Bankrupting on a non-provable debt

ASIC v King [2021] FCA 1610

Background

In 2003, the Full Court of the Federal Court held in ASIC v Forge (2003) 133 FCR 487 (‘Forge’) that the fact that a pecuniary penalty order is a debt that is not provable in bankruptcy is no impediment to the issue of a bankruptcy notice in reliance on such a debt and that there is no discretion to set aside a bankruptcy notice on that basis.  The Court in Forge restricted its consideration of the questions of whether a sequestration order could or would be made at the suit of a creditor owed such a debt: Forge [12], [33]-[34].

Those questions squarely arose in ASIC v King [2021] FCA 1610 (‘King’).  In that case, ASIC had issued a bankruptcy notice relying on an unpaid pecuniary penalty of $300,000 plus interest, which had been ordered by the Supreme Court of Queensland in proceedings arising out of the collapse of the Octaviar group (ASIC v Managed Investments Ltd & Ors (No 10) [2017] QSC 96, ‘pecuniary penalty proceedings’).

It was common ground in King that the pecuniary penalty was a debt which would not be provable in Mr King’s bankruptcy by operation of s 82(3AA) Bankruptcy Act 1966 (Cth) (‘Act’) but that, in accordance with the decision in Forge, ASIC was nevertheless entitled to serve the bankruptcy notice which was founded upon that penalty.  Mr King failed to comply with the bankruptcy notice within 21 days of service and had not paid the pecuniary penalty.  It was also common ground that the statutory requirements for the creditor’s petition had been satisfied and that Mr King had committed an act of bankruptcy.

There was uncontradicted evidence before the Court that Mr King owed, or was alleged to owe, significant other debts.

Mr King adduced no evidence and made no submission that he was able to pay his debts.

Issues for determination

The issues for determination were:

1. whether the Court had jurisdiction to make a sequestration order; and
2. whether, in the exercise of the Court’s discretion, a sequestration order ought be made.

Jurisdiction to make a sequestration order

Justice Downes held that the statutory scheme supported a finding that the Court did have jurisdiction to entertain ASIC’s creditor’s petition and that there was no reason to restrict the meaning of “creditor” in s 43 of the Act to creditors with provable debts.  Her Honour considered that:

• in Forge, it had been accepted that ASIC is a creditor for the purposes of s 40(1)(g) of the Act and so is permitted to serve a bankruptcy notice in respect of a pecuniary penalty. Therefore, “[i]t would be incongruous if ASIC was not also “a creditor” which may present a petition in reliance on an act of bankruptcy arising from non-compliance with the bankruptcy notice that ASIC was legally permitted to serve”: [39]; 
• subsection 44(1) of the Act contained further conditions to be satisfied before a creditor’s petition could be presented, including the existence of a debt or debts owed to the petitioning creditor. Here, the term used was “debt” and not “provable debt”, both of which were defined terms in the Act.  Where it was necessary to draw a distinction between creditors with provable debts and creditors with non-provable debts, the language of the Act made that plain: [40]-[43]; and
• the word “creditor“ should be interpreted consistently in ss 40(1)(g), 43 and 44, which were all contained in Part IV of the Act: [44].

Justice Downes also found, at [46]-[60], that the decision of O’Mara Constructions Pty Ltd v Avery (2006) 151 FCR 196, which was relied upon by Mr King, could be distinguished and did not contain any general proposition in relation to non-provable debts beyond those which might be statute-barred.

Discretion to make a sequestration order

Justice Downes ultimately determined to exercise the Court’s discretion to make a sequestration order in respect of Mr King, as he had “failed to demonstrate that for other sufficient cause a sequestration order ought not be made within the meaning of s 52(2)(b) Bankruptcy Act”: [101].  Her Honour made this determination having had regard to the following considerations:

1. Mr King was insolvent.
2. ASIC had a direct interest in the sequestration order, as it had the benefit of significant costs orders against Mr King (which would be provable in any bankruptcy).
3. Public interest considerations favoured the making of a sequestration order, having regard to the evidence indicating insolvency and substantial provable debts, and the public interest in fair notice to the public in dealing with an insolvent person which is provided by the bankruptcy regime. 
4. Special circumstances were not required to make a sequestration order based on a non-provable debt. Mr King had submitted that the Court should adopt the approach taken in the UK cases of Russell v Russell [1998] 1 FLR 936 and Levy v Legal Services Commission [2001] 1 All ER 895 (‘Levy’), namely: that there needed to be “special circumstances” before a petitioning creditor with a non-provable debt could obtain a sequestration order. However, Justice Downes declined to adopt the approach taken in these cases, finding at [84]-[89] that: 
   1. there was nothing in the language of ss 43, 44 or 52 of the Act that would require such an interpretation, and it was inappropriate to impose limitations not found in the express words in respect of the jurisdiction conferred on the Court by s 52; and
   2. the decision in Levy was inconsistent with Forge, and the approach of Jonathan Parker LJ in Levy was inconsistent with scheme or purpose of the Act in Australia, which required the Court to have regard not only to the rights of parties to the proceedings, but also to the community as a whole.
5. There was no abuse of process by ASIC established or to be inferred from the evidence before the Court.  Since the jurisdiction existed, there was nothing inappropriate in ASIC seeking a sequestration order against an insolvent debtor, nor about the fact that ASIC had done so without first having its cost orders assessed.  Presenting and prosecuting a creditor’s petition were acts done for the benefit of all creditors, and a sequestration order was also for the protection of the public.  ASIC had invoked the jurisdiction for the purpose for which it existed, namely: to have a sequestration order made against the estate of an insolvent debtor in whose estate ASIC had a real interest.