Yigal Benaharon & Anor v Fabric Dyeworks (Aust) Pty Ltd [1998] FCA 1109 (24 August 1998)

Last Updated: 14 September 1998

IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY	VG 7423 of 1998

BETWEEN:	YIGAL BENAHARON First Applicant GLORIA BENAHARON Second Applicant
AND:	FABRIC DYEWORKS (AUST) PTY LTD (ACN 006 402 213) Respondent

JUDGE:	WEINBERG J
DATE:	24 AUGUST 1998
PLACE:	MELBOURNE

EX TEMPORE REASONS FOR JUDGMENT

The court has before it an application by Yigal Benaharon and Gloria Benaharon to extend the time for complying with a bankruptcy notice. The application is brought pursuant to subs 41(6C) of the Bankruptcy Act 1966 . That subsection provides as follows:

"Where:

(a) a debtor applies to the Court for an extension of the time for complying with a bankruptcy notice on the ground that proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued have been instituted by the debtor, and

(b) the Court is of the opinion that the proceedings to set aside the judgment or order

(i) have not been instituted bona fide; or

(ii) are not being prosecuted with due diligence;

the Court shall not extend the time for compliance with the bankruptcy notice.

The background to this application is relatively straightforward.

On 29 May 1998 Smith J, in the Supreme Court of Victoria, delivered judgment in matter No 5251 of 1996, Fabric Dyeworks (Aust) Pty Ltd v Yigal Benaharon and Gloria Benaharon. The case involved an allegation that the two defendants (who are the applicants in the present proceeding) were at all relevant times directors of a company, Yigal Fabrics Pty Ltd ("Yigal Fabrics"). That company was engaged in the business of buying and selling material. From time to time it would have the material dyed by the plaintiff, Fabric Dyeworks (Aust) Pty Ltd, as part of that business.

Between April 1993 and November 1994, Yigal Fabrics incurred debts to the plaintiff totalling $464,807.55 at the end of that period. The plaintiff brought proceedings to recover that amount from the defendant directors pursuant to the provisions of the Corporations Law. In essence, the plaintiff contended that the directors were liable for the debts of Yigal Fabrics because that company had been permitted to trade while insolvent, contrary to the provisions of s 592 of the Corporations Law (prior to 23 June 1993), and s 588G thereafter.

His Honour, Smith J, found for the plaintiff. In the course of his reasons for judgment he found that from at least 30 June 1992, Yigal Fabrics was insolvent. His Honour found that prior to 23 June 1993 there were reasonable grounds to expect that Yigal Fabrics would not be able to pay its debts as they fell due and, after 23 June 1993, there were reasonable grounds to suspect that fact. He rejected the various defences proffered on behalf of the defendants and gave judgment for the plaintiff in the sum of $464,807.55 plus $95,563.05 interest.

That judgment was apparently authenticated on 1 June 1998. On that same date a bankruptcy notice was issued on behalf of the plaintiff judgment creditor. On 12 June 1998 the applicants (ie the judgment debtors) served a notice of appeal upon the judgment creditor and on 18 June 1998, as prescribed by the rules, the notice of appeal was filed with the Court. On 19 June 1998 the proposed contents of an appeal book were served and filed. I was told that the contents have not yet been settled by the registrar but that this was simply because no appointment had yet been obtained to enable that step to be taken.

On 24 June 1998 a Mareva injunction was obtained ex parte by the judgment creditor against the judgment debtors and an associated corporate entity. That Mareva injunction was extended until further order by consent on 3 July 1998.

It seems now to be established by the authorities, and it was common ground before me, that subs 41(6C) is applicable to an appeal; that is, "proceedings to set aside the judgment or order in respect of which the bankruptcy notice was issued" include an appeal - See Re Taylor; ex parte Deputy Commissioner of Taxation [1983] FCA 316; (1983) 74 FLR 377 per Sheppard J; Bryant v Commonwealth Bank of Australia (unreported, Full Federal Court, 11 November 1994). Cf Re Lentini (1991) 29 FCR 363 per Neaves J; Re Halliday; ex parte Halliday and ACN 003 075 394 Pty Ltd [1993] FCA 416; (1993) 44 FCR 349. It is also common ground before me that the applicants are prosecuting that appeal with due diligence.

