Creditors Petitions And The Constitution Collide. Catastrophe And Chaos Ensues.

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Recent cases warn that it is petitioning creditors, not the former bankrupts, who may generally expect to have to pay costs.
Australia Insolvency/Bankruptcy/Re-Structuring
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Creditors Petitions and the Constitution Collide. Catastrophe and Chaos Ensues

"It's the vibe of it. It's the Constitution. It's Mabo. It's justice. It's law. It's the vibe and ah, no that's it. It's the vibe. I rest my case."

  • Dennis Denuto, The Castle

If you did not know that the Constitution has a fundamental role to play in creditor's petitions, then you are destined for a costly catastrophe. Only by understanding the "Constitutional imperative" will you avoid an extremely expensive lesson that could leave you indebted far more than you are owed by the debtor. Follow this guide to avoid a creditor's petition turning into your own debtor's petition 1.

Its the Constitution, Stupid

When a Court makes a sequestration order on a creditor's petition it is exercising Federal judicial power which the Constitution reserves for judges appointed under Chapter III of the Australian Constitution.

Registrars of the Federal Courts are not judges appointed under Chapter III. Yet Registrars are responsible for the vast majority of Creditor's Petitions in the Federal Court of Australia and the Federal Circuit and Family Court of Australia. So how do they do it?

In practice, the Federal Courts have established a 'work around' by allowing certain powers to be delegated to registrars, provided the exercise of those powers is able to be reviewed by a judge. Critically, this review must be a review de novo – this means a rehearing, not an appeal. 2 The Constitutional basis for this review is often forgotten by lawyers, as well as sometimes by judges, which leads to significant complications and enormous costs and delays, as several recent cases demonstrate. And the costs in issue can also include significant remuneration and expenses incurred by a bankruptcy trustee where a sequestration order is eventually set aside. The most recent cases warn that it is petitioning creditors, not the former bankrupts, who may generally expect to have to pay these costs.

The costs aspect will be explored in a later article, but first let's consider how bad the problem can become.

Bechara v. Bates

In Bechara3 a debtor was made bankrupt on 5 July 2016. Because of a fundamental failure to understand the Constitutional imperative, firstly by the parties, and then by numerous judicial officers, judgment on the review of this sequestration order was not determined until15 October 2021. An appeal from this determination was dismissed on 11 December 2023. Barring further litigation, a single creditor's petition will have taken well over 7 years to be finally determined. During that period, any other creditors were prevented from enforcing their debts, whilst the trustee was effectively hamstrung from progressing the bankruptcy.

Ms Bechara (a solicitor) briefed Mr Bates (a barrister) but did not pay his fees. Mr Bates obtained judgments for approximately $128,000 and commenced bankruptcy proceedings.

  • On 5 July 2016, a sequestration order was made against Ms Bechara.
  • On 25 July 2016, Ms Bechara filed an "interim application" which was "treated as an application for review of the registrar's decision" 4 .
  • By 8 December 2016 a Federal Circuit Court Judge refused Ms Bechara's application for an adjournment, and dismissed the review application due to her non-appearance and non compliance with the Court's directions 5 .
  • On 3 March 2017, an application by Ms Bechara to reinstate her review application was also dismissed, the Court saying:
    • "The difficulty for Ms Bechara is that she has never articulated her case. ... Nor was any evidence filed to satisfactorily explain that application." 6
  • On 17 May 2017, a renewed application for reinstatement of the review application was also dismissed - "if Ms Bechara was dissatisfied, she should appeal" 7 .
  • On 6 April 2018, almost a year later 8 , the Federal Court (in its appellate jurisdiction) dismissed Ms Bechara's applications for leave/time to appeal the orders made on 8 December 2016, 3 March 2017, and 17 May 2017 9 , saying
    • "The Court and the respondent remain completely in the dark as to the basis on which Ms Bechara sought review of the Registrar's sequestration order." 10

The matter found its way up to the High Court, then back down to the Full Federal Court, before the Chief Justice seized control of the runaway train.

