Australian Court Finds Pending Mediation Insufficient to Prevent Bankruptcy Order

The Federal Circuit and Family Court of Australia has held that the existence of a pending voluntary mediation process was not sufficient to prevent a sequestration order in bankruptcy proceedings arising from a commercial lease dispute. In F.S.U. Property Pty Ltd v Khanal [2026] FedCFamC2G 1836, the Court considered whether an attempt to resolve the underlying dispute through mediation constituted sufficient cause to decline making the bankruptcy order.

The dispute arose from a commercial lease involving F.S.U. Property Pty Ltd and Mr Khanal. Mr Khanal had applied for mediation through the New South Wales Small Business Commission on 2 July 2026, following which the Commission's mediation service contacted the lawyer nominated by F.S.U. Property. The parties relied on the mediation process in proceedings seeking review of a sequestration order previously made by a Registrar.

The Court acknowledged that there appeared to be some prospect of mediation taking place but emphasised that the process was voluntary and depended on the parties reaching an agreement. No settlement had been achieved, and the mediator had no authority to impose an outcome. Any resolution affecting Mr Khanal's liability would therefore require the creditor's agreement.

In these circumstances, the Court found that the pending mediation process did not constitute sufficient cause to decline making a sequestration order. The application for review was dismissed.

The decision highlights an important distinction between the availability of mediation and its legal effect on pending proceedings. While mediation may offer an opportunity to resolve the underlying commercial dispute, initiating a voluntary process alone does not prevent a court from proceeding with bankruptcy orders. The outcome remains dependent on the parties reaching an agreement and on the applicable legal requirements governing the proceedings.