Re Eddie Solomon Ex Parte: John Ralph Reid [1986] FCA 179 (6 June 1986)

FEDERAL COURT OF AUSTRALIA

Re: EDDIE SOLOMON
Ex Parte: JOHN RALPH REID
No. P1809 of 1985
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
GENERAL DIVISION
BANKRUPTCY DISTRICT OF NEW SOUTH WALES AND THE AUSTRALIAN CAPITAL TERRITORY
Beaumont J.(1)

CATCHWORDS

Bankruptcy - receiver appointed over property of debtor pursuant to s.573(1)(h) of Companies (N.S.W.) Code - receivership order construed by Supreme Court to cover future property - Supreme Court directed debtor may use property in hands of receiver to pay reasonable living expenses - receivership order made on 11 December 1984 - bankruptcy notice issued on 25 July 1985 - whether notice bad due to s.41(3)(b) of Bankruptcy Act - whether effect of receivership was that execution of judgment was stayed - leave of Supreme Court required to levy execution against property in receiver's hands - whether s.41(3)(b) limited to situations where equitable execution has occurred.

Companies (NSW) Code ss.324A, 573(1)(h)

Bankruptcy Act 1966 s.41(3)(b)

Alexander v. Cambridge Credit Corporation Ltd. (Receiver Appointed) (1985) 2 NSWLR 685

Ex parte Ide; In re Ide (1886) 17 QBD 755

Re Pannowitz; Ex parte Wilson (1975) 38 FLR 184

Re A debtor (1984) 2 All ER 257

Ames v. The Trustees of The Birkenhead Docks (1855) 20 Beav 332; 52 ER 630

Re Bond (1911) 2 KB 988

In re Sedgwick, Ex parte Sedgwick (1888) 5 Morr 262

Bracia Czeczowiczka v. Markus (1936) 1 All ER 944

HEARING

SYDNEY
6:6:1986

Counsel and Solicitors for Debtor: Mr. M. Pembroke instructed by Sly & Russell with Hall & Hall and Dare Reed.

Solicitors for Petitioning Creditor: Andrew P. Abaza and his agents Messrs Clayton Utz.

Solicitor for Corporate Affairs Commission: Mr. N.J. Parsons

Solicitors for Official Trustee: P.A. Somerset & Co.

ORDER

1. Petition dismissed.

2. Reserve liberty to any party to apply for costs on 7 days' notice.

Note: Settlement and entry of orders is dealt with in Bankruptcy Rule 124.

DECISION

For the reasons given in this matter on 7 March 1986, I rejected one ground advanced by the debtor in opposition to the petition for the sequestration of his estate. I stood over, for further argument, the other grounds of opposition. I have now heard further argument on these additional grounds.

2. There is no dispute as to the relevant facts. As has been noted in the earlier reasons, on 11 December 1984, on the application of the Corporate Affairs Commission, the Supreme Court of New South Wales ordered, pending a final hearing or further order, that Mr. A.B.M. McIntosh ("the receiver") be appointed receiver of the property of Transphere Pty. Limited, of Eddie Solomon Pty. Limited and of the debtor ("the order"). The order was made pursuant to s.573(1)(h) of the Companies (N.S.W.) Code. Under that provision:

"Where -

(a) an investigation is being carried out under
this Code in relation to any act or
omission by a person, being an act or
omission that constitutes or may constitute
an offence against this Code;

(b) a prosecution has been instituted against a
person for an offence against this Code;
or

(c) a civil proceeding has been instituted
against a person under this Code,

and the Court considers it necessary or desirable
to do so for the purpose of protecting the
interests of any persons to whom the person
referred to in paragraphs (a), (b) or (c), as the
case may be....is liable or may be or become
liable to pay any moneys, whether in respect of a
debt, by way of damages or compensation or
otherwise....,the Court may, on application by
the Commission, make one or more of the following
orders -

(h) An order appointing -

(i) where the relevant person is a
natural person - a receiver or
trustee, having such powers as the
Court orders, of the property or
part of the property of the
person...."