Along Comes Allsop CJ

On 14 May 2020 Chief Justice Allsop, after a case management hearing, delivered an 11 page judgment noting the "long and, to a degree, unfortunate history" 11 of the proceedings, in which the "merits of the underlying dispute ... have almost been list in the mists of procedure and time" 12 . His Honour arranged for the parties to reconstitute the proceedings, reminded them of the Constitutional imperative and set out the fundamental problem. This was that on Ms Bechara's application for review:

" was for Mr Bates, as the creditor, to prosecute his creditor's petition before the Federal Circuit Court judge, and if Ms Bechara was unwise enough not to turn up to the hearing, the creditor's petition would be heard again in her absence. Instead, the application for review was dismissed for want of prosecution or failure to comply with a timetable when, at least arguably, she had no part to play until the evidence of the petitioning creditor, sufficient to engage s 52 of the Bankruptcy Act 1966 (Cth), was filed and relied upon. In other words, this case, somewhat sad in its history, throws up a fundamentally important point about bankruptcy practice in the Federal Circuit Court and in this Court." 13

The Full Court and The Constitutional Imperative

The full Federal Court restated the "Constitutional imperative" 14 behind judicial review of a registrar's orders 15 :

"The judicial power of the Commonwealth may only be exercised by judges of federal courts or other courts exercising federal jurisdiction and membership of a federal court is confined to judges appointed in accordance with s 72 of the Constitution. However, federal judicial power may be delegated to registrars if the power exercised by them is subject to review or appeal by a judge or judges of the court: Harris v Caladine [1991] HCA 9 ... The opportunity for a review by way of hearing de novo is sufficient to satisfy that requirement: Harris v Caladine 172 CLR at 95, 123 and 164."

From the Full Court's lengthy consideration of the implications of the Constitutional imperative, a number of principles may be extracted:

  1. A registrar's order takes immediate and valid effect "as an order of the judges of the Court but on the basis that a judge may be asked to make an order in place of the exercise of delegated authority" 16 .
  2. The review does not depend upon establishing any error of the registrar. It is a rehearing of he creditor's petition "considered afresh on the evidence and on the law at the time of the review, that is, at the time of the hearing de novo." 17
  3. Counterintuitively, although the debtor (where a sequestration order is reviewed) is the applicant, the application "is not prosecuted by the debtor (applicant for review) but by the creditor in the proceeding in which the registrar's order was made" 18 . Further "The only onus of the debtor/bankrupt against whose estate a sequestration order has been made is to prove either solvency or any other sufficient cause under s 52(2) of the Bankruptcy Act 1966 (Cth)" 19 .
  4. If, on review, a judge makes a different order, then "the delegated exercise of power is undone or revoked and a decision by a judge is made in its place" 20 . That is, the Court "makes a new order to replace the registrar's order and does so in the exercise of the power of review" 21 .
  5. A judicial review "should be undertaken promptly" given the implications arising from a decision being reversed 22 .
  6. In the meantime, "interim relief may be sought pending the outcome of the review" 23 . The Court did not explore what such relief might be, but this is a message that "caution is to be exercised by a trustee in bankruptcy in incurring expenses where the validity of the sequestration order is in issue" 24 .
  7. There is little or no scope for summary disposal procedures 25 . Rather, "if the matter is hopeless, it should be heard and disposed of promptly at a final hearing" 26 .
  8. However, an application for review is still "subject to all proper procedural orders" 27 and to "legitimate procedural controls and proper case management techniques" 28 . Instead, the review should be heard "with despatch" 29 . This qualification may prove fertile ground for bankrupts 30 .
  9. Of course, the Constitutional imperative applies to all Registrar decisions exercising delegated power. But not all reviews are the same. For instance, in an application for \review by a "reluctant" debtor seeking to set aside a bankruptcy notice:
    • "The moving party for that rehearing is the debtor. If proper case management and default in compliance with orders or non-attendance give rise to questions of orders in default of appearance or want of prosecution of the defaulter's application, so much can be accepted." 31
  10. At the rehearing, if the Court concludes "that a sequestration order would have been appropriate at the date of rehearing, it dismisses the application for review leaving the registrar's order in place and the date of the debtor being made bankrupt as the date of the registrar's order and preferably, for the sake of good order, confirms or affirms the registrar's order." 32

But hasn't the Creditor's Petition Become Stale?

