Their entitlement to the sum arose on the making of an order under s 588FF. Thus the order of the Magistrates' Court both perfected the first respondents' entitlement to the sum as a debt and provided the judgment on which they relied under s 40(1)(g) of the Bankruptcy Act. The applicant is, therefore, in no position to contend that the Magistrates' Court was incontestably wrong because the debt enforced by its judgment did not in truth exist. It was the judgment which gave rise to the debt. To impugn the judgment, the applicant would have to make good the proposition that, on the material now known to this court, that judgment could not – not might not – have been given. In my view, the most that might be said in favour of the applicant in this part of the case is that, had that material been placed before the Magistrates' Court, it might have been given more to think about than it had in the proceeding in which the applicant did not appear. It could not be said that that court could not have been satisfied that the payment of 20 July 2011 was voidable because of s 588FE of the Corporations Act. 16 As to the applicant's second element, the insuperable reality for him is that s 588FG of the Corporations Act operates by way of a defence to an application under s 588FF. Had the applicant appeared before the Magistrates' Court, he might have persuaded it that he received the payment on 20 July 2011 in good faith, and that he had provided valuable consideration for that payment, thereby satisfying paras (a) and (c) of s 588FG(2). But he advanced no such defence. The court is in no position now to say that any such defence, if advanced, would have been bound to succeed. In these respects the case is, in my view, quite different from one in which it is possible later to say that a primary cause of action on which a creditor relied in enforcement proceedings never existed. Although, in a forensic context such as the present, the principle of res judicata, is not, I accept, applicable with all of its customary strictness, nonetheless it remains true that a party to litigation is bound by the way that he or she has conducted the case, and cannot later be heard to say that a judgment adverse to him or her should not have been given because of the strength of a defence which might have been, but which was not, taken. 17 What I have said to date relates only to paras (a) and (c) of s 588FG(2). With respect to para (b) of that subsection, the applicant would have been in much greater difficulty on the primary facts of the case. He would have had to persuade the Magistrates' Court that, on 20 July 2011, he had no reasonable grounds for suspecting that the company was insolvent, or would become insolvent as a result of making the payment, and that a reasonable person in his position would have had no such grounds for so suspecting. Given that it was the applicant himself who applied for the company to be wound up, and whose own application was to come on for hearing the following day, the prospect that he would have carried the Magistrates' Court with him under para (b) strikes me as a most unlikely one. 18 For the above reasons, I reject the applicant's case that the sequestration order of 3 July 2014 ought not to have been made. Indeed, I take the view that, taking into account all of the evidence to which I have been exposed, that order was the obvious outcome to the first respondents' application then dealt with by the Registrar. 19 The respondents had a number of discretionary grounds upon which, they submitted, I should not make a s 153B order. However, since each of them was based on the premise that I would reach the conclusion that the sequestration order of 3 July 2014 ought not to have been made, the occasion for a consideration of them does not arise. 20 The applicant had a number of subsidiary complaints against the first and third respondents, or one or more of them, largely concerned with the discharge of their duties as liquidators and trustee. The basis of these complaints as raising justiciable issues in this proceeding is by no means self-evident, but they all assumed a favourable outcome for the applicant under s 153B of the Bankruptcy Act. In the circumstances, I propose to say nothing further about them. 21 Upon the determination of the applicant's proceeding under s 153B, the stay imposed by Order 6 made on 1 July 2016 will, by its own terms, come to an end. As I indicated to counsel, no further order is required for the discharge of that stay. 22 There will be orders to make clear that the respondents' costs are covered by s 109(1)(a) of the Bankruptcy Act – the costs of the first respondents and the company as petitioning creditors and those of the third respondent as trustee. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jessup. Associate: Dated: 28 September 2016