This week’s TGIF looks at the decision of the Federal Court of Australia in Donoghue v Russells (A Firm) [2021] FCA 798 in which Mr Donoghue appealed a decision to make a sequestration order which was premised on him ‘carrying on business in Australia' for the purpose of section 43(1)(b)(iii) of the Bankruptcy Act 1966 (Cth) (Act).

Key Takeaways

  • A person may carry on business ‘in’ Australia under section 43(1)(b)(iii) of the Act even though the bulk of their business is conducted overseas because there are acts done in Australia ancillary to business activities in other countries.
  • A person may also carry on business in Australia without necessarily having a place of business in Australia.
  • The words ‘carrying on’ imply the repetition of acts and activities which possess something of a permanent character and it is generally insufficient for there to be a single transaction or a number of isolated transactions.

Background

On 4 July 2019, the Federal Circuit Court made a sequestration order against Mr Donoghue as a result of his failure to comply with a bankruptcy notice issued by the Respondent, Russells, Mr Donoghue’s former solicitor, for unpaid legal costs.

Mr Donoghue left Australia in July 2014 and has not returned since then. In the appeal against the sequestration order before the Court, Mr Donoghue did not dispute the fact that he had committed an act of bankruptcy, but contended that the primary judge did not have jurisdiction to make a sequestration order.

The requirements of section 43(1)(b)(iii) of the Act are only satisfied if a person is ‘carrying on business in Australia, whether personally or by means of an agent or manager’. The Court would otherwise have jurisdiction to make a sequestration order under the balance of section 43(1)(b) if a debtor was personally present or ordinarily resident in Australia, or had a dwelling house or place of business in Australia, or was a member of a firm or partnership carrying on business in Australia.

The decision at first instance

The primary judge held that Mr Donoghue did not have a dwelling house in Australia as he had ceased to live in his former property in Hamilton, Queensland (Hamilton Property) since 2014 and the Hamilton Property has been occupied by Mr Donoghue’s ex-wife since their separation in 1998.

However, the primary judge also found that the Hamilton Property was Mr Donoghue’s place of business in Australia for various reasons including that he had listed the Hamilton Property as his address for service and his residence under his personal guarantee with the CBA. As a result, the primary judge decided that Mr Donoghue had a place of business in Australia and was carrying on business in Australia when the act of bankruptcy was committed.

Nature of the appeal

Mr Donoghue appealed to the Federal Court of Australia on the basis that the primary judge’s interpretation that the phrase ‘carrying on business in Australia’ had ‘a very wide meaning’, was mistaken and that what is actually required for one to be ‘carrying on business in Australia’ is a commercial enterprise in the nature of a going concern, which entailed activities engaged in for the purposes of profit on a continuous and repetitive basis in Australia or, put more simply, the person must be ‘trading’ in Australia.

What did the Court decide?

On the issue of the construction of section 43(1)(b)(iii) of the Act, the Court accepted Mr Donoghue’s submission that the primary judge overstated the scope of the phrase ‘carrying on business’ by describing it as ‘having a very wide meaning’. However, the Court rejected Mr Donoghue’s argument that it is essential that a going concerns exists in Australia for one to be carrying on business in Australia.

Rangiah J summarised the following key principles as being relevant to a determination as to whether one is carrying on business in Australia :

  • Whether a one is ‘carrying on business in Australia’ is a question of fact.
  • A debtor may carry on business ‘in’ Australia even though the bulk of his or her business is conducted overseas.
  • It is not necessary for a person to have a place of business in Australia to carry on business in Australia.
  • The words ‘carrying on’ imply the repetition of acts and activities which possess something of a permanent character; and it is generally insufficient for there to be a single transaction or a number of isolated transactions.
  • However, a single transaction in Australia may be enough if it has been made in the course of the person carrying on business overseas.
  • It may be sufficient that there are acts done in Australia ancillary to activities or transactions that make up a business. In this regard, trading is not regarded as completed until a business has performed all the obligations imposed by the fact of trading. Examples of such ancillary acts may include the raising of capital in Australia for use by a business overseas, or the winding up of a business and the payment of debts after a business has ceased to actually trade in Australia.

The Court ultimately dismissed the appeal on the basis that the primary court made no error in finding that Mr Donoghue was carrying on business in Australia at the time of committing the act of bankruptcy.

The available evidence, relied upon at the initial hearing, was that Mr Donoghue borrowed money from a family trust for use in his business overseas. That family trust had borrowed between $4 million and $5 million from CBA (CBA Loan), the repayment of which had been guaranteed by Mr Donoghue. Further, Mr Donoghue remitted funds from his business in Australia to his ex-wife based in Australia, including for the purpose of repaying the CBA Loan.

Comment

In the context of section 43(1)(b) of the Act a person does not need to have its main operation in Australia to be ‘carrying on business’ in Australia. While the analysis will require an examination of the relevant facts, it may be sufficient that the person only raises funds or repays debts in Australia even if they are not physically located here and have no place of business here.