The Full Court accepted "there are some complexities and difficulties yet to be fully and certainly resolved" 33 in applying the Constitutional imperative. Their Honours identified three such matters 34 :

  1. Whether a Creditor's Petition can go stale before a review is determined – the issue which divided the Full Federal Court in Totev v Sfar35 ;
  2. Whether the Court hearing the review can instead/also annul the bankruptcy under s153B of the Bankruptcy Act 1966 (Cth)– the issue which divided the full court in Hadjimouratis 36 ; and
  3. Whether the Court has power 37 to apportion responsibility for the trustee's costs (as the Full court did in Flint38 ).

The Court did not need to decide the second and third issues, which were considered in 2 separate cases which we will examine in a separate article.

But was there any point allowing the creditor's petition to be reheard? Section 52(4) of the Bankruptcy Act requires a creditor's petition to be heard within 12 months (which they court can extend by up to a further 12 months. This period had expired years before the Full Court was considering Ms Bechara's matter.

In Totev v Sfar 39 , the Full Federal Court was divided as to whether a creditor's petition became stale when remitted for rehearing more than 24 months after it had been filed.

However, in Bechara, Allsop CJ and the Full Court unanimously held that time did not continue to run on the creditor's petition whilst a sequestration order had been made:

"The mere bringing of the application for review does not invalidate, revoke or suspend the exercise of that delegated authority ... [W]hile that review is pending the delegated authority by which the registrar made the order (in the present case the sequestration order) remains in existence and so too the order made in its exercise." 40

Therefore the rehearing will either affirm the sequestration order (which continues in effect), or dismisses it (in which case the sequestration order is set aside). Either way, a sequestration order had been "made on the petition" before the time limit expired, and the petition did not become stale.

Postscript - Bechara

As it happened, it took a further 8 separate (albeit COVID-19 affected) hearing days (plus a further costs hearing), 3 reported decisions (and a further costs judgment) 41 , and 7 months before finally, 5½ years after the creditor's petition was filed, and almost 5 years after the review application was dismissed, on 15 October 2021 the sequestration order made against Ms Bechara on 5 July 2016 was ... affirmed. The entire 5 years of litigation to the High Court and back had achieved absolutely no change in the bankrupt status of Ms Bechara. An appeal against this decision was dismissed on 13 December 2023, a further 2 years later.

In the process there were some significant practical issues about de novo rehearings which the Court had to consider. These included:

  • whether Ms Bechara was obliged to comply with the Court's rules 42 – she was 43 ;
  • the consequences of failure to comply with the rules – the Court had discretion not to allow Ms Bechara to appear or be heard; to refuse to consider grounds of objection not properly raised; and to not require strict proof of matters not in any notice 44 ;
  • whether Mr Bates had fully complied with the requirements of the Bankruptcy Rules –he had not 45 ; and
  • whether his failure invalidated the proceedings – it did not; s306 Bankruptcy Act could cure the defects so they were not 'other sufficient cause' why a sequestration order should not be made 46 .

In the end however, Ms Bechara was, and remains, a bankrupt. It was not necessary to consider who should pay the bankruptcy trustee's costs if the sequestration order had been set aside. In Samsakopoulos47 , and Ghasemi/Khakasz48 the Full Federal Court has held that these costs will in many cases be borne by the petitioning creditor. There are real risks in not understand the Constitution foundation of the bankruptcy system in Australia.

