Australian Steel Company v Bianco [2002] FMCA 159 (31 July 2002)

Last Updated: 21 October 2003

FEDERAL MAGISTRATES COURT OF AUSTRALIA

AUSTRALIAN STEEL COMPANY v BIANCO

[2002] FMCA 159

BANKRUPTCY - substitution of petitioning creditor - whether interests of creditors would be served by substitution - whether substitution would be oppressive

Bankruptcy Act 1966 (Cth), s.49

Contracts Review Act 1980 (NSW)

Corporations Law

Dean v QUF Industries Limited [1981] FCA 71; (1981) 51 FLR 317

South-East Water Limited v Kitoria Pty Limited (1996) ACSR 465-472

Applicant:

AUSTRALIAN STEEL COMPANY (OPERATIONS) PTY LTD ACN 089 426 955

Respondent:

PHIL BIANCO

File No:

SZ70 of 2002

Delivered on:

31 July 2002

Delivered at:

Sydney

Hearing Date:

31 July 2002

Judgment of:

Driver FM

REPRESENTATION

Solicitors for the Applicant:

Mr D Phair

Counsel for the Respondent:

Mr R Tregenza

Solicitors for the Respondent:

Ledlin Partners

ORDERS

(1) The application contained in the notice of motion, filed 31 July 2002, is dismissed.

(2) The creditor's petition, filed 30 January 2002, is dismissed.

(3) The applicant is to pay the respondent's costs and disbursements of and incidental to the application.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY

SZ70 of 2002

AUSTRALIAN STEEL COMPANY (OPERATIONS) PTY LTD ACN 089 426 955

Applicant

And

PHIL BIANCO

Respondent

REASONS FOR JUDGMENT

1. I have before me for ex tempore judgment a notice of motion filed in Court this afternoon by the Australian Steel Company (Operations) Pty Limited (ACN 089 426 955) for orders that it be substituted as the applicant in bankruptcy proceedings, being a creditor's petition filed by CSR Limited (trading as CSR Construction Materials). The notice of motion also seeks the adjournment of the creditor's petition, reservation of costs and such other orders as the court sees fit. The motion is opposed by the respondent debtor, Mr Bianco.

2. The bankruptcy proceedings previously came before the Court on 18 and 19 June 2002 for a contested hearing of the creditor's petition, filed by the then petitioning creditor CSR. On the morning of the second day of that hearing a settlement was entered into by the petitioning creditor and the debtor and I made consent orders, the effect of which was, relevantly, to adjourn the hearing of the creditor's petition to today.

3. The present applicant was present by leave on the earlier hearing of the creditor's petition and foreshadowed an application for substitution at that time.

4. The application is made for an order for substitution under s.49 of the Bankruptcy Act 1966 (Cth) ("the Bankruptcy Act"). The operation of that section is succinctly discussed in Butterworths Bankruptcy Law and Practice at p.11,127. The presentation and prosecution of a creditor's petition are done for the benefit of all the debtor's creditors and, accordingly, where a creditor's petition is not prosecuted with due diligence or at all, s.49 allows for another creditor to be substituted as the applicant creditor. The power to permit substitution is discretionary.

5. In Dean v QUF Industries Limited [1981] FCA 71; (1981) 51 FLR 317 at 321 the Federal Court stated that s.49 serves a number of important practical purposes:

" It helps avoid multiplicity of petitions in that it reduces the circumstances in which it is necessary for another creditor to file an independent petition to protect his position against the possibility that the petitioner in a pending petition may be paid out or may otherwise fail to proceed. It gives other creditors a degree of protection against dilatoriness on the part of a petitioner or collusion between petitioner and debtor to defeat or delay creditors."

