Depending on which side of the coin you find yourself on, sequestration orders – where the Court orders a trustee to manage a bankrupt estate – are either a welcome development in your quest to recover unpaid debts, or an unwanted intrusion of the Court’s authority into your financial affairs.
In any event, whether one is a current (or future) creditor or debtor, it is important to understand the two-stage process of bankruptcy – the serving of a bankruptcy notice and (if accepted by the Court) the making of sequestration orders. It is also important to understand that there are ways to oppose the making of sequestration orders, and that, under s 52(1) of the Bankruptcy Act 1966 (Cth) (Bankruptcy Act), the Court has discretion to not make the orders if it is not satisfied with the proof of the matters stated in a creditor’s petition.
In the recent Federal Court case of Aquamore Credit Equity Pty Ltd v Maroon  FCA 1399, Justice Stewart provides a useful summary of the law around sequestration orders and what is required for the Court to refuse to make the order on the basis of an off-setting claim that purports to exceed the amount owed to a creditor, pursuant to s 52(2) of the Bankruptcy Act.
The matter concerned two proceedings in which the creditor Aquamore Accredited Equity Pty Ltd as trustee of the Spring Park Unit Trust (Aquamore) sought the sequestration of the estates of Christopher Arthur Maroon (Christopher), Allan John Marron (Allan) and Michael John Maroon (Michael) (together, the Maroons).
On 1 November 2018, Aquamore obtained summary judgment in the amount of $4,682,115.45 as well as for possession of a property at Point Fredrick owned by Christopher and Allan (Point Fredrick Property), and costs assessed in the amount of $29,088.49.
Aquamore exercised its power of sale as mortgagee in possession and received $4,021,376.83 in proceeds, leaving an outstanding amount of $689,827.11. Aquamore served bankruptcy notices on the Maroons, who unsuccessfully ran proceedings seeking to have the notices set aside. The Maroons commenced fresh Supreme Court proceedings, with the fifth iteration of the statement of claim seeking, among other things, equitable compensation from Aquamore for breach of a mortgagee’s duties.
The current proceedings concerned whether or not to grant the sequestration orders over the Maroons estates.
The Requirements for a Sequestration Order
The Court noted that there was no dispute that the requirements to order the sequestration of the Maroons’ estates had been met in that:
- The bankruptcy notice was obtained in respect of final judgments that taken together, in each case, amount to at least the statutory minimum of $5,000 (Bankruptcy Act 1966 (Cth), s 41(1));
- The bankruptcy notice was in the form prescribed by the regulations (s 41(2));
- When the bankruptcy notice was issued, a period of more than six years had not elapsed since each of the judgments (s 41(3));
- The bankruptcy notice had attached to it copies of the two judgments (Bankruptcy Regulations 1996 (Cth), r 4.01);
- The bankruptcy notice was served on each of the Maroons within six months of it being issued (r 4.02A);
- The debtors committed an act of bankruptcy for the purposes of s 40 by failing to comply with the bankruptcy notice by 17 December 2021;
- Each creditor’s petition was presented within six months of the date of the act of bankruptcy and relates to a debt exceeding $5,000 (s 44(1)(a) and (c));
- Each petition is accompanied by an affidavit of search (Federal Court (Bankruptcy Rules) 2016 (Cth), r 4.04(1)(a)); and
- Affidavits of final search and final debt fulfilling the requirements of r 4.06 of the Federal Court (Bankruptcy Rules) 2016 (Cth) were tendered.
The Grounds of Opposition
Regardless of the Court’s acknowledgment that the creditor had met the requirements for the orders, the Maroons submitted that the Court should use its discretion not to make the sequestration orders on the grounds that:
- each of them was solvent;
- each of them had an offsetting claim in the 2021 Supreme Court proceeding that exceeded the amount owed to Aquamore; and
- the Court should go behind each of the judgments on which Aquamore relied and consider the claim in the 2021 Supreme Court proceeding that there was no debt owed to Aquamore.
The Court’s Decision
In the Court’s consideration of the Maroons’ submission, it provided a useful commentary on the requisite threshold of solvency, as well as an analysis of the strength of an offsetting claim, required to oppose the imposition of sequestration orders.
In order to be ruled solvent, the Maroons were required to present the Court with the “fullest and best” evidence of their financial position. However, the Court held that the evidence submitted was far from the “fullest and best”. The Maroons failed to prove the threshold test that they have assets which exceed their liabilities or that any such assets are capable of ready realisation.
In their second ground of opposition, the Maroons relied on their claim against Aquamore in the 2021 proceeding for breach of mortgagee obligations in possession of the Point Fredrick property as an offset. The Court noted two issues that arose in preventing a successful offsetting claim. Firstly, the claim was only available to Christopher and Allan since Michael had not been an owner of the Point Fredrick property. Secondly, the claim relied on had been stayed indefinitely. Consequently, where the proceedings the subject of the offsetting claim had been stayed, the Court had no basis to adjourn the present proceedings.
The final argument made was a request for the Court to “go behind” the judgements relied on by Aquamore. As explained above, the Maroons were unsuccessful in prior proceedings in having the 2018 Supreme Court judgements set aside. Any basis for setting aside these judgements had already been litigated between the parties and expressly rejected in the Supreme Court. The Court therefore had no basis on which to “go behind” the 2018 decisions.
Accordingly, the Court found that none of the opposing grounds were sufficient to exercise its discretion to not make the sequestration order, and the orders were made.
This judgment reaffirms the rule that solvency is a question of being able to pay one’s debts as they become due and payable. It also re-affirms that courts will be reticent to oppose sequestration orders on the basis of a debtor claiming that “unrealised” assets, such as pending litigation, should offset any debt owing or contribute to the determination of their solvency.
Additionally, during the discussion of the Maroons’ solvency the Court confirmed that solvency is not just a question of wealth, but a question of wealth than can actually be used to pay a debt when required. As the Court noted at : “A person may be at the same time insolvent and wealthy. The nature of a person’s assets, and their ability to convert those assets into cash within a short period of time, must be considered in determining solvency.”
The Court also set out that offsetting claims need to be certain and quantifiable. In this case, it was held that the stayed proceedings, despite having prospects of resulting in a judgment in the debtor’s favour, were “too uncertain and, more particularly, too far off to be able to play a significant role in the assessment of solvency.”
It is possible to oppose a bankruptcy notice and set aside an application for sequestration orders. However, as seen in the Maroons’ case, it is important that any defences are grounded in real, practical evidence, as opposed to pending litigation proceedings or unsubstantiated claims that one is able to pay their debts.
If you have any questions about this article, please get in touch with a key contact or any member of our team. If you have any questions about this article, please get in touch with one of our Key Contacts in our Restructuring, Turnaround & Insolvency, or Litigation and Dispute Resolution teams.
This information and the contents of this publication, current as at the date of publication, is general in nature to offer assistance to Cornwalls’ clients, prospective clients and stakeholders, and is for reference purposes only. It does not constitute legal or financial advice. If you are concerned about any topic covered, we recommend that you seek your own specific legal and financial advice before taking any action.
 Aquamore Credit Equity Pty Ltd v Maroon  FCA 1399, 31.
 Aquamore Credit Equity Pty Ltd v Maroon  FCA 1399, 47.