May 2009

Debtors, trustees, and sequestration and other orders - traps for young players

In Richmond v BMW Australia Finance Limited (No 1) & (2) [2009] FCAFC 24 the Full Federal Court of Australia decided three matters of practical importance:

  • the ability of a debtor to appoint a controlling trustee after a sequestration order has been made;
  • the powers of the Federal Magistrates Court to reserve reasons for judgment; and
  • the manner of publication of the reasons.

The Facts

A creditor's petition was issued against Mr Richmond in the Federal Magistrates Court.  The Bankruptcy Act provides for a maximum period of 24 months in which a creditor\'s petition must be heard.

Argument on Mr Richard\'s petition was not heard until the final day of the maximum period.  

After the parties made their submissions, the Federal Magistrate retired to consider his decision and returned to the bench in the late afternoon to pronounce that a sequestration order should be made. The Federal Magistrate further announced that he had not had an opportunity to prepare reasons for the decision but that they would be given as quickly as possible, in no more than 21 days (a reference to the time for filing an appeal). The Federal Magistrate stayed all proceedings on the sequestration order for a period of 21 days.

Although the Federal Magistrate subsequently published the reasons within the time specified, Mr Richmond appealed against the sequestration order on the sole ground that the Federal Magistrate did not give his reasons contemporaneously with his decision.

The Federal Court extended the stay of proceedings under the sequestration order pending the hearing of the appeal.  On the morning of the appeal, Mr Richmond purported to appoint a controlling trustee under s 188 of the Act and made an application to the Full Federal Court for an adjournment of the appeal so that the procedure provided for after the appointment of the trustee could take place. 

Adjournment Application

The question before the Full Federal Court was whether it is possible to appoint a controlling trustee after a sequestration order has been made, as the Act does not explicitly say when a debtor can appoint a controlling trustee.

The Court noted that while under s 37(1) of the Act all proceedings under a sequestration order can be suspended, s 37(2) of the Act expressly provides that the Court lacks power to suspend the operation of the sequestration order itself.

The Court then noted that s 188 of the Act enables a debtor to appoint a controlling trustee \"without their estate being sequestrated\". Since the sequestration order had already been made even though proceedings under it were stayed, the Court unanimously held that it was too late for the appointment of a controlling trustee and refused the adjournment application.

Appeal

As far as the substantive appeal itself was concerned, the Full Federal Court noted that the Federal Magistrates Court Act (the FMC Act) does not expressly say that a Federal Magistrate has the power to reserve reasons and publish them later and that under the common law there is an obligation on courts to deliver judgment and give reasons promptly and in public.

However, the Full Federal Court pointed out that section 3 of the FMC Act directs the Federal Magistrates Court to operate as informally as possible and to use streamlined procedures.

Also section 75 (1) of the FMC Act authorises the publication of orders and reasons by another Federal Magistrate on behalf of the Federal Magistrate who heard the proceedings and who subsequently prepared the judgment if the original Federal Magistrate is not available to publish them. 


Moreover, section 75(2) of the FMC Act provides that if orders are made but reasons are reserved by the Court and the Federal Magistrate who heard the proceedings and prepared the reasons is not available to publish those reasons, it may be done by another Federal Magistrate on behalf of the Federal Magistrate who heard the proceedings.

The Court concluded that s 75(2) of the FMC Act makes it plain that a Federal Magistrate may give judgment but reserve the reasons for judgment and publish them at a later time, allowing for a disconformity between the delivery of judgment and the reservation of reasons.  The appeal was dismissed on that basis.

The Court also emphasised the common law tradition of public justice and the importance of s 13(2) of the FMC Act which provides that the Court must exercise its powers in open court. Read in conjunction with s 13(2), s75(2) of the FMC Act assumes that when the Court is ready to give its reasons they must be given in open court. Publication on the internet or by correspondence with the parties would therefore be insufficient.

Summary

There are three conclusions to be drawn from these decisions of the Full Federal Court.

First, a controlling trustee must be appointed by the debtor before a sequestration order is made. 

Second, it is implied by the FMC Act that the Federal Magistrates Court has power to reserve judgment. However, if reasons are reserved, the Federal Magistrate is obliged to deliver reasons as promptly as possible.

Third, after a contested hearing it is essential that the Federal Magistrates Court publishes reasons for making orders in open court.

So, a party that is the beneficiary of a favourable order, where the reasons are not given simultaneously with judgment, needs to be careful to follow up the Federal Magistrate to give reasons within a short time thereafter and deliver those reasons in open court. If this does not occur, a debtor may be able to escape bankruptcy on very technical, but nonetheless important, grounds.

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.

Natalia Panchenko