Alister Byron v Southern Star Group Pty Ltd [1997] FCA 151 (11 March 1997)

CATCHWORDS

Bankruptcy - Application under subs 41(6A) of the Bankruptcy Act 1966 for an extension of time to comply with a bankruptcy notice - whether application out of time - whether time for compliance with notice should be extended - principles governing courts discretion to extend time where an appeal has been instituted from judgment upon which notice is based - whether all that is needed is that appeal is "arguable" - whether different principles from those governing courts discretion to adjourn debtors petition - relevance of facts that no stay sought or ordered, an appeal has already been dismissed and proceeding in question is application for special leave to make a further appeal

Companies Code - whether under para 556(2)(a) consent was given to incurring of a debt - whether consent can be implied from "mere activity" of a director who has no authority to incur or prevent the incurring of the debts

Bankruptcy Act 1966 , subs 41(6A), s 33

Companies (NSW) Code, s 556

Federal Court Rules, O 3 r 5, O 77 r 1(3)

Bryant v Commonwealth Bank of Australia 9 November 1994 unreported FCA FC

Re Baker; Ex parte Baker v Staples 4 September 1995 unreported FCA Kiefel J

Streimer v Tamas (1981) 37 ALR 211

Re Carter; Ex parte National Mutual Trustees Ltd [1995] FCA 1196; (1995) 129 ALR 435

Re Sterling; Ex parte Esanda Ltd [1980] FCA 61; (1980) 44 FLR 125

Olivieri v Stafford (1989) 24 FCR 413

Wilkinson v Osborne [1915] HCA 92; (1915) 21 CLR 89

Re Geard; Ex parte Reid 11 February 1994 FCA unreported

Agrillo v Codisposto 16 December 1994 FCA unreported

Re Smith 4 May 1994 FCA unreported

Re Taylor; Ex parte Deputy Commissioner of Taxation [1983] FCA 316; (1983) 74 FLR 377

Standard Chartered Bank of Australia Ltd v Antico [1995] NSWSC 31; (1995) 38 NSWLR 290

ALISTER BYRON v SOUTHERN STAR GROUP PTY LTD

No. NG 7033 of 1997

CORAM: Lehane J

PLACE: Sydney

DATE: 11 March 1997

IN THE FEDERAL COURT OF AUSTRALIA )

NEW SOUTH WALES DISTRICT REGISTRY )

GENERAL DIVISION ) No. NG 7033 of 1997

BETWEEN: ALISTER BYRON

Applicant

AND: SOUTHERN STAR GROUP PTY LTD

Respondent

CORAM: Lehane J

PLACE: Sydney

DATE: 11 March 1997

MINUTE OF ORDERS

THE COURT ORDERS THAT:

1. Application refused.

2. Time for compliance with bankruptcy notice extended to the day seven days after delivery of judgment on this application.

3. The applicant to pay the respondent's costs of the application.

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 )

GENERAL DIVISION ) No. NG 7033 of 1997

BETWEEN: ALISTER BYRON

Applicant

AND: SOUTHERN STAR GROUP PTY LTD

Respondent

CORAM: Lehane J

PLACE: Sydney

DATE: 11 March 1997

REASONS FOR JUDGMENT

LEHANE J: This is an application, under subs 41(6A) of the Bankruptcy Act 1966 (the Act), for an extension of time to comply with a bankruptcy notice. It is the most recent episode in long-running litigation between Southern Star Group Pty Ltd (Southern Star), the creditor on whose application the bankruptcy notice was issued, and Mr Alister Byron, to whom the notice is addressed.

The bankruptcy notice is dated 1 February 1996 and was served on 27 June 1996. The judgment debt on which it is based amounts to $491,561.18. The judgment was given in proceedings in the equity division of the Supreme Court of New South Wales. It is necessary to describe those proceedings in a little detail; the essential facts are common ground.

