AustLII [Home] [Databases] [WorldLII] [Search] [Feedback]

Federal Magistrates Court of Australia
You are here:  AustLII >> Databases >> Federal Magistrates Court of Australia >> 2010 >> [2010] FMCA 102

[Database Search] [Name Search] [Recent Decisions] [Noteup] [Download] [Help]

Kossaifi v Eakin & Ors [2010] FMCA 102 (19 February 2010)

[AustLII] Federal Magistrates Court of Australia

[Index] [Search] [Download] [Help]

Kossaifi v Eakin & Ors [2010] FMCA 102 (19 February 2010)

Last Updated: 24 February 2010

FEDERAL MAGISTRATES COURT OF AUSTRALIA

KOSSAIFI v EAKIN & ORS

BANKRUPTCY – Application to set aside a bankruptcy notice – whether issuing of the notice was an abuse of process.



Amos v Brisbane TV Ltd (2000) 100 FCR 82; [2000] FCA 825
Brunninghausen v Glavanics [1998] FCA 230
Killoran v Duncan [1999] FCA 1574
Maxwell-Smith v S & E Hall Pty Ltd (2006) 233 ALR 81; [2006] FCA 825
Re Athans; Ex parte Athans (1991) 29 FCR 302
Re Sarina; Ex parte Council of the Shire of Wollondilly [1980] FCA 66; (1980) 43 FLR 163
Reid v Hubbard (2003) 1 ABC(NS) 438; [2003] FCA 1424
Slack v Bottoms English Solicitors [2002] FCA 1445
Watts v Adelaide Bank Limited [2009] FCA 420
Watts v Adelaide Bank Limited [2009] FCAFC 169

Applicant:
JOSEPH KOSSAIFI

Respondents:
TIMOTHY JOHN EAKIN, JOHN RICHARD COX, ANDREW PAUL TENNENT SUTHERLAND AND MICHAEL LEO STAFFORD TRADING AS EAKIN MCCAFFERY COX SOLICITORS

File Number:
SYG 96 of 2010

Judgment of:
Barnes FM

Hearing date:
10 February 2010

Delivered at:
Sydney

Delivered on:
19 February 2010

REPRESENTATION

Counsel for the Applicant:
Mr B Katekar

Solicitors for the Applicant:
Yates Beaggi Lawyers

Counsel for the Respondents:
Mr J Darams

Solicitors for the Respondents:
Eakin McCaffery Cox Solicitors

ORDERS

(1) The application be dismissed.
(2) The applicant pay the costs of the respondents as agreed and in the absence of agreement taxed in accordance with the Federal Court Rules.
FEDERAL MAGISTRATES
COURT OF AUSTRALIA AT
SYDNEY

SYG 96 of 2010

JOSEPH KOSSAIFI

Applicant


And


TIMOTHY JOHN EAKIN, JOHN RICHARD COX, ANDREW PAUL TENNENT SUTHERLAND AND MICHAEL LEO STAFFORD TRADING AS EAKIN MCCAFFERY COX SOLICITORS