6. In the context of the equivalent section in the Corporations Law, s.465B, his Honour Ryan J in South-East Water Limited v Kitoria Pty Limited (1996) 21 ACSR 465-472 stated:

"In my view, the proper exercise of the discretion conferred by section 465B of the Law requires the court to weigh in the balance two competing policies. The first is that an insolvent company should not be permitted to continue to trade to the detriment of its existing or future creditors, and should be wound up as expeditiously as possible. If the achievement of this objective is jeopardised by the inaction or lack of diligence of the petitioning creditor, another creditor should be substituted as contemplated by section 465B(1)(a) to allow the winding up proceedings to continue in the interests of the generality of creditors, some of whom may have refrained from initiating their own proceedings in the knowledge that the original petition had been instituted. On the other hand, the Court should not allow winding up proceedings to be used as a debt-collecting mechanism or an instrument of oppression to be held over the head of a company otherwise trading satisfactorily by a creditor whose debt is the subject of a genuine dispute."

7. It seems to me that the position is essentially the same in relation to s.49 of the Bankruptcy Act. There are competing public interests as well as private interests involved. Section 49 permits another creditor to be substituted in circumstances of collusion or dilatoriness on the part of a petitioning creditor, and it ensures that if a debtor is insolvent his affairs are brought under the operation of the Bankruptcy Act as expeditiously as possible. On the other hand, the Court should not allow bankruptcy proceedings to be brought through substitution as a means of oppression of a debtor where there is a genuine dispute about the existence of a debt.

8. In the present case the applicant is a company related to a company to which a guarantee was allegedly provided by the debtor at an uncertain time, but it would seem to have been given on or after 11 November 1993, when a credit application was made by a company associated with the debtor. The applicant asserts that the debtor is indebted to it as it is a related entity of the company which received the guarantee, and in pursuance of its claim it has taken proceedings in the District Court against the debtor and others.

9. Judgment in the District Court proceedings has been entered against the debtor's company, which is in liquidation. Judgment was set aside against the debtor after having been entered for default, noting, among other things, that the debtor is resisting the claim pursuant to the Contracts Review Act 1980 (NSW) ("the Contracts Review Act").

10. The proceedings in the District Court are continuing as a contested claim between the applicant and the debtor. If the applicant was to be substituted as petitioning creditor it would avoid the necessity of it obtaining judgment against the debtor, given that an act of bankruptcy has prima facie already been committed by the debtor by failing to respond within time to a bankruptcy notice served on him by the initial petitioning creditor.

11. If the creditor's petition was successful in that a sequestration order was granted, the applicant would avoid the necessity of pursuing to judgment the proceedings in the District Court. The applicant would simply prove on the basis of the claim of debt as a creditor in the bankruptcy.

12. The petitioning creditor, CSR Limited, could not be said to have been dilatory or to be in collusion with the debtor. The fact is simply that a payment has been made to CSR in order to satisfy the debt owed to it by the debtor. It therefore has no continuing interest in the creditor's petition. The applicant has a continuing interest in that creditor's petition in view of its claim being pursued in the District Court. If the order for substitution were to be made a serious issue would remain at a hearing of the creditor's petition, whether the sequestration order sought should be granted in advance of the decision, if any, of the District Court in the proceedings between the parties.

13. That brings into sharp relief the question of whether there is a bona fide dispute between the parties as to the existence of the claimed debt. I am satisfied that there is. In the first place, there is a defence based on the Contracts Review Act. In the second place, the debtor disputes that the applicant is entitled to the benefit of the guarantee purportedly given by the debtor to a company called SCI Operations Pty Limited. The answer to that dispute will probably be governed largely by the terms of the guarantee given, and whether the applicant is taken to be a corporation which is related to SCI Operations Pty Limited.

14. Mr Tregenza, for the applicant, has put before me material this afternoon which goes a considerable distance to satisfying me on that issue of relationship between the corporations. Nevertheless, I am satisfied that there is a bona fide dispute between the parties which is presently being litigated in the District Court.

15. In those circumstances, I am concerned that an order for substitution would permit the creditor's petition to be used as an instrument of oppression to be held over the head of the debtor, given that the applicant would potentially avoid the need to have its claim determined in the District Court. In my view, those proceedings in the District Court should run their course before bankruptcy proceedings are pursued by the applicant and I will accordingly not grant the application for substitution.

16. There being no other creditor who comes forward to take advantage of the petition, it is appropriate and desirable that I should also dismiss the creditors petition filed on 30 January 2002.

I certify that the preceding sixteen (16) paragraphs are a true copy of the reasons for judgment of Driver FM

Associate:

Date: 9 August 2002