The issue which I must determine is whether the proceeding to set aside the judgment or order, that is the appeal, has "not been instituted bona fide" within the meaning of that expression in s 41(6C)(b)(i). If the Court is of that opinion, subs (6C) provides that it shall not extend the time for compliance with the bankruptcy notice.

It would appear that the principles which govern the grant or refusal of an extension of time within which to comply with a bankruptcy notice are not entirely free from doubt. In Re Baker; ex parte Baker and Staples (unreported, Federal Court, 4 September 1995) Kiefel J held that where there is a genuine and arguable appeal against a judgment founding a bankruptcy notice, it is ordinarily desirable, because of the consequences of an act of bankruptcy, to grant an extension of the bankruptcy notice to allow a judgment to be tested.

That approach is to be contrasted with the approach adopted by some other judges of the Court. (See for example Bryett v Deputy Commissioner of Taxation (unreported, Federal Court, 5 September 1997 per Madgwick J); Byron v Southern Star Group Pty Ltd (1997) 73 FCR 264. In those decisions their Honours considered that the decision of Sheppard J in Re Geard; ex parte Reid (unreported, Federal Court, 11 February 1994), should be followed. There Sheppard J expressed the view that where a debtor has made no application to obtain a stay of proceedings on a judgment which founded a bankruptcy notice, and which is under appeal, it would require special circumstances before a court would extend time to comply with the bankruptcy notice. Lehane J, in Byron (supra) at 270 said:

"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."

My attention was drawn to Adamopoulos and Anor v Olympic Airways SA, (1990) 95 ALR 525 a decision of the Full Court of the Federal Court in which the Court dealt with the principles which apply where the question is whether the court should proceed to sequestrate the estate of a debtor in circumstances where an appeal is pending against the judgment founding the bankruptcy notice. In that case, the Court adopted as correct the test laid down in Ahern v Deputy Commissioner of Taxation (Queensland) [1987] FCA 312; (1987) 76 ALR 137 at 148, in which the governing principle was stated in the following terms:

"It is also well established that, in general, a court exercising jurisdiction in bankruptcy should not proceed to sequestrate the estate of a debtor where an appeal is pending against the judgment relied on as the foundation of the bankruptcy proceedings, provided that the appeal is based on genuine and arguable grounds."

The differences in emphasis between the approach adopted by Kiefel J on the one hand, and Madgwick, Lehane and Sheppard JJ on the other, need only be noted in the present case. It may be that a somewhat different test applies when the Court deals with sequestration rather than the extension of time for compliance with a bankruptcy notice. Whatever be the correct view, however, the result would not differ in the present case.

The first matter which I must address is whether I am of the opinion within the terms of subsection (6C)(b)(i) of s 41 that the appeal which has been brought was not instituted bona fide. If I am of that opinion, that is the end of the matter. If I am not of that opinion, broader questions of discretion may still arise.

I have before me an affidavit sworn by the first applicant, Yigal Benaharon, in which he deposes to having received legal advice to the effect that the appeal has reasonable grounds of success. He also deposes to having instituted the appeal in good faith. On the other hand, I have before me an affidavit sworn by a director of the present respondent in which he deposes to having received legal advice to the effect that the appeal has little prospect of success. He expresses the opinion that it was brought as a delaying tactic and, accordingly, that it was not instituted bona fide.

There is little in this affidavit material which is of assistance to me in determining whether or not I am of the opinion that the appeal was not instituted bona fide. I have been provided with a copy of the judgment of Smith J, and a copy of the notice of appeal. I have read the grounds of appeal. Some of them seem to me be barely tenable. Others are so imprecise in form that it is impossible to ascertain their meaning. Some grounds, however, can be readily understood and, if made good, would lead to his Honour's judgment being set aside.