Factual background

Mr Byron was a director of a company called Corporate Video Pty Limited (the company). In August and September 1989 the company bought video tapes from Southern Star. The total price was $322,832.50, only $50,000 of which was paid. On 13 March 1990 the company went into liquidation. In May 1990 Southern Star began proceedings against four directors of the company, including Mr Byron, relying on s 556 of the Companies (NSW) Code. That section (now replaced in Pt 5.7B Div 3 of the Corporations Law by substantially different provisions) provided in subsections (1) and (2) as follows:

556 (1) If:

(a) a company incurs a debt, whether within or outside the State;

(b) immediately before the time when the debt is incurred:-

(i) there are reasonable grounds to expect that the company will not be able to pay all its debts as and when they become due; or

(ii) there are reasonable grounds to expect that, if the company incurs the debt, it will not be able to pay all its debts as and when they come due; and

(c) the company is, at the time when the debt is incurred, or becomes at a later time, a company to which this section applied;

any person who was a director of the company or took part in the management of the company, at the time when the debt was incurred, is guilty of an offence and the company and that person or, if there are two or more such persons, those persons are jointly and severally liable for the payment of the debt.

Penalty: $5,000 or imprisonment for one year or both.

(2) In any proceedings against a person under sub-section (1) it is a defence if the defendant proves:-

(a) that the debt was incurred without his express or implied authority or consent; or

(b) that at the time when the debt was incurred, he did not have reasonable cause to expect:

(i) that the company would not be able to pay all its debts as and when they became due; or

(ii) that, if the company incurred that debt, it would not be able to pay all its debts as and when they became due.

Rolfe J held that three of the defendants, including Mr Byron, were liable under that provision to pay the amount of the unpaid purchase price due to Southern Star. His Honour's judgment was delivered on 7 June 1991. On 20 February 1995 the Court of Appeal allowed an appeal by Mr Byron, on the basis that Rolfe J had erred in refusing to admit affidavit evidence sworn the day before the trial and substantially after the date which had been fixed by his Honour for the filing and serving of affidavits; the proceedings against Mr Byron were, accordingly, remitted to the Equity Division for a new trial, which took place before Young J in September 1995. Young J gave judgment in favour of Southern Star and on 3 November 1995 his Honour made orders, including the order on which the bankruptcy notice relies. On 28 November 1995 Mr Byron filed a notice of appeal from the orders made by Young J. The appeal was heard by the Court of Appeal on 10 December 1996 and on 20 December 1996 it was dismissed. The decision of the Court of Appeal was unanimous. Mr Byron has now lodged an application for special leave to appeal to the High Court from the decision of the Court of Appeal.

In that summary I have dealt only with the principal events in the litigation between Southern Star and Mr Byron. There have been a number of peripheral skirmishes which it is unnecessary, for present purposes, to describe.

Meantime, Southern Star caused the bankruptcy notice to be issued and served it on 27 June 1996. On 19 July 1996 Mr Byron filed an application for an order extending the time for compliance with the bankruptcy notice and for an order setting the bankruptcy notice aside; by consent, an order was made extending time for compliance until 14 days after the delivery of judgment by the Court of Appeal. The application to set aside the bankruptcy notice appears to have been adjourned. Disregarding the possible effect of the fixed vacation, the extended time for compliance with the bankruptcy notice expired on 4 January 1997. On 14 January 1997 Mr Byron made a further application for orders that time for compliance with the bankruptcy notice be extended (that is the application now before me) and that the bankruptcy notice be set aside.

Preliminary point: is the application out of time?

The application relies on subs 41(6A) of the Act which provides:

(6A) Where, before the expiration of the time fixed for compliance with the requirements of a bankruptcy notice:

(a) proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor; or

(b) an application has been made to the Court to set aside the bankruptcy notice

the Court may, subject to subsection (6C), extend the time for compliance with the bankruptcy notice.