3. In appointing the receiver, the Supreme Court further ordered that he have -

"the powers set forth in Section 342A (sc.324A)
of the ...Code and in addition:

(a) the power to determine the assets and
liabilities of the property (sic) to which
he is appointed receiver..."

4. By s.324A(1) of the Code, a receiver has the power to do all things necessary or convenient to be done to attain the objectives for which he was appointed. The powers specifically conferred by s.324A(2) include a power to enter into possession and take control of the property of which he is appointed receiver (see s.324A(2)(a)).

5. On 3 June 1985, McLelland J., sitting in the Equity Division of the Supreme Court, gave certain directions to the receiver (see (1985) 9 A.C.L.R. 820). The application for directions was made after questions had arisen, first, as to the true construction of the word "property" where used in the orders made on 11 December 1984 and, in particular, whether the order picked up future property; and secondly, as to the operation, in the context of the receivership, of a "mareva" injunction granted at that time against the debtor restraining him from disposing of his assets subject to a proviso permitting him to discharge his and his family's reasonable living expenses ("the injunction").

6. As to the first question, McLelland J. held that the definition of "property" in s.9 of the Companies and Securities (Interpretation and Miscellaneous Provisions) (N.S.W.) Code applied to the order. By that definition, "property" means "any legal or equitable estate or interest (whether present or future...) in real or personal property of any description and includes things in action". The Court directed the receiver that he would be justified in acting on the basis that the expression "property" where used in the order includes property acquired by the debtor after the date of the order as well as property of the statutory description at the date of the order.

7. As to the second question, McLelland J. reconciled the apparent conflict between the generality of the order on the one hand and the proviso to the operation of the injunction on the other by holding that:

"the freezing effect of the respective
receiverships of all property of the first,
second and third defendants (i.e. Transphere
Pty. Limited, Eddie Solomon Pty. Limited and the
debtor) is modified to the extent contemplated
in the proviso to that injunction so that, by
necessary implication, the first, second and
third defendants commit no breach of the
receivership orders by making payment in
accordance with those provisos out of moneys
otherwise subject to the control of the
receiver. Furthermore....the receiver should
facilitate the making of such payments and...to
that end such payments may be made out of
property of the respective defendants in the
hands of the receiver."

8. The Court directed that the receiver would be justified in acting on the basis that payments within the terms of the proviso to the injunction may be made from the property of the respective defendants in his hands as receiver.

9. On 22 August 1985, the bankruptcy notice was served on the debtor. The notice, which had issued on 25 July 1985, required the debtor, within 14 days, to pay or secure the sum of $25,674.13 claimed to be due under a District Court judgment obtained by the petitioning creditor on 14 May 1985.

10. On 29 April 1986, the Supreme Court further ordered that the order be varied so that the expression "property" where used therein excludes property which is vested (either presently or at any future date) in either the Official Trustee in Bankruptcy or a registered trustee (as defined in the Bankruptcy Act, 1966 ("the Act")) who becomes or may become the trustee of the estate of the debtor.

11. It was first submitted on behalf of the debtor that the bankruptcy notice was bad because its issue was prohibited by s.41(3)(b) of the Act. Under that provision, a bankruptcy notice shall not be issued if, at the time of the application for its issue, "excecution of the judgment to which it relates has been stayed". Accepting that no stay of execution had in fact been granted, it was contended by the debtor that the "freezing" effect of the receivership meant that execution should, within the meaning of the authorities, be considered to be stayed.

12. Section 156(3) of the District Court Act 1973 (N.S.W.) confers a general discretion upon that Court to grant a stay of execution (cf. Alexander v. Cambridge Credit Corporation Ltd. (Receiver Appointed) (1985) 2 NSWLR 685 at pp 693-4). But, as has been noted, no stay of execution has, in fact, been granted. Can it nonetheless be said that, for the purposes of s.41(3)(b) of the Act, execution should be deemed to have been stayed?