On behalf of the applicants it has been submitted that the Court should extend the time for complying with the bankruptcy notice for the following reasons. First, it is said that there is nothing before the Court which could properly lead to the conclusion that the appeal was not instituted bona fide. Second, the appeal was instituted soon after the judgment of Smith J was delivered, and it has been prosecuted with due diligence. Third, the Mareva injunction which was granted, and has since been extended, is said to provide a significant measure of protection to the judgment creditor against any dissipation of assets.

These factors, it is contended, make it fair and reasonable to permit the applicants to pursue their appeal without the inevitable consequences which would flow from denying an extension of time for complying with the bankruptcy notice. Those consequences include, of course, the likelihood of a creditor's petition being brought, and the very issues which I am presently being asked to determine in relation to an extension of time for complying with the bankruptcy notice being agitated again in response to that petition. It was submitted also, I think correctly, that were a sequestration order made, the probabilities are that the appeal would not be pursued.

Another matter which was relied upon by the applicants was that the respondent, the judgment creditor, had moved extraordinarily quickly to issue the bankruptcy notice in the present case, namely on the very day that the judgment was authenticated. This contention seems to me not significantly to advance their case. The applicants also submitted that it was likely that the appeal will be heard either later this year, or early next year, at the latest. That is a matter which I do, of course, take into account.

The respondent submitted that the extension of time should not be granted. It was said that it was plain from the form of the notice of appeal, when examined together with the reasons for judgment delivered by Smith J, that the appeal enjoyed little prospect of success. The inference could be drawn that it had been instituted merely as a delaying tactic.

The respondent submitted that even if I were not of the opinion that the appeal had not been instituted bona fide, I should nevertheless exercise my discretion against the applicants because the existence of the Mareva injunction did not provide as great a protection to the judgment creditor as would an early examination of the affairs of the applicants. The earlier that sequestration proceedings could be set in train, it was contended, the greater would be the likelihood of the judgment creditor recovering the fruits of its judgment.

I consider the arguments in this case to be reasonably evenly balanced. In the end, however, having weighed them as carefully as the circumstances permit, I am not persuaded that the appeal was not instituted bona fide. Moreover, I am satisfied that pursuant to s 41(6C) the discretion to extend the time for compliance with the bankruptcy notice should be exercised in favour of the applicants by granting such an extension of time.

I propose to grant that extension until the hearing and determination of the appeal, or until further order. I should make it plain that in exercising my discretion in favour of granting the extension I expect that the applicants will do all that is within their power to expedite the hearing of the appeal. In the event that they fail to do so, the respondent will, of course, have liberty to apply to the Court for any orders that might be appropriate.

As regards costs, the applicants brought this application seeking first to set aside the bankruptcy notice and, in the alternative, to have time for compliance extended. They made no effort to support their claim to set aside the bankruptcy notice. It was all but conceded before me that this claim was untenable. No arguments were advanced to support it, and no evidence was led which could found any such order. The respondent should, in my view, be entitled to the costs incurred this day, having been obliged to attend before me to oppose the application to set aside the bankruptcy notice. That was an application which was not pursued, in circumstances where no prior notice was given to the respondent that the applicants would confine their application to gaining an extension of time. Had such notice been given, the respondent might have elected not to oppose that part of the application which was pursued.

The orders of the Court are as follows. Pursuant to subs 41(6C) of the Bankruptcy Act 1966 I order that:

(1) The time for complying with the bankruptcy notice served on the applicants on 1 June 1998 be extended to 14 days after the hearing and determination by the Court of Appeal of the Supreme Court of Victoria of the Notice of Appeal dated 12 June 1998 in matter number 5251 of 1996, or further order.

(2) There be general liberty to apply.

(3) The applicants pay the respondent's costs of this application

I certify that this and the preceding six (6) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg

Associate:

Dated:

Counsel for the Applicants:	Mr V Ruta
Solicitor for the Applicants:	Bock & Co
Counsel for the Respondent:	Mr T Egan
Solicitor for the Respondent:	Thomas Egan and Associates
Date of Hearing:	24 August 1998
Date of Judgment:	24 August 1998