Subsection (6C) applies where an extension of time is sought on the ground that proceedings to set aside the judgment or order on which a bankruptcy notice was based have been instituted and the Court is of the opinion that the proceedings either have not been instituted bona fide or are not being prosecuted with due diligence; in those circumstances, the Court is not to extend the time for compliance. Southern Star did not press an argument that the Court should be of the opinion either that the application for special leave was not instituted bona fide or that it is not being prosecuted with due diligence, and there is no basis in the material before me on which I could form such an opinion. Subsection (6C) requires, therefore, no further consideration.

Southern Star did, however, submit that the Court no longer had power to extend the time for compliance with the bankruptcy notice because the application now before me was filed only on 14 January 1997, that is to say more than 14 days after the delivery of the judgment of the Court of Appeal (the date to which the time for compliance had previously been extended). Additionally, if the making of the application for special leave is to be regarded as the institution of proceedings to set aside the judgment on which the bankruptcy notice is based (and I think I should so regard it: Bryant v Commonwealth Bank of Australia 9 November 1994 unreported FCA FC; Re Baker; Ex parte Baker v Staples 4 September 1995 unreported FCA (Kiefel J)) that application was filed only on 16 January 1997. Accordingly, Southern Star argued, neither of the steps which Mr Byron might have taken to empower the Court to extend the time for compliance had been taken within the time allowed and therefore no further extension could be granted.

Mr Byron, in response, referred me to the Federal Court Rules, O 3 r 5:

In the period from the beginning of the day on which the fixed vacation begins until the end of the 14th of January next following, time shall not, unless the Court otherwise orders, run so as to put any party in default in respect of any act for the doing of which a time is fixed by the Rules or by any judgment or order of the Court but business may be done during that period.

Counsel for Mr Byron argued that that rule was made applicable by O 77 r 1(3), the previously extended time for compliance with the bankruptcy notice having been fixed (so he submitted) by an order of the Court. I am by no means convinced that that argument should succeed: I doubt that an extended time for compliance with a bankruptcy notice is to be regarded as a time fixed by an order of the Court for the doing of an act. So to regard it would sit uneasily with s 33 of the Act, which explicitly excludes the time fixed for compliance with a bankruptcy notice from the general power to extend time which the section gives to the Court; it would also produce the curious result that O 3 r 5 enlarged an extended time for compliance with a bankruptcy notice, but not the time originally fixed.

It is, however, unnecessary to pursue that matter further. In this case Mr Byron had already, on 19 July 1996, filed an application to set aside the bankruptcy notice. When, on that same application, the time for compliance was extended, the application to set the notice aside appears, as I have said, to have been adjourned. Certainly it was not disposed of and I cannot see why it should be regarded as having become spent or ceased to be on foot either by the passage of time or by reason of the lodgement, by Mr Byron, of a further application, in the document by which he now applies for a further extension of time, to set the bankruptcy notice aside. That being so, Mr Byron in my view had, before the expiry of the time fixed for compliance with the bankruptcy notice, filed an application to set it aside. It follows that the Court has a discretion to grant a further extension of time for compliance; the circumstance that the previously extended time has already expired, so that an act of bankruptcy has already been committed, makes no difference for this purpose: Streimer v Tamas (1981) 37 ALR 211 at 215, 216; Re Carter; Ex parte National Mutual Trustees Ltd [1995] FCA 1196; (1995) 129 ALR 435 at 439, 440.

Should time for compliance be further extended?

It is clear that "the power to extend time for compliance is in aid of the power to set aside the notice itself" (Re Sterling; Ex parte Esanda Ltd [1980] FCA 61; (1980) 44 FLR 125 at 130). Equally there is no doubt that it is not only on the hearing of a petition that the Court may "go behind" the judgment giving rise to the judgment debt on which the petitioning creditor relies; the judgment debt can be impeached on a motion to set aside a bankruptcy notice. As Gummow J points out in Olivieri v Stafford (1989) 24 FCR 413 at 430, 431 counsel's argument to that effect in Wilkinson v Osborne [1915] HCA 92; (1915) 21 CLR 89 at 90 appears to have been accepted by Griffith CJ at 94 and by Isaacs J at 105, with both of whom Gavan Duffy J agreed. There appears, however, to be some difference of opinion in the cases as to the principles which will guide the court in exercising its discretion to extend time, in aid of a motion to set aside a bankruptcy notice, where an appeal has been instituted from the judgment upon which the bankruptcy notice is based.