Respondents


REASONS FOR JUDGMENT

  1. This is an application to set aside a bankruptcy notice on the basis that issuing of the notice was an abuse of process.
  2. The bankruptcy notice in issue, NN5667 of 2009, was issued on 10 December 2009. The respondent creditors claimed in this bankruptcy notice that Mr Kossaifi, the applicant debtor, owed them a debt of $51,149.16. According to Mr Kossaifi, the bankruptcy notice was served on him on 31 December 2009. Mr Kossaifi lodged this application on 19 January 2010 together with a supporting affidavit.
  3. Mr Kossaifi was a former client of the respondents, who are partners in the firm of solicitors known as Eakin McCaffery Cox Solicitors (Eakins). In about May 2008 Mr Kossaifi approached Mark Doble, a partner in Eakins, and engaged Eakins as his solicitors in relation to a dispute with a Mr Elias, who was a fellow director of Joe & Joe Developments Pty Limited (the Company).
  4. On 21 July 2008, on the instructions of Mr Kossaifi, Mr Doble caused an originating process to be filed in the Supreme Court of New South Wales on behalf of Mr Kossaifi seeking, among other things, an order that the Company be wound up pursuant to s.461 of the Corporations Act 2001 (Cth) on the basis that it was just and equitable to do so. Eakins issued monthly memoranda of costs and disbursements to Mr Kossaifi. These accounts were not paid.
  5. Eakins received a written request from Yates Beaggi Lawyers (Yates Beaggi) on 5 December 2008 to release files and documentation relating to Mr Kossaifi’s Supreme Court proceedings. That letter enclosed an authority from Mr Kossaifi. Eakins exercised a lien on the files in light of its unpaid costs.
  6. On 10 December 2008 Yates Beaggi wrote to Eakins requesting copies of all tax invoices issued by the firm to Mr and Mrs Kossaifi in respect of the Supreme Court proceeding, including any tax invoices in respect of the dispute before the litigation commenced and also a copy of the letter of engagement/fee disclosure issued by Eakins to the Kossaifis. Yates Beaggi also advised that they were instructed to apply to the Supreme Court of New South Wales for assessment of the costs incurred with Eakins by the Kossaifis. Eakins provided the requested information to Yates Beaggi by letter dated 18 December 2008.
  7. Five months later, on 21 May 2009, Mr Kossaifi by his solicitors filed an application for assessment of costs in the New South Wales Supreme Court. In the meantime, administrators of the Company had been appointed on 9 February 2009 and a Deed of Company Arrangement (DOCA) entered into on 31 March 2009.
  8. On 17 June 2009 Eakins filed a response to the costs assessment application in the Supreme Court of New South Wales. A certificate of determination of costs in the sum of $50,549.88 was issued on 29 September 2009, marked sent on 14 October 2009.
  9. On 16 October 2009 Mr Doble wrote to the Manager, Costs Assessment of the Supreme Court of New South Wales on behalf of Eakins, seeking that that certificate of determination of costs be amended to properly reflect the name of the costs respondents. On 20 October 2009 Eakins served copies of the certificate of determination of costs on Mr Kossaifi’s solicitors Yates Beaggi and stated:
  10. No reply was received.
  11. On 27 October 2009 Eakins again wrote to Yates Beaggi, enclosing by way of service the amended certificate of determination issued on 22 October 2009 and marked sent on 23 October 2008, reflecting the proper name of the costs respondents. The letter advised that the certificate was currently being registered as a judgment in the Local Court of New South Wales and reiterated that unless the sum was paid within seven days:
  12. There is no evidence of any response to this letter.
  13. On 12 November 2009 the Local Court of New South Wales at the Downing Centre issued a certificate of judgment for the sum of $50,624.88 pursuant to the amended certificate of determination of costs. It recorded that judgment was made and entered on 27 October 2009.
  14. On 16 November 2009 Eakins wrote to Yates Beaggi enclosing by way of service a copy of the certificate of judgment and stated:
  15. No reply was received. Indeed, Eakins did not receive any response to the letters of October and November 2009 and there is no suggestion in the evidence before the court that there was any reply.
  16. On 10 December 2009 a bankruptcy notice was issued by the Official Receiver at the request of the respondents, addressed to Mr Kossaifi and based on the Local Court certificate of judgment. It is this bankruptcy notice that is the subject of the present application. It is not in dispute that the bankruptcy notice was served on Mr Kossaifi on 31 December 2009.