13. It is well established that, for the purposes of s.41(3)(b), execution is deemed to have been stayed where a judgment creditor is not "in a position to issue immediate execution upon it" (per Bowen L.J., in Ex Parte Ide; In re Ide (1886) 17 QBD 755 at p 76O; Re Pannowitz; Ex parte Wilson (1975) 38 FLR 184 at pp 187-8; cf. Re A debtor (1984) 2 All ER 257 at pp 265-6). It is also trite law that a judgment creditor may not, without leave of the court which appointed the receiver, levy execution against the property comprised in the appointment of the receiver (see O'Donovan Company Receivers and Managers (1981) at p.321; Meagher, Gummow and Lehane, Equity Doctrines and Remedies, 2nd ed. (1984) at p.663). Any attempt to interfere with that property is an interference with an officer of the court in the performance of his functions. If done without leave of the court, it is a contempt of court. It will not be permitted even if the property concerned is not yet in the actual possession of the receiver (see Ames v. The Trustees of The Birkenhead Docks (1855) 20 Beav 332 at p 353; 52 ER 630 at p 638).

14. It follows, in the light of the construction of the order by McLelland J., that it was not open to the petitioning creditor, at the time of issue of the bankruptcy notice, to execute against any of the property of the debtor without the leave of the Supreme Court, subject to one exception which is not here material. The exception lay in the operation of the proviso to the injunction. Its operation could not be material here because the proviso is limited to the payment of living expenses of the debtor and his family: it did not purport to authorise, expressly or by implication, the payment of the judgment debt out of the property the subject of the receivership. Nor, in my view, did any of the powers conferred upon the receiver, whether specifically or generally, authorise any such payment.

15. Since, at the time of the issue of the bankruptcy notice, no leave has been obtained from the Supreme Court permitting the petitioning creditor to levy execution against any of the debtor's property, it must follow that the prohibition contained in s.41(3)(b) applies with the consequence that the bankruptcy notice was bad.

16. It should be noted that counsel for the debtor drew attention to the following statement in Kerr on Receivers, 16th ed. (1983) (at p.131), in discussing the effect of the appointment of a receiver:

"The order (appointing a receiver) does not
create any charge, so as to give the creditor
priority over other creditors, where the
judgment debtor is a company in liquidation. It
is not execution, so as to entitle the executors
of a deceased judgment creditor to apply for it
under R.S.C., Ord.46 r.2, in order to enforce a
judgment obtained by their testator. Nor does
it amount to a stay of execution within section
1(1)(g) of the Bankruptcy Act 1914 so as to
disentitle the judgment creditor's obtaining the
order to issue a bankruptcy notice in respect of
the same debt.(2)" (Emphasis added)

Kerr appends this footnote:

"(2) Re Bond (1911) 2 KB 988; nothing had in
fact come into the hands of the receiver; the
court in bankruptcy may inquire whether the
receivership order prevented payment of the
debt; ibid."

17. In my opinion, Bond is not authority for the broad proposition asserted by Kerr. In any event, Bond may be distinguished from the present case. In Bond, a judgment creditor obtained, by way of equitable execution, the appointment of a receiver of certain property only of the judgment debtor. There was no evidence that there was any money of the judgment debtor in the hands of the receiver, nor was he in possession of any interest of the judgment debtor which could be sold. A question arose whether the appointment of the receiver prevented the debtor from paying the judgment debt, thus operating as a stay of execution within the meaning of s.4, sub-s.1(g) of the Bankruptcy Act 1883, with the consequence that the judgment creditor was not entitled to serve a bankruptcy notice on the judgment debtor in respect of the judgment.