Mr Byron relied heavily on Re Baker. In that case Kiefel J granted an extension of time, for compliance with a bankruptcy notice, until the determination of an appeal from the District Court judgment on which the bankruptcy notice was based. Her Honour said this:

It ought to be borne in mind that I am not asked here by the debtor to go behind the judgment, which may arise on the hearing of a petition. By that time however the question as to whether the judgment stands will have been determined. S 41(6A) allows for the matter to be litigated and finally determined although, of course, the filing of an appeal will not alone produce that result. At this point whether there is a liability for the debt is sought to be ascertained by the process of appeal. Cases concerned with whether an adjournment of a petition ought to be granted, where an appeal is outstanding, hold that it is generally desirable to permit the conclusion of investigation into liability before a sequestration order is made: Ahern v Deputy Commissioner of Taxation [1987] FCA 312; (1987) 76 ALR 137 and Adamopoulos & Anor v Olympic Airways SA & Anor (1990) 95 ALR 525, at least where it is shown that the dispute is "genuine". ... A similar approach ought, in my view, apply to the grant of an extension of time in which to comply with a bankruptcy notice.

Her Honour then pointed out that subs 41(6A) and the succeeding subsections:

... recognise the serious consequences which follow if a bankruptcy notice is not complied with. At least where the proceeding taken is genuine and arguable, the course the subsection allows is that a person ought not to be called upon to answer the notice and to have his/her solvency tested without the order upon which it is based being first tested. It would hardly be of comfort to the judgment debtors or a just outcome to have the judgment set aside and then be faced with all that flows from having committed an act of bankruptcy in failing to comply with it.

In view of a concession by the judgment creditor that the appeal was at least arguable, her Honour did not consider it necessary to determine whether the appeal instituted by the judgment debtors could be said to have more than slight prospects: her Honour proceeded on the basis that once it is accepted that an appeal is arguable, it is not appropriate for a court considering an application to extend time for compliance with a bankruptcy notice to consider whether the prospects of the appeal are to be regarded as more than slight. The mere fact that it is arguable, once it is determined that the appeal has been instituted in good faith and is being diligently prospected, produces the consequence (her Honour held) that, ordinarily at least, an extension of time will be granted.

Evidently her Honour was not referred to Re Geard; Ex parte Reid 11 February 1994 unreported FCA, in which Sheppard J took a somewhat different view, or later decisions in which Geard was followed. In Geard an appeal to the Court of Appeal had been instituted from the judgment of the Supreme Court of New South Wales which founded a bankruptcy notice served on the judgment debtor. His Honour refused an application for an extension of time pending the determination of the appeal. His Honour's approach to the way in which the discretion should be exercised appears in the following passage from the judgment:

The critical question then is how that discretion should be exercised. As earlier stated, the parties have made, both orally and in writing, detailed submissions concerning the issues which will arise for determination on the appeal and have invited the Court in effect to express a view, provisional though it may be, on the likely outcome of the appeal. To a degree I have felt obliged to look at the matter for myself, but I think it most undesirable that a judge of this Court should in effect undertake some provisional review to determine the correctness or otherwise of the judgment of another court especially when that judgment is under appeal to the court of appeal which has jurisdiction to hear appeals in the normal course. I prefer to approach the matter in a different way.

The debtor has not made any application for a stay of proceedings pending the outcome of the appeal. Why he has not done so is not clear to me but the judgment which has been recovered against him is a final judgment and execution upon it has not been stayed. it would seem to me to require quite special circumstances before a court exercising jurisdiction in bankruptcy would, in effect, do what has not been done in the court in which the judgment has been obtained by extending the time for compliance with the bankruptcy notice when no application to stay the judgment has been made. If one were to contemplate the taking of such a course, one would usually require evidence of the means of the debtor and would wish to consider whether or not it were appropriate to order that security for the amount of the judgment should be provided. Those are matters which a court exercising jurisdiction to stay the execution of a judgment would wish to consider.

