Re Dominic Maddestra; Clyde William Badger and Christopher John Borella Ex Parte: Penfolds Wines Pty Limited [1993] FCA 15 (3 February 1993)

FEDERAL COURT OF AUSTRALIA

Re: DOMINIC MADDESTRA; CLYDE WILLIAM BADGER and CHRISTOPHER JOHN BORELLA
Ex parte: PENFOLDS WINES PTY. LIMITED
Nos. W P1953, 1963 and 1964 of 1991
FED No. 83
Number of pages - 10
Bankruptcy

COURT

IN THE FEDERAL COURT OF AUSTRALIA
BANKRUPTCY DISTRICT OF THE STATE OF WESTERN AUSTRALIA
GENERAL DIVISION
Lee J.(1)

CATCHWORDS

Bankruptcy - sequestration order - whether Court satisfied by debtors that there was other sufficient cause why an order ought not to be made.

Bankruptcy Act 1966 Pt.X; s.52; sub-ss.52(1), 52(2), 52(5); para.52(2)(b)

Clyne v. Deputy Commissioner of Taxation (1985) 5 FCR 1

Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd. (1967) 10 FLR 384

HEARING

PERTH, 3 February 1993
3:2:1993

Counsel for the Applicant: C.L. Zelestis QC, P.G. Donovan

Solicitors for the Applicant: Mazza McCallum and Robinson

Counsel for the Debtors: R.H.B. Pringle QC, D. Peterson

Solicitors for the Debtors: Murie and Edward

DECISION

LEE J. On the 3rd February 1993 I made sequestration orders against the estates of Dominic Maddestra ("Maddestra"), Clyde William Badger ("Badger") and Christoper John Borella ("Borella") on a creditor's petition presented against each debtor by Penfolds Wines Pty. Limited ("Penfolds").

2. I provided oral reasons for my decision to make the sequestration orders which are now amplified by including a short summary of relevant facts, adding the citation of appropriate authorities and elucidating several points.

3. Each petition was presented on the 10th October 1991. Each debtor filed a notice of intention to oppose the petition on the ground that there was other sufficient cause why a sequestration order ought not to be made. The debtors thereby relied upon para.52(2)(b) of the Bankruptcy Act 1966 ("the Act")

4. Penfolds obtained a judgment against the three debtors in the Supreme Court of Western Australia on the 22 March 1991 in the sum of $284,738.38. The act of bankruptcy recited in each petition was the failure of each debtor to comply with a bankruptcy notice served by Penfolds on each debtor demanding payment of the unsatisfied judgment.

5. The amount of the judgment represented the value of goods supplied on credit by Penfolds to Retail Equity Pty. Ltd. ("Retail Equity"), the trustee of the Retail Equity Unit Trust. Retail Equity carried on business as a retailer of liquor. The three debtors had guaranteed to Penfolds that they would discharge the indebtedness of Retail Equity to Penfolds if called upon.

6. On the 11th December 1990 a secured creditor, Custom Credit Corporation Ltd. ("Custom Credit"), appointed receivers and managers of the property of Retail Equity. Shortly thereafter Retail Equity, the debtors and others commenced proceedings in the Supreme Court of Western Australia against Custom Credit claiming damages for improper appointment of the receivers and for loss occasioned by the conduct of the receivers.

7. The substance of the ground of opposition to the petition stated above was that Retail Equity may recover substantial damages from Custom Credit in the Supreme Court litigation thereby enabling it to meet a substantial part of its indebtedness to its creditors and relieving much of the liability of the debtors as guarantors. It was also said that a substantial number of creditors to whom the debtors had also provided guarantees in respect of debts incurred by Retail Equity were prepared to await the outcome of the Supreme Court litigation rather than pursue the debtors through petitions in bankruptcy.

8. The petitions came on for hearing before me on the 8th May 1992.

9. After hearing counsel for the petitioner and for the debtors and considering the evidence adduced in the hearing I ordered that the petition stand adjourned subject to the debtors complying with detailed directions designed to better inform the petitioner of the affairs of the debtors and the prospects of the Supreme Court litigation. The petitioner was permitted to administer interrogatories in respect of the information the debtors were directed to provide. Liberty was given to the petitioner to apply to re-list the petition for hearing. On the 5th June 1992 I made an order that any material filed by the debtors pursuant to my direction for disclosure was to be received and dealt with in confidence.

10. The petitions came on for hearing again on the 28th August 1992. On that day and by consent the petitions were listed for mention on the 28th October 1992. In addition pursuant to sub-s.52(5) of the Act the period at the expiration of which the petitions would lapse was fixed at eighteen months from the 10th October 1991. On the 28th October 1992 the petitioner applied to re-list the petitions for hearing. That application was adjourned to the 10th November 1992 and the debtors directed to file an affidavit by the solicitor having the carriage of the Supreme Court litigation which described the progress of that litigation and the grounds upon which the hearing of the petitions should be further adjourned.

11. On the 10th November 1992 I directed that the petition be listed for hearing on a date to be set by the Registrar and that the debtors file any further affidavits in support of their opposition to the making of a sequestration order seven days before the date of listing. The petition was listed for hearing on the 3rd February 1993.

12. On the hearing of the matter on the 3rd February 1993 the three petitions were heard concurrently. I was mindful of the need for the circumstances of each debtor to be considered separately but there was no issue that each debtor had committed an act of bankruptcy and was insolvent. It was not in issue that the petitioning creditor had proved the matters required by sub-s.52(1) of the Act.

