Federal Court sets aside bankruptcy notice used for debt collection against solvent individuals as abuse of process

Without first formally demanding payment of a debt, creditors served a bankruptcy notice.  The debtors were insolvency practitioners and there was no suggestion that they were insolvent.  Federal Magistrate Raphael set aside the notice on the basis it was an abuse of process, issued with a purpose not of making the respondents bankrupt but of embarrassing them. His Honour said:

‘The proper purpose of seeking a sequestration order against the estate of a debtor is so that a debtor, who is unable to pay his debts as and when they fall due, should have his affairs controlled for the benefit of all his creditors and not just specific ones.  Allied to this purpose is the prevention of the debtor incurring further obligations which he will not be able to meet. It is a public purpose. The bankruptcy process is not to be used for private ends.’

On appeal, the decision was confirmed by the Federal Court’s Justice Marshall.  In Lord v Rankine [2011] FMCA 668, at [20] – [34] (despite the numbering below) his Honour said:

‘The abuse of process issue

  1. The Federal Magistrate found at [26] that the request to issue the notice against the respondents “was not so much to secure payment from recalcitrant debtors but to embarrass them”.

  2. At [27], his Honour referred to other methods to enforce a judgment and specifically to a “garnishee order”.

  3. His Honour said at [27]:

    The applicants [current respondents] are partners in a firm of accountants. It would have been simple for a garnishee to be issued against that firm in respect of any drawings or profits payable to the debtors. There has been no suggestion that the …[current respondents] are personally insolvent, it is acknowledged that notwithstanding their personal liability for the costs, they were acting in their capacity as special liquidators and court officers…..

  4. The Federal Magistrate went on (also at [27]) to refer to unassessed costs orders which have been made in Supreme Court in favour of the current respondents with respect to their litigation with the first and second appellants. His Honour then said:

    In circumstances like this where the relationship between the parties has become severely strained, as it clearly is, the Court should look very carefully at the way in which [the notice]…is sought to be used. A misuse of the processes at the Court constituted an abuse of process.

  5. His Honour referred to various authorities at [27] and [28] and then said at [29]:

    The proper purpose of seeking a sequestration order against the estate of a debtor is so that a debtor, who is unable to pay his debts as and when they fall due, should have his affairs controlled for the benefit of all his creditors and not just specific ones.  Allied to this purpose is the prevention of the debtor incurring further obligations which he will not be able to meet. It is a public purpose. The bankruptcy process is not to be used for private ends.

  6. The Federal Magistrate referred to the “course of dealings” between the parties and in particular to the events of 18 May 2010 referred to at [16] above. His Honour then said at [29]:

    …this course of dealings and the failure of the respondents to take any other steps to execute upon their judgment is indicative of an intention to utilise the bankruptcy process for reasons other than securing the orderly distribution of the debtor’s estates.

  7. His Honour noted that the respondents are partners in an established insolvency practice and are officers of the Court with a right of indemnity over the assets of Nielsen.

  8. Taking all of the foregoing considerations into account, the Federal Magistrate concluded that “the issuance of this notice constitutes an abuse of process and it should be set aside on that ground”.

  9. The finding of the Court below that the issuing of the notice was an abuse of process is a finding of fact. I consider that it was a finding which was open to his Honour on the evidence before him and a correct and appropriate finding in all the circumstances.

  10. Counsel for the appellants submits that the respondents bear a heavy onus in establishing that the notice was issued for an improper purpose. Counsel referred to the judgment of Heerey J in Reid v Hubbard [2003] FCA 1424. Reid dealt with an application by a third party to set aside a bankruptcy notice. At [40], his Honour noted that the case before him “was beset not only with improbability but also internal inconsistency”.

  11. I can detect nothing in the reasons of Heerey J in Reid which supports the view that a particularly heavy onus is required to be met before a bankruptcy notice will be set aside as an abuse of process. A court considering such an issue will examine that matter objectively having regard to the entire relevant factual matrix and if it forms the view that the issuing of the notice is an abuse of process it ought not feel timid about saying so. Certainly the Federal Magistrate suffered from no such timidity and rightly so.

  12. The appellants next submit that the solvency of a debtor is not a ground to set aside a bankruptcy notice. They rely on Re Athans; ex parte Athans (1991) 29 FCR 302 at 310, per Hill J. At 310 in Athans Hill J said that:

    The mere fact that the debtor is solvent is not a ground for the court to set aside a bankruptcy notice.
    (Emphasis added.)

    However, his Honour immediately went on to say:

    The Act gives no general discretion to the court to set aside bankruptcy notices valid in form which are not an abuse of the process and I know of no case where a bankruptcy notice has in such circumstances been set aside.
    (Emphasis added.)

  13. Justice Hill is not to be taken as saying in Athans that a bankruptcy notice being issued will not be an abuse of process by reason of the solvency of a debtor. The solvency of a debtor and the attributes of the particular debtor and his or her history with the creditor will be relevant to the issue of bona fides of a bankruptcy notice. So much is so as a matter of practical commonsense. Nothing in the judgment of Drummond J in Amos v Brisbane TV Land (2000) 100 FCR 82, especially at [21], as relied on by the appellants, stands to support a contrary proposition.

  14. Whether or not the bankruptcy notice has been issued as an abuse of process is a question of fact for the trial judge. As long as the trial judge commits no appealable error in that fact finding exercise, the primary finding should stand. The appellants contend that Raphael FM took into account an irrelevant consideration and largely based his judgment on that matter. That consideration was said to be the respondents’ status as officers of the court. His Honour did refer to the fact that as liquidators the respondents have that status. However, that was only one piece in the jigsaw puzzle that constituted the factual matrix before the primary judge. It was also important that the respondents were partners in a large insolvency practice and were engaged in Supreme Court litigation in opposition to the first and second appellants. There was ample material before his Honour to support his finding that the appellants caused the notice to be issued, not to secure payment of the costs order but for the predominant purpose of embarrassing the respondents. As counsel for the respondents submits, if the predominant purpose of the issuing of the notice was to have the costs order satisfied, a formal request should have been made for payment to enable the appellants to respond to that request, in the context of continuing litigation between the parties in the Supreme Court. Further, from November 2009 to 23 April 2010, the respondents acted on the basis that the appellants were seeking a review of the quantum of the costs certificate to obtain a higher amount.

  15. For the foregoing reasons the Court rejects the submissions of the appellants that the Federal Magistrate erred in finding that the issuing of the notice was, in all the circumstances, an abuse of process.’

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