McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41 (18 April 2013): Bankruptcy, whether debt owing at time of bankruptcy, sections 44(1) and 52(1) of Bankruptcy Act

April 21, 2013 |

The Full bench of the Federal court in McCracken v Phoenix Constructions (Queensland) Pty Ltd [2013] FCAFC 41 by unanimous decision and per Lander J’s reasons, upheld an appeal against a sequestration order made by the Federal Magistrate’s Court.  The issue on appeal, at [34], is succinctly described as:

“..first, whether if a debt is relied upon for the issue of the bankruptcy notice and as an act of bankruptcy, that debt must continue to be owing at the time when the creditor’s petition is heard for the Court to make a sequestration order; secondly, if the debt is no longer owing at that time, whether the petitioning creditor can rely upon a later debt which first arose after the act of bankruptcy and after the filing of a creditor’s petition; and thirdly, if that debt can be relied upon at the hearing of the creditor’s petition and at the time of the making of the sequestration order, must that debt be for a liquidated sum.”

Facts 

The Appellant (“McCracken”) and the Respondent (“Phoenix”) were involved in a proceeding which culminated in judgement being entered for Phoenix in the sum of $2,025,212.17 on 15 June 2011. On 7 July 2011 the official receiver issued a bankruptcy notice directed to McCracken [4]. On 12 July 2011 McCracken filed a notice of appeal [5] and on 13 July the trial judge ordered McCracken to pay Phoenix’s cost of the proceedings [6]. Those costs were never assessed. On 10 August 2011 a bankruptcy notice was served on McCracken [12] with Phoenix filing a creditor’s petition on 11 August 2011. The creditors petition relied on a number of acts of bankruptcy including McCracken absenting himself from Australia and his dwelling house to avoid service. It did not rely upon the appellants failure to pay the judgement sum [13].  On 27 September 2011 in the Court of Appeal refused McCracken’s application for a stay of the judgement [15] and the Federal Magistrates Court refused his application for a stay of the bankruptcy proceeding [16]. On 18 October 2011 Phoenix filed an amended creditors petition relying upon McCracken’s failure to comply with the bankruptcy notice [17].

On 18 May 2012 the Court of Appeal allowed McCracken’s appeal and set aside the orders made by the trial judge [19]. On 19 July 2012  the Federal Magistrates Court heard the petition and made a sequestration order against McCracken on 14 September 2012 [22]. Their Honours’ noted that at the time the Federal Magistrates Court heard the creditor’s petition the debt which was relied on in both the bankruptcy notice and the creditor’s petition no longer existed, having been discharged by the Court of Appeal [23]. The Federal Magistrate concluded that even though the amount may have changed there was an ongoing debt that which was still doing due and owing [31] and that once an act of bankruptcy had been committed it remained available for the purposes of a sequestration order and did not rely on other acts of bankruptcy relied upon by Phoenix, such as the conduct of the appellants to avoid service [33].

Decision

Where the debtor who has committed an act of bankruptcy is ordinarily resident in Australia the court may make a sequestration order against the estate of the debtor [51].  The first requirement to found that jurisdiction is that the debtor has committed an act of bankruptcy [52]. The second necessary fact is that the debtor comes within one of the descriptions and section 43(1) (b) of the Bankruptcy Act 1966 (the “Act”).

The Court found that whilst the debt need not be the same debt as was relied upon to the act of bankruptcy it must be a debt which existed at the time of the act of bankruptcy [63]. The debt must also be a debt for liquidated sum payable immediately or at a certain future time [65]Section 52 (1) requires the creditor by affidavit or viva voce evidence of the matters stated in the petition. That requires proof that an act of bankruptcy occurred as alleged in the proof of debts relied upon in the creditors petition and they can only be those that existed at the time of the act of bankruptcy occurred and when the creditors petition was presented [77]. The creditor must also prove that the debts on which the petitioning creditors rely is or are still owing [79].

The Court found that at the time a hearing of creditor’s petition the debt which was created by the judgement of the Supreme Court of Queensland and relied upon in the act of bankruptcy and in the petition no longer existed [91]. Phoenix could not rely upon it therefore could not satisfy section 52(1)(a) of the Act. Phoenix could not have relied any judgement debt in the form of a costs order.  That order only came into existence on 18 May 2012. Further that order in any event was not a debt for liquidated sum [94] and the debt could not become a liquidated sum until the procedures had been finalised and the registrar had made an order in the assessors certificate [94].

The Court rejected Phoenix’s submission that it had not engaged a costs consultant because the McCracken was insolvent and it would not have recovered the costs of the assessment and McCracken could have required Phoenix to assess the costs. Their Honours also rejected Phoenix’s  submission that an approved costs assessor had provided opinion that the costs could have been assessed at about $400,000 which could be relied upon [96].  As such no sequestration order could have been made because it is a prerequisite for the making of such an order that at the time of the orders made the creditor is able to provide a liquidated sum in excess of $5000 (section 41 (1) (b) (i)).

Issue

That bankruptcy notices and creditor petitions are technical documents which must comply with the Act is trite  This decision highlights the great care in determining what is the debt upon which a notice or petition applies and what act of bankruptcy is relied upon.  The fact situation in this case is unusual but highlights the need to always refer back to the legislation to determine whether the creditor’s position changed vis a vis the debtor.  Phoenix found itself without a judgement debt and while it had obtained a costs order its favour it had not assessed that order so that it could be calculated and a certificate issued for liquidated sum. Notwithstanding that, it pressed on with and the court found the fatal flaws in the petition.  Lander J’s decision will be quite influential as he  undertook a very detailed and useful analysis of the operation of bankruptcy notices and creditors petition.

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