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:
"...it was for Mr Bates, as the creditor, to prosecute his creditor's petition before the Federal Circuit Court judge...
