Case notes

Barranbali Pty Ltd v Pioneer Australia Pty Ltd [2021] FCAFC 100

This case addresses whether a single joint creditor has standing under s 90-20 of the Insolvency Practice Schedule (Bankruptcy), Schedule 2 of the Bankruptcy Act 1966 (Cth) to apply for an order to remove and replace a trustee pursuant to s90-15. It also considers whether a proof of debt is capable of being lodged by one only of joint creditors.

Background

In this case a loan was guaranteed by the bankrupt (the sole director) and her husband. The company defaulted. Judgment was awarded in the sum of $7,146,275. A trustee was appointed to the bankrupt estate and subsequently a single joint judgment creditor of the bankrupt (the Second Respondent) brought an application to the Court to remove and replace the existing trustee, despite the First and Second Respondents being named joint creditors. The primary judge made orders that the trustee be replaced.

The bankrupt challenged the replacement and argued that ‘joint creditors can only act together, and anything done without the authority and agreement of them is invalid’. At first instance the primary judge held that ‘there is nothing in the Act which suggests that the making of an application to ensure the proper administration of the bankrupt estate is one which cannot be made alone’ [42]. The primary judge recognised that the definition of ‘creditor’ under s5-30 of the Insolvency Practice Schedule was ‘very wide’ and confirmed that ‘there is nothing in the scope or purpose of s5-30 or of s90-15 and 90-20 which suggests that the word creditor should be given any narrow construction’.

The Appellants appealed this decision.

Consideration

The Court dismissed the appeal.

The Court unanimously agreed with the primary judge that the Second Respondent had the necessary standing. Greenwood J, with whom Perry and Anastassiou JJ agreed, observed that ‘…the proper construction … is such that one of two joint creditors of a debtor… has standing under s90‑20(1) to apply to this Court (s27) for orders under s90‑15(1)… without applying jointly with the other joint creditor; or having the authority of the other joint creditor to apply; or joining the other joint creditor as a respondent to the application’ [3].

Greenwood J found that standing to apply for such orders is conferred by s90-20(1) on ‘a person with a financial interest in the administration of a regulated debtor’s estate’ [4], and that a person with ‘financial interest’ is defined in section 5-5 of Schedule 2 by reference to s5-30 of Schedule 2, which confirms that a ‘creditor’ has such an interest [4].

Perry and Anastassiou JJ confirmed the primary judge’s view that ‘the distinction of relevance between a single creditor and joint creditor flows from the nature of the obligation itself’ [61]. They went on to add that ‘the meaning of the word “creditor” remains uniform and consistent throughout the Act, it is merely that the rights of a single joint creditor in relation to the administration of the bankrupt’s estate vary depending on the nature of the obligation.’ [63]

Perry and Anastassiou JJ rejected the submission that to allow a joint creditor to act independently in seeking a s90-15 order is antithetical to the common law constraint against joint creditors acting independently in relation to the recovery of a single obligation, which, the Appellant argued, defines the rights of joint creditor for all purposes [62]. The Court highlighted the distinction between Division 90, which is ‘concerned with the proper administration of estates’, and applications concerned with the enforcement of debts or judgments, which raise different considerations with respect to standing.

Lodging proof of debt by single joint creditor

Finally, while the lodging of a proof of debt by a single joint creditor was not an issue the Court was required to decide, and hence the views expressed were obiter, Perry and Anastassiou JJ, opined that the orthodox position was correct: if a [hypothetical] trustee permitted a proof of debt lodged by one only of joint creditors ‘it would be inconsistent with the principle articulated by the High Court in Bowen’ [Australian Workers’ Union v Bowen [1946] HCA 24; (1946) 72 CLR 575]  [70]. However, Greenwood J disagreed and argued that one of two joint creditors should still be able to lodge a proof of debt notwithstanding the reluctance or unwillingness of a joint judgment creditor to assist or participate in such a process [31].

Donoghue v Russells (A Firm) [2021] FCA 798

Issues

Whether the debtor “was carrying on business in Australia” under s43(1)(b)(iii); whether the debtor “had a place of business in Australia” under s43(1)(b)(ii); whether servicing a debt in Australia constitutes “carrying on business in Australia”

Background

From 2011, the appellant (‘the debtor’) had been engaged in litigation with the Commissioner of Taxation. The creditor was a firm of solicitors that acted for the debtor in much of that litigation. The litigation ended in May 2018 when judgment was entered against the debtor for an amount in excess of $48 million.

The debtor was able to obtain certificates which allowed him to temporarily leave Australia. However, the debtor had not returned to Australia since July 2014. A bankruptcy notice was issued which was not complied with. To satisfy the various tests for making a sequestration order the creditor contended that the debtor had a ‘dwelling house’ in Australia, had a ‘place of business in Australia’, and was ‘carrying on business in Australia’ at the time when the relevant oct of bankruptcy occurred [12 June 2018].

