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QBE Insurance (Australia) Limited v Ekes [2011] FMCA 46 (31 January 2011)

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QBE Insurance (Australia) Limited v Ekes [2011] FMCA 46 (31 January 2011)

Last Updated: 9 February 2011

FEDERAL MAGISTRATES COURT OF AUSTRALIA

QBE INSURANCE (AUSTRALIA) LIMITED v EKES

BANKRUPTCY – Creditor’s petition – validity of debt – effect of Part X personal insolvency agreement – judgment debt entered by consent in proceedings commenced prior to insolvency agreement – whether debtor’s liabilities released by the insolvency agreement – new and valuable consideration given by creditor – entry of consent orders was not precluded by the Pt. X agreement – sequestration order made.


Australian Woollen Mills Pty Ltd v The Commonwealth [1954] HCA 20; (1954) 92 CLR 424
Balfour v Balfour [1919] 2 KB 571
Dunlop Pneumatic Tyre Company Ltd v Selfridge & Company Ltd [1915] UKHL 1; [1915] AC 847
Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52
Jakeman v Cook (1878) 4 EX D 26
McDonald, Henry & Meek’s Australian Bankruptcy Law & Practice
Wild v Tucker [1914] 3 KB 36

Applicant:
QBE INSURANCE (AUSTRALIA) LIMITED (ABN 78003191035)

Respondent:
HECTOR EKES

File Number:
SYG 1151 of 2010

Judgment of:
Smith FM

Hearing date:
31 January 2011

Delivered at:
Sydney

Delivered on:
31 January 2011

REPRESENTATION

Counsel for the Applicant:
Ms S Mahmud

Solicitors for the Applicant:
Turks Legal

Counsel for the Respondent:
Mr F Gutierrez

Solicitors for the Respondent:
Avondale Lawyers

ORDERS

(1) A sequestration order be made against the estate of Hector Ekes.
(2) All proceedings under the sequestration order are stayed under s.52(3) of the Bankruptcy Act 1966 (Cth) for 14 days, on the following conditions:
(3) The applicant creditor’s costs, including all reserved costs, be taxed and paid from the estate of the respondent debtor in accordance with the Bankruptcy Act 1966 (Cth).
(4) Note that the date of the act of bankruptcy is 12 April 2010.
(5) Note that a consent to act as trustee has been signed by Giles Geoffrey Woodgate.
(6) The applicant must give a copy of this order to the Official Receiver within 2 working days.
FEDERAL MAGISTRATES
COURT OF AUSTRALIA
AT SYDNEY

SYG 1151 of 2010

QBE INSURANCE (AUSTRALIA) LIMITED (ABN 78003191035)

Applicant


And


HECTOR EKES

Respondent


REASONS FOR JUDGMENT

(revised from transcript)

  1. QBE Insurance (Australia) Limited (“QBE”) seeks a sequestration order against Mr Ekes based on his liabilities under a judgment of the District Court of NSW entered with his consent on 2 September 2009. The petition raises interesting questions concerning the enforceability of the judgment, in the face of a personal insolvency agreement under Part X of the Bankruptcy Act 1966 (Cth) executed by Mr Ekes on
    16 July 2009, which released him from liabilities then owing to QBE and previously claimed in the same District Court proceedings.
  2. QBE’s statement of claim was filed in the District Court of NSW on 3 October 2008, and was given the case number 4673/08. It alleged that Mr Ekes owed QBE $106,500 under a deposit bond issued at the request of Mr Ekes in 2006 in relation to his purchase of a property at Bowral, and claimed this amount with interest and costs totalling $110,114.62. The statement of claim joined as second defendant, Wajiha Ahmed, who is Mr Ekes' former wife. It referred to a guarantee agreement executed by her on the same date as the request for the deposit bond was made by Mr Ekes, and alleged that she was liable under the guarantee for the same indebtedness as was sued for against Mr Ekes.
  3. The further pleadings and course of the District Court case are not explained in the evidence before me, and there is little evidence of the events leading to the entry of the consent judgment on 2 September 2009. I shall set out its terms below, but, in short, it gave a verdict with costs in favour of Ms Ahmed against QBE, but required Mr Ekes to pay $150,000 to QBE in five $30,000 instalments spaced over the subsequent twelve months. It is common ground that he has paid none of these instalments.
  4. After the commencement of the District Court proceedings and before the agreement reflected in the consent judgment was made, Mr Ekes had set in train the provisions of Part X of the Bankruptcy Act. On 11 June 2009 a controlling trustee was appointed under s.188 of the Bankruptcy Act. The controlling trustee’s report included QBE as an undisclosed creditor in relation to a "deposit bond indemnity" of $131,473.99. It appears to be common ground that this was a reference to the liability which QBE had alleged in its District Court statement of claim. Under the agreement proposed to the creditors, Mr Ekes' unsecured creditors who were expected to prove in the estate and totalled $5,872,000, would receive an estimated dividend of 2.17 cents in the dollar.
  5. It is uncontested that a representative of QBE attended the creditors meeting on 16 July 2009 which approved the proposed agreement, that QBE was admitted to vote based on the debt claimed against Mr Ekes in the District Court, and that it is bound by the personal insolvency agreement executed by Mr Ekes on 16 July 2009. QBE’s proof of debt dated 15 July 2009 is in evidence. It identified the indebtedness of Mr Ekes, by attaching its District Court statement of claim and the deposit bond documentation. It indicated that it had not “obtained a judgment” in respect of that claim against Mr Ekes or, implicitly, against Ms Ahmed as guarantor, nor received any payments in reduction of the debt. It claimed an indebtedness of $91,473.99, after allowance for an amount of security.
  6. The effect of Mr Eke’s execution of the agreement was to bind QBE in accordance with the terms of ss.229 and 230 of the Bankruptcy Act:
  7. The references in these provisions to a ‘debt’ and ‘provable debt’ take their meaning in relation to a Part X agreement from s.5 and by the adoption in s.231(3) of, inter alia, ss.82 to 118 concerning the proof of debts in bankruptcy. Section 5 defines ‘debt’ as ‘includes liability’, and ‘provable debt’ as ‘a debt or liability that is, under this Act, provable in bankruptcy’. The general nature of such liabilities is defined in s.82:
........
  1. Mr Ekes’ personal insolvency agreement contained provisions giving effect to ss.229 and 230. Clauses 11 and 12 provided:
  2. The reference in these clauses to a “creditor of the debtor in relation to any debt” should, in my opinion, in the context of the relevant provisions of the Bankruptcy Act, and noting that there is an express adoption of its definitions in clause 1.1(a), mean that QBE was such a creditor in relation to any indebtedness provable by it under Part X pursuant to the adopted provisions of s.82 of the Bankruptcy Act. In particular, it was such a creditor in relation to the liabilities of Mr Ekes claimed in QBE’s pending statement of claim in the District Court, to which he and Ms Ahmed remained defendants. It remained also a creditor in relation to its pending claims against Ms Ahmed under her guarantee, which were in no respects released or impeded by Mr Ekes’ Part X agreement.
  3. The circumstances in which a judgment was later entered in those proceedings is not fully explained in the affidavits of either party before me. I infer that the District Court matter was listed for hearing on 2 September 2009. Mr Ekes has legal qualifications and has practised as a solicitor. According to his affidavit of 1 September 2010:
  4. This evidence confirms no more than what is implicit in the terms of the order which was then made and entered by the District Court. That is, that the orders were made by consent of all three parties to the proceedings, and gave effect to an agreement arrived at by them in oral discussions on 2 September 2009. I consider that the terms of their agreement are to be found in the terms of the consent orders themselves, including the noted agreements. The order stated:
12. Exhibits returned.
  1. The present petition of QBE, and its supporting bankruptcy notice, rely upon indebtedness of Mr Ekes under the terms of this judgment.
    I consider that its outcome turns upon two issues:
    1. Whether the entry of the judgment against Mr Ekes constituted the taking by QBE of a ‘fresh step’ in the District Court proceedings which was contrary to the provisions of s.229(2)(c) of the Bankruptcy Act and clause 11.1(c) of the Part X agreement; and
    2. Whether the liabilities incurred by Mr Ekes under the agreement made on 2 September 2009, which was given effect by the consent orders, are enforceable by QBE in the face of the release of his deposit bond liabilities under s.230 of the Bankruptcy Act and clause 12 of the Part X agreement.
  2. If I was satisfied that either of these questions should be answered in favour of Mr Ekes, that is, that the entry of the judgment was a step which was precluded by the Bankruptcy Act, or that the judgment met a liability to QBE which had been released by the Part X agreement, then there would, in my opinion, be good grounds for my declining to accept the affidavits verifying the petition, and for dismissing the petition.
  3. [I note that the petition also relies upon a separately incurred liability of Mr Ekes for $2,500 under a costs order of this Court made on
    30 March 2010, when dismissing an application to set aside the bankruptcy notice. This might provide sufficient separate support for the petition, but might not prevent the Court examining the indebtedness underlying the bankruptcy notice. For the reasons which follow, I do not need to reach conclusions on those issues.]
  4. Turning to the first issue, I was not taken by either party to any authorities on the effect of s.229(2)(c). It has obvious similarities with the better known provisions of s.58(3)(b), but lacks the flexibility of provision for leave from the Court to continue proceedings, and it arises after, rather than before, an insolvent person is released from provable debts. In this context in Part X, in my opinion, the preclusion of “fresh steps” in a pending proceeding to which a debtor is a party after he or she has made a personal insolvency agreement should be construed as governing only ‘fresh steps’ which are themselves “in respect of a provable debt” under the Part X agreement, and not as precluding other ‘fresh steps’ in the proceedings which are in respect of other liabilities of the debtor or other parties, and which are not governed by the provisions of the Part X agreement. Put another way, the paragraph precludes “fresh steps” in pending proceedings only to the extent that the pending proceedings are characterised as being “legal proceedings in respect of a provable debt”.
  5. I consider that the language of s.229(2)(c) is susceptible of that construction, and must intend that meaning. I can see no reason to give the section a broader interpretation, so as unconditionally to preclude the taking of fresh steps by a creditor against the debtor or against another party to the pending proceedings, if those steps concerned liabilities of the debtor or another party which were not provable debts under the Pt X agreement.
  6. On that construction, in the present case the section did not have the effect of precluding QBE taking “fresh steps” in the proceedings against Ms Ahmed in relation to her liability under her guarantee of Mr Ekes’ deposit bond liability. Nor, in my opinion, did it preclude QBE obtaining the benefit by way of a judgment entered in the proceeding against Mr Ekes, in relation to any new liability on his part which was legally cognisable and enforceable separately from his liabilities which were provable in his Part X agreement.
  7. The orders made by the District Court on 2 September 2009 must be understood in the context where the District Court has general powers to make orders extending to claims other than those initially identified in a statement of claim in the proceedings, and also to make consent orders giving effect to liabilities under agreements made between the parties to the litigation subsequent to its inception (see Uniform Civil Procedure Rules 2005 (NSW), rr.36.1 and 36.1A). Liabilities in debt imposed by a consent order made in proceedings, are not necessarily the same liabilities whose existence was the subject matter of the proceedings, but may represent liabilities incurred under a separately enforceable agreement reached between the parties in the proceedings.
  8. On the above construction of s.229(2)(c), and if the District Court orders should be understood as giving QBE the benefit of a fresh liability incurred by Mr Ekes under the terms of the agreement which settled the proceedings, rather than merely confirming his liability which had been released by the personal insolvency agreement, then there is nothing in s.229(2)(c) which precluded QBE from taking the step of entering the orders and now enforcing them in this Court by way of bankruptcy proceedings.
  9. Clause 11 of the Part X agreement which bound QBE pursuant to s.229(1), did not contain any wider preclusion than is found in s.229(2)(c). Rather, it duplicated that provision, even when construed in the above manner. This is because the preclusions in cl.11.1 of taking steps ‘to bankrupt the debtor’, or of taking ‘any further step whatsoever’ in any proceedings pending against the debtor in respect of a debt, are subject to the unequivocal exception in cl.11.2. The exception clearly allowed a creditor who is bound by the Part X agreement, to take further steps in pending proceedings, and to obtain a judgment enforceable in bankruptcy, in respect of a liability of the debtor ‘which may arise after the Commencement Date’, i.e. the date when it became operative on the date of the execution of the agreement (see s.229(1)).
  10. The outcome of the first issue therefore depends upon the outcome of the second issue: whether the liability of Mr Ekes to QBE under the District Court consent orders should be regarded as the same liability which was released under s.230, or as a new and independently enforceable liability incurred by Mr Ekes to QBE after the commencement of the Pt.X agreement.
  11. There is, in my opinion, good authority that a creditor may take steps to enforce a liability previously released by s.153 of the Bankruptcy Act following a discharge from bankruptcy, or by the equivalent release given to a Part X debtor under s.230(1), if “new and valuable consideration to pay the old debt released by the discharge has been given”. In such a case, the debtor’s liability arises under a new contract which is fully enforceable in law, and its enforcement is not precluded by the terms or policy of the Bankruptcy Act.
  12. The current editors of ‘McDonald, Henry & Meek’s Australian Bankruptcy Law & Practice’ refer to these authorities under the following annotations to s.153:
  13. I have considered the cases cited by the learned authors, and agree that they support the proposition suggested. In particular, the English cases of Jakeman v Cook and Wild v Tucker explain why it is not inconsistent with a release under bankruptcy legislation for new promises by a debtor to be enforceable and not covered by the statutory release, and why there is no general principle of public policy, whether implicit in the bankruptcy legislation or otherwise, against the enforcement of such fresh promises. Atkin J, as he then was, explained in Wild v Tucker:
  14. Such an approach to the present Commonwealth bankruptcy legislation, and to the provisions of Part X in particular, appears to me to be consistent with a recent judgment of the High Court in relation to the provisions of the Act which release debts provable under s.82(1), but not liabilities accruing after the date of the bankruptcy, even if they arise out of pending litigation (see Foots v Southern Cross Mine Management Pty Ltd [2007] HCA 56; (2007) 234 CLR 52).
  15. I therefore conclude that Mr Ekes cannot dispute his indebtedness to GIO under the consent orders of 2 September 2009, if the agreement made on that day which it gave effect to was supported by new and valuable consideration given by QBE.
  16. This is to be addressed by analysing the agreement which gave rise to the liability of Mr Ekes to make the payments set out in paragraphs 1 to 5 of the orders of the District Court. As I have noted, the terms of the agreement are to be found and distilled from the terms of the orders themselves. I do not accept Mr Ekes current suggestion that, in effect, he consented to the orders against him in the belief that they were legally ineffective. Even if this was his true frame of mind at the time, the objectively determined intention of the parties cannot, in my opinion, be so found on the evidence before me.
  17. In my opinion, the terms of the orders show both expressly and implicitly that new and valuable consideration was given by QBE to support the new promises by Mr Ekes, even if they revived all or part of the liabilities previously released by his Pt.X agreement.
  18. In relation to the first $30,000 instalment, the orders expressly noted in order 8 that fresh consideration was given, by way of QBE accepting a liability to pay Ms Ahmed's costs in the proceedings. In relation to the second $30,000 instalment, the agreement noted in order 9 was obviously framed so as to identify fresh expenses and rights to interest which were not subject to the release, since they arose subsequent to the Part X agreement.
  19. In relation to the third, fourth and fifth instalments of $30,000, the orders do not record expressly any agreed separate consideration given by QBE as the ‘price’ for these liabilities being accepted by Mr Ekes. However, order 6, in which QBE consented to a verdict in favour of the guarantor against QBE’s claims against the guarantor, in my opinion, implicitly explains and points to additional consideration being given by QBE for Mr Ekes accepting liability under orders 3, 4 and 5. The implication from the agreement is, in my opinion, that QBE withdrew its claims against Mr Ekes’ former wife under her guarantee in return for Mr Ekes’ acceptance of new liabilities.
  20. Nothing in the evidence before me points to the new losses or detriments on the part of QBE, which supported Mr Ekes’ new liabilities under the terms of agreement reflected in the District Court orders, being illusory or valueless within the concept of consideration in contract law (see Balfour v Balfour [1919] 2 KB 571 at 578, Dunlop Pneumatic Tyre Company Ltd v Selfridge & Company Ltd [1915] UKHL 1; [1915] AC 847 at 855, and Australian Woollen Mills Pty Ltd v The Commonwealth [1954] HCA 20; (1954) 92 CLR 424 at 456-460).
  21. In my opinion, therefore, the orders made by the District Court gave rise to fresh liabilities on Mr Ekes, and they were supported by consideration under an agreement to settle those proceedings in relation to all parties. That agreement may have revived liabilities which had been released by effect of the personal insolvency agreement, but it gave rise to new liabilities and there was no bar under the Bankruptcy Act or the personal insolvency agreement on QBE from seeking enforcement of the judgment entered pursuant to the consent orders.
  22. I am, therefore, satisfied that the grounds of opposition argued by Mr Ekes to the petition which contended that the orders of the District Court had been entered “illegally”, or contrary to a moratorium and prohibition under the personal insolvency agreement, or that the terms of that agreement and/or of the legislation "estopped" QBE from enforcing the orders, are not made out. I am satisfied that the orders were properly entered, and support the indebtedness relied upon in the present bankruptcy notice and petition.
  23. There was also a ground of opposition asserting that, in fact, QBE had been paid the $30,000 due under order 1 of the consent orders plus the costs in the Federal Magistrates Court proceedings, shortly after the dismissal of Mr Ekes’ application to set aside the bankruptcy notice. That contention has been abandoned at the hearing, and the evidence before me points against, rather than in favour of, that amount ever having been paid.
  24. For the above reasons I am satisfied that the indebtedness asserted in the bankruptcy petition totalling the amount of $66,035.89 is established, both on the affidavits verifying, and on an examination of the evidence concerning the underlying liability giving rise to the alleged indebtedness. In this respect, I note that the petition records that an amount of $30,000 of the indebtedness is covered by security held by QBE. The effect of s.44(2) of the Bankruptcy Act is therefore that the petition must rely on the indebtedness over and above $30,000. However, for the above reasons I am satisfied as to that additional indebtedness, and that it exceeds the jurisdictional threshold under s.44(1) of the Bankruptcy Act.
  25. The affidavit of debt tendered under r.4.06 of the Federal Magistrates Court (Bankruptcy) Rules 2006 (Cth) deposes to a current state of indebtedness of Mr Ekes under the costs order and the District Court judgment, including interest on the judgment amounts, totalling $162,445.92. My above reasoning would also accept that this indebtedness has been made out.
  26. The act of bankruptcy relied on in the petition is non-compliance with a bankruptcy notice served by email on Mr Ekes on 24 February 2010. Although the affidavit proving that service is defective, its defects are manifest on its face, and Mr Ekes has conceded due service of the bankruptcy notice both in this proceeding and in his previous proceeding in this Court. The time for compliance with the bankruptcy notice was extended by orders of this Court in the previous proceeding up until 12 April 2010, and the petition asserts the act of bankruptcy occurring on that day. I am satisfied that it did occur on that day, if not earlier.
  27. I am satisfied as to the other requirements of the Bankruptcy Act and regulations and rules in relation to the making of sequestration order. In particular, I am satisfied as to the matters required under s.52(1) of the Bankruptcy Act.
  28. Mr Ekes has not presented any evidence or arguments that he is able to pay his debts to which he has become liable since his Personal Insolvency Agreement. The only “other sufficient cause” he has pointed to is his contention that the orders to which he consented in the District Court were invalidly or ineffectively entered. For the reasons above, I find against him in relation to that contention.
  29. I note that Mr Ekes sought an adjournment of the petition today. His adjournment application was founded solely upon the bringing by him of a notice of motion in the District Court. The motion was filed on 28 January 2011, three days ago, and seeks:
4. Costs.
  1. The affidavit in support of the motion relies upon the same evidence as is before me. In short, the motion appears to propound the same arguments which I have addressed above, and rejected, as to the ineffectiveness or impropriety of the judgment being entered in the District Court, by reference to provisions of the Personal Insolvency Agreement and perhaps also implicitly the Bankruptcy Act.
  2. I have refused the adjournment application. It appears to me that it was made far too late in the present proceedings to be seriously entertained, given that it raises the same arguments which were being litigated in this Court. The proceedings in this Court have been on foot since the petition was filed on 24 May 2010, and the critical issues were raised by Mr Ekes in his notice of grounds of opposition filed on 6 July 2010. He has been legally represented throughout the proceedings, and indeed is himself a solicitor. In my opinion this Court is in as good or better a position than the District Court to assess the arguments concerning the effect of the Bankruptcy Act and to rule upon them. For that reason, I decided to proceed with the petition.
  3. In my opinion, QBE has established an entitlement to the making of a sequestration order today, and I propose to make one.
  4. [POSTSCRIPT. After giving the above judgment, Mr Ekes sought a stay on the sequestration order to enable him to pay the debt. There is no evidence that he has or will have any capacity to do this, and I declined to delay the making of a sequestration order. I was, however, prepared to stay the operation of the order for 14 days to enable Mr Ekes to obtain my revised judgment and take legal advice. If he does decide to appeal, I note that he will need to apply to the Federal Court for any further stay, since I take the view that this Court is precluded by s.37(2) of the Bankruptcy Act and by the exclusion in s.29(1)(a) of the Federal Court of Australia Act 1976 (Cth). In view of the complete absence of any evidence as to Mr Ekes current trading and financial position and his intentions as to travel, I shall make my order conditional upon his delivering his passport to the trustee, and lodging a statement of affairs.]

I certify that the preceding forty-four (44) paragraphs are a true copy of the reasons for judgment of Smith FM


Date: 4 February 2011

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