  17. On 14 January 2010 Eakins received a letter of that date from Yates Beaggi seeking withdrawal of the bankruptcy notice by Monday, 18 January 2010. The letter advised that otherwise Yates Beaggi had instructions to file with this court an application to stay or set aside the bankruptcy notice and that, as Eakins were said to be aware, Mr Kossaifi had made provision for full payment of the sum claimed from within the “Deed Fund of the Deed [of] Administration of the Company” (in relation to which deed administrators had been appointed). The letter stated that this was pursuant to an express written term in the DOCA and that the Company held sufficient assets to pay all creditors, and Eakins, 100 cents in the dollar, that payment was expected to be made in or around February 2010, and that this could be verified with the Deed Administrators.
  18. On 14 January 2010 Eakins responded to this letter, advising that it had been incorrectly assumed by Yates Beaggi that Eakins had been made aware that a DOCA in respect of the Company made provision for payment to them of the judgment debt due to them by Mr Kossaifi. It was pointed out that Eakins was not, and never had been, a creditor of the Company and that it was not bound by any DOCA in respect of the Company. Eakins also advised that they had not been provided with a copy of the DOCA and were unaware of the terms, but that in any event the bankruptcy notice was grounded on a judgment in favour of Eakins in circumstances where the judgment debt had not been paid and the judgment had not been stayed. The letter also advised that Eakins would be happy to resolve the matter as cost effectively and expeditiously as possible and asked Yates Beaggi to advise if their client had a proposal by 10 am on 15 January 2010.
  19. However, on 15 January 2010 Yates Beaggi advised Eakins that they intended to file an application to set aside the bankruptcy notice on 18 January 2010 and enclosed a copy of the DOCA. On the same day Eakins replied, indicating that they were “unable to draw any comfort from the contents of the Deed”, noting that the firm was not a creditor (prospective or otherwise) of the Company; that their retainer was with Mr Kossaifi who was the costs applicant in the assessment proceedings and the judgment debtor; and that they were not prepared to withdraw the bankruptcy notice. However Eakins undertook not to file a creditor’s petition until 5 February 2010, so as to allow Mr Kossaifi time to raise funds to pay the judgment debt. They also advised that any application to set aside the bankruptcy notice would be opposed.
  20. The parties to the DOCA executed on or about 31 March 2009 are the Deed Administrators, the Company, Mr and Mrs Kossaifi and four members of the Elias family. The Kossaifis and the Eliases are all guarantors under the DOCA which provides that certain payments are to be made to the Deed Administrators by the Company and the guarantors and that (after payment of creditors of the Company) the Deed Administrators pay “subordinated creditors” who, by Item 7 of the Schedule to the Deed, consist of “Any creditor of the Company that is a related entity as that term is defined in the Corporations Act 2001 including” five listed firms of which Eakins is one. In relation to Eakins’ costs there is provision for “the amount” to be held in a solicitors’ trust account until the amount was agreed upon or formally assessed. Under the DOCA subordinated creditors are to be paid after payment in full of creditors.
  21. Mr Kossaifi’s unchallenged affidavit evidence was that the Company had agreed to indemnify him in respect of the costs charged by Eakins. His estimate at the time of swearing of his affidavit of 19 January 2010 was that on completion of the DOCA there would “be more than sufficient funds to pay the Respondent in full” and that the Company would have net assets of approximately $297,628.70.
  22. On 19 January 2010 Eakins were served with the application to set aside the bankruptcy notice and the supporting affidavit. On 20 January 2010 Eakins wrote to Yates Beaggi suggesting that no grounds for setting aside the bankruptcy notice were disclosed and inviting them to discontinue the proceedings. On 21 January 2010 Eakins sent a further letter to Yates Beaggi advising that if the proceedings were not discontinued they would not consent to any adjournment, that counsel had been briefed and that they would seek to have the matter determined on 9 February 2010 (the first return date).