The primary judge was not satisfied that the debtor had a dwelling house in Australia at the time the notice was issued. The debtor had resided in a Brisbane property (‘the property’) with his wife but he had left after separating in 1998. His family continued to continue to reside at the property. In 2008 the debtor borrowed between $4m and $5m from the Commonwealth Bank (CBA). In her capacity as trustee of the family trust the debtor’s wife agreed to be the borrower of the funds and for the property to be used for security for the loan, which was advanced over a period of time. The debtor was responsible for repaying the loan secured over the property. He personally guaranteed that loan. The monthly repayments of that loan were in the order of $45,205. The primary judge agreed it was reasonable to infer that the substantial monthly repayments were made from the debtor’s business activities.

The debtor listed the property as the address for service of notices under his personal guarantee with the CBA. He also gave to the CBA the property as his residential address. The primary judge concluded the evidence indicated that it was borrowed by the debtor for business purposes adding that the debtor’s wife stated that he continues to use that facility for his business.

The primary judge found that the debtor “had a place of business in Australia” and “was carrying on business in Australia” at the time when the act of bankruptcy was committed. Accordingly, his Honour held that the Court had jurisdiction to make a sequestration order. In the appeal, the debtor contended that the primary judge erred in making both findings.

Consideration

Whether the primary judge erred in finding that the debtor was carrying on business in Australia

The Court looked at the scope of s43(1)(b)(iii) and the debtor’s submission that it ‘requires a commercial enterprise in the nature of a going concern, that is, activities engaged in for the purpose of profit on a continuous and repetitive basis in Australia’. The creditor contended that all that is required is that some part of a business, not necessarily direct trading activity, be carried on in Australia. The Court found no authority that addressed the competing submissions.

After a comprehensive review of case-law the Court distilled six propositions [50]:

(1)  Whether a company is “carrying on business in Australia” is a question of fact.

(2)   The words “carrying on” imply the repetition of acts and activities which possess something of a permanent character; and it is generally insufficient for there to be a single transaction or a number of isolated transactions.

(3)  A single transaction in Australia may be enough if it has been made in the course of business which the debtor is carrying on overseas.

(4) A debtor may carry on business “in” Australia even though the bulk of his or her business is conducted overseas.

(5)  It may be sufficient that there are acts done in Australia ancillary to activities or transactions that make up a business. ..it is not essential that a business engage in actual trading activity in Australia. Examples of such ancillary acts may include the raising of capital in Australia for use by a business overseas… and the payment of debts after a business has ceased to actually trade in Australia.

(6)  A person may carry on business in Australia without necessarily having a place of business in Australia.

The Court rejected the debtor’s submission that for the debtor to carry on business in Australia, it is essential that a going concern exist in Australia, stating that:

It is not essential to demonstrate actual trading activity in Australia. It may be enough for the creditor to demonstrate that the debtor engages in acts or transactions in Australia which are ancillary to trading activity conducted overseas. Whether it is enough will depend upon the particular facts of the case. [51]

The Court placed considerable weight on the ‘direct and unequivocal’ evidence of the debtor’s wife, (in evidence led by the debtor), that ‘the debtor borrowed and used, and continues to use, the money for the debtor’s business.  The references to “his business” must, on their face, be understood as referring to the debtor’s own business. Mrs Donoghue’s evidence does not suggest that the money was borrowed for and used by a business operated by some person or entity other than the debtor.’ [66]

The Court then considered the fact that the debtor had not given evidence and had provided no explanation for his failure to give evidence. The primary judge had relied on the rule in Jones v Dunkel; that the unexplained failure by a party to call a witness may in appropriate circumstances support an inference that the uncalled evidence would not have assisted the party’s case. The Court endorsed that approach noting that:

The absence of evidence from the debtor also allowed a more confidently drawn inference that the debtor’s business was the source of the funds for the repayments. It was unnecessary for there to be evidence about the nature and extent of the debtor’s business. [73]

The Court rejected the debtor’s argument that he was not ‘carrying on a business’ at the time of the act of bankruptcy by making monthly repayments on the loan. The Court accepted that ‘if the raising of loans in a country is capable of constituting the carrying on of business in that country, so too must be the repayment of such loans’ [77]. Further supporting the conclusion that the debtor was carrying on a business the Court noted the salient facts:

The debtor borrowed the money from the family trust for use in his business, which is based overseas. The debtor continues to use the funds in his business. The debtor makes regular and ongoing repayments of approximately $45,000 per month to Mrs Donoghue in Australia. The debtor, it should be inferred, makes the loan repayments from the capital or income of his business. The making of the loan repayments is part of the carrying on of the debtor’s business. [78]

While that was sufficient to dispose of the appeal the Court went on to consider whether the debtor had ‘a place of business in Australia’. The creditor had argued that the criteria in s 43(1)(b)(ii) and (iii) of the Act were disjunctive, that is that the criterion of “place of business in Australia” can be satisfied even if the criterion of “carrying on business in Australia” was not. If the debtor was not carrying on a business this raised the question whether the jurisdictional requirement to make a sequestration order would be satisfied if a person could have a place of business in Australia without carrying on business in Australia.

