Review of sequestration orders dismissed – rejection of bankrupt’s explanation of decision not to defend underlying claim

The Federal Circuit Court has recently dismissed a bankrupt’s application for review of sequestration orders.  See the recent case of Commonwealth Bank of Australia Ltd v Jordanou [2018] FCCA 2972.

The application for review was based on the High Court’s decision in Ramsay Health Care Australia Pty Ltd v Compton (2017) 261 CLR 132.  The bankrupt tried to explain why she did not defend the creditor’s claims which led to the judgment that founded the bankruptcy notice and creditor’s petition.  The court did not just accept the bankrupt’s explanation.  It carefully looked at the evidence and rejected the bankrupt’s explanation.

Underlying judgment

During the Supreme Court trial where judgment was eventually given against her, while she sat in court, Mrs Jordanou’s lawyer informed the court that Mrs Jordanou did not wish to give evidence and therefore did not wish to defend the case.   The creditor proceeded to prove its case, including its claimed debt, with Mrs Jordanou’s lawyer being present and Mrs Jordanou continuing to sit in court.

After the Supreme Court pronounced judgment in favour of the creditor, Mrs Jordanou interrupted and stated that what her lawyer had informed the court about her position was not accurate.  The Supreme Court informed Mrs Jordanou that it was too late as judgment had been pronounced.

Mrs Jordanou never sought to appeal the Supreme Court judgment. The creditor issued a bankruptcy notice and creditor’s petition, pursuant to which sequestration orders were made against Mrs Jordanou.

Application for review of sequestration orders

It was only at that stage that Mrs Jordanou applied for a review of the sequestration orders.  She alleged that she had been willing to give evidence and to defend the Supreme Court case.

When asked why she didn’t speak up earlier when she heard her lawyer tell the Supreme Court that she would not be giving evidence and would not defend the case, Mrs Jordanou stated that she was scared and did not fully understand what was going on.

Consideration of evidence and decision

The FCCA carefully considered the circumstances in which judgment was given in the Supreme Court.  It was not able to find any evidence rationally explaining why Mrs Jordanou did not say anything earlier, if indeed she was willing at the time to give evidence and defend the case.  The FCCA was satisfied that the Supreme Court judgment was genuine and valid.

It was noted that, even if the sequestration orders were set aside, Mrs Jordanou would then have to appeal the Supreme Court judgment.  The FCCA observed that a relevant and possibly determinative consideration before the appeal court would be Mrs Jordanou’s unsatisfactory explanation as to why she decided not to defend the case in the first place.

The FCCA dismissed the application for review of the sequestration orders.

Significance of decision

This decision may give some greater certainty to judgment creditors, trustees in bankruptcy and creditors of the bankrupt estate.  It suggests that a court, when considering an application by a bankrupt for review invoking the principles in Compton, will carefully look to see whether the bankrupt’s reasons for seeking for a review are consistent with the evidence.

A court should not just accept the bankrupt’s statements made after the fact about their actions that led to the underlying judgement.  If those statements are not rationally supported by the evidence, those statements should not persuade the court that the underlying judgment was anything but valid and regular.

If you have any queries, please contact either Jason Quah or Rebecca Fahey on 03 9600 2450.

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