The Moral: Tell it to the Judge

Perhaps the most important lesson from Bechara is to consider applying for a creditor's petition to be heard by a judge. This is something the Full Court itself, in a separate judgment, recommended:

"If for some reason known to the applicant or the delegate it is not appropriate for the application to be determined by the exercise of delegated judicial power then that is a matter that should result in the application being referred to a judge for determination (without any prior exercise of delegated judicial power)." 49

This is sage advice. Of course it will not always be "known" in advance. And what will make it "not appropriate" for a registrar to hear a petition? A dispute? A history of litigation? A self-represented party?

And if a creditor's petition is heard by a registrar, and a review filed, it is critical that creditors understand the Constitutional imperative and proceed to rehear the petition again, even if the Court wants to dismiss the application for review. It's not just the vibe.


1 For a more fulsome consideration of these issues see Mullette, S; "Reviews of Sequestration Orders Part One - Bechara and the Constitutional Imperative" (2023) 22(8) INSLB 120.

2 See Federal Court of Australia Act 1976, s 35A(5); Harris v Caladine [1991] HCA 9; 172 CLR 84.

3 Bechara v Bates [2021] FCAFC 34, per Allsop CJ, Markovic and Colvin JJ at [176] (emphasis in original). See also Kimber v The Owners Strata Plan No. 48216 [2017] FCAFC 226; on appeal from Kimber v the Owners Strata Plan no 48216 [2016] FCA 1090 at [82]; cited in Bechara v Bates [2021] FCAFC 34, per the Court, at [82].

4 Bechara v Bates (No 2) [2020] FCA 659 per Allsop CJ at [3].

5 Bates v Bechara [2016] FCCA 3489, per Nicholls J – As regards Ms Bechara's non-appearance pursuant to Rule 13.03C(1)(c) and as regards non-compliance under Rule 13.03B(1)(a) of the Federal Circuit Court Rules 2001 (Cth); see now Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth) rules 13.06(1)(c) and 13.05(1)(a) respectively.

6 Bates v Bechara (No 2) [2017] FCCA 985 at [13], cited in Bechara v Bates [2021] FCAFC 34 at [71].

7 Bechara v Bates [2021] FCAFC 34 at [72].

8 In the Full Court's marvellous understatement: "There were delays." - Bechara v Bates [2021] FCAFC 34 at [99]. The applications were filed on 6 June 2017 and heard on 15 March 2018.

9 Bechara v Bates [2018] FCA 460 per Perry J

10 Id. at [30].

11 Bechara v Bates (No 2) [2020] FCA 659 per Allsop CJ at [1]; cf [23] "this case, somewhat sad in its history..."

12 Id. at [27], described later as both a "prescient observation" and "something of an understatement": Bates v Bechara (No 2) [2021] FCCA 1809 per Kelly J at [13].

13 Id. at [23]. The three Full Court decisions his Honour had referred to were Totev v Sfar [2008] FCAFC 35; 167 FCR 193; Zdrilic v Hickie [2016] FCAFC 101; 246 FCR 532 and Martin v Commonwealth Bank of Australia [2001] FCA 87.

14 Bechara v Bates [2021] FCAFC 34 at [24], their Honours adopting the "apt words" of Beach J in Tran v Pu [2015] FCA 97; 228 FCR 562 at 566–567 [19]

15 Bechara v Bates [2021] FCAFC 34 at [1]

16 Id. at [3].

17 Id. at [24].

18 Id. at [27](b), emphasis added

19 Id. at [27](d) – S 52(2) Bankruptcy Act: the Court may dismiss a petition if "satisfied by the debtor" of solvency or "that for other sufficient cause a sequestration order ought not to be made".

20 Id. at [4].

21 Id. at [7].

22 Id. at [5].

23 Id. at [6].

24 Robson as former trustee of the estate of Samsakopoulos v Body Corporate for Sanderling at Kings Beach CTS 2942 [2021] FCAFC 143; 286 FCR 494 per Colvin J at [182] referring to Kyriackou v Shield Mercantile Pty Ltd (No 2) [2004] FCA 1338 per Weinberg J at [42]; Flint v Richard Busuttil & Company Pty Ltd [2013] FCAFC 131; (2013) 216 FCR 375 per Allsop CJ, and Katzmann and Perry JJ at [58]; Boensch v Somerville Legal [2021] FCAFC 79 per Katzmann, Markovic and Abraham JJ at [165].

