Kakavas v Crown Melbourne Limited [2011] FMCA 11 (20 January 2011)

Last Updated: 3 May 2011

FEDERAL MAGISTRATES COURT OF AUSTRALIA

KAKAVAS v CROWN MELBOURNE LIMITED

[2011] FMCA 11

BANKRUPTCY – Bankruptcy notice – extension of time for compliance – application refused.

Bankruptcy Act 1966, ss.41(6A), 41(7), 49(6A), 306 Trade Practices Act, s.51AA

Benaharon v Fabric Dyeworks (Aust) Pty Ltd [1998] FCA 1109 (24 August 1998) Bryant v Commonwealth Bank of Australia (1994) FCA 1474 Byron v Southern Star Group Propriety Limited [1997] FCA 151; (1997) 73 FCR 264 Re Geard; Ex parte Reid (unreported FCA Sheppard J 11 February 1994) Kakavas v Paradise Enterprises Limited [2010] FMCA 574 Kakavas v Crown Limited and Ors (2010) BSCA 102

Applicant:

HARRY KAKAVAS

Respondent:

CROWN MELBOURNE LIMITED

File Number:

MLG 880 of 2010

Judgment of:

Riethmuller FM

Hearing date:

4 August 2010

Date of Last Submission:

4 August 2010

Delivered at:

Melbourne

Delivered on:

20 January 2011

REPRESENTATION

Counsel for the Applicant:

Mr Galvin QC

Solicitors for the Applicant:

Madgwicks

Counsel for the Respondent:

Mr Gronow

Solicitors for the Respondent:

Minter Ellison

ORDERS

(1) The application for an extension of time to comply with the bankruptcy notice be refused.
(2) The applicant pay the respondent’s costs.

FEDERAL MAGISTRATES COURT OF AUSTRALIA AT MELBOURNE

MLG 880 of 2010

HARRY KAKAVAS

Applicant

and

CROWN MELBOURNE LIMITED

Respondent

REASONS FOR JUDGMENT

Background

1. The facts and circumstances in this case are similar to Kakavas v Paradise Enterprises Limited [2010] FMCA 574. A significant difference is that in this case, the applicant has a counterclaim involving damages exceeding $20 million, on the basis of alleged unconscionable conduct pursuant to s.51AA of the Trade Practices Act. The underlying facts and circumstances are also different. In this case the applicant had been gambling over an extended period at Crown Casino whereas he only had a one-off gambling period at Paradise Casino, where he went for a number of days on his honeymoon with his wife.
2. In the present case, the applicant applies to set aside the bankruptcy notice on two substantive grounds:
   1. that the bankruptcy notice contained an incorrect ACN number for the creditor;
   2. that the underlying debt is not owed, and that the debtor has applied to set aside the judgment by way of an appeal in the Court of Appeal of the Supreme Court of Victoria.

The incorrect ACN number

3. The first claim is that the ACN number on the bankruptcy notice is incorrect. This error is not disputed. However, there is no suggestion of any prejudice that arose from this error. There is no other company with a similar name that the creditor has had dealings with, nor is there any evidence to suggest that the applicant had not realised that the company was his creditor.
4. This is nothing more than a technical defect which is cured by s.306 of the Bankruptcy Act. To the extent that the application concerns this defect it ought to be dismissed.

The debt is not owed

5. To the extent that the application concerns the second issue, it is more difficult. Counsel for the applicant developed the argument on the basis that the extension of time to comply with the bankruptcy notice was sought as part of the process of applying to set aside the bankruptcy notice. The applicant explained that once the judgment was overturned on appeal, if he is successful in the appeal, the bankruptcy notice will no longer be founded upon a valid judgment. The bankruptcy notice can then be the subject of an application to set it aside. The applicant thus argued that the application to extend time for compliance with the bankruptcy notice is an interlocutory order to facilitate an application to set aside the bankruptcy notice.
6. The reason for this technical categorisation of the nature of the application before me lies in its impact upon the question of whether or not the debtor’s financial circumstances are relevant to an application to extend the time for compliance with a bankruptcy notice.
7. The applicant relied heavily upon Bryant v Commonwealth Bank of Australia (1994) FCA 1474, where the Full Court (Davies, Foster and O’Loughlin JJ) stated at paragraph 11:
   • [11] It is not clear that his Honour refused to admit into evidence an affidavit by Mr Bryant attesting to his solvency. The trial judge indicated, however, that solvency was not relevant. In that respect his Honour was correct. A solvent debtor may commit an act of bankruptcy by failing to comply with the bankruptcy notice served upon him. Solvency becomes relevant when a petition based upon the act of bankruptcy is presented.
8. The comment was made in response to a ground of appeal suggesting that the trial judge had erred in law in refusing to admit into evidence the appellant’s affidavits attesting to his solvency on an application to set aside a bankruptcy notice on the basis that the applicant had a counterclaim or set-off. Importantly, at paragraph 19 of that judgment, the court pointed out that the applicant in that case had not satisfied the requirements of s.41(7), and time was not extended. The case before me is one pursuant to s.41(6A). At paragraph 23, their Honours did turn to whether or not the discretion should be exercised under s.41(6A). The court did not turn to a consideration of the applicant’s financial circumstances.
9. The argument was further developed on behalf of the applicant that the application for an extension of time to comply with the notice and the attack upon the bankruptcy notice itself was one that was between the two parties to these proceedings, and did not involve creditors generally in the way that a sequestration application would. Some doubt is cast upon this by the comments of Lehane J in Byron v Southern Star Group Propriety Limited [1997] FCA 151; (1997) 73 FCR 264, where at 270 his Honour 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 account the interests 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.
10. The scheme of the bankruptcy legislation is to provide a mechanism, through the use of a bankruptcy notice, by which one can easily obtain evidence sufficient to found an application for a sequestration order. The mechanism is a simple one: a notice in a prescribed form is given to the debtor requiring them to meet a debt within a certain period of time. Failure to do so amounts to an act of bankruptcy upon which the sequestration application can be based. Even without the assistance of the bankruptcy provisions, the failure to discharge the debt would create some prima facie evidence as to the debtor’s insolvency. This evidence is founded on the proposition that ordinarily those who are solvent pay their debts when they fall due and payable.
11. However, the statutory scheme with respect to bankruptcy notices does not rely upon a determination of the question of solvency until a sequestration order is sought. The failure to pay a debt due and owing, as referred to in a duly drawn and served bankruptcy notice, is deemed by the legislation to be an act of bankruptcy. Evidence of solvency at that point does not alter the fact that the debtor has committed an act of bankruptcy within the meaning of the Act. In this sense solvency is not relevant when considering setting aside or staying a bankruptcy notice.
12. However, in exercising the discretion to extend time for compliance with the bankruptcy notice, the debtor’s financial circumstances may be particularly relevant. For example, in some cases it may be able to be established that the inability to pay the debt as referred to in the bankruptcy notice is caused by temporary liquidity problems of a person who has significant assets. In other cases there may be a real question as to whether or not there are sufficient assets to meet liabilities. The extent of assets a debtor has compared to the alleged debts indicates the level of risk to the creditor of any delay.
13. Whilst solvency is not a ground for setting aside a bankruptcy notice, a debtor’s financial circumstances will often be relevant to an application to extend time for compliance with the notice. As such, some consideration of the applicant’s financial circumstances is warranted in this case.
14. Argument also ensued with respect to the operation of the Supreme Court’s decision refusing a stay. In Re Geard; Ex parte Reid (unreported FCA Sheppard J 11 February 1994) Sheppard J took the view that it would only be in exceptional circumstances that an extension of time to comply with a bankruptcy notice was granted, if a stay had not been obtained from the court that issued the judgment that was the foundation of the debt. This was confirmed by Lehane J in Byron v Southern Star Group Propriety Limited [1997] FCA 151; (1997) 73 FCR 264. This view is not universal. Weinberg J in Benaharon v Fabric Dyeworks (Aust) Pty Ltd [1998] FCA 1109 (24 August 1998) (at page 3) summarised the differing judicial views:
    • 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] FCA 151; (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.
15. At page 5 Weinberg J noted the practical consequences of a sequestration order in most cases, saying:
    • It was submitted also, I think, correctly, that where a sequestration order is made, the probabilities are that the appeal would not be pursued.
16. The applicant’s argument was, effectively, that once an appeal has been lodged, there should ordinarily be an extension of time to comply with the bankruptcy notice, pending the outcome of the appeal. This cannot be the law, as it would allow a bankruptcy to be forestalled for a considerable period of time by utilising the appeal processes, even if appeals were not bona fide. It also seems unlikely that it is the law that a weak, but bona fide, appeal should have such an impact in circumstances where a debtor has no capacity to meet the judgment, there is risk of assets being dissipated and the extension of time would affect the relation back period.
17. It is not appropriate for this Court to determine the prospects of an appeal against a judgment of the Supreme Court. Prima facie the Supreme Court judgment of the trial judge stands until it is set aside. However, in this case there is a bona fide appeal, a proposition which is not seriously cavilled with by the respondent. The respondent says that the appeal has few prospects of success. I accept that the appeal is a bona fide appeal and that it is not for me to assess its prospects where it is not hopeless.
18. The conclusion that it is not appropriate for this Court to attempt to assess the prospects of the appeal against, in this case, a Justice of the Supreme Court, demonstrates the logical importance of having regard to the decision of the Supreme Court as to whether or not to stay a judgment of that court. In this case the Supreme Court determined that it would not stay the judgment. That decision has been the subject of a special leave application to the High Court of Australia, and the special leave application refused. Whilst there are some technical matters that are apparent from reading the refusal of the special leave application, I am nonetheless left with the position that the Supreme Court of Victoria has refused to grant a stay, in accordance with the law of Victoria, and that such refusal has not been overturned by the High Court. This is a relevant consideration that I must take into account.
19. The real issue, in cases such as the present, appears to lie in the potential prejudice to each of the parties if the bankruptcy notice is not extended. In this regard, one cannot help but consider the circumstances, both in direct financial terms and the surrounding circumstances of the parties. An obvious prejudice would be where a party is in a contractual relationship which has a clause that automatically terminates the relationship, should an act of bankruptcy be committed, or causes financiers to call in mortgage.
20. Similarly, where a party has been able to provide undertakings or consent to injunctions to preserve assets, there may be little danger to a creditor if an extension of time to comply with the bankruptcy notice is granted, as assets sufficient to meet the debts of the party will be available, or at least all available assets secured.
21. In cases such as the present where the party is, on anyone’s view, insolvent, there are real risks to the creditor of a delay in the date of the act of bankruptcy. The extent of this risk is apparent from the decision of the Court of Appeal of the Supreme Court of Victoria in dealing with the stay application: see Kakavas v Crown Limited and Ors (2010) VSCA 102.
22. There is no evidence before me of any contractual relations or other matters which may be affected by a refusal to extend the time for compliance with the bankruptcy notice.
23. As set out in Kakavas v Paradise Enterprises Limited (2010) FMCA 574, it seems that if the judgments against the applicant stand, he is insolvent and, indeed, is likely to be insolvent even if the judgments do not stand.
24. There does not appear to have been any delay in the proceedings in this case. There is no specific prejudice to the applicant that can be pointed to, other than the fact that the expiration of the period of time to comply with the bankruptcy notice moves the applicant one step closer to a potential application for a sequestration order. There is potential prejudice to creditors in a case such as this, considering the likely complexity of the matter, which involves potentially $50 million in debts, including some $25 million in debts to family members, if there is delay.

Conclusion

25. Considering the matter as a whole, the application for an extension of time to comply with the bankruptcy notice ought to be refused.

I certify that the preceding twenty-five (25) paragraphs are a true copy of the reasons for judgment of Riethmuller FM

Date: 11 January 2011