18. Phillimore J., with the concurrence of Avory, J., said (at p.991):

"On behalf of the appellant it is said that the
pendency of a writ of fi. fa. where execution
has been issued in the ordinary way amounts to a
stay of execution because while the writ is
pending a second writ of fi. fa. cannot be
issued, and that therefore a creditor who has
issued execution by means of a writ of fi. fa.
cannot serve a bankruptcy notice, because he is
in the position of a creditor with a judgment
upon which execution has been stayed. That is a
purely technical rule which only applies where
the same conditions exist or where there is a
writ of fi. fa. which is still effective. In
the present case no writ of fi. fa. has been
issued. There has merely been equitable
execution by means of a receivership. There is
nothing to prevent the respondents obtaining the
appointment of other receivers, nor is there
anything to prevent the issue of a writ of fi.
fa. I think that the technical rule with regard
to the writ of fi. fa. is based upon the
principle that a creditor must not seize a
debtor's goods in execution, and thereby prevent
him paying the debt, and at the same time serve
him with a bankruptcy notice for the purpose of
making him a bankrupt. That is the reason why
when execution is still running by means of a
fi. fa. a creditor cannot serve a bankruptcy
notice. But the principle does not apply to
cases where there has only been equitable
execution. The Court may inquire whether the
equitable execution has in any way prevented the
debtor from paying his debt. But in this case
there is no money in the hands of the receiver.
If there were money in the hands of the receiver
it would be applied in payment of this debt.
There is no suggestion that the receiver is in
possession of any interest which could be sold,
and I therefore think that neither in substance
nor technically is there any ground for the
appellant's contention."

19. A similar approach had earlier been taken by Lord Esher in In re Sedgwick, Ex parte Sedgwick (1888) 5 Morr 262. It was held that a judgment creditor who had obtained a charging order on certain shares belonging to the debtor was entitled to issue a bankruptcy Notice. Lord Esher said (at p.264):

"If all that the creditor has done is to make it
more difficult but not to prevent the payment it
does not come within the equity."

(See also Bracia Czeczowiczka v. Markus (1936) 1 All ER 944 per Lord Atkin at p 949; Williams and Muir Hunter, The Law and Practice in Bankruptcy, 19th ed. at pp 32-3).

20. It is true that Lord Esher spoke in terms of an "equity" arising between the judgment creditor and the debtor; and that no such "equity" could arise here because the appointment of the receiver occurred at the instance of the Corporate Affairs Commission. On the other hand, the authorities have clearly established that it is a necessary implication from the language of s.41(3)(b) that a bankruptcy notice may issue only if the judgment creditor were then entitled to proceed to immediate execution. No doubt, an "equity" of the type envisaged by Lord Esher would disentitle a judgment creditor from proceeding to immediate execution but, in my view, this is not an exhaustive statement of the matters that may disqualify a judgment creditor from issuing a bankruptcy notice. There is no reason, of logic or otherwise, to limit the operation of s.41(3)(b) to cases where the debtor can establish an "equity". In my opinion, the existence of any relevant circumstance sufficient to disentitle a judgment creditor from proceeding immediately to execution falls within the implied prohibition contained in s.41(3)(b).

21. For the reasons already given, in the absence of the grant of leave by the Supreme Court, the petitioning creditor was not entitled to levy execution against any of the property of the debtor. Leave not having been sought, it follows that the issue of the bankruptcy notice was proscribed by s.41(3)(b). In these circumstances, the petition must be dismissed.

22. It should be noted that the debtor advanced reasons why, in any event, the Court, in the exercise of its discretion, should decline to make a sequestration order. In the circumstances, it is not necessary to deal with this argument.

23. I propose to make no order for costs as this stage. I will reserve liberty to any party to apply for costs and, if necessary, I will hear argument on that question. Since the debtor failed on the issue the subject of the earlier reasons for judgment but was successful on the issue now decided, it is my tentative view that it would be appropriate that, as between the petitioning creditor and the debtor, there should be no order as to costs. However, the Corporate Affairs Commission applied (albeit in the interests of the general body of creditors) for the receivership and this appointment which had the effect of prohibiting, at least temporarily, execution on the petitioning creditor's judgment. In those circumstances, my provisional view would be that the Commission should pay the costs of the petitioning creditor.

24. I make the following orders:

1. Petition dismissed.

2. Reserve liberty to any party to apply for costs on 7

days' notice.