25 Id. at [24]-[26]

26 Id. at [83].

27 Bechara v Bates [2021] FCAFC 34 at [74]

29 Bechara v Bates [2021] FCAFC 34 at [91]

30 The reference to 'proper procedural orders' became somewhat significant in the rehearing of the creditor's petition against Ms Bechara. See Kelly J Bates v Bechara [2021] FCCA 1693 (26 July 2021); Bates v Bechara (No 2) [2021] FCCA 1809(5 August 2021); Bates v Bechara (No 3) [2021] FedCFamC2G 155 (15 October 2021,). For example, rejecting Ms Bechara's submission that filing a notice of grounds of opposition was "utterly irrelevant" to the de novo hearing: [2021] FCCA 1809, [14], [59]-[60], [91], [107], [295].

31 Id. at [93].

32 Id. at [88].

33 Id. at [28].

34 Bechara v Bates [2021] FCAFC 34 at [30].

35 Totev v Sfar [2008] FCAC 193; 167 FCR 198.

36 Pattison v Hadjimouratis [2006] FCAFC 153; 155 FCR 226.

37 Under s 104(3) of the Federal Circuit Court Act (now section 256(2) of the Federal Circuit and Family Court of Australia Act 2021 (Cth)) or s 35A(6) of the Federal Court of Australia Act 1975 (Cth)

38 Flint v Richard Busuttil and Co Pty Ltd [2013] FCAFC 131; 216 FCR 375.

39 [2008] FCAFC 35 (12 March 2008) (Emmett, Bennett and Cowdroy JJ); 167 FCR 193; 247 ALR 180; 5 ABC(NS) 691; 122 ACSR 115

40 Bechara v Bates [2021] FCAFC 34 at [149].

41 Bates v Bechara [2021] FCCA 1693; Bates v Bechara (No 2) [2021] FCCA 1809; Bates v Bechara (No 3) [2021] FedCFamC2G 155; Bates v Bechara (No 4) [2021] FedCFamC2G 304

42 Federal Circuit Court (Bankruptcy) Rules 2016 (Cth) (see now Federal Circuit and Family Court of Australia (Division 2) (General Federal Law) Rules 2021 (Cth)).

43 Bates v Bechara (No 2) [2021] FCCA 1809 at [5]-[7], see also at [17]. Earlier, the same Judge held: "There is every reason to conclude that compliance with the imperative obligations in rr 2.04 and 2.06 assumes greater importance once the entitlement to seek review under s 104(2) has been engaged": Bates v Bechara [2021] FCCA 1693; 360 FLR 144, per Kelly J at [55].

44 Ibid., and see the propositions and authorities stated at [60]ff.

45 The petition and affidavit in support did not refer to or attach the order disposing of Ms Bechara's application to set aside the bankruptcy notice: Bates v Bechara (No 2) [2021] FCCA 1809 per Kelly J at [318]-[319]; see also Bates v Bechara (No 3) [2021] FedCFamC2G 155 at [33].

46 Bates v Bechara (No 3) [2021] FedCFamC2G 155 at [16] per Kelly J.

47 Robson as former trustee of the estate of Samsakopoulos v Body Corporate for Sanderling at Kings Beach CTS 2942 [2021] FCAFC 143; 286 FCR 494

48 Porter as former trustee of the estates of Ghasemi and Kakhsaz v Ghasemi [2021] FCAFC 144; 286 FCR 556

49 Robson as former trustee of the estate of Samsakopoulos v Body Corporate for Sanderling at Kings Beach CTS 2942 [2021] FCAFC 143; 286 FCR 494 per Colvin J (Allsop CJ and Markovic J agreeing on this point)

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