Whether the primary judge erred in finding that the debtor had a place of business in Australia

The primary judge concluded that at the date of the act of bankruptcy [12 June 2018] the debtor had a place of business in Australia. The first reason was that the debtor was carrying on business in Australia by servicing the debt to the family trust in Australia. The second reason was that the debtor provided the property as his address for his personal guarantee. Finally, the debtor remained a director and his address for the directorship remained the property. The primary judge concluded that as the debtor did not give evidence about these matters this gave rise to a Jones v Dunkel adverse inference.[83]

The appeal Court disagreed with that conclusion, indicating that the unchallenged evidence of the debtor’s daughter was that the company had never traded nor operated any business, and that the only thing it had done was purchase a car for the debtor’s wife. [88] It concluded that the facts did not support an inference that the debtor had a place of business in Australia at the date of the act of bankruptcy.

The appeal court concluded that if the ‘primary judge was wrong in concluding that the debtor was carrying on business in Australia, his Honour was also wrong to conclude that the debtor had a place of business in Australia.’ [89] The Court left open the question whether a person may have a place of business in Australia without carrying on business in Australia (the converse of the last proposition the Court derived from the authorities listed above - a person may carry on business in Australia without necessarily having a place of business in Australia). The appeal was dismissed with costs

 

Davidson v Official Receiver [2021] FCAFC 73

Issue

This case addresses whether a notice issued by the Official Receiver pursuant to s 139ZQ of the Bankruptcy Act (the ‘Act’) to recover a transfer at undervalue pursuant to s120(1) of the Act is valid, despite the expiration of the limitation period in s127(3) before the notice has been complied with or sought to be enforced.

Background

In this case, the Bankrupt became bankrupt on the filing of a debtor’s petition on 16 December 2013 and was automatically discharged on 16 December 2016. On 6 December 2019, the Official Receiver (First Respondent) issued a notice to the Appellant pursuant to s139ZQ of the Act requiring payment of $12,507,025.84 to the Trustee (Second Respondent) (‘the Notice’). This amount represented the aggregate of payments made by the Bankrupt to the Appellant, which the Trustee claimed were transfers of property for less than market value and void within the meaning of s 120(1) of the Act. 

Action under s120(1) of the Act voiding a transfer of property must be commenced by the trustee before the expiration of six years from the date of bankruptcy, pursuant to s127(3) of the Act. The Notice was issued 10 days prior to the expiration of the limitation period for the commencement of a proceeding pursuant to s120.

On 14 May 2020 the FCC dismissed the Appellant’s application for summary judgment and a s 139ZS(1) order setting aside the Notice on the grounds that it was issued out of time (see MLG 319 of 2020).  The Appellant sought leave to appeal to the FCAFC and orders setting aside the Notice and a declaration pursuant to s30(1) of the Act that the trustee is barred by s127(3) from commencing s139ZQ(8) action.

Consideration

The Court granted leave to appeal but dismissed the application.

Whether the s139ZQ Notice was statute barred by s 127(3)

The Court rejected the Appellant’s argument that the claim was statute barred as the Notice had to be not merely issued, but ‘either complied with or sought to be enforced, within the six-year limitation period in s127(3) in order to be valid’ (see [40]).

The Appellant argued that the issuing of the Notice did not constitute an ‘action under section 120’ pursuant to s 127(3) of the Act, and that in the absence of a definition within the Act, ‘action’ should be interpreted to mean ‘civil proceedings’. In rejecting this argument, the Court considered the meaning of ‘action’ under s127(3):

[42] there is no basis to interpret the phrase “an action” in s127(3) as being limited to a proceeding… [A]n action must be understood as conduct by the trustee to recover money pursuant to a transaction at undervalue, not only by commencing proceedings but also by the taking of other steps…

The Court observed the administrative nature of s139ZQ, noting that it ‘creates an alternative pathway and separate cause of action to the curial process under s 120 of the Act’ and for this reason, ‘once a s 139ZQ notice is validly issued (including within the limitation period in s127(3)), it does not cease to be valid merely because it has not been complied with, or sought to be enforced, before the expiry of that limitation period’ (see [43]).

The Court rejected the submission that the issuing of a s139ZQ notice has the effect of extending the limitation period contained in s127(3) ‘indefinitely’ for the commencement of action in respect of a transfer at undervalue under s120 (see [27], [44]). It noted that s127(3) should be construed as abolishing a trustee’s right to bring a claim if not issued within the limitation period, and not just the right to obtain a remedy. As such, the issuing of a notice pursuant to s139ZQ is contingent on the notice being provided within the s127(3) limitation period.

The scope of ‘trustee of a bankrupt’ in s139ZQ(1)

Finally, the Court rejected the Appellant’s argument that the term ‘trustee of a bankrupt’ in s139ZQ(1) does not include the trustee of a discharged bankrupt, confirming that the trustee has an ongoing function in relation to the bankrupt estate even after the bankrupt has been discharged (see [50]).