A further factor is that this is an application to extend time for compliance with a bankruptcy notice; it is not the hearing of a bankruptcy petition. The refusal of the application will not affect the status of the debtor but it will mean that he, in all probability, will commit an act of bankruptcy. That act of bankruptcy will be available to the petitioning creditors or to any other creditor upon which to base a bankruptcy petition at any time in the period of six months after the act of bankruptcy has been committed. Otherwise the debtor's position will remain unaffected by what the Court does.

If the appeal is ultimately dismissed and the judgment stands with the consequence that the bankruptcy proceedings go on, it may be quite important to the petitioning creditor, whoever he or she may be, to the general body of creditors and to the trustee in bankruptcy, that there be, for the purposes of the administration of the bankrupt estate, an act of bankruptcy committed at an earlier time than would be the case if this application were acceded to.

The approach adopted by Sheppard J was followed by Whitlam J in Re Smith 4 May 1994 unreported and by Sackville J in Agrillo v Codisposto 16 December 1994 unreported.

Although I was referred, in argument, to both Baker and Geard, little attention was given to the difference of approach which, in my view, the passages which I have quoted clearly display. Because there is such a difference, I must consider for myself the approach appropriately to be adopted in a case such as this. In my view the considerations to which Sheppard J refers indicate that the principles to be applied where the question is whether a petition should be adjourned or dismissed are not necessarily those which should guide the exercise of the discretion to set aside, or extend time for compliance with, a bankruptcy notice. The commission of an act of bankruptcy is, undoubtedly, a serious matter; it is, however, of a different order of gravity from the change of status brought about by the making of a sequestration order; and there is also to be taken into account the interest of both the judgment creditor and other creditors of the judgment debtor in ensuring that, if ultimately a sequestration order is made, the relevant act of bankruptcy occurs earlier rather than later.

I think, therefore, that considerable weight should be given to the circumstance that here, as in Geard, no stay has been granted (or, apparently, sought) of the judgment supporting the bankruptcy notice. It does not follow that other matters are not to be taken into account: the discretion is "at large" (Re Taylor; Ex parte Deputy Commissioner of Taxation [1983] FCA 316; (1983) 74 FLR 377 at 379). For example, the authorities suggest that, reluctant as the Court may in most cases be to enter into the merits of an appeal, the merits may be relevant, at least where the Court is able to regard the prospects of success as "slight" (e.g. Bryant) or, possibly, in a case where it is apparent that the prospects of success are unusually strong (Kiefel J, in Baker, discussed the merits of the appeal in some detail, considering it desirable to do so as further applications were likely; it is evident that her Honour's view was that the appeal had substantial prospects of success). It may be that different considerations apply where the proceedings instituted for the purpose of setting aside the judgment are, rather than an appeal, separate proceedings seeking to set the judgment aside (Olivieri; Agrillo) particularly where, as in Agrillo, the judgment was entered by consent. I think it is relevant, as a consideration reinforcing the Court's reluctance to extend time in the absence of a stay, that an appeal has already been dismissed and the proceeding in question is (as here) an application for special leave to make a further appeal.

Considerable attention was devoted, in argument, to the particular circumstances, and I should refer to them briefly. Before the Court of Appeal the only issue between the parties was as to whether the company's indebtedness to Southern Star was incurred without Mr Byron's knowledge and consent (Companies Code para 556(2)(a)). The onus of establishing that "defence" lay on Mr Byron. While it was found that the relevant orders were placed without Mr Byron's actual knowledge, it was clear on the evidence that he became aware, while orders were still being placed, that the company was buying tapes from Southern Star (and therefore incurring indebtedness to it). The real question was as to "consent". Mr Byron was a director but was not the managing director and he did not control the board. Nor did he have authority to incur the indebtedness himself or to prevent the managing director from incurring it. He expressed opposition to the purchase of tapes from Southern Star; that opposition was based on commercial considerations unrelated to the question of the company's solvency or whether it should be incurring debts. He suggested that, if the company did deal with Southern Star, it should impose certain conditions on Southern Star, but that suggestion was not followed. He participated in discussions with a representative of Southern Star about the possibility that the company would buy its tapes. The question was whether, in the circumstances I have briefly described, and given particularly that Mr Byron expressed opposition to the purchase of tapes from Southern Star, he could be said to have consented to the incurring of the indebtedness arising from the purchases.

