The ‘Constitutional Imperative’ – a bankrupt’s right to review a sequestration order

In Bechara v Bates,[1] the Full Federal Court reminds us of the proper procedure for review of a sequestration order made by a registrar. This case raises an important point about bankruptcy practice and procedure in the Federal Circuit Court and the Federal Court. Sometimes described as a ‘constitutional imperative’, a bankrupt is entitled to a review (by a judge) of a sequestration order made by a registrar.

What happened?

The long history of the dispute between Mr Bates and Ms Bechara (both legal practitioners) involving various proceedings, applications and appeals in the Federal Circuit Court, the Federal Court and the High Court is difficult to summarise succinctly. In short:

• In December 2015, Mr Bates served upon Ms Bechara a bankruptcy notice for approximately $127,000 arising from judgements for legal fees.
• On the basis of a creditor’s petition then filed by Mr Bates, a sequestration order was made against the estate of Ms Bechara in July 2016 (the Sequestration Order).
• Ms Bechara then filed an ‘interim application’ (on the incorrect court form) seeking orders that, inter alia, the Sequestration Order be set aside pursuant to section 104(3) of the Federal Circuit Court of Australia Act 1999 (Cth) (the Circuit Court Act) and that the creditor’s petition be dismissed (the Interim Application).[2]
• The application came on for hearing in December 2016 (the Interim Application Hearing) however Ms Bechara did not attend. An application for adjournment was refused and the Interim Application was dismissed on the grounds of (a) non-appearance and (b) by reason of Ms Bechara failing to comply with orders and failing to prosecute her application with due diligence (the Interim Application Order).[3]
• After multiple applications/proceedings in the Circuit Court, the Federal Court and the High Court, the case came on before the Full Federal Court. It was an appeal from a decision of a single judge (not exercising the original jurisdiction of the Court, but rather the appellate jurisdiction of the Court under section 25(2)(a) or (b) of the Federal Court of Australia Act 1976 (Cth)).[4]
• After the Chief Justice made it clear to the parties that there was difficulty with the appeal in that it was from orders made in the appellate jurisdiction, Ms Bechara filed an amended notice of appeal and an application under section 39B of the Judiciary Act 1903 (Cth) directed at quashing the decision of the Federal Circuit Court (i.e. the Interim Application Order (amongst others)).[5]

The critical issue the Full Federal Court considered was whether the Federal Circuit Court committed an error of approach by misunderstanding the nature of the review proceeding and what consequences (if any) flowed from that.

The nature of the review proceeding

Citing Totev v Sfar,[6] the Court explained that the making of a sequestration order involves the exercise of judicial power. Under Chapter III of the Australian Constitution, that power can be exercised by a justice. A registrar is not a justice. Consequently, whilst a power may be delegated to a registrar, for the registrar’s decisions on questions of both fact and law to be valid, those decisions must be subject to review by a justice.

Having considered the key cases, the Court summarised the principles of the nature of review by judges of the orders made by registrars under section 104 of the Circuit Court Act (particularly with respect to bankruptcy):

• It is misconceived to think of the review proceeding in terms of summary or default judgment terminating an application for review. For example, that the applicant must show some error in the approach of the registrar is incorrect.
• The application for review is a demand that the claim for relief (the sequestration order) be heard by a judge as opposed to a registrar.
• The application for review leads to a hearing de novo of the creditor’s petition. This means that the justice takes a ‘fresh look’ at the issues by way of a complete rehearing of the facts and the law. This is different to an appeal, where for example the judge will consider whether or not the conclusion reached was correct.
• The rehearing of the creditor’s petition is not prosecuted by the debtor (here, Ms Bechara) but by the creditor in the proceeding in which the registrar’s order was made (here, Mr Bates).
• The onus is upon the creditor to prosecute its petition. The only onus of the debtor/bankrupt is to prove either solvency or any other sufficient cause under section 52(2) of the Bankruptcy Act 1966 (Cth).

In this case, at the Interim Application Hearing, the Circuit Court did not recognise that it was a complete rehearing of the creditor’s petition. Rather, that application had been dismissed because of Ms Bechara’s failure to appear and her failure to prosecute her application. This was not a hearing de novo as required.

Put another way, Ms Bechara had challenged the entire basis upon which the sequestration order was made by seeking a review. Consequently, Mr Bates bore the onus of proving all matters required for the Sequestration Order to be made (again) and this could occur irrespective of, for example, whether Ms Bechara attended the hearing (as often does happen in creditor’s petitions).

Ultimately, the Full Federal Court make orders setting aside the Sequestration Order (amongst others) and for the rehearing of the creditor’s petition to be heard by the Federal Circuit Court – over five years since the Sequestration Order and the Interim Application were made.

Conclusion

• Get the procedural steps right! An application for review of a sequestration order enlivens the requirement for the creditor to prosecute the creditor’s petition (again). Such an application for review should not be dismissed for default by the debtor.
• Even if there is default by the debtor, the creditor still bears the onus of prosecuting the creditor’s petition.

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Authored by:

Scott Couper, Partner
Tahlia O’Connor, Senior Associate

[1] [2021] FCAFC 34.

[2] The Court considered that this was intended to be an application for review under section 104(2) of the Circuit Court Act of the Sequestration Order and the exercise of the Circuit Court’s review power under section 104(3) to make any order it thought fit in relation to the matter in respect of which the Sequestration Order was made.

[3] Bates v Bechara [2016] FCCA 3489.

[4] Note that if the application had been made under section 39B(1) of the Judiciary Act 1903 (Cth) to set aside the Federal Circuit Court decision, that application would have been in the original jurisdiction.

[5] The Chief Justice directed that the matter be heard by a Full Court in the original jurisdiction pursuant to s 20(1A) of the Federal Court of Australia Act 1976 (Cth).

[6] [2008] 167 FCR 193.