13. The real issue arising on each petition was whether the litigation commenced by Retail Equity and by the debtors in the Supreme Court had such prospect of success that the Court should be satisfied that there was other sufficient cause why a sequestration order ought not to be made. (See Clyne v. Deputy Commissioner of Taxation (1985) 5 FCR 1.)

14. Counsel for the petitioner contended that on satisfying the requirements of s.52 of the Act a petitioning creditor obtained something in the nature of an entitlement or a "prima facie" right to a sequestration order. I think that puts the matter too highly. The Court has a discretion to exercise which involves consideration of a number of matters. A petitioning creditor may expect the discretion to be exercised in its favour if a debtor is unable to meet the requirements of sub-s.52(2) and fails to satisfy the Court that there is sufficient cause upon which an order for sequestration ought not to be made. However, the choice for the Court is not between the making of a sequestration order and dismissal of the petition. An order may be made adjourning the petition in appropriate circumstances. When these petitions first came on for hearing I considered that there was good reason not to make a sequestration order forthwith and that the appropriate order at that time was to adjourn the proceedings and allow examination of the prospect that the debtors may benefit from the Supreme Court litigation and to allow some time for that litigation to be progressed or settlement of it to be discussed.

15. By 3 February 1993, only two months remained to run before the petitions lapsed and in addition to the interests of the parties, the interests of the public had to be given close consideration. (See Re Dolman; Ex parte Elder Smith Goldsbrough Mort Ltd. (1967) 10 FLR 384 per Gibbs J. at p 391.)

16. The debtors had provided guarantees in respect of substantial debts incurred for goods supplied on credit to a corporation trading as a trustee and their admitted inability to meet those commitments may require greater weight to be given to the public interest in due administration of businesses and examination of the affairs of the debtors. The balance must fall more heavily in favour of the public interest as time passes between the act of bankruptcy and disposal of the petition.

17. I note that the Act has multiple purposes although a principal object is to provide rational distribution of the property of debtors between competing creditors where it is obvious that the assets and means of a debtor will be insufficient to meet the demands of creditors.

18. The Act also seeks to serve the public interest by providing incentives or sanctions to ensure that better adherence to "commercial morality" is maintained by participants in commercial or trading activities. Persons who are engaged in business or commerce on their own account will be subject to inquiry and investigation if they are unable to do so profitably and incur debts that they are unable to discharge. By that means the Act seeks to provide creditors with the benefit of recourse to rectification of improper dealings if warranted. The Act acknowledges that the essence of trade is the extension of credit and the use of it by traders. In other words it is in the public interest that credit be made available to trading enterprises and that creditors be encouraged to do so with knowledge that the Act is designed to provide some assistance.

19. In addition the Act provides a means of relief for debtors who, through ill fortune and no lack of commercial morality or due diligence, find themselves in the position where they are unable to trade profitably and the demands of creditors to be oppressive. They may gain the assistance of the provisions of the Act which allow them to have their affairs taken over and re-ordered. Furthermore, the provisions of Pt.X of the Act allow such persons to call their creditors together and put proposals to them. The Act obliges the creditors to participate and provides for the will of the majority of creditors to prevail. That may provide some relief for an honest and diligent trader.

20. In the present case the burden was on the debtors to satisfy the Court there was other sufficent cause why a sequestration order ought not to be made. The use of the word "ought" adds something to the words with which it appears and may impose some degree of limitation upon whatever discretion the Court may have to decline to make a sequestration order. It is not a discretion to decline to make such an order upon the demonstration of sufficient cause so to act. The Court must be satisfied that there is sufficient cause as a result of which an order ought not to be made. (emphasis added)

21. The litigation commenced by Retail Equity and the debtors was said to have such prospect of success that in due course the petitioning creditor could expect the principal debtor, Retail Equity, to discharge its indebtedness to it. When the orders were first made to adjourn the hearing of this petition it was said that the litigation was being treated with expedition and that the opportunity for discussion of settlement may bear fruit in short time making a sequestration order unnecessary or inappropriate. Nine months have passed since the hearing of the petition was adjourned without the Supreme Court litigation being any closer to resolution and, indeed, if it were to go to trial it could not expect to be heard within fifteen months. Furthermore, I am satisfied, as counsel for the petitioners submits, that the litigation does not have on its face a real appearance that it is capable of satisfying the demands of the petitioner and other creditors in the short term, a matter to be borne in mind when assessing the willingness of other creditors to await the outcome of this litigation and the public interest in these petitions.

22. If collateral litigation is well advanced and likely to bring a beneficial result to a debtor, there may be good cause for the Court not to make a sequestration order and it may be satisfied that such an order ought not to be made. The Court may mould its order according to the circumstances, deferring further hearing of the petition subject to review or it may be entirely satisfied that a sequestration order ought not to be made on the petition at any time and that the petition should be dismissed.

23. In the present case the extended petition is nearing the end of its life and the point has now come where a determination must be made whether the petition should be dismissed or sequestration orders made. I am not satisfied that the debtors have shown that there is other sufficient cause in which the Court may conclude that a sequestration order ought not to be made. The making of those orders will have no bearing on the conduct of the litigation in the Supreme Court.

24. There will be sequestration orders as requested in the petitions and orders made that the costs of the petitioner be taxed pursuant to the Act and be payable to the petitioner out of the estates of the respective debtors taxed as one set of costs, one-third of the taxed sum to be payable out of each estate.