The basis on which both Young J and the Court of Appeal rejected Mr Byron's arguments on the issue of consent is, I think, clearly summed up in the following passage from the judgment of Simos AJA in the Court of Appeal:

In my opinion, the appellant's reservations and expressed lack of agreement in respect of the purchases by the company from the respondent are not, in all the circumstances, sufficient to justify a finding, the onus of proof being on the appellant, that the appellant had not consented to the further purchases.

In my opinion, if there had in truth been a relevant lack of consent on the part of the appellant to the purchases, giving rise to the debt, it would have been reasonable to expect that the appellant would have taken steps to prevent those purchases, beyond simply saying that he had reservations and did not agree with them, more especially having regard to the fact that he would know that such purchases would result in the incurring by the company of debts which the company would not be able to pay.

Young J had relied on, and the Court of Appeal approved, a passage in the judgment of Hodgson J in Standard Chartered Bank of Australia Ltd v Antico [1995] NSWSC 31; (1995) 38 NSWLR 290 at 366, 367 in which his Honour rejected the proposition that consent to the incurring of debts can never be implied from "mere activity" of a director who has no authority to incur or prevent the incurring of the debts. Simos AJA (with whom Abadee AJA agreed) expressed the view that that passage was not inconsistent with observations of members of the Court of Appeal in Metal Manufacturers Pty Ltd v Lewis (1988) 13 NSWLR 315. Certainly the view expressed by Hodgson J is consistent with a number of decisions of courts of other states to which he refers. Three comments may be made. One is that the result in the proceedings between Southern Star and Mr Byron depended very largely on findings of fact, as to which there was concurrence between Young J and all members of the Court of Appeal. Secondly, to the extent that the decision involves the construction of s 556 of the Companies Code, it involves an aspect of that provision which has no counterpart in the legislation now in force. Thirdly, in basing his application for special leave (as he does) on the footing that there is no doctrine of "implied consent" and that "mere inactivity" will always exclude a finding of consent, Mr Byron seeks to have upheld a view of superseded legislation which is contrary both to the most recent pronouncement of the Court of Appeal on the subject and also to decisions of courts in other states.

Beyond making those obvious points, it is unnecessary and I think inappropriate for me to say more about the merits or prospects of Mr Byron's application for special leave. The matters to which I have referred make it clear, in my view, that at the least this is not an exceptional case in which (following the reasoning of Sheppard J in Geard) the Court should extend time for compliance with the bankruptcy notice on the ground of the existence of an appeal (or an application for leave to appeal) where no stay has been obtained or sought.

Conclusion

For those reasons it is appropriate to make orders similar to those made in Geard and Agrillo. The application before me should be refused, but it is appropriate to give Mr Byron an opportunity of complying with the bankruptcy notice. Accordingly, the application for an extension of time for compliance with the bankruptcy notice dated 1 February 1996 is refused. The time for compliance with that bankruptcy is extended for a period of seven days from the date of this judgment. Mr Byron should pay the costs of the application.

I certify that this and the preceding 14 pages are a true copy of the Reasons for Judgment of the Honourable Justice Lehane.

Associate:

Dated: 11 March 1997

Heard: 25 February 1997

Place: Sydney

Decision: 11 March 1997

Appearances: Mr L J Aitken of counsel instructed by G T Down appeared for the applicant.

Mr F G Lever of counsel instructed by Heidtman & Co appeared for the respondent.