  23. When the matter came before me on 9 February 2010 it was listed for hearing on 10 February 2010. Mr Doble, who was in England, was cross-examined by telephone link.
  24. In essence, the applicant’s contention is that, as Emmett J observed in Brunninghausen v Glavanics [1998] FCA 230 (at 235):
  25. It was not disputed that this court has power under s.30 of the Bankruptcy Act 1966 (Cth) to set aside a bankruptcy notice that could be characterised as an abuse of process (see Maxwell-Smith v S & E Hall Pty Ltd (2006) 233 ALR 81; [2006] FCA 825 at [41] – [42]). However, as Jacobson J stated in Maxwell-Smith at [41], the Bankruptcy Act:
  26. Thus, as Hill J pointed out in Re Athans; Ex parte Athans (1991) 29 FCR 302 (at 310), the mere fact that a debtor is solvent is not of itself a ground for the court to set aside a bankruptcy notice. His Honour noted in that respect that the Federal Court’s jurisdiction to set aside a defective bankruptcy notice stemmed from s.30 of the Bankruptcy Act and that it was not a general discretionary jurisdiction and in that sense differed from the jurisdiction to make a sequestration order under s.52(1) of the Act, which is expressed as discretionary. The same can be said of the jurisdiction of this court. (Also see Amos v Brisbane TV Ltd [2000] FCA 825; (2000) 100 FCR 82 at 88; [2000] FCA 825 and Reid v Hubbard (2003) 1 ABC(NS) 438 at 450; [2003] FCA 1424).
  27. There is no challenge to the form of the bankruptcy notice. Not is there any suggestion of a s.41(5) notice or evidence that the applicant has taken any steps to challenge either the assessment of costs or the judgment entered in the Local Court. He does not dispute the basis or the amount of the debt owed to the respondents in these proceedings.
  28. In essence, the applicant’s argument is that he is not insolvent and that the purpose of issuing the bankruptcy notice was to put pressure on him to pay. He claims to have “substantial value” locked up in the assets of the Company, that he can pay the debt and that provision for payment of the judgment debt has been made in the DOCA to which he, (but none of the respondents), is a party.
  29. Counsel for Mr Kossaifi contended that there was evidence to satisfy the court that Mr Kossaifi could pay the debt out of the assets of the Company and that Mr Doble always thought he was going to get paid out of the Company and knew there were substantial funds in the Company to which Mr Kossaifi had access. Reference was made to the fact that in cross-examination Mr Doble had suggested that the letter from Yates Beaggi of 10 December 2008 (which requested copies of tax invoices, the letter of engagement/fee disclosure and stated that Yates Beaggi were instructed to apply for an assessment of costs) was “a delaying tactic by a rogue” and that either Mr Kossaifi did not want to pay, or could not pay, Eakins’ bill.
  30. It was submitted for the applicant that in these circumstances the purpose of issuing the bankruptcy notice was to remedy the delay in payment, and Mr Kossaifi’s evidence was that there were funds to pay Eakins, as provided for in the DOCA, that he anticipated would be available in six to eight weeks.
  31. It was acknowledged by counsel for the applicant that, as attested to in the affidavit of Danielle Cavill sworn on 8 February 2010, the shareholders of the Company and the Deed Administrators were in dispute as to the operation of the DOCA. On or about 27 November 2009 (which I note was before the issue of the bankruptcy notice and also before the date on which Mr Kossaifi swore his affidavit), the Deed Administrators filed an originating process in the Supreme Court seeking directions, declarations and orders in relation to the DOCA, including orders for the termination of the DOCA and a declaration that the guarantors to the DOCA (including Mr Kossaifi) were in breach of their obligations pursuant to the DOCA. Other orders were sought including, in the alternative, an order that the Company be wound up. At the first directions hearing on 8 February 2010 the matter was listed for 22 March 2010 to obtain a hearing date. Mr Kossaifi apparently opposes such application.
  32. Counsel for the applicant nonetheless referred to Mr Kossaifi’s unchallenged affidavit evidence as to his belief that the Company was solvent and would be able to pay all its creditors (including Eakins) in full, as provided for in the DOCA.
  33. Reference was made to the fact that as Spender J stated in Slack v Bottoms English Solicitors [2002] FCA 1445 (at [17]):

(See also Re Sarina; Ex parte Council of the Shire of Wollondilly [1980] FCA 66; (1980) 43 FLR 163 and Brunninghausen v Glavanics [1998] FCA 230 per Emmett

  1. It was acknowledged that Mr Kossaifi’s solvency should be determined at the time the bankruptcy notice was issued in accordance with the approach in Re Sarina. Accordingly, the court would need to be satisfied that at the time the bankruptcy notice was issued Mr Kossaifi was willing and able to pay the relevant debt within a reasonable time.
  2. Counsel for the applicant accepted that there was a difficulty for the applicant in this regard because there was no evidence before the court of his other assets and liabilities. Reliance was placed on the evidence of Mr Kossaifi of the Company’s financial situation at the time when Eakins acted for Mr Kossaifi.
  3. The applicant submitted also that the court could be satisfied that Mr Doble’s state of mind was that Mr Kossaifi could pay the debt and would do so very soon out of Mr Kossaifi’s share of the net assets of the company.
  4. The applicant contended that it was apparent that the purpose of the issue of the bankruptcy notice was to put pressure on Mr Kossaifi to pay the debt, rather than to invoke the court’s insolvency jurisdiction.
  5. It was submitted that the court could be satisfied that at the time the bankruptcy notice was issued, Mr Doble, and hence Eakins, did not have any genuine intention to invoke the insolvency jurisdiction of the court because Mr Doble thought he would get paid if he put enough pressure on Mr Kossaifi, because he knew Mr Kossaifi had plenty of money or at least that he had assets locked up in the Company.
  6. In these circumstances it was contended that the purpose of issuing the bankruptcy notice was to put pressure on Mr Kossaifi to pay and that this constituted an abuse of process.
  7. However, for the reasons that follow, I am not satisfied that abuse of process has been established in this case. The “heavy onus” (see Reid v Hubbard (2003) 1 ABC(NS) 438 at 450; [2003] FCA 1424) that the applicant bears to establish an abuse of process has not been satisfied.
  8. The time to determine whether there was an abuse of process is the time that the bankruptcy notice was issued. Subsequent events have slight relevance, except insofar as they throw light upon circumstances which might have been appreciated and foreseen at the time of the issue of the notice (see Killoran v Duncan [1999] FCA 1574 per Gyles J at [13]).
  9. First, the mere fact that a debtor is solvent is not a ground to set aside a bankruptcy notice (see Re Athans at 310 and compare the position in relation to the jurisdiction to make a sequestration order where the court may, in the exercise of discretion, refuse to proceed to make a sequestration order where a debtor is solvent and see also Re Sarina). In any event it has not been established that Mr Kossaifi was solvent at the time the bankruptcy notice was issued or, indeed, at any time thereafter. There is no evidence before the court as to all Mr Kossaifi’s assets and liabilities. His expressed belief in the solvency of the Company does not establish his solvency at the time the bankruptcy notice was issued (or now). Moreover, I note that the DOCA was entered into before the bankruptcy notice was issued and on the evidence of Ms Cavill the position of the Company was not and is not as clear as Mr Kossaifi believed. At present it appears that there is a deficiency and a dispute as to the operation of the DOCA. The Supreme Court proceedings that were instituted before the bankruptcy notice was issued may lead to termination of the DOCA or the winding up of the Company.
  10. In any event, it has not been established that Mr Doble, and through him Eakins, should have known that Mr Kossaifi was solvent at or before the time of issue of the bankruptcy notice. I accept Mr Doble’s evidence in cross-examination that at the time Eakins acted for Mr Kossaifi, Mr Doble’s understanding as to the financial circumstances of Mr Kossaifi and the Company was based on what Mr Kossaifi told Mr Doble, which he had not verified. At that time he accepted Mr Kossaifi’s estimate that there was a net equity of 2.5 million dollars in the Company although, as he pointed out, contingencies of which he could not have been aware may have arisen. In any event, the fact that Mr Doble thought that Mr Kossaifi had “plenty of money” at the time Eakins was acting for him is not such as to lead to an inference that Mr Doble was of the same belief at the time (some 12 months later) that the bankruptcy notice was issued, having regard to the time that had passed and Mr Kossaifi’s failure to pay any part of the debt after the costs assessment. Moreover, I accept Mr Doble’s evidence that, while he thought the Company was solvent in 2008, in about the second quarter of the 2009 calendar year he became aware that the Company was subject to a deed of company arrangement and that this suggested to him that it may have been insolvent.
  11. Further, given that the court has no general discretion to set aside bankruptcy notices which are valid in form and which are not an abuse of process, the fact that Mr Kossaifi might (depending on the outcome of the present Supreme Court proceedings) come into money “shortly”, or that money may be available through the DOCA, is not a basis on which to set aside the bankruptcy notice.
  12. Nor do these factors, taken together with all the other evidence, establish an abuse of process. I accept in that respect that, as Drummond J stated in Amos v Brisbane TV Ltd (2000) 100 FCR 82; [2000] FCA 825 at [21], even if there was evidence before the court that was such as to establish that the debtor is currently solvent and was solvent when the bankruptcy notice was issued, a valid bankruptcy notice can only be set aside if the creditors’ use of the notice can “in all the circumstances of the particular case be characterised as an abuse of process.”
  13. In Amos v Brisbane TV Ltd Drummond J was not prepared to find that there had been an abuse of process, notwithstanding that the creditor had not checked whether the debtor had sufficient assets to pay the amount of the judgment debt before invoking the bankruptcy process. In that case the bankrupt had made assertions about his poor financial circumstances. While there was no assertion of poor financial circumstances by the debtor in this case, having regard to the time that passed before the time the bankruptcy notice was issued, the possibility of changed circumstances, the fact that Eakins’ costs had been unpaid for a considerable period of time and the absence of a response to their initial letters of October and November 2009 to the solicitor for the applicant seeking payment (and advising that if the amount was not paid a bankruptcy notice would be filed and served), this is not a case in which an abuse of process is made out based on Mr Doble’s understanding of Mr Kossaifi’s financial position at the time Eakins acted for him. Further, there is no evidence that Mr Doble or Eakins were aware of the provisions of the DOCA in relation to their debt and, in any event, it was a judgment debt owed by Mr Kossaifi.
  14. As Heerey J explained in Reid v Hubbard (2003) 1 ABC(NS) 438; [2003] FCA 1424 at [43] the criterion for abuse of process is “whether the improper process was the predominant purpose of the party using the process”. That has not been made out.
  15. I accept Mr Doble’s evidence and am not satisfied that it can be inferred that he, or through him, Eakins had any improper motive or state of mind indicative of an abuse of process in obtaining the issue of bankruptcy notice in 10 December 2009. In particular, I accept Mr Doble’s evidence that if the application to set aside the bankruptcy notice is dismissed and there is an available act of bankruptcy and if the debt is not paid he will file a creditor’s petition on behalf of Eakins.
  16. Mr Doble properly conceded that he obtained the issue of the bankruptcy notice in the “hope” that Eakins would be paid. However I accept that this “hope” was in circumstances where if the debtor did not comply Mr Doble would proceed on behalf of Eakins to present a creditor’s petition, which he could not do without an available act of bankruptcy (such as failure to comply with a bankruptcy notice). I am not satisfied that it can be inferred that Mr Doble’s state of mind was such as to establish that his predominant purpose was an improper purpose in these circumstances. Again it is relevant to have regard to the time that had passed since Eakins acted for Mr Kossaifi, the absence of any payment or suggestion of payment in that time and the fact that the Company (which Mr Doble had thought had plenty of money in 2008) had entered a Deed of Company Arrangement in 2009. In such circumstances it was a reasonable and proper step for the creditor to procure the issue of a bankruptcy notice.
  17. The fact that Mr Doble hoped that by issuing the bankruptcy notice the debt would be paid is not such as to establish an abuse of process. As Spender J indicated in Slack v Bottoms English Solicitors [2002] FCA 1445 at [21]:

The same may be said in this case.


  1. In this case, (as in Killoran v Duncan [1999] FCA 1574), the evidence does not satisfy me that the respondents do not genuinely intend to pursue this matter by invoking the court’s jurisdiction in relation to a creditor’s petition if there is default in compliance with the notice. Nor is there any evidence of any undue pressure being applied. The correspondence referred to above did no more than clarify precisely what steps the respondents would be taking (as was the case in Killoran v Duncan at [11]).
  2. The evidentiary foundation to support a contention of an abuse of process has not been made out in this case (see Watts v Adelaide Bank Limited [2009] FCA 420; affirmed on appeal in Watts v Adelaide Bank Limited [2009] FCAFC 169).
  3. Insofar as the applicant relied on Brunninghausen v Glavanics, the factual circumstances in that case differed significantly from those of this case. In that case an appeal was on foot, there had been an offer of a first mortgage as security for the debt and there was correspondence between the parties about this possibility and a very considerable balance of solvency was proved. None of those factors are present in this case.
  4. Hence I am not satisfied that it has been established that there was an abuse of process.
  5. I note for the sake of completeness, that in Killoran v Duncan Gyles J went so far as to suggest (at [14]) that even if there was a prima facie case of abuse of process, if circumstances had altered significantly after the time of issue of the bankruptcy notice such that it would not be appropriate to set aside the notice, the court could decline to set aside the bankruptcy notice where there was no evidence of solvency. Tt is not necessary to consider this issue in this case as I am satisfied that it has not been established that there was an abuse of process or any other basis on which the bankruptcy notice should be set aside.
  6. The application should be dismissed with costs.

I certify that the preceding fifty-six (56) paragraphs are a true copy of the reasons for judgment of Barnes FM


Associate:


Date: 19 February 2010

AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.austlii.edu.au/au/cases/cth/FMCA/2010/102.html