Adelaide Bank Ltd v Badcock [2002] FMCA 10 (30 January 2002)

Last Updated: 30 April 2002

FEDERAL MAGISTRATES COURT OF AUSTRALIA

ADELAIDE BANK LIMITED v BADCOCK

[2002] FMCA 10

BANKRUPTCY - Review of Registrar's decision - jurisdiction of Federal Magistrates Court and Federal Court to review sequestration orders made by Registrar - nature of review - requirement for judicial officer to be satisfied of matters required by section 52(1) of the Bankruptcy Act - petition - security held by a petitioning creditor - no conflict between amount for which bankruptcy notice issues and amount for which secured petitioning creditor claims in petition.

Bankruptcy Act 1966 (Cth), ss.37, 44, 52(1), 52(2), 52(3)

Bankruptcy (Legislation Amendment) Act 1996 (Cth), s.3, sch. 1

Federal Court of Australia Act 1976 (Cth), ss.29, 35A

Federal Court Rules

Federal Magistrates Act 1999 (Cth), Div 4, ss. 102, 103, 104(2), 104(3)

Federal Magistrates Court (Delegation to Registrars) Rules 2000

Federal Magistrates Court Rules

Reg v Davison [1954] HCA 46; (1954) 90 CLR 353

Evans v Heather Thiedeke Group Pty Ltd (1990) 95 ALR 424

Harris v Caladine [1991] HCA 9; (1991) 172 CLR 84

Norman Young & Kristine Young v Hunter MMI Finance Limited (unreported,

FCA, 23 March 1993, Burchett J)

Coleman v Lazy Days Investments Limited [1994] FCA 1442; (1994) 55 FCR 297

Trustees of the Franciscan Missionaries of Mary v Weir [2000] FCA 574

Martin & Anor v Commonwealth Bank of Australia [2001] FCA 87

Cottrell v Wilcox [2001] FCA 866

Applicant:	ADELAIDE BANK LIMITED
Respondent:	ROBERT JOHN BADCOCK
File No:	AZ 202 of 2001

Delivered on:

30 January 2002

Delivered at:

Adelaide Heard in Sydney

Hearing Date:

21 January 2002

Judgment of:

Raphael FM

REPRESENTATION

Applicant in person

Counsel for the Respondent:

Mr J Lunn

Solicitors for the Respondent:	O'Loughlins
Trustee appeared in person

ORDERS

(1) The hearing is adjourned to 4 February 2002 at 9.30am.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

AZ 202 of 2001

ADELAIDE BANK LIMITED

Applicant

And

ROBERT JOHN BADCOCK

Respondent

REASONS FOR JUDGMENT

1. This is an application for review of a decision of Registrar Christie given in the Federal Magistrates Court at Adelaide on 21 December 2001. The learned Registrar made orders:

(1) pursuant to rule 1.06 of the Federal Magistrates Court Rules 2001 ("the Federal Magistrates Court Rules"), dispense with the need for compliance with rule 31.04;

(2) a sequestration order be made against the estate of Robert John Badcock;

(3) the petitioning creditor's costs, including any reserved costs, be taxed pursuant to the Federal Court Rules ("the Federal Court Rules") and paid in accordance with the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act").

The Court notes the date of the act of bankruptcy is 7 September 2001.

2. Division 4 of the Federal Magistrates Act 1999 (Cth) ("the FMA") deals with the role and power of Registrars. Section 103 of the FMA provides for delegation of powers to the Registrars and the Federal Magistrates Court (Delegation to Registrars) Rules 2000 provides in rule 1.4(1)(viii) the power to make a sequestration order against the estate of a debtor. Subsections 104(2) & (3) of the FMA provide as follows:

104(2) Review of the Exercise of Registrar's Powers

A party to proceedings in which a Registrar has exercised any of the powers of the Federal Magistrates Court under subsection 102(2) or under a delegation under subsection 103(1) may:

(a) within the time prescribed by the rules of court; or

(b) within any further time allowed in accordance with the rules of court; apply to the Federal Magistrates Court for review of that exercise of power.

104(3) [Review]

The Federal Magistrates Court may, on application under subsection (2) or on its own initiative, review an exercise of power by a Registrar under subsection 102(2) or under a delegation under subsection 103(1), and may make any order or orders it thinks fit in relation to the matter in respect of which the power was exercise.

3. These provisions mirror provisions in the Federal Court of Australia Act 1976 (Cth) "(the FCA") and Rules.

4. At the commencement of this application Mr Lunn, who appears for the petitioning creditor, submitted to the Court that the Court did not have jurisdiction to deal with this application. In response to my request for clarification Mr Lunn confirmed that his submission would be that the Federal Court was also devoid of jurisdiction to review the decision of a Registrar to make a sequestration order. Mr Lunn suggested that the appropriate way of seeking relief in respect of such a decision was to appeal it to the Full Bench of the Federal Court.

5. The basis upon which the respondent made the submission is its reading of section 37 of the Bankruptcy Act:

37(1) Subject to subsection (2), the Court may rescind, vary or discharge an order made by it under this Act or may suspend the operation of such an order.

The Court does not have power to rescind or discharge, or to suspend the operation of:

(a) a sequestration order; or

(b) an order for the administration of the estate of a deceased person under Part IX.

6. The respondent argued that this provision of the Bankruptcy Act overrode the provisions of the FMA and the Rules. He submitted there was no discretion in relation to the matter. The Court was bound by the clear words of the provision.

7. I asked Mr Lunn whether he had any authority to support this application but he advised me that he did not.

8. The clear words of section 37 are, on further examination, somewhat more opaque. Firstly, notwithstanding the prohibition on any power to suspend the operation of sequestration order found in section 37 there is a clear power to do so granted by section 52(3). That section puts a limit of 21 days on the stay of any sequestration but this limitation does not prevent the Court from granting a stay for longer pursuant to section 29 of the FCA and Order 52, rule 17 of the Federal Court Rules: Evans v Heather Thiedeke Group Pty Ltd (1990) 95 ALR 424; Coleman v Lazy Days Investments Limited [1994] FCA 1442; (1994) 55 FCR 297. Section 37 as it now is came into the Act by way of an amendment in 1992. In March 1993 Burchett J considered the new section in Norman Young & Kristine Young v Hunter MMI Finance Limited (unreported, FCA, 23 March 1993, Burchett J). His Honour said:

"My attention has been properly directed to section 37 which provides, as it has fairly recently been amended, a bar to the rescission by the Court of a sequestration order. However, it seems clear to me that section 37 has nothing to say to section 31A, which is not a general provision about the powers of the Court in bankruptcy, but a specific provision dealing with the delegation of powers to the Registrar, and with the consequences of such a delegation, framed, of course, in terms designed to overcome the constitutional problem which was highlighted in Reg v Davison [1954] HCA 46; (1954) 90 CLR 353."

9. Section 31A was repealed by the Bankruptcy (Legislation Amendment) Act 1996, section 3 and schedule 1. Since then an identical power has been exercised pursuant to section 35A of the FCA. That section is identical to sections 102 - 104 of the FMA.

10. The Full Bench of the Federal Court considered the amended sections in Trustees of the Franciscan Missionaries of Mary v Weir (2000) FCA 574. The Court approved the decision in Re Young and went on to say at paragraph 23:

"In our opinion sections 37 and 52(3) of the Bankruptcy Act are provisions having general application to the exercise of jurisdiction in bankruptcy by the Court; but the exercise of that jurisdiction through a delegation satisfying the strict requirements in Harris v Caladine and the other authorities to which we have referred is a special case, and it is governed by its rules."

11. Mr Lunn did not impugn the power of a Registrar to make sequestration orders. I am satisfied that the proper method of reconsidering the sequestration order made by a Registrar is by way of review and that the form of that review should be in accordance with the view of the Full Bench in Martin & Anor v Commonwealth Bank of Australia (2001) FCA 87.

12. The decision in Martin makes it quite clear that the responsibility of a judge in bankruptcy hearing a review of a Registrar's decision to make a sequestration order is to hear de novo the creditor's petition. In order to hear the creditor's petition de novo it is necessary for the judicial officer to be satisfied with the proof of the matters of which subsection 52(1) of the Bankruptcy Act requires the Court to be satisfied. Those requirements include matters which have to be proved by way of affidavit evidence. Rule 31.06 of the Federal Magistrates Court Rules sets those out in detail.

13. I am not sure that Mr Lunn was familiar with the dicta of the Full Bench in Martin when he commenced upon the rehearing of the petition. I had previously indicated that as the creditor was obliged to prove the matters required by section 52(1) it should go first and do that before the debtor, although the applicant in the proceedings, was required to indicate why the sequestration order should not be made.

14. Before he had completed his submissions, counsel for the creditor requested a short adjournment for a personal matter. I granted this and suggested that whilst I was off the bench he consider the decision of the Full Bench in Martin. Upon his return counsel advised that he wished me to adopt the affidavits filed before the Registrar. He reiterated a submission that had been made before the Registrar that the debtor had, in his own affidavits, admitted his inability to pay his debts and requested that I exercise the same discretion as the Registrar had in relation to the service of the reasons for decision of the previous Registrar in respect of an application made by the debtor to set aside the bankruptcy notice.

15. I was not provided with any further affidavits and in particular it was not provided that the affidavits required by rule 31.06(3) or 31.06(4). Although in regard to the latter I was advised from the bar table that the debt was still owing.

16. I am not satisfied that the creditor has complied with the formalities required by the Bankruptcy Act and the Rules. However, because of the findings which I have made and which are detailed below concerning the debtor's application for review, I would propose to adjourn this matter until 9.30am on 4 February 2002 at Adelaide but that adjournment be limited to:

"the determination of the formal matters of proof referred to in section 52(1) of the Act": Cottrell v Wilcox [2001] FCA 866.

17. I have heard the submissions of Mr Badcock in support of the application. In addition I have read his written submissions handed up on 21 January 2002 and his affidavit of 10 January 2002 and the other documentation contained in the file including the appeal book to which reference was made.

18. The background of this dispute is that the applicant, personally and through various business entities with which he was connected, borrowed money from the Bank of Adelaide. Security was given by way of Real Property Act mortgages and personal guarantees. At one stage a deed of priority was entered into with the bank which altered the normal priorities pursuant to which the bank would have been entitled to exercise its rights. The business has failed and the bank sought to recover its loans. Amongst other actions which the bank took, it brought proceedings against Mr Badcock in the District Court of South Australia. In those proceedings Mr Badcock raised various issues of a technical nature relating to the exercise of the bank's powers in the light of the provisions of the deed of priority. When I use the word "technical" I am not being perjorative of Mr Badcock. The defences which he raised were in the nature of legal argument rather than argument strictly as to facts. Mr Badcock was unsuccessful in his proceedings. He started an appeal but he failed to proceed with it. I am informed by counsel for the bank that pursuant to the Rules of the Supreme Court of South Australia the appeal is deemed to have been dismissed. Applications made relatively recently to resurrect the appeal process have also been unsuccessful.

19. Both before the Registrar and myself Mr Badcock sought to impugn the District Court judgment. It is his view that the Federal Magistrates Court has the power to interfere in that judgment as opposed merely to a power under the Bankruptcy Act to "go behind" the judgment when making a decision in relation to a bankruptcy matter. Mr Badcock appears to have misunderstood the provisions of sections 14, 15, 16 and 18 of the FMA as powers which would allow the Court to interfere in the decisions of State Courts. This, of course, is not the case as was pointed out by the learned Registrar in paragraph 16 of her reasons for decision.

20. I have carefully considered the submissions put forward by Mr Badcock and with the exception of one, with which I will deal later, I do not believe that they differ in any marked degree from those which were put to Registrar Christie. In her reasons for decision Registrar Christie has traversed these submissions and dealt with them in a way which is both thorough and correct. I would respectfully adopt those reasons. I do not think there is anything that I can usefully add to them save possibly to emphasise that this is not an appropriate case in which to attempt to "go behind" the original District Court judgment. The major reason which I would advance for that conclusion is the nature of the dispute and the nature of the judgment itself. Mr Badcock recognised the technicality of the issues, he sets out in his submissions lists of statutes and sections of statutes that he claims are relevant to his argument and makes much of the alleged errors of the learned District Court judge. These are all matters upon which most appropriate way to seek relief is by appeal. Mr Badcock did not pursue that appeal expeditiously and although he was given a further opportunity to do so he did not comply with the orders that were made. These are all matters within the jurisdiction of the State courts. As Mr Badcock is not asserting that the judgment was achieved by fraud or non disclosure or in any other manner that would reflect on the conduct of a party or of the Court these bankruptcy proceedings are not the appropriate forum to debate the validity of the original District Court judgment.

21. The only matter which was raised before me and which was not considered by Registrar Christie, because it was not put to her, is the suggestion that the petition may be incorrect in the way in which it refers to an act of bankruptcy in respect of a judgment of a sum in excess of $100,000, but a debt supporting the petition of only approximately $43,000.

22. This matter was raised by Mr Badcock in paragraphs 21 and 22 of his affidavit of 10 January.

23. It is true that the bankruptcy notice refers to the sum of $110,922.39, being the District Court judgment. That is the amount for which the notice was issued and the debtor has failed to comply with the terms of the notice. He sought to set aside the notice but that did not succeed and he did not seek a review of the Registrar's decision. The petition alleges that the debtor owes the creditor $443,283.69 which is made up as described in paragraphs, 1.1, 1.2 and 1.3 of the petition. These sums include the amount of $100,922.29, the subject of the bankruptcy notice. The petition, as it is required to do, then sets out statements relating to the existence of security held by the creditor and states:

"the total value of security is valued at $440,000 leaving an unsecured balance owing to the applicant creditor of $43,475.09."

24. The statement relating to security is mandated by section 44 of the Bankruptcy Act. One of the purposes of these sections is to ensure that the unsecured portion of the petitioning creditor's debt exceeds the statutory amount of $2,000. The section 44 requirements do not affect in any way the bankruptcy notice for that is only a document requiring a debtor to pay a debt that will have further consequences if he fails to do so. No creditor is obliged to realise his security before proceeding in other ways to enforce payment and subject to the provisions of section 44 a creditor is not obliged to realise his security before commencing bankruptcy proceedings.

25. Mr Badcock owed $110,922.39 when the bankruptcy notice was issued. The creditor asserts that that sum is still owed but he only seeks to recover as an unsecured creditor from the estate of the debtor the sum of $43,475.09.

26. My finding is that there is nothing in the submissions made by Mr Badcock that would satisfy me that I should invoke section 52(2) of the Bankruptcy Act. There is no evidence whatsoever that the debtor is able to pay his debts, indeed as Mr Lunn pointed out the evidence is to the contrary and the submissions do not convince me that there is any other sufficient cause why a sequestration order ought not to be made.

I certify that the preceding twenty-six (26) paragraphs are a true copy of the reasons for judgment of Raphael FM

Associate:

Date: