Australia: Federal Circuit Court considers the prima facie right of a creditor to a sequestration order despite allegations of fraud, malice and incapacity

HISTORY

On 1 May 2014, the Creditor commenced proceedings against the Debtor for a sequestration order against his estate in respect of unpaid legal costs awarded by the Magistrates Court of Western Australia.

Various preliminary issues protracted the case, including:

• failure to effect personal service - an order for substituted service ultimately being obtained;
• the validity of service of a creditor's petition on a person suffering from an incapacity;
• a concurrent application to the State Administrative Tribunal (SAT) by the Debtor to revoke an order appointing the Public Trustee as Plenary Administrator of his estate; and
• the lapsing of the creditor's petition due to delays, necessitating interlocutory proceedings to extend its life.

At the hearing on 29 January 2015, the Court considered this history in determining:

1. whether conditions for adjournment were met;
2. whether there was proof of matters necessary for making an sequestration order; and
3. whether there was sufficient cause not to make a sequestration order.

PRIMA FACIE RIGHT TO A SEQUESTRATION ORDER

In this case, the court accepted that the Creditor had filed the necessary affidavits mandated by the rules prior to the hearing to confirm:

• service of all required documents;
• performance of the required searches of the National Personal and Insolvency Index; and
• that the debt was still owed.¹

Consequently, the Creditor proved the matters required under section 52(1) of the Bankruptcy Act 1966, giving it a prima facie right to the granting of a sequestrian order.

GROUNDS OF OPPOSITION

Where a prima facie case is made out, the Court may decline to issue a sequestrian order if the debtor evidences that he or she is able to pay the debts and there is sufficient cause that the order should not be made.²

In this case, the Debtor opposed the petition on the grounds that:

• the petition was founded upon a fraud by the Creditor and his solicitors;
• the petition was actuated out of malice; and
• insolvency had not been determined and the petition was otherwise an abuse of process.

The Debtor alleged that the Creditor's solicitor had confessed to him that the solicitor was not charging the Creditor for the unpaid legal costs which underpinned the application for a sequestration order. The Debtor further alleged that he had documentary proof to support his position, however, such proof was never provided to the Court.

Pursuant to section 140(1) of the Evidence Act 1995 (Cth) and the principles espoused in Qantas Airways v Gama,³ the gravity of the matters alleged will be a relevant consideration for the Court in determining whether or not the burden of proof (i.e. the balance of probabilities) has been discharged.

An allegation of fraud and malice, particularly one involving the provision of professional services by a lawyer and one which suggests that the Court was misled, would require specific particulars and cogent and clear evidence.

In this case, no notes or documentation relevant to the allegation of non-payment of legal costs, criminal fraud and malice were in evidence. As such, the Debtor did not discharge the burden of particularisation, or of proof as required by s 140(1) of the Evidence Act 1995 (Cth).

On the basis that the Debtor failed to provide any evidence of special circumstances or prove he was able to pay his debts, the Court granted the order because there was a prima facie basis for making a sequestrian order, and no basis for not making a sequestrian order.

COMMENTS

This case illustrates that the principle in Sanders v Sanders⁴ is still good law in Australia. When a creditor has a prima facie right to a sequestration order, the Court will make that order unless special circumstances are sufficiently evidenced to justify the Court departing from its usual practice.

Further, the discussion by the Court in this case reinforces the principle in Qantas Airways Ltd v Gama¹that serious allegations will require cogent and clear evidence to satisfy the balance of probabilities threshold under the Evidence Act 1995 (Cth).

Footnotes

¹ [2008] FCAFC 69.

¹ FCC (Bankruptcy) Rules, r. 4.06(1), (2), (3) and (4).

² Bankruptcy Act 1966, s52(2).

³ [2008] FCAFC 69.

⁴ [2003] FCA 1079; affirmed on appeal in Sanders v Knudsen & Yates trading as The Hargreaves Practice [2004] FCAFC 305 at [14] per Whitlam, Branson and Sackville JJ.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Most awarded firm and Australian deal of the year Australasian Legal Business Awards	Employer of Choice for Women Equal Opportunity for Women